the functioning, regulation, and supervision of otc derivatives markets. these failures were well illustrated by the widespread and destabilizing effects of large losses by american international group ( aig ) on its otc structured finance and credit derivative positions. in the absence of government intervention, aig ’ s failure would have exposed its counterparties to significant losses at a time of widespread financial stress. further, the lack of transparency in otc derivatives markets at that time led to a wave of uncertainty about who was exposed to aig and the extent of that exposure. this fundamental lack of information fueled concerns about potential losses and drove a cycle of escalating pressure on large financial institutions around the globe. government intervention was deemed necessary to stop this cycle and contain the threat to the financial system. aig ’ s failure revealed systemic problems in the otc derivatives market that went well beyond the failure of a single market participant. in addition to the federal reserve, the cftc, fdic, fhfa, fca, occ and sec are responsible for establishing margin requirements on derivatives that are not cleared through a ccp. bis central bankers ’ speeches the group of twenty governments responded by committing that all standardized derivatives would be moved to central clearing and that derivatives that are not centrally cleared would be subject to margin requirements. 2 progress has been made on both of these fronts. since credit default swaps clearing was introduced in 2009, the notional value of cleared credit derivatives has grown to more than $ 6 trillion. the notional value of interest rate swaps that are centrally cleared has more than doubled since 2009 and now stands at more than $ 400 trillion. 3 these amounts will surely increase further in the coming years. and international standards on margin requirements for derivatives that are not centrally cleared have recently been finalized. 4 i would like to briefly discuss how these reform