christine m cumming : comments at the 10th anniversary of cls remarks by ms christine m cumming, first vice president of the federal reserve bank of new york, at the celebration of the 10th anniversary of cls, new york city, 17 april 2013. * * * i am honored to be here tonight to speak on the occasion of the 10th anniversary of the founding of cls. today, it ’ s hard to recreate the shock created by bankhaus herstatt ’ s failure in 1974 and the revelation that even a relatively small, internationally active bank could pose such substantial financial risk to participants in the foreign exchange market. herstatt ’ s failure was just one of several shocks in the early 70s that signaled the end of two plus decades of relatively tranquil recovery and growth after world war ii. another notable shock of those years, of course, was the breakdown of the bretton woods foreign exchange arrangements and the introduction of substantial and unfamiliar volatility to the foreign exchange markets. a saving grace was that the foreign exchange community has had the great good fortune over the decades to be led by participants who recognized the importance of a healthy, resilient and change - friendly marketplace and worked collaboratively to achieve that. over the years, the foreign exchange community also forged bonds with central banks in major financial centers to promote foreign exchange market health. it has been a great model of public - private cooperation made possible by private - sector leadership. despite all that, foreign exchange market participants and central banks in 1974 found herstatt risk to be an intractable problem. all that was left to banks was to manage it. and so it went for 20 years. then, in the mid - 1990s, bill mcdonough, president of the new york fed, identified the continued existence of herstatt risk as a challenge to be met. as chairman of the committee on payments and settlement systems of the g - 10 central bank governors, he spurred the central bank community to take a fresh look. this time, the combination of new financial analysis and the rapidly expanding availability of raw computing power made the difference. • in what today still stands as a landmark in analysis of the connection between operational and financial risk, the 1996 allsopp report demonstrated in a straightforward manner just how much financial risk existed in the bilateral settlement of gross principal amounts of foreign exchange – an analysis that provided the insight into how a settlement facility could reduce that risk, and into understanding how settlement management could improve in the interim

2007, 2009 and 2011. ( b ) results are based on portfolios comprising assets rated by all respondents in the sample ( co - rated ). ( c ) portfolios differ between the exercises in 2007, 2009 and 2011. results have been normalised by the mean. ( d ) sample sizes differ : six to twelve in 2007 and seven to thirteen in 2009, depending on portfolio ; and eight in 2011. ( e ) the bars show the maximum – minimum ranges. the values on top of the 2011 results indicate the maximum – minimum ratio. bis central bankers ’ speeches sovereigns banks corporates source : fsa, and bank calculations ( a ) based in the results of the fsa ’ s hypothetical portfolio exercise for 2011. ( b ) results are based on portfolios comprising assets rated by all respondents in the sample ( co - rated ). ( c ) the sample includes six banks. ( d ) the bars show the maximum – minimum ranges. the values on top of the 2011 results indicate the maximum – minimum ratio. chart 5 : risk weight variability in the trading book ( a ) ( b ) ( c ) ( d ) 1, 000 max - min range chart 6 : risk weight variability in the irc model ( a ) 66. 2 median 1, 000 5. 3 3. 9 max - min 30 78 100 88 2. 3 median 183 127 var svar irc 8 12 13 18 19 20 21 22 23 24 all - in source : bcbs ( a ) from the bcbs hypothetical portfolio exercise for the trading book. ( b ) sample consists of 15 banks. ( c ) values have been normalised by the median. for each model, the ranges represent the simple average of the normalised minima and maxima for all portfolios the model was applied to. for the all - in portfolio, the supervisory multiplier was held constant. ( d ) numbers on bars indicate maximum - minimum ratios. source : bcbs ( a ) from the bcbs hypothetical portfolio exercise for the trading book. ( b ) sample consists of 15 banks. ( c ) values have been normalised by the median. ( d ) numbers on bars indicate maximum - minimum ratios. chart 7 : average risk weights for major uk banks by counterparty ( a ) ( b ) chart 8 : average risk weights for major uk banks under different approaches ( a ) per cent per cent basel ii irb approach basel ii standardised approach basel i ( c ) financial households other