Major banks and dealers at the core of these markets generate both short- and longer-term credit and market risk exposures from a number of sources and activities, including trading positions, loan commitments that support securities issuance, and warehousing positions in advance of packaging and distributing them. Retained interests associated with securitization transactions are substantial relative to capital of the largest firms. And the importance of securitization for the firms-both from a funding and revenue generation standpoint-provides an incentive for them to support investors in these products in ways that may go beyond contractual obligations. •  The post-trade processing and settlement infrastructure, particularly in credit derivatives, is still quite weak relative to the significance of these markets, although the major dealers and buy-side investors are making a substantial effort to address these problems. The total stock of unconfirmed trades is large and until recently was growing considerably faster than the total volume of new trades. The time between trade and confirmation is still quite long for a large share of the transactions. The share of trades done on the available automated platforms is still substantially short of what is possible. Until the adoption of a new protocol last fall, firms were typically assigning trades without the knowledge or consent of the original counterparties. Nostro breaks, which are errors in payments discovered by counterparties at the time of the quarterly flows, rose to a significant share of total trades. Efforts to standardize documentation and provide automated confirmation services has lagged behind product development and growth in volume.

They mean that in thinking about ways to mitigate systemic risk it is not tenable to focus simply on bank-centered financial institutions, and it is not feasible to achieve change through national approaches applied only to the institutions of the home country. For these reasons, where we see a need to induce a broader change in market practice, a broader range of informal mechanisms of cooperation among supervisors, among market participants and involving supervisors and market participants would be useful. The second generation of the Counterparty Risk Management Policy Group, led by Jerry Corrigan, is one example of a market-led initiative to define a set of common challenges and recommendations for  4  BIS Review 14/2006  change. Supervisors in the major financial centers are following progress against those recommendations closely. The effort to improve the post trade processing infrastructure for over-the-counter derivatives is an example of regulatory cooperation to help address a collective action problem among market participants, with some encouraging initial results. In this effort, the 14 major dealers along with almost as many supervisors and market regulators from the United States and other major countries, met at the New York Fed in September 2005. We outlined our concerns and asked the dealers to give us a plan for how to fix the problem. They came up with a credible plan, with a set of outcomes-based targets, and agreed to report progress on a common set of metrics.