william c dudley : remarks at panel discussion on otc derivatives reform and broader financial reforms agenda remarks by mr william c dudley, president and chief executive officer of the federal reserve bank of new york, at the 2013 otc derivatives conference, paris, france, 12 september 2013. * * * it is a pleasure to be here. who wouldn ’ t want to be in paris – anytime – let alone in september? my comments today will focus on how over - the - counter ( otc ) derivatives reform fits in with the broader financial reform agenda and those aspects of the reform effort in otc derivatives that could potentially fall short relative to those broader objectives. my short answer, which i will elaborate on in my remarks, is that the otc derivatives reform effort fits in very well with the broader reform agenda, but there are significant risks that we will fall short in this arena relative to what we are likely to achieve elsewhere. as i see it, the g20 reform effort for otc derivatives has three broad goals : reduce systemic risk with respect to otc derivatives activities ; improve the ability to aggregate and analyze over - the - counter derivatives otcd risk exposures across markets, institutions and product classes ; and improve competition and protect against market abuse. systemic risk is being reduced in a number of different ways. first, mandating the standardization, whenever possible, and central clearing of otc derivative trades can reduce risk by transforming a complex web of bilateral firm exposures into a smaller set of net exposures between each dealer and the central counterparty ( ccp ). given their role in fostering financial stability, robust financial market infrastructures ( fmis ) that are properly risk - managed can serve as a source of strength in times of stress. central clearing can also reduce systemic risk by requiring collateral from the participants. to the extent that the otcd reform effort results in the greater use of collateral, that should also help make the system safer. second, increasing capital and liquidity requirements, improving governance, risk management, and resolution and recovery, as well as implementation of the principles for financial market infrastructures ( pfmis ) promulgated by the committee on payment and settlement systems ( cpss ) and the international organization of securities commissions ( iosco ) should make fmis more robust and resilient. fmis performed well during the financial crisis, but with otcd reform, we are asking fmis to do even more, so the bar needs to be higher. third, firm

monetary / exchange regimes, despite their very difficult starts under the most inauspicious of circumstances, now appear to be serving countries well. inflation is in the very low single - digit range in most of the newly floating economies, and in many instances the successful effort to bolster monetary credibility has been reflected in short - term interest rates that have declined to historically low levels. moreover, authorities have gained new degrees of freedom to manage their economies and to respond to changing internal and external circumstances. but if the promised benefits of monetary discretion are to be fully realized going forward, markets need to understand the objectives and the framework by which the monetary authorities will decide future policy actions. in this regard, i would note that some countries, including thailand, have looked to inflation targeting as a framework to accomplish that end. and indeed, inflation targeting would seem to have much to recommend it, provided that it is approached not as a panacea, but rather as a pragmatic organizing framework for policy. in other words, policy frameworks such as inflation targeting can be useful where they signal a disposition towards continuous and predictable communication, and a forward - looking, informative policy approach. but as i said, inflation targeting per se is not a sure - fire solution – for example, the costs of disinflation do not appear to be lower in inflation - targeting countries – nor is it a prerequisite for effective communication and ultimately effective policy. role of fiscal policy clearly, crisis prevention through promoting stable and sustainable conditions in the macro - economy is not solely the province of central banks. sound fiscal policies are needed to complement the effectiveness of even the soundest monetary policies. chronically loose fiscal policy is a persistent threat to macroeconomic stability, through the build - up of internal and / or external debts that can be devastating. for the countries of east asia, the public sector ’ s generally low initial indebtedness provided important latitude for dealing with the recent crises. governments had room to stimulate aggregate demand recovery through fiscal ease ; moreover, extensions of public guarantees and capital helped to contain the banking crises. however, while initially strong fiscal positions provided flexibility to address financial sector problems and aid recovery, public debt has since risen to high levels in a number of countries, and contingent liabilities often remain significant, raising some concern about potential future debt growth. thus, governments now face the challenge of moving to retighten fiscal policy in the face of slowing economies, and over the longer term, gradually restoring