Transcript of the Global Financial Stability Report Press Briefing with Jose Viñals, Financial Counsellor and Director of the Monetary and Capital Markets Department

April 13, 2010

and with Laura Kodres, Chief of the Global Financial Stability Division, Juan Solé (chapter 2), John Kiff (chapter 3), and Effie Psalida (chapter 4)
Washington, D.C.
Tuesday, April 13, 2010
Webcast of the press briefing Webcast


MS. LOTZE: Good day, everybody, and welcome to this press briefing on the Analytical Chapters of the Global Financial Stability Report, Chapters 2 to 4.

Chapter 1 of the report will be released next Tuesday, April 20, ahead of the Spring Meetings on April 24 and 25. You've had an opportunity to look at the chapters and the press points under embargo, and a lot of you have logged in which is very welcome.

Let me introduce our speakers for you today. They will all make short introductory remarks. At the far end of the table of Jose Viñals, the Financial Counselor of the IMF and Director of the Monetary and Capital Markets Department. Mr. Viñals will have to leave after some introductory remarks, but he will also be at next week's press conference on Chapter 1 of the GFSR. To my immediate right is Laura Kodres, Chief of the Global Financial Stability Division. Next to her is Juan Solé, one of the authors of Chapter 2 on Systemic Risk and Financial Regulation. Next to him is John Kiff, lead author of Chapter 3 on Making OTC Derivatives Safer. Last but not least is Effie Psalida, lead author of Chapter 4 on Global Liquidity Expansion. Let's begin with the introductory remarks and then we will take your questions. Mr. Viñals, please?

MR. VINALS: Thank you very much, Conny.

[This section was inaudible on the webcast. Inserted are Mr. Viñals’ written remarks:

Good morning. Today we are releasing the three analytical chapters in our upcoming Global Financial Stability Report. These chapters cover some of the most relevant areas facing policymakers as they devise financial reforms that address the systemic risks that arose during the crisis and deal with potential forthcoming vulnerabilities. I will provide an overview of the chapters and then let my colleagues give you some of the main messages and the details.

Chapter 2 focuses on two questions facing policymakers attempting to reform the financial landscape. One, whether systemic risk would be reduced by placing all regulatory functions under the purview of one entity—be that a single agency or an overseeing council? And two, if we were to use capital surcharges on financial institutions to try to limit the systemic risk associated with domino-like failures, how would we construct such surcharges? Let me stress that, we do not have “the” answer to these difficult questions, but we think we have been able to frame the debate in a constructive way and provide guidance to policymakers on these important issues. For instance, we do not necessarily see a capital surcharge on systemically-important institutions as the only way to reduce systemic risk, but as one method of a multipronged approach. There is a need to examine a number of approaches to see which one or which combination will do the job best.

Chapter 3 takes a slightly different tack by delving into how we can improve market infrastructure to help limit systemic risk. As you are aware, the over-the-counter derivatives market has been under scrutiny since problems in the credit default swap market arose with Lehman’s bankruptcy and AIG’s near miss. We look closely at the how central counterparties for clearing these contracts can be a shock-absorber in the financial system.

Chapter 4 looks ahead to the vulnerabilities that may be building up in some countries partly as a result of the low interest rates and ample liquidity that has characterized the main advanced economies’ current monetary policy stances. The chapter documents that global liquidity plays a role in capital inflows to emerging and some other advanced countries where interest rates are higher and growth prospects are stronger. Certainly, an increase in capital inflows is a positive development following their dramatic decline during the height of the crisis, but they can be too much of a good thing if they add to inflation pressures or asset price bubbles. The chapter looks closely at the policy options that liquidity receiving economies can use. It suggests that, as a first-best solution, macroeconomic policies, including flexible exchange rates, and enhanced prudential regulations for the financial sector, can go a long way in managing a surge of capital inflows. It also reviews the international experience with capital controls.

I will leave you with these initial remarks and let Laura Kodres and my other colleagues elaborate on the main messages arising from these chapters. Thank you.]

MS. KODRES: Thanks, Jose. Let me just provide a bit more context for the three chapters and why we tackled the topics that we did, perhaps reiterating a few of Jose's comments. Then I'll let my colleagues give you the main findings from each of the three chapters.

