##s in the limit systems and credit exposure measurement methodologies employed, including limited use of counterparty exposure stress testing. in particular, measures of the potential future exposures arising from derivative positions with hedge fund counterparties were found in need of significant enhancements at some banks. in general, banks placed undue reliance on the collateralization of current mark - to - market exposures and underestimated the potential exposure that could arise under difficult market conditions. the findings of this special review served as a primary source for the basle committee ’ s recent report, “ sound practices for banks ’ interactions with highly leveraged institutions ”. federal reserve staff played a major role in shaping the scope of the basle documents, drafted significant portions of early versions of the basle committee ’ s main paper, and provided significant input into its sound practices paper. president mcdonough ’ s testimony discusses, at length, the content of the basle documents, including the sound practices they identify. the board of governors fully endorses both basle documents. the basle guidance has been incorporated in federal reserve guidance by direct reference in our recent supervision and regulation letter, “ supervisory guidance regarding counterparty credit risk management ” ( s. r. 99 - 3 ). they have been transmitted by the appropriate federal reserve banks to all state member banks and holding companies with significant hedge fund exposures and to all federal reserve staff supervising those institutions. moreover, the march 1999 update to the federal reserve ’ s trading and capital markets activities manual will incorporate the specific sound practices identified in the basle documents in a special hedge fund subsection of its existing counterparty credit risk management section. the results of the targeted reviews conducted in the third and fourth quarter of 1998 have been shared with each institution reviewed, and supervisory plans tailored to each institution ’ s particular circumstances have been developed. supervisory staff is monitoring each bank ’ s management of hedge fund counterparty exposures as well as the bank ’ s efforts to address any identified risk management shortcomings. i understand that other g - 10 bank supervisors have translated the basle documents into the appropriate foreign language and transmitted them to industry associations and / or institutions with hedge fund relationships. in some cases, supervisors have taken steps to monitor bank hedge fund exposures and bank initiatives to enhance internal counterparty credit risk management systems. private sector response in the aftermath of ltcm [ is this a heading? if so, bold and followed by new para. ] as would be expected coming out of the

##ps may play in the future, the governing council of the ecb has confirmed the importance of having at least one ccp clearing facility for otc derivatives in the euro area. to that end, the forthcoming escb - cesr recommendations for central counterparties and the fsb promotion of otc derivative market standards both provide guidance on the application of ccps for otc derivatives ; similar recommendations have been proposed by the us treasury. these communications highlight the importance of reviewing the standards recommended for central counterparties. the committee for payments and settlements systems ( cpss ) and the international organisation of securities commissions ( iosco ) recently initiated such a review of their ccp recommendations. moreover, efforts to apply them in a coordinated manner were deemed to be necessary. market participants also have a role to play in developing this infrastructure and reducing risks in the otc market. they should be ambitious in their aims for adopting the ccp approach ; for those trades that remain outside the ccp, they should seek to refine risk management measures and ensure that they are registered with regulated trade repositories. by implementing ccps and by actively supporting market participants in reducing the risks of otc derivatives, national authorities can effectively mitigate the risks inherent in these markets, thereby fostering financial stability. let me also inform you about another initiative, regarding the measurement of the credit risk transfer. following an initiative of the ecb, the committee on the global financial system ( cgfs ) mandated in september 2008 a working group ( chaired by the ecb ) to review credit risk transfer statistics collected under the auspices of the cgfs. the main focus of attention was on enhancing the biannual cds statistics published by the bis. moreover, the working group investigated ( 1 ) how to make best use of available data, notably those which i already mentioned from the us dtcc, which has been publishing weekly statistics since november 2008, and ( 2 ) the convergence with other statistics ( in particular the bis triennial survey and bis consolidated banking statistics ). to this end, the working group weighed carefully users ’ needs against the estimated reporting costs and concluded on a number of short and medium - to - longer term proposals to enhance the availability of statistics on cds that are now being implemented, with first results expected during the course of next year. 2 these enhanced cds statistics will provide a better insight into the use of cds across economic sectors allow the monitoring of the size and sector composition of credit risk transfer by financial intermedia