in response, many firms have changed their compensation practices since the crisis to better align incentives between individuals and firms, particularly through enhanced deferral of incentive compensation, with delayed vesting and the possibility of more robust forfeiture in a broader set of circumstances. we have strongly encouraged these reforms in our supervision of these institutions. in my view, the reforms are both essential and generally on target. the u. s. financial regulators, including the federal reserve, are also preparing for public comment a proposed new rule on incentive compensation that will codify and strengthen these initiatives. as the review notes, greater transparency can also help curb market abuses and strengthen competition. in the united states, we have had over a decade of experience with the trade reporting and compliance engine ( trace ) in over - the - counter corporate bond, mbs and abs markets. the municipal securities rulemaking board provides similar data for municipal bonds. the dodd - frank act also imposed rules requiring greater transparency in over - the - counter derivatives markets through the use of central clearing, trade repositories, and swap execution facilities. given the issues around otc derivatives during the recent crisis, these clearly are important initiatives. but despite significant progress, there are still a number of impediments to bis central bankers ’ speeches sharing trade report data across regulatory agencies and jurisdictions, leaving us with only a piecemeal picture of the overall market rather than the full transparency that we desire. the issues around foreign exchange ( fx ) benchmarks serve to illustrate one of the important challenges discussed in the review – the difficulty of managing the potential conflicts of interest associated with the traditional market - maker model. in fx markets, a wide range of end users seek to guarantee trade execution at the wm reuters fixing at 4 : 00 p. m. u. k. time each day. this practice results in dealers having advance information about flows, and at the same time places them at some risk, as they are agreeing to execute these orders at an unknown future price. this advance information can create a perception that dealers are trading ahead of their clients, and it certainly created incentives to attempt to influence the fixing price. the recent financial stability board ( fsb ) report on foreign exchange benchmarks 1 made a number of recommendations designed to address these issues in this specific market, including use of trading platforms to maximize the netting of fixing orders, encouraging dealers to charge a transparent bid - asked spread or other fee to compensate them for the risk they take, and

the consequent franchise value would compensate nfbs for the costs they incur because they can hold only high - quality securities, are subject to supervision and prudential requirements, and have to operate in a highly transparent fashion. in essence, abs - backed repo funding would be limited to nfbs. the first two questions i would pose about this creative policy proposal are the most basic : what problem is it supposed to solve, and how does the breadth of the remedy align with that problem? given their analysis of the breakdown of the repo market, gorton and metrick ’ s answer might be self - evident : the g - m proposal aims to solve the information problems that increased the risk from maturity transformation associated with abs repo funding. this, of course, is not solving for the entire shadow banking system, though an effective plan for reforming the abs repo market would be a major accomplishment in itself. 2 but in proposing a solution to this problem, g - m would significantly restrict all asset - backed securitization. while it is obvious that too much credit was created through abs and associated instruments in the years preceding the crisis, it seems at least reasonable to question whether the best policy response is this dramatic a change in the regulatory environment. one wonders, for example, if it is desirable to forbid anyone but nfbs from buying abs, particularly if there are investors interested in holding these assets regardless of their utility in repo arrangements. the severe problems now associated with abs began with assets held by mismatched entities like structured investment vehicles or financial institutions engaged in capital arbitrage under basel ii, not those held by end investors. a variant on this initial question is how much the legal environment for securitization should be changed in order to provide a source of stable short - term liquidity in wholesale funding markets. limiting securitization purchases to nfbs will surely result in some tailoring of abs to the business models of nfbs, an outcome that might not be identical to a securitization market tailored to the funding needs of lenders providing credit to businesses and consumers. also, as i will explain later, the g - m proposal would require non - trivial changes in bank regulatory policy, as well as the significant extension of discount window access to a new kind of institution. all this would be in pursuit of a mechanism for generating large amounts of liquidity. a cost - benefit discussion is probably needed at the outset