With the depth of the crisis behind us now comes really the hard work of examining what went wrong and how to fix it. Chapters 2 and 3 take on that challenge head on, and Chapter 4 looks more closely at how vulnerabilities can build up given the current monetary stance of some of the countries that were hit hardest by the crisis.

As you're well aware, the first round of regulatory reforms are well underway. The first steps have been put into place and they are typically regulations that build up capital and liquidity buffers in financial institutions, mainly in banks. The Basel Committee on Banking Supervision came out with their consultative document in December and asked for public comment on their enhancements to the Basel II Framework and new Liquidity Management Framework.

The next steps are much more difficult. The crisis showed that the safety and soundness of individual institutions is not enough to prevent a breakdown. The whole may be greater than the sum of the parts. That is, there are risks to the financial system that result from the interaction of institutions, in particular, what we are now coining systemic interconnectedness. Thus, many in the financial community are now focused on how to mitigate these systemic risks.

Unfortunately, concrete and practical ways of doing so are really in the early stages of development. Without prejudging which way will be best, Chapter 2 puts on the table a methodology to construct a systemic risk-based capital surcharge, one of the proposals under discussion. As far as we know, this is one of the first attempts to produce a practical way of formally linking a capital charge to the systemic interconnectedness of an institution. While there are still many aspects to work out, it is a bold start to the discussion.

Chapter 2 also asks another important question in light of various proposals, where or in which existing regulatory body should one house a systemic risk regulator? In other words, who should be watching for and mitigating a buildup in systemic risks? Again, a topic of much discussion but usually without a framework for how to think about it. Chapter 2 sets out to examine this issue in a more concrete way to set the stage for a deeper discussion.

Chapter 3 examines another aspect of systemic interconnectedness risk by looking at counterparty risk in the OTC derivatives market, the risk that if one party fails to honor its commitments on its contracts that it could lead to other parties failing as well. Moving OTC derivative contracts to central counterparties, or CCPs as they are called, is one way of lowering this risk. This type of infrastructure improvement, an improvement in the plumbing of the financial system, may not appear too glamorous, but it is incredibly important to the stability of the financial system.

As we point out in Chapter 3, setting up CCPs is not the only way to mitigate this risk and there are some interim costs to moving contracts to CCPs, but we believe that moving standardized contracts to CCPs will help make OTC derivative markets safer. The topic deserves serious discussion and a realistic appraisal of the cost and benefits, so we have spent a lot of effort to provide a good primer on the subject.

The final chapter takes a look forward and examines an issue that is the outcome of the crisis, the easy monetary conditions adopted to help bolster the financial system as credit markets were impaired. These easy conditions have prompted fears about their effects not in the originating countries so much but in the emerging and other advanced economies where the funds appear to be flowing. For the most part, such flows are a reflection of the good policies and growth prospects in the receiving countries, but a surge in flows can be difficult for some countries to handle. In particular, it might set the stage for financial instability through maybe excessive credit growth, asset price bubbles and inflation. Chapter 4 looks at these possible outcomes first with attention to the mechanisms for the spillovers, and second, how to address them including the potential use of capital controls.

I'll now let my colleagues take you through some of the main messages. We'll start with Juan. Thank you.

MR. SOLE: Thank you, Laura. Thank you all for being here today both physically and virtually.

It's a pleasure for me to deliver a few of the highlights of the chapter entitled Systemic Risk and the Redesign of Financial Regulation. To put the chapter a little bit in context, let me say as you all know there was a flood of regulatory reform proposals that sprang from the financial crisis and most of these proposals were attempting to deal with the risk that distress in a particular financial institution would spread to the rest of the financial sector, the so-called phenomenon of systemic risk. This was a welcome development. But one characteristic that we found in most of these proposals was a lack of detail regarding the design and the implementation of the measures that these reform proposals were calling for and we thought that these details were important to get a good sense of whether these proposals were feasible and even desirable.

So against this background the chapter set out to do two things. We wanted to look at two key sets of proposals, in particular those dealing with the allocation of regulatory powers or regulatory functions to monitor and to substantially lessen systemic risk, and also those proposals dealing with the introduction of systemic risk-based capital surcharges, or in other words, higher capital requirements for systemic institutions.

