in productivity. the bank ’ s focus on bringing inflation down to low and sustainable levels reflects both this fundamental national objective as well as its own statutory objective of achieving and maintaining monetary stability. 6 the second main responsibility of the bank is to promote and maintain financial stability through the regulation and supervision of domestic banks, by assisting in the development and operation of an efficient payments mechanism, and by maintaining confidence in the currency. these functions constitute the bulk of the bank ’ s activities, and they involve the licensing of commercial banks and other deposit - taking institutions, continuous monitoring of their solvency and liquidity, daily processing of cheques and other means of payment used in the hundreds of thousands of financial transactions that occur each day, and designing, printing and minting as well as distributing good quality bank notes and coin to the public. 7 it is important to point out that the overall credibility of the bank, and hence its effectiveness in achieving its fundamental objectives, is critically dependent on how well it performs these operational tasks. competent and well - trained staff, high standards of efficiency and accuracy, up - to - date equipment and facilities, are required and must have the full attention of management to ensure that they are the best available for the job to be performed. experience has shown that financial stability and monetary stability are inextricably linked. this means that regulation and supervision of financial institutions will be most effective in an environment of macroeconomic stability. a consistent and sound macroeconomic policy environment, with complementary monetary, fiscal and exchange rate policies, is essential. major inconsistencies inevitably lead to an increase in economic and financial risks, to the point where the financial system itself becomes vulnerable. at the same time, the absence of a well - functioning financial system will make the achievement of monetary stability more difficult. there is one other element of a sound and efficient financial system that must be taken into account by the bank. it is that corporate governance for financial institutions be of the highest standards, and that specialist service providers, such as accountants, auditors and lawyers, adhere to equally high professional standards and code of business ethics. you will agree that if accounting and auditing standards are weak or perverted, effective banking regulation and supervision will be seriously compromised. that is why in addition to on - site and off - site supervision, the bank of botswana regularly meets commercial banks bilaterally and as a group, to ensure that good corporate governance is the order of monetary policy statements 2003 and 2004, bank of botswana, ga

the management of credit and market risk, where best practice aggregates risk on a consolidated basis across the full range of activities of the institution. we believe that it is important for banks to carefully monitor a comprehensive profile of their payments system exposures, and to assign clear responsibility for that function in one place in the institution. i noted earlier the value of transparency of rules and procedures for payments systems, but this is useful only if participants make use of that transparency. both the operator and the participants should know the rules of the road. in complex clearing and settlement systems, each firm should fully understand its exposures and how they are changing across the board, and not just on a business line by business line basis. participants need to understand how the system ’ s procedures would affect them in the event they came under stress, and how these procedures would be applied to others in the event a major firm had difficulty settling on the system. transparency is important also to ensure that the major system participants play their appropriate role in holding the operators of payments systems to high standards. participant or member discipline should complement the work of payments system overseers, in a role analogous to the market discipline applied by counterparties to financial institutions. clearing and settlement arrangements for otc derivatives as we look at the evolution of the global payments system, one critical area that deserves further attention by market participants and central banks is the clearing and settlement arrangements for the over - the - counter derivatives market. this is an area where the innovation that has driven rapid growth has not been matched by a comparable investment in the infrastructure for post - trade processing. because of the relatively slow development of clearing and settlement services for the otc derivatives market, dealers and their counterparties have been forced to assume and manage risks that are largely avoidable. unexecuted confirmations create unnecessary legal risk for counterparties and can add to replacement cost risk. delays and errors in settlement add cost and liquidity risk. there are a number of important efforts by the private and official sectors that offer the promise of progress. the effort underway by the industry to standardize documentation, automate confirmation procedures, and match and reconcile payment flows is very important. the fed has played a role in shaping recommendations for close - out netting on a cross - product basis, and has been strongly supportive of efforts to put these provisions into u. s. law. adoption of the hague securities convention by countries around the world will improve legal certainty for cross - border collateral arrangements, which is important for