At times, we may be more effective by helping to convene a group of market participants to reach consensus on best practices or a common solution than we would be defining or imposing a solution ourselves. Of course, not all problems are amenable to a solution by public support of private initiative, but we should be open to these types of approaches when they are likely to be successful in achieving our objectives. And sixth, we have to be careful that the necessary and constructive attention that has been devoted over the past several years to meeting control and compliance challenges does not detract from the classic safety and soundness requirements of risk management. These should not be competing priorities. The financial costs and reputational damage associated with compliance and control failure can be very large. And the investments in the internal control infrastructure—in audit and corporate governance changes and in controls over financial reporting—are crucial parts of the foundation for a credible risk management framework. But we need to make sure that the demanding and ever evolving challenges of managing credit and market risk receive a degree of attention by senior management and boards that is commensurate with the risks. And this balance needs to be reflected in where we focus our supervisory efforts, as well. These classic prudential issues, those that make a critical difference in reducing the vulnerability of markets to systemic risk, need to be a principal focus of supervisory attention.
This is a time where I believe it is important to encourage more care and conservatism in the discipline of risk management. There are three areas at the top of our hierarchy of concerns. First, it is very important that the major dealers make the investments necessary to improve the operational infrastructure that underpins the credit derivatives and broader over-the-counter (OTC) derivatives market. Operational risk and infrastructure failures have played a prominent role in past financial crises, and the infrastructure weaknesses that have characterized the credit derivatives markets since their inception are another credible source of concern. The major market participants, both the dealers and the traditional and nontraditional investors, are in the process of improving the infrastructure that supports these markets. The changes underway to clean up the backlog of unconfirmed trades, to automate the entire post-trade-processing environment, and to improve the settlement process in events of default will help reduce operational risk in the derivatives market and reduce some sources of uncertainty that could exacerbate a market shock. We are encouraged by the progress made to date and will continue to encourage further improvements. Second, we believe that the major dealers, as well as the large commercial and investment banks, should take a cold, hard look at financing conditions and margin practice, particularly with respect to hedge fund counterparties and in OTC derivatives.