Financial market institutions were created partly in reaction to these imperfections and continuously adapt themselves when faced with fresh challenges. Additional support comes from the public regulatory and oversight regimes, especially in the field of securities clearing and settlement systems. 3. The definition of oversight  At this stage I switch perspectives and I would like to briefly explain what central bankers, including myself, have in mind when referring to an effective oversight regime. Broadly speaking oversight can be defined as a central bank’s contribution to the smooth functioning of payment, clearing and settlement systems. Oversight differs from supervision, which aims at monitoring the soundness of financial institutions at the micro level. It also differs from surveillance, which focuses on a smooth functioning of financial markets. Furthermore there is a wide consensus, at least among central banks, on what the objectives of oversight should be: maintaining the safety of payment, clearing and settlement systems and promoting their efficiency. It is worth stressing that such a consensus has resulted from a sometimes lengthy but never discouraging learning process within the central bank community. Keeping in mind the positive achievements regulatory and oversight authorities have reached so far I now would like to address some challenges that we still face in this field. BIS Review 28/2003  3  4. Regulatory and oversight challenges in securities clearing and settlement systems  First of all let me clarify a fundamental point.
Third, if borrowers and investors did not embrace an orderly collateral liquidation mechanism, supervisory oversight could be brought to bear to limit the use of tri-party repo funding on the grounds that it is still an unstable source of funds. For example, the use of tri-party repo could be restricted unless borrowers demonstrated that there was an adequate means of orderly collateral liquidation upon the failure of a major dealer. Turning next to the issue of money market mutual funds, further reform to directly address the incentive for investors to run is essential for financial stability. In November, the Financial Stability Oversight Council (FSOC) put out for comment three alternative paths forward:13 1. Moving to a floating net asset value (NAV). 2. Retaining a stable NAV, but adding a new NAV buffer and a minimum balance requirement. The minimum balance would be at risk for 30 days following withdrawals. If the fund subsequently “broke the buck” during this period by suffering losses greater than the size of its NAV buffer, the minimum balance would be first in line to absorb these losses. 3. A larger NAV buffer than in the second alternative, but without a minimum balance at risk buffer. I have stated my views on money fund reform before.14 Although any of these proposals – depending on the fine print of course – would likely be an improvement over the status quo, the first and third proposals don’t fully eliminate the incentives to run.