It ensures the robust collateralisation of the remaining net exposures through the margin taken from participants. And in the event of a default, any losses that exceed the defaulter’s collateral margin held by the CCP are mutualised between the members. As the Lehman experience illustrated, the centralised, rules-based management of a clearing member’s default by a CCP, combined with the incentives created by mutualisation enhance the system’s resilience and continuity during a stress and brings greater certainty to the default management process for market participants. Central clearing also brings greater transparency – in the run up to the crisis and during the crisis itself, authorities had very poor visibility over the network of derivatives transactions. That made it much harder to identify risks and the connections between institutions. 3  All speeches are available online at www.bankofengland.co.uk/speeches  3  2  Not all derivative contracts are suitable for central clearing. Where clearing is not possible, the post crisis reforms include similar requirements to margin and report bilateral derivative contracts. But the additional mutualisation and central default management benefits of central clearing, justify in my view, the authorities efforts since the crisis to move derivatives that are suitable for clearing onto CCPs. These efforts have been successful. Reforms since the crisis have led to a very substantial increase in the use of clearing services for both exchange traded and over the counter derivatives.

These benefits to financial stability complement the critical role that capital markets play in efficient resource allocation and in reducing overreliance on the banking sector for the mobilization of savings and financial intermediation. Additionally, diversified financial markets provide investors with alternative asset classes in times of financial stress. However, developing such markets is a long-term process that requires proper planning, appropriate prioritization and decisive action in several successive stages. Divert efforts from further development of financial markets Financial markets in EE’s have become more interlinked within the local and global financial systems, but they are still shallow and prone to sudden price movements and greater disruption that may undermine confidence in their integrity. It is therefore important that the ongoing fundamental reforms in emerging financial markets continue and that these longer term priorities are not forgotten as a consequence of predominant focusing on the policy response to the financial crisis and on the accomplishment of the international regulatory reform agenda. In this sense, a decisive action is needed to develop a domestic investor base, address market illiquidity, and improve key aspects of market infrastructure in order to mitigate risks to emerging economies’ financial stability. Ultimately, development of bond markets, money markets and government securities markets is the optimal route for further progress on this front. The assistance of international partners in this area is of a key importance and should not be neglected in conditions of growing challenges of different size and shape on both sides.