The second major goal is to promote consistent global enforcement of the standards. Toward this end, the Principles unify and harmonize three existing sets of standards – Core Principles for Systemically Important Payment Systems; Recommendations for Securities Settlement Systems; and Recommendations for Central Counterparties. As part of this effort, the Principles strengthen the “responsibilities of authorities.” This includes a new framework for cooperation among financial authorities. It calls for central banks, market regulators, and other relevant authorities to cooperate with each other, both domestically and internationally, and to support each other in fulfilling their respective mandates to promote the safety and efficiency of FMIs. This builds upon existing frameworks that have already been used successfully by CPSS and IOSCO for effective cooperation in the oversight of global institutions. Such cooperation can facilitate more comprehensive oversight, improve efficiency and effectiveness, reduce or eliminate any gaps in regulation, supervision, and oversight, and minimize potential duplication of effort and burden on both the FMIs and the cooperating authorities. Toward the goal of consistent global enforcement, the Principles are considered to be minimum requirements. In contrast, the three old sets of guidance were weaker, being recommendations rather than requirements. As recommendations, they could be ignored. In contrast, as the Principles make clear, countries that are members of CPSS and IOSCO are  BIS central bankers’ speeches  5  to apply the principles to “the fullest extent possible.” This means that regulation and legal frameworks are to be adjusted as needed in order to accommodate the standards.

First, there have to be strong incentives in the system – such as capital requirements on banks and securities dealers – to provide an impetus for dealers to standardize OTC derivatives trades whenever practical. The goal is fewer bespoke trades and more standardized trades. Second, the G20 leaders agreed that all standardized OTC derivative trades should be mandatorily cleared through CCPs by the end of 2012. Third, records for all OTC derivative trades – including bilateral bespoke trades – must be reported to trade repositories. The data as part of this reporting requirement would include key trade attributes and a legal entity identifier so that aggregate exposures could be readily calculated. Fourth, the two standard-setting bodies mentioned earlier – CPSS and IOSCO – would strengthen and broaden the principles for financial market infrastructures. Fifth, these Principles would be adopted globally, strengthening the resilience of the financial system. The logic behind these five elements of reform goes like this: Standardizing trades improves transparency and price discovery. This mitigates the opaqueness that helped to generate the illiquidity and loss of market function evident during the crisis. Requiring that such trades be cleared through CCPs is designed to reduce the aggregate amount of risk in the system. That is because the gross exposures can be netted down when all the dealers clear through one common central clearing party. In a CCP framework, the bilateral exposures of each dealer to one another are replaced by a single set of claims to and from the CCP.