the ecb “ with a view to contributing to the safety and soundness of credit institutions and the stability of the financial system within the eu and each member state ”. the emphasis on the systemic perspective is further strengthened by a reference to “ the unity and integrity of the internal market ”. the micro - prudential tasks of the ecb will also have a systemic dimension. namely, the ecb will take decisions regarding all “ significant ” banking groups ( around 150 banks in the euro area countries ). since these institutions have systemic relevance, prudential measures applied will also have consequences on the stability of the financial system as a whole. regarding the macro - prudential tasks conferred on the ecb, the power to initiate and implement macro - prudential measures will primarily remain with the national authorities, subject to a notification mechanism vis - a - vis the ecb. the ecb may object to these measures and the national authorities should duly consider the ecb ’ s reasons prior to proceeding with any decision. moreover, any national competent or designated authority may propose to the ecb to act in order to address the specific situation of the financial system and the economy in its member state. an important feature of the ssm regulation is that the ecb may, if deemed necessary, also apply macro - prudential measures. these measures include higher requirements for capital buffers as well as more stringent measures to address systemic or macro - prudential risks at the level of credit institutions. the application of these measures is however subject to the conditions and procedures specifically set out in the capital requirements directive ( crd iv ) and the capital requirements regulation ( crr ). the toolbox that is envisaged to be at the disposal of macro - prudential authorities, including the ecb, is rather broad. the set of available instruments defined by the crd iv includes ( i ) counter - cyclical capital buffers, ( ii ) a systemic risk buffer, ( iii ) a capital surcharge for systemically important financial institutions as well as ( iv ) pillar 2 measures applied to groups of institutions. the prudential measures that are falling under the remit of the crr and that can be used for macro - prudential purposes include ( i ) capital requirements, ( ii ) sectoral risk weights, ( iii ) large exposure limits, ( iv ) leverage ratio and liquidity requirements, once implemented, and ( v ) public disclosure requirements. additional features

interesting when markets are structurally imbalanced, with short - term traders, dynamically hedging, concentrated on one side. if short - term traders are structurally long, their dynamic hedging may have the effect of dampening market movements, producing zones of local stability. but where, as a group, they are structurally short, their dynamic hedging can sometimes amplify price movements, increasing volatility, if the market proves illiquid under stress. while i have set this out in a rather general way, it isn ’ t fanciful. there are examples of it going back over nearly twenty years : some involving the explicit writing of options ; some implicit writing of options ; and some arising from trading strategies that mimic optionality. for example, the 1987 equity market crash was exacerbated by the prevalence of portfolio insurance, a trading strategy akin to delta hedging an option : sell when prices are falling. a dynamic variant of a ‘ stop loss ’. similar strategies are now a key feature of some principal - protected hedge fund investments, via so - called constant proportion portfolio insurance ( cppi ). to preserve the nominal principal, the ‘ guarantor ’ will sell units in, say, a fund of funds as its value falls, and vice versa. i guess some assumptions are made about underlying liquidity, and that these are reflected in how such strategies are effected. in 1994, and again in 2003, hedging the negative convexity of us mortgage - backed securities amplified the rise in dollar bond yields, with some violence. 3 the underlying factors here, of course, are that us mortgage borrowers have an option to prepay, so they are long options on mortgage interest rates. the financial sector is, correspondingly, structurally short options, which it can – and does – slice and dice in various ways in an attempt to distribute the option exposure to those who want it. but to a greater or lesser extent, a residue is left, some of it with institutions which de facto seem to have short holding periods. they dynamically hedge, either continuously or within thresholds. a rather graphic – if, ultimately, not stability - threatening – example of what i ’ m describing occurred a few weeks ago in the structured credit markets. i ’ ll spend a few moments on this as the distribution of optionality was quite complex. for some while, a wide range of regional banks, insurers and pension funds in europe and asia