Regarding the first set of proposals, those that have to do with monitoring systemic risk, the chapter argues that it's not enough to mandate that regulators oversee or simply monitor systemic connections or risks, but that instead we need to add better tools to the regulators’ arsenal to reduce the systemic risk that financial institutions might pose on the rest of the financial system. This is so because regulators have a natural tendency to be lenient toward financial institutions that are deemed too important to fail or too systemic. In conclusion, if only this mandate is added to the regulatory arsenal, the chapter argues this is not going to be enough to reduce systemic risk as systemic institutions will continue to pose risks to the financial sector.

In terms of the second set of proposals that we looked at, those that have to do with systemic risk-based capital surcharges, let me emphasize as we do in the chapter that we're not necessarily endorsing the adoption of these charges. The message of the chapter instead is that in order to properly assess whether this is a measure that is a good measure to tackle systemic risk, in order to do that we also need to look at the details of how these measures or how these charges would be put in place and that's what the chapter tries to make a contribution toward. What the chapter does, it illustrates step by step a methodology or a way of how one would go about to introduce these systemic charges for systemic institutions. We thought that this was a very valuable exercise because in doing so it makes explicit a number of problems or issues that even if a national regulator decides to adopt these charges, they have to confront these issues before they're fully implementable.

Let me mention just a few of the main points that we make in the chapter. The first one is that if not carefully designed, systemic risk-based charges for systemic institutions will also add procyclicality to the current Basel II Capital Accord. Let me pause here for a second and remind some of you that what we understand by procyclicality is the tendency for capital requirements to increase during an economic downturn thus straining even more financial institutions and curtailing the availability of credit to the overall economy which is obviously something that is not desirable. In raising that flag in the chapter we also show a method to remove some of these procyclical effects from these charges.

The second point that we make in the chapter is that in the design of these systemic charges it is very important to bear in mind also the cross-border connections or the international connections that most large financial institutions have nowadays. To accomplish this goal, it is important that national regulators collaborate and share information on these cross-border connections because if instead the capital surcharges are implemented from a purely domestic point of view, then we're bound to underestimate or even miss altogether some important sources of contagion.

One final point that we make about these charges in the chapter is the recognition that these additional surcharges are going to represent an additional burden for financial institutions and therefore getting the timing right is key especially in the current environment where one would want to ensure that there is enough credit to sustain the recovery. So if it's decided that these charges should be implemented, getting the timing right is also a key element.

Let me stop here by saying that still a lot needs to be settled regarding the future of financial regulation, but that the Fund is excited to be a contributor in this debate. With that I'll pass it on to John. Thank you.

MR. KIFF: Thanks, Juan. The topic I'm going to be addressing today is the issue of central counterparties for over-the-counter derivative markets and the role we can play in making them safer. Before I'll start though, I was described as the lead writer on this topic, but actually there are also seven very important colleagues who played a very important role. It's a very complex topic with a lot of different dimensions, regulatory and legal, so this truly was a team effort. CCPs are being put forward as the way to make over-the-counter derivatives markets safer, sounder and more transparent. This chapter provides a primer on this topic and discusses the key policy issues.

Over-the-counter derivatives markets have grown rapidly from about $100 trillion to $600 trillion in the last decade. Over-the-counter derivatives are bilateral trades between two parties rather than on organized exchanges. Outstanding volumes exceed those traded on exchanges by about 10 times. Due to their size and structure, these markets have become a major systemic risk because of the potential domino effects that would be triggered by the failure of a single large counterparty. It's not just about the size of these markets, but the proliferation of redundant overlapping contracts that result from the writing of offsetting contracts rather than closing out the original contracts. These bilateral trades exacerbate counterparty risk and add to the complexity and opacity of the interconnections in the financial system. That became apparent in September 2008 when authorities had to make expensive decisions regarding the future of Lehman Brothers and AIG based on only partially informed views of potential effects of the firms' failures.

However, these counterparty risks can be substantially reduced if these bilateral contracts are settled or cleared through a CCP. A CCP interposes itself between two bilateral counterparties and assumes all the contract's contractual rights and obligations. Basically, a CCP becomes a counterparty to each other’s counterparty. CCPs reduce counterparty and systemic risk by enforcing robust risk-management standards, loss sharing among the CCP members and multilateral netting.

