In a very interconnected financial system, it can be almost self-fulfilling that when the market starts to think some of the banks are in trouble, in fact all of them are4. A third example in this section is the dynamic hedging strategy of a bank’s credit risk arising from its derivatives portfolio (Credit/Counterparty Valuation Adjustment: CVA hedging). This normally refers to the credit risk of a counterparty that is not directly offset by some form of collateral5. Suppose a corporate has issued a fixed rate bond because investor preference makes that the best value, but really it wants to have a floating rate liability. A bank will accommodate this by providing an interest rate swap. If interest rates go up, that swap may generate a net value owing to the bank. Receiving that value depends on the corporate not defaulting and so the bank will have a credit exposure to the corporate. But the corporate cannot be expected to post collateral – it will just regard its debt as having been converted to floating rate (and typically it won’t hold any collateral it could post anyway). A bank that is active in these interest rate swaps will end up with a large number of such mark-to-market exposures. Collectively, the resulting exposures constitute a credit portfolio which changes with the mark-to-market values of the underlying derivatives contracts. To manage the credit risks embedded in this so-called CVA portfolio, most banks will hedge dynamically in the CDS market.
•  And looking ahead, if foreign exchange transactions become centrally cleared, what role can and should CLS play to facilitate the safe settlement of those transactions? •  I’d note, CLS has plenty of strategic choices there, always a good sign. Second, CLS was created by private sector leadership and financial institutional commitment and industry collaboration is a key part of a successful future. •  CLS cannot do its work alone. What makes CLS successful are members who are proactive in identifying and working with CLS on opportunities to further strengthen the CLS ecosystem, particularly in a market that is rapidly changing. •  That will require not just member support but also member investment. Third, the birth of CLS and its development exemplifies the productivity of public sectorprivate sector collaboration. We have different roles, but a common interest in the performance and resiliency of the foreign exchange market. As we play our respective roles, we can make each other more insightful and better performing. We have done that here in foreign exchange settlement – and speaking personally, I would like to see private sector and public sector tackle more opportunities across the financial markets. Let me end by congratulating CLS and all who are part of it on these first 10 very successful years, thank the wider group here for the collaboration you have developed within the industry, and thank you also for the partnerships you have forged with central banks, most especially, with the Federal Reserve Bank of New York.