At the official level, international cooperation is intensifying through groups such as the Joint Year 2000 Council, chaired by my Federal Reserve colleague, Governor Ferguson. However, it is plausible that time will simply run out for some countries and some institutions. While I certainly don’t expect a financial system breakdown, the potential for some disruption to international trade and capital flows exists and that puts a premium on maximizing our efforts now. Finally, the practice of risk management must permeate all levels of your institutions, from the executive offices to the trading rooms. The senior management of most large financial institutions now have a variety of sophisticated measures and reports on their firms’ exposures, making it possible for them to track credit and market risks on a daily basis. But if the insights gleaned from these risk management tools are not incorporated into the operations of the front line, where both trading and credit decisions are made, they will be of little help when they are needed most. This is especially true for this audience because of the constant and rapid evolution of the fixedincome markets. Against the backdrop of the budget surplus in the United States, there are expectations for a continued reduction in the supply of U.S. Treasury securities. Borrowers in a variety of markets – including corporate, agency, and, to a lesser extent, emerging market and mortgage-backed securities – have taken this opportunity to meet investor demand with a greater volume of new issues and larger offering sizes.

One issue is the increasing integration of banking, securities and insurance services; a second is the increasing pace at which capital moves across international borders; a third, the Year 2000 problem; and a fourth, the challenge of bringing improved risk management techniques to business operations as a whole, including the trading rooms. This is particularly important for participants in the rapidly changing fixedincome markets. First, the integration of previously separate financial services means that institutions must be prepared to manage risks across a far wider range of products, business units, and counterparties than they have been accustomed to doing. In the securities lending markets, for example, an increasing number of firms are accepting equities as collateral for financing arrangements, or structuring securities lending transactions off-balance-sheet through total return swaps and other derivative structures. Thus, corporate treasurers must develop greater expertise in equity and derivatives markets. More broadly, the potential economies of scale and scope, as well as the potential benefits of reducing risk through sectoral and geographic diversification, have fueled the trend towards consolidation in varied financial industry sectors. As this trend continues, we must meet the challenge of merging the risk management practices of previously separate financial firms. These readjustments are likely to be far more complex for firms consolidating across the spectrum of financial service providers. A second issue that has an important bearing on risk management techniques is the increasing pace at which capital moves across international borders.