The second option is to have a mechanism or process to facilitate the orderly liquidation of a defaulted dealer’s collateral. One could imagine a mechanism that was funded by tri-party repo market participants and potentially backstopped by the central bank. This would have the advantage of dealing with the entire tri-party repo market and not artificially favoring one type of collateral over another. It would also push against the underpricing of liquidity and credit risk during good times by forcing market participants to pay for the costs of a liquidation facility up front. 11  OMO eligible is collateral that the Fed can purchase or repo in its open market operations. 12  In addition, because the Federal Reserve is authorized to intervene in the Treasury, agency debt, and agency MBS markets, it could act to stabilize these markets during times of stress. This would make it easier to liquidate such collateral without unduly depressing prices. 6  BIS central bankers’ speeches  Because no single market participant has a strong incentive to develop such a mechanism, however, sustained regulatory pressure may be required to reach such a solution. From the perspective of the tri-party repo borrowers and investors, the status quo undoubtedly is viewed as superior because neither group is forced to fully bear the externalities associated with their actions. Instead they anticipate that emergency liquidity would be made available in the event of a future systemic crisis.
As time goes by, we will have to consider our options. A review of our future exchange rate policy will be particularly important. The possibility of Iceland at some stage joining a larger currency area should not be precluded, particularly if the political and economic cost of staying outside will be found to outweigh any advantage of maintaining an own currency. BIS Review 117/1999  4  Iceland and America Looking briefly in another direction, Iceland’s relations with the great continent in the West date back a thousand years. In recent decades, we have had important trade links with the United States. However, the relative share of trade with the US has declined significantly, or below 15%, since exports to the US peaked at almost 30% of total exports in the 1970s. Imports from the US also declined significantly from a high level around the middle of the century to around 10% of total imports in the most recent years. The number of American tourists has also declined in relative terms. Although the share of the US in Icelandic merchandise trade and tourism has declined, the US dollar still plays a significant role as a vehicle currency in Icelandic trade and foreign exchange transactions. Recent changes in the geographical pattern of trade and investment reflect the liberalisation of trade within Europe and the increasing globalisation of the world economy. Like other developed countries, Iceland has a most favoured nations agreement with the US and Canada.