The robust risk management starts with stringent clearing membership requirements in terms of financial resources, operational capacity and market expertise. It is followed by several layers of financial support for covering losses that result from clearing member defaults and backup emergency liquidity support. Loss sharing through the CCP's guarantee fund which is funded by clearing member contributions. Nondefault and clearing members are also on the hook for additional assessments if default losses wipe out the guarantee fund. Multilateral netting effectively knocks out most of the redundant overlap in contracts that I mentioned earlier. For example, it reduced total credit default swaps outstanding by about 90 percent. However, CCPs concentrate counterparty risks and thus magnify the systemic risk related to their own failure so it's essential that they be effectively regulated and supervised. For each jurisdiction there should be a clear legal basis that assigns a lead authority to regulate CCPs. In addition, systemically important CCPs should be subject to the oversight of a systemic overseer that has the authority to allow access to emergency liquidity which in most countries is the central bank. Moreover, given the global nature of these markets, the global CCP oversight framework should level the playing field at a high minimum level and discourage regulatory arbitrage. Also authorities should have in place contingency plans and appropriate powers to deal with a CCP failure on a globally coordinated basis. At the national level, central banks should stand ready to provide emergency backup liquidity to systemically important CCPs and provide those CCPs with access to their payment infrastructure for everyday transactions.

The benefits of systemic risk reduction can be achieved only if enough contracts are moved to CCPs. In that regard, there remain some issues including potentially large up-front costs to dealers in terms of collateral and guarantee fund contributions. However, on the benefit side there are some virtuous circularity in that the greater the number of contracts centrally cleared the greater the benefits of multilateral netting so that there should be some natural incentives for dealers to centrally clear, and they do appear to be getting on with it.

On the other hand, some dealers' customers may be holding back the move to central clearing due to some uncertainties as to how their positions and collateral will be treated in the event of the default of the dealers through which they establish CCP positions and good progress has been made on that legal front. If these efforts stall, some extra incentives may be required. In that case, we suggest charging dealers a fee tied to the risks that their derivative positions impose on their counterparties. If incentives don't work, mandating may be necessary. If it is, it should be phased in gradually and should recognize that on the CCP side there are significant infrastructure development costs, the need to develop new rules, procedures and market practices, all things that can't be done overnight. In addition, the ultimate decision to offer clearing services for specific contracts should be taken by the CCP since they are the ones bearing the risks. In any case, all OTC derivative transactions should be recorded in regulated and supervised trade repositories and detailed individual counterparty data should be available to all relevant regulators and supervisors. The bottom line of the chapter is that the devil is in the details, this is a very complex area and getting all these bits and pieces and all these moving parts right is the key to making OTC derivatives safer at both the individual counterparty level and the systemic risk level. Now to Effie.

MS. PSALIDA: Thank you, John. I also would like to say that I am one of five colleagues who have worked on Chapter 4 and representing five colleagues here today.

With the onslaught of the global financial crisis, central banks ramped up money supply and liquidity in the crisis countries to ease the effects of sharply curtained credit. The increased liquidity helped stabilize the financial system and supported the return to growth. However, the current easy global liquidity conditions and the resulting surge in capital flows pose policy challenges for a number of countries where the crisis did not originate. These economies, both emerging market and advanced, with relatively strong growth prospects and also relatively higher interest rates are at the receiving end of the global liquidity expansion and the ensuing surge of capital inflows. As the slide shows, capital inflows are not yet at precrisis levels, but they are targeted to specific economies that have the higher growth and higher interest rates, so the challenges and vulnerabilities may already be growing and it's something to be looking at.

The primary challenge is the risk of rising inflation expectations in the goods and assets markets. Sudden surges in capital inflows also raise concerns about vulnerabilities to sudden reversals of capital flows, that is, capital outflows, once the global liquidity is unwound after exit policies take place in crisis countries.

Chapter 4 analyzes this issue and finds that global liquidity pushes up local equity prices and reduces interest rates in receiving economies. These economies have a number of policy options for responding to capital inflow surges. The first line of defense is to implement the macroeconomic policy mix that is appropriate for the country, for example, a more flexible exchange rate policy, in particular when the exchange rate is undervalued. Our analysis shows that a floating exchange rate provides a natural buffer against surges in global liquidity and ensuing valuation pressures on domestic assets, official reserve accumulation where the authorities collect capital, reducing interest rates if the inflation outlook permits and tightening fiscal policy when the overall macroeconomic policy stance is too loose.

