Well, the central counterparty, who is a known player, functions as the counterparty to each of the parties to the transaction. The seller and the buyer then have a claim and a liability, respectively, with the central counterparty instead of with each other. The advantages of a central counterparty are that securities settlement can be both safer and more efficient. The transactions can be netted out 5 and the counterparty is known. The counterparty risks can be managed by the central counterparty obtaining collateral. Moreover, the central counterparty has its own financial resources. The drawback with a central counterparty is that the market risks are concentrated to a single player – a high concentration of risk. Provided the operations are properly organised, however, this is not a problem. Still, the concentration of risk does mean that central counterparties are often systemically important. Supervision and oversight are therefore highly relevant. 6 I shall leave counterparty risks for the moment and turn to the problem in the United States with insufficient market transparency. Many American credit derivatives are non-standardised products and have therefore been inherently difficult to understand and value. If attempts were made to cope with the lack of transparency, one way would be to use electronic trading because this enhances market transparency and reduces the risk that access to information is not uniform. Another important effect of electronic trading is that concentrating trading to one facility makes pricing more efficient. Each order can be matched with the best price.

The big moves in asset prices during 2009 – a 50% rise in equities, 150bp fall in LIBOR spreads, the 150 bps fall in targeted corporate bond spreads for example – will have been strongly supported by the Bank’s monetary policy operations. And by purchasing the gilts which asset managers and others would normally have bought, the impact of the quantitative easing programme will have been to increase the demand for more risky assets – like corporate bonds. So the corporate and gilt purchase programmes have been complementary. Conclusion In my talk this evening, I hope I have explained a bit more clearly the motivation for and the design of the APF corporate purchase schemes. The Bank has not sought to provide large scale funding directly using public money. Rather, the operations have been consistent with a central bank acting as “Market Maker of Last Resort”. The Bank has transacted in modest quantities designed to improve the liquidity of corporate credit markets, bring down the cost of credit and encourage private sector lending. That has been supported by the much larger programme of quantitative easing and the low level of Bank Rate. The evidence suggests that, in conjunction with a very large monetary stimulus, abroad as well as at home, the corporate purchases have been successful in helping to invigorate those corporate credit markets in which the Bank has intervened. References Benford J, Berry S, Nikolov K, and Young, C (2009), “Quantitative Easing”, Bank of England Quarterly Bulletin 2009 Q2, available at http://www.bankofengland.co.uk/publications/quarterlybulletin/qb090201.pdf.