arrangements, or structuring securities lending transactions off - balance - sheet through total return swaps and other derivative structures. thus, corporate treasurers must develop greater expertise in equity and derivatives markets. more broadly, the potential economies of scale and scope, as well as the potential benefits of reducing risk through sectoral and geographic diversification, have fueled the trend towards consolidation in varied financial industry sectors. as this trend continues, we must meet the challenge of merging the risk management practices of previously separate financial firms. these readjustments are likely to be far more complex for firms consolidating across the spectrum of financial service providers. a second issue that has an important bearing on risk management techniques is the increasing pace at which capital moves across international borders. the proliferation of electronic trading and banking may not only improve the efficiency with which transactions are executed, but also may accelerate the rate at which capital flows through global financial markets. the rewards of increasingly open financial markets may be great, but the punishment for poor investment decisions and lapses in public policies may be comparably severe. thus, global financial markets are likely to place a greater premium on robust risk management practices. the year 2000 computer problem is a third issue that needs to be a top priority for risk managers. one need only look at the price action in interest - rate futures markets to note the high degree of uncertainty surrounding this issue. while an organization may have prepared its internal systems, it still may be exposed to credit risk from less - prepared counterparties in both the public and private sector. thus, i fully support the contingency plans a number of institutions are putting in place. i think it is important to make clear that it is the boards of directors and senior management of financial institutions – not the regulators – who must be responsible for ensuring that their – 3 – companies provide seamless and high - quality service through the year end. the federal reserve system has completed the internal testing of almost all of its applications. in addition, the governments of various industrialized nations stepped up their internal y2k remediation efforts last summer. at the official level, international cooperation is intensifying through groups such as the joint year 2000 council, chaired by my federal reserve colleague, governor ferguson. however, it is plausible that time will simply run out for some countries and some institutions. while i certainly don ’ t expect a financial system breakdown, the potential for some disruption to international trade and capital flows exists and that puts a premium on maxim

##izing our efforts now. finally, the practice of risk management must permeate all levels of your institutions, from the executive offices to the trading rooms. the senior management of most large financial institutions now have a variety of sophisticated measures and reports on their firms ’ exposures, making it possible for them to track credit and market risks on a daily basis. but if the insights gleaned from these risk management tools are not incorporated into the operations of the front line, where both trading and credit decisions are made, they will be of little help when they are needed most. this is especially true for this audience because of the constant and rapid evolution of the fixedincome markets. against the backdrop of the budget surplus in the united states, there are expectations for a continued reduction in the supply of u. s. treasury securities. borrowers in a variety of markets – including corporate, agency, and, to a lesser extent, emerging market and mortgage - backed securities – have taken this opportunity to meet investor demand with a greater volume of new issues and larger offering sizes. in addition, expectations for increased investor demand for euro - denominated investments, together with the possibility of reduced participation by speculative and arbitrage trading accounts, are likely to have an effect on spreads of fixed - income securities to treasuries. traders in various fixed - income markets already have begun to note increased levels of spread volatility and expectations for higher absolute spreads relative to historical levels in response to these market dynamics. in this environment, managing market risk will become more difficult as the nature of fixedincome spread products changes. as we recently have learned, spread relationships that had endured for many years can break down suddenly, thereby increasing the already complex task of hedging positions. the increase in the liquidity premium for on - the - run treasury securities last fall resulted in increased hedge - related activity in both the interest - rate swap and treasury futures markets. traders have continued to explore the usefulness of non - treasury fixed - income securities as hedging vehicles. risk managers must, therefore, be especially rigorous in analyzing their firms ’ positions and hedging strategies, particularly when historical experience may not be as predictive a guide as it once seemed to be. i am encouraged by some recent market efforts to improve risk management practices. in lending, the risk - return discipline has been greatly enhanced at some international banks. these institutions have introduced measures to compare credit spreads with historical loss rates on well