Macroeconomic policies can be usefully complemented with reinforcing prudential regulations in the financial system, and if conditions allow, the liberalization of capital outflows can also be useful. The appropriate policy mix will depend on the specific conditions of each country. When these policy measures are not sufficient and capital inflow surges are likely to be temporary, capital controls may be considered in certain cases as a complement to the policy mix for individual countries. They may be beneficial, in other words, for individual countries. However, more permanent increases in inflows tend to stem from more fundamental factors and therefore need more fundamental economic adjustments.

In terms of specific evidence on the effectiveness of capital controls, there is indication that controls can lengthen the maturity of certain types of inflows, that is, keep the capital in the country longer, although in general they do not reduce the total volume of inflows. Also their effectiveness declines over time so they need to be adjusted and readjusted in order to retain effectiveness and their implementation is both costly and distortionary to the financial system and to the economic environment more generally. When we think of the effect on other countries, the adoption of inflow controls in one country if effective can divert capital flows to other countries prompting the introduction of capital controls in those countries as well. A widespread reliance on capital controls may delay necessary macroeconomic adjustments in individual countries and right now widespread use of capital controls could prevent the global rebalancing of demand and thus hinder global recovery and growth. I will stop here and welcome your questions. Thank you.

MS. LOTZE: Thanks very much. We're going to come to questions now. I just wanted to remind everyone because we've already gotten a question earlier on Greece, that this briefing is on the analytical chapters on the GFSR and that we will keep it to that, so this is not a venue for topics of the day. We have one question online but I wanted to see if there's a question in the room right here. Please identify yourself.

QUESTIONER: I'd like to clarify right away something on Chapter 2. When you mentioned surcharges, do we agree that we're talking about a tax? Because surcharge is a pretty word but it's kind of vague and I just wanted to make sure that we're talking about a tax. If that's the case, among the different possibilities that you mentioned, reducing the size of certain business activities and others, is that the one you would see as potentially the most effective? The third question, how is this paper related to the proposal that the IMF is going to make to the G-20 regarding the contribution of the financial sector to the cost of bailouts?

MS. KODRES: Let me begin with the first question and then I'll turn it over to Juan for some specifics. The surcharge that we have in mind is in fact a capital surcharge. It is not a tax in the sense of a tax on profits or a tax on earnings of the firm, a traditional type of tax. He can explain how we construct it as a capital charge specifically.

Whether or not we think that this type of design of a regulatory response is the most appropriate, the jury is still out. We have not taken the analysis further which is the next step for many of these proposals which is a quantitative impact study along the same lines that the Basel Committee would likely attempt to do and so we cannot say at this point which of the many proposals that are on the table are likely to be the ones that are most effective for reducing systemic risk. I will stop there but ask Juan to clarify a little bit about how we contract the capital charge so that you can see that it's in fact a capital charge and not a tax.

MR. SOLE: Just to add to what Laura mentioned, in the chapter we illustrate two methods to compute this charge, and the two things that I would like to highlight to answer your question and which underline the difference between a capital charge and a tax is that the capital charge that we designed in the chapter is risk-based. That is, it's based on the systemic risk that the institution poses. The second one is that it's a buffer and that money stays with the institution as opposed to what happens in a tax, that that is transferred to the government. So in that sense, the difference is that the capital charge increases the resiliency of the institution to sustain different shocks.

You also mentioned the effectiveness of another measure, limiting activities of banks. That's another measure that is on the table, but as Laura said, the jury is still out. We listed it in the chapter because it's currently being discussed. It has attracted a lot of attention. But we also believe that more analysis and in-depth analysis and looking at the details of what this measure would entail is warranted before one can make a pronouncement about whether this is going to be the most effective or not. There was a last part of your question about this relates to an IMF paper.

MS. KODRES: As you are aware, the G-20 has asked the Fund to look explicitly at a financial transactions tax. That paper will be available I presume depending on whether the G-20 decides to release it or not at the time in the spring when we have agreed that we would provide them with the details on that. So at this point I cannot comment about the tack or the results that the IMF paper will ultimately provide to the G-20.

QUESTIONER: Capital surcharges, concretely a firm is asked to set capital aside?

