notably in the markets for over - the - counter ( otc ) derivatives and in short - term funding markets. the federal reserve, together with other regulators and the private sector, is engaged in a broad effort to strengthen the financial infrastructure. for example, since september 2005, the federal reserve bank of new york has been leading a major joint initiative by both the public and private sectors to improve arrangements for clearing and settling credit default swaps and other otc derivatives. the federal reserve and other authorities also are focusing on enhancing the resilience of the markets for tri - party repurchase agreements, in which the primary dealers and other large banks and broker - dealers obtain very large amounts of secured financing from money funds and other short - term, risk - averse investors. in these efforts, we aim not only to make the financial system better able to withstand future shocks but also to mitigate moral hazard and the problem of " too big to fail, " by reducing the range of circumstances in which systemic stability concerns might prompt government intervention. more generally, the stability of the broader financial system requires key payment and settlement systems to operate smoothly under stress and to effectively manage counterparty risk. currently, the federal reserve relies on a patchwork of authorities, largely derived from under the memorandum of understanding, the sec and the fed will freely share information and analyses pertaining to the financial conditions of primary dealers. the two agencies have also agreed to work jointly with the firms to support their continued efforts to strengthen their balance sheets, their liquidity, and their riskmanagement practices. see : board of governors of the federal reserve system and securities and exchange commission ( 2008 ), " federal reserve and sec issue memorandum of understanding to deepen information sharing and cooperation ", press release, july 7. bank - affiliated primary dealers are already subject to mandatory consolidated supervision, but the focus of that supervision has been on limiting risks to the banks and other insured depository institutions within the holding company. existing provisions may need to be modified to provide regulatory authority to assess and limit risks to all functionally regulated entities, including securities subsidiaries. our role as a banking supervisor, as well as on moral suasion to help ensure that the various payment and settlement systems have the necessary procedures and controls in place to manage the risks they face. by contrast, many major central banks around the world have an explicit statutory basis for their oversight of payment and settlement systems. because robust payment and settlement systems are vital for financial stability, the congress

##ally important securities firm. 4 president's working group on financial markets ( 2008 ), " policy statement on financial market developments ", march 13. the membership of the financial stability forum consists of central bankers, regulators, and finance ministers from many countries, including the united states. their report is available at : financial stability forum ( 2008 ), " report of the financial stability forum on enhancing market and institutional resilience ", april 7. the treasury blueprint is available at : u. s. department of the treasury ( 2008 ), " blueprint for a modernized financial regulatory structure ", march 31. primary dealers are banks and securities broker - dealers that trade in u. s. government securities with the federal reserve bank of new york. on behalf of the federal reserve system, the new york fed's open market desk engages in the trades to implement monetary policy. prudential supervision of investment banks since the near - collapse of the bear stearns companies, inc., in march, the federal reserve has been working closely with the securities and exchange commission ( sec ), which is the functional supervisor of each of the primary dealers and the consolidated supervisor of the four large investment banks, to help ensure that those firms have the financial strength needed to withstand conditions of extreme market stress. to formalize our effective working relationship, the sec and the federal reserve this week agreed to a memorandum of understanding. 5 cooperation between the fed and the sec is taking place within the existing statutory framework with the objective of addressing the near - term situation. in the longer term, however, legislation may be needed to provide a more robust framework for the prudential supervision of investment banks and other large securities dealers. in particular, under current arrangements, the sec's oversight of the holding companies of the major investment banks is based on a voluntary agreement between the sec and those firms. strong holding company oversight is essential, and thus, in my view, the congress should consider requiring consolidated supervision of those firms and providing the regulator the authority to set standards for capital, liquidity holdings, and risk management. 6 at the same time, reforms in the oversight of these firms must recognize the distinctive features of investment banking and take care neither to unduly inhibit innovation nor to induce a migration of risk - taking activities to less - regulated or offshore institutions. strengthening the financial infrastructure the potential vulnerability of the financial system to the collapse of bear stearns was exacerbated by weaknesses in the infrastructure of financial markets,