Market participants should both have the right tools to make the right choices and want to make the right choices. The various principles on governance then build upon that ethical foundation. They highlight some of the key structures that a firm should have in place to support responsible behavior by its individual employees and as an organization overall. The principles within the execution section were those that occupied the most hours of focus during the last two years. Principle 8, for example, is the first execution principle and is quite short: “Market Participants should be clear about the capacities in which they act.” Although short, this principle generated very active discussion. Reaching consensus on how to describe various roles in the market was unexpectedly challenging. Terms relating to these roles, like principal and agent, may be used differently across different regions and by different entities. Moreover, they may have legal definitions, and the Code is not intended to interfere with legal definitions. Within the Code, acting as an ‘agent’ is described roughly as executing orders on behalf of a client without taking on market risk in connection with that order. Acting as a ‘principal’ is described as taking on one or more risks in executing a client order. In doing so, a principal may have discretion in the execution of a trade and, if so, that discretion should be communicated clearly and exercised fairly and in such a way that is not designed or intended to disadvantage the client.
So far there has been little sign of significant deterioration in these areas. But as you know, bad debts are a lagging indicator of the state of the economy. The most reasonable assumption is that bad debt provisions and charge-offs will increase, though we do not yet know to what extent. •  Provisions may also increase as a result of a decline in property prices and collateral values caused by SARS. The value of bank premises may also be affected. Some of these effects may prove to be short-lived. Others may take longer to emerge, as in the case of the impact on asset quality. The overall impact on earnings is thus difficult to quantify. As of now, and assuming that the SARS problem does not drag on for too long, most banks seem to think that the adverse effect on profits will not be too severe. It bears repeating that the balance sheets of the banks remain strong. We have updated our stress tests to take account of the SARS outbreak, and these continue to show that the banks can withstand a great deal of pressure from a variety of sources. We do not expect that this will actually be put to the test in practice, but it is comforting to know that the banks are more than adequately capitalised in case of need. What can the banks do to limit the potential downside risk from SARS?