MR. SOLE: It's capital. What distinguishes it from previous capital is the way this is calculated and the reason why this capital is required. The reason is that it's based on the systemic risk of that particular institution. Whereas current capital is based on the riskiness of the assets, this charge that we present in the chapter is computed based on the riskiness that that institution poses on the rest of the financial institutions in the system or the interconnections as we call it in the chapter.

QUESTIONER: I'm interested in your thoughts on the regulatory architecture and I guess the degree of integration and coordination on a sort of supranational level you feel would be needed to make a systemic regulator effective across borders?

MS. KODRES: I think we can all agree that the crisis was not one that was in one country, but that it spread relatively rapidly to a number of countries and I think that is a significant component of this crisis that we need to think very carefully about. I think the first step in addressing coordination will be to provide regulators in the various systemically important countries with the adequate information that they need to assess those connections and we have in fact last fall as part of the G-20 process provided some information about how to determine systemically important institutions' markets and instruments and as part of that goal we have also identified data gaps that we think need to be filled in order for the regulatory community to do their job. Before we get to the point of having good data, I think it will be difficult to have an overriding view of what the vulnerabilities are in the system.

That said, there are other elements that will need to be in place. Certainly one is the Basel Committee and the FSB's efforts in trying to provide a common framework for thinking about vulnerabilities and thinking about how to manage risks across the global financial system. And as well there are efforts being made in order to assure that bankruptcy codes and unwindings of institutions when things go poorly are coordinated across border. So those are three elements I would highlight, one, information to a consistent approach to regulatory capital charges and liquidity and these other items that are on the table, and thirdly, some sort of unwinding or resolution procedures which would be better coordinated across border.

QUESTIONER: Is there a need do you think for some sort of court of last resort whose judgment would be accepted by all the countries involved so that country A doesn't it feel like too much of our stuff is tied up in systemic institutions more than country B and that's putting us at a disadvantage?

MS. KODRES: That's a tough question. I'm not sure that we're quite ready to move to that step. I think the FSB is in a position to think about how we do this more effectively. Having an international court of financial resolution seems a bit farfetched at this point. That said, I think there is bone fide process being made in trying to at least identify how cross-border burdens can be shared more efficiently.

MS. LOTZE: Can I just take a question from the Online Media Briefing Center? It's a two-part question and I think the first part was just answered, but if you want to add something to that, please do. Let me just read it out:

Can you give us specific examples of tools systemic risk regulators will need, but I think you just went into that, Laura. The second part of the question is more addressed to Effie also on Chapter 4: Chapter 4 seems very familiar. What is new or different about the conclusions versus previous reports on the subject? I think this is a reference to the Staff Position Note on capital controls. Effie?

MS. PSALIDA: Yes. The issue of capital controls is something that the Fund has been looking at for decades and there is a lot of experience both empirical from countries and analytical. We have been writing on this many years. It is true that there was a Staff Position Note that came out a few months ago which in many ways complements this chapter because that note looks more at the effects of capital controls on growth and the experience of countries during the crisis, while our chapter looks more at the effects on the financial system and financial stability including effectiveness and distortions. I think I'll stop here.

QUESTIONER: These questions are probably directed at you, Mr. Kiff, some broad questions related to central clearing parties. One, could you give us a sense on how prevalent these are in the international sphere at the moment, whether they exist at all and where they might exist and where they might be working well? Second, do you have thoughts on how much competition should exist between CCPs, whether it's better to have one big one or several? Then thirdly, could you speak to the international connectedness of these CCPs? What sort of coordination needs to go on between countries and between regulators given that investors presumably could exchange OTCs wherever they want?

MR. KIFF: Great questions. The one, CCPs, do they actually exist? Are they actually doing business? In fact, they are. LCH Clearnet has been running SwapClear which clears interest rate swaps since I think the year 2000 or so and have now cleared something like 200 trillion of those contracts and that's in a market that's sized at about 400 trillion or so, so substantial clearing volumes have been done there. Clearing of CDS contracts have come in a bit later. ICE Trust is probably the major CDS clearer right now, they're U.S. based and they've done substantial volumes. It's hard to nail down exactly what proportion of the market is centrally cleared right now, we're waiting for numbers on that, but they do impressive volumes. They cleared I think somewhere in the order of 6 or 7 trillion last year and that's compared to a 30 trillion or so market. So good progress is being made, and the dealers also report that they're doing most of their standardized contracts now through CCPs.

As I said before, the stumbling block seems to be the treatment of customers who usually aren't members. They can be members of some of the CCPs but generally they are not and so they have some concerns about the segregation of their collateral when their clearing member goes down because they're always operating via clearing member, but there's good progress being made on the legal front there but it's a very complex issue.

In terms of competition, I must admit when we wrote about this last year we were at the position that we thought ideally there should be just one mega CCP covering all contracts. That way you get the best efficiencies in almost every way imaginable. That's not the way the world has worked out, and so this chapter deals with how to make the CCP world work better as it is right now by making the point that the regulations have to be coordinated. We talk a lot about global coordination, but actually you also need to have national coordination within the country. That's important too so you don't have a race to the bottom in terms of risk-management standards and so on.

The other point we make in the chapter though, and this is kind of a forward-looking thing, is once you've got the individual CCPs all running safely and properly, we believe that the future lies in interlinking these CCPs. So you may have CCPs all over the world clearing different types of contracts, but they would be linked together so that in some respects they behave as one. When I look at the legal issues based on the customer clearing and so, we've got very similar and maybe even more complex issues in interlinking across countries, so I think it's best to sort of walk before we run on that front. That sort of covers your third question I think that they're all over the world. I'd mentioned ICE Trust, LCH Clearnet. There is also an ICE operation in Europe, I forgot to mention that, which is actually separate from the ICE Trust operation in the U.S., but they're clearing CDS in Europe, and several operations are poised to do business shortly. Thanks.

QUESTIONER: I have a more general question related to the three chapters. Given that, one, the financial systems seems to be more concentrated than ever, two, that the activities in the derivatives markets are bigger than ever, and third, that global liquidity seems to be more ample than ever, what does this imply for the general health of the global financial system? Thank you.

MS. KODRES: I think we'd like to postpone that question a little until next week where we talk about the status of the global financial system and how we think it's changed in the last 3 to 6 months. That is the subject matter of Chapter 1 typically of the GFSR. Let me just reiterate though that the reason that we chose these three chapters was exactly the point that you make. They are topical. They are important. They are issues that need to be addressed and they need to be addressed at least soon. I don't think we can wait too long.

That said, I think a point that I'd like to make that will carry through next week is that while we should spend a fair bit of energy attempting to get the reforms underway, when they will be implemented is a very sensitive topic. As Juan pointed out, we may in fact want to do some things in terms of setting the stage for where we will end up but without necessarily implementing them during the period in which the economy is still trying to recover. So the timing will be critical, but we should move ahead with the business of figuring out what exactly we would want the endpoint to look like in terms of the regulatory reforms.

MS. LOTZE: I have one more question online. You mentioned the need for cross-border collaboration. The G-20 agreed on principles for regulatory reform. How confident are you that the key countries are working together to develop complementary regulatory reform and what will be your message for the countries next week. This is a very broad question, Laura.

MS. KODRES: I think I answered the second part of the question which is the message for next week, to set in place the broad plans of where the reform effort should go and then spend some time thinking about how soon or how quickly they should be implemented based on the conditions in the global financial system.

How confident am I? The Fund is spending many hours and many individuals' time in terms of trying to get global consensus on many of these issues. I think they are moving ahead. The number of meetings that are taking place at the FSB, with the Basel Committee, with IOSCO, with a number of other international fora, suggests that indeed people are focused on trying to get the basis for some international cooperation and to make sure that the regulatory reforms do not potentially mean that we have regulatory arbitrage. That said, it is important that we make sure that countries don't get too far ahead in various areas. Several countries of course are anxious to move ahead and we would caution that we need to move ahead as one global community so that such regulatory arbitrages do not in fact inhibit the types of progress we're trying to make to eliminate the systemic risk in the system. Thank you.

MS. LOTZE: I have one more question online, just an informative question. They just wanted to confirm that the reserve money curve in Figure 4.2 refers to central bank reserves.

MS. PSALIDA: Figure 4.2 refers to reserve money, so money in circulation and banks' reserves with the central bank, not the official reserves.

MS. LOTZE: I hope that answered the question. If we have no more questions in the room and no more online, then we will conclude the press conference here. Thank you very much for coming and for participating online.

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