, exchange - traded market when the trading halt ends? what kinds of problems might domestic specialists and market makers have in restarting if the market has moved away from them during the halt? recent changes to shorten the duration of the circuit breakers likely would ameliorate these concerns somewhat, but the worry remains. - 3another important change in the financial landscape in the years since the crash has been a greater focus on risk management by both market participants and supervisors. developments of new instruments, both on and off exchanges, and of new methods for evaluating risk, have given market participants powerful new tools to allow them to absorb market shocks. similarly, risk management tools have been enhanced at clearing organizations. regulators must respond to these new tools. to fully utilize their benefits, regulators will need to approach regulation and supervision in different ways. a good example is to be found in the approach by banking supervisors to developing a capital requirement for market risk. after initial fits and starts, the basle supervisors ’ committee embraced the concept of using banks ’ internal models as a basis for a capital requirement for market risk. the federal reserve has taken this process of employing new approaches to regulation a step further with its pre - commitment proposal. pre - commitment allows banks to commit to the maximum loss they will experience over the next quarter in their trading portfolio ; this commitment becomes their capital requirement. the proposal gives banks incentives to establish the commitment in a prudent fashion through fines and disclosures if it is violated. economists in the audience will recognize this proposal as an application of an incentive - compatible approach to regulation. i suspect that there are far more areas in our regulatory structure in which incentive - compatible approaches could be implemented. self - regulatory organizations also may find such an approach beneficial, particularly in this era in which sros are being asked to assume more and more regulatory responsibilities. incentive - compatible regulation essentially tries to harness the self - interest of market participants to achieve broader public policy goals. by using such an approach, our overall goal is to make individual market participants more resilient and better able to withstand shocks. this, after all, is the most basic ( and probably the most effective ) protection for firms faced with events such as the 1987 crash. at a macroeconomic level, public policies also should ensure that markets and the economy itself can withstand shocks. while the 1987 crash did not have significant, real economic effects, this is not always the case with stock market crashes. such episodes are generally accompanied by dramatic increases

well. numerous changes also have been implemented in clearing systems. doubts that emerged about the soundness of clearing systems were some of the most frightening aspects of the crash. the changes to clearing systems have received far less attention than those to trading systems, but their long - term consequences likely are more profound. such critical parts of the “ plumbing ” as the agreements between the futures clearing houses and the settlement banks have been clarified and put on a much sounder footing. in addition, many clearing organizations have established back - up liquidity facilities that will enable them to make payments to clearing members in a timely fashion even if a clearing member has defaulted. in both our evaluation of trading mechanisms and our evaluation of clearing systems, an important intangible outcome of the crash is that we now have a better understanding of the way these systems work. during ordinary trading days, market participants rarely if ever question counterparties ’ ability and willingness to perform on obligations. in the months following the crash, policy makers and market participants began to examine those payment conventions more closely. the bulk of the changes to risk management systems that flowed from the crash related to efforts to clarify or make more rigorous the responsibilities and obligations of market participants that previously had been left ambiguous or were part of the lore of “ normal ” market practice. - 2another very important intangible legacy of the crash is our better understanding of the need for cooperation and coordination among commodity, securities, and banking market authorities. the crash vividly illustrated the extent to which markets are intertwined and the extent to which large financial firms have lines of business that cut across many markets. the forums for coordination are almost too numerous to mention, not least of which is the president ’ s working group on financial markets. the working group comprises the heads of the treasury, sec, cftc, and federal reserve, and in addition, other banking supervisory agencies, the national economic council, and the council of economic advisers participate. prospect looking forward, we are better positioned today to absorb market shocks than we were prior to the 1987 crash. we undoubtedly, however, will have many different problems in future periods of volatility. responses to events such as the 1987 crash tend to be crisis - specific. one of our challenges is to make public policy responsive to changing market conditions rather than let it be driven solely by the most recent crisis. the circuit breakers put in place after the crash offer an interesting example of this phenomenon. circuit breakers are trading halts coordinated across the equity and