agathe cote : toward a stronger financial market infrastructure for canada – taking stock remarks by ms agathe cote, deputy governor of the bank of canada, to the association for financial professionals of canada ( montreal chapter ), montreal, 26 march 2013. * * * introduction it ’ s a pleasure to be here today. i am going to take advantage of this audience of financial professionals to talk about financial market infrastructure, a subject that affects every single person in one way or another – you, because of the nature of your work, more than others. usually, when people talk about infrastructure, they think about roads and transportation systems. montrealers, like everyone who lives in a big city, know only too well what happens when a city ’ s infrastructure system is weak or fails : delays, disruptions of all kinds, and various degrees of chaos. the nature of infrastructure is such that we only truly understand its importance when it fails us. the same goes for financial market infrastructure. virtually all financial transactions are cleared, settled and recorded through financial market infrastructures ( fmis ). fmis allow consumers and firms to safely and efficiently purchase goods and services, make financial investments, and transfer funds. given the critical role of fmis, their risk management is of paramount importance ; indeed, the subject of “ systemic risk ” was a hot topic in discussions about infrastructure long before the recent financial crisis. over the past twenty years, there has been a steady stream of improvements, for example, developing payments systems and safely settling foreign exchange transactions across time zones. these improvements proved their worth during the crisis. despite numerous institutional failures around the world and extreme levels of uncertainty and risk aversion, fmis continued to perform their critical functions. the crisis also highlighted the importance of one type of fmi in particular – central counterparties ( ccps ). a ccp acts as a buyer to every seller and a seller to every buyer for the financial transactions that it clears. an appropriately risk - controlled ccp improves the market ’ s resilience by reducing counterparty credit risk and, therefore, the potential for disruptions to be transmitted through the financial system. this helps essential markets to remain continuously open, even in times of severe stress. a ccp also provides enhanced netting efficiencies to its members, and helps to manage defaults in a controlled manner. for example, the lehman brothers default, one of the most memorable and dramatic of the recent crisis, would have been even worse if

when both the new zealand and australian dollars are rising or falling, our currency has often gone a little further than theirs : perhaps something to do with our smaller size and less - liquid markets. it is not my main topic today but can i make just a few quick observations about interest rates. first, our interest rates are currently low by our historical standards ( lower than they were when the exchange rate was falling, and only lower than this on three occasions in the last 20 years ). even after adjusting for inflation, interest rates are lower than they have been for most of that time. second, while the reserve bank ’ s monetary policy has a big influence over the level of short - term interest rates over short periods of time, the average or normal level of interest rates over periods of years is mainly determined by new zealanders ’ willingness to save and appetite to borrow. for reasons that are not fully understood, over the years new zealanders have continued to have a higher appetite for debt, at any particular level of interest rates, than do citizens of most other countries we typically compare ourselves with. only when that changes will our interest rates settle, on average, around the level of those in other countries. i want to turn now to outline something of how we think about the exchange rate in setting monetary policy. in setting the official cash rate, we are always very conscious of exchange rate changes, and how those developments will affect the outlook for growth and inflation a little down the track. those effects have changed through time. for example, not just in new zealand but internationally, prices seem to be less responsive to exchange rate movements than they were 15 years ago. suppliers seem to be absorbing more of the impact of cyclical fluctuations in the exchange rate. and as an increasing proportion of our exports are moving up the value - chain, our firms are getting a little more pricing power themselves, and hence are less immediately exposed to the effects of exchange rate fluctuations. and, of course, access to sophisticated financial derivatives gives many firms some breathing space to adjust to changes in the exchange rate. but as a trading nation, exchange rate fluctuations will always be a big influence on the short - term economic outlook, and monetary policy. a rising exchange rate has a very real impact on exporting firms, and those supplying them - here in christchurch and throughout the country. and it does so particularly when individual cross - rates move rather differently, for reasons that have nothing to do with events in new zealand : for example,