The way to do it is to set up a state-administered system to which all the banks pay a fee in relation to their risks, much like an ordinary insurance policy. Sure, the state still stands the risk in the event of a large failure. But in this system, it is duly compensated for the risk. And the financing is robust. If implemented widely, this solution will also make for a more level playing field between banks from different countries competing partly on the same markets. I therefore hope that the proposal will get more international attention than it has so far. There must be a strong negotiating position for the government even when financial stability is threatened The above set up is a good set up to be able to handle the average bank failure. But, again, in some situations a different regime may be needed. In particular, this may be the case when it comes to larger and more complex banks in a situation of markets turmoil, when there is a systemic threat to the financial system. In this situation, it may not be possible to immediately revoke the licence for a bank which is in serious violation of the supervisory regulations. The focus will need to be on maintaining the key operations in the financial system. To secure this, the bank may need to stay open, at least for a while.
These concepts are echoed in the various principles that follow, which highlight more specific recommendations based upon the roles market participants take on and the types of transactions in which they engage. Labels aside, the fundamental recommendations regarding roles recognize the importance of clear communication of roles, the importance of fairness and the strong expectation that discretion not be used in a manner designed to disadvantage a client. Clarity of terminology was again important during the development of Principle 11 on prehedging. The Code is very specific in how it describes pre-hedging. It is defined as “the management of the risk associated with one or more anticipated client orders, designed to benefit the client in connection with such orders and any resulting transactions.” The principle then lays out circumstances in which such pre-hedging may or may not be appropriate. 2/6  BIS central bankers' speeches  The principles on information sharing cover topics where there had seemed to be a lack of clarity within the market. The principles emphasize the importance of appropriately identifying and managing confidential information. They describe what may constitute confidential information and when such information should or should not be shared and with whom. They also provide guidance as to how market participants might communicate market color appropriately and, critically, without compromising confidential information. It is important to recognize that the FX market is not entirely about trading and execution—risk management, compliance, and confirmation and settlement are central to FX transactions, and they comprise the final two sections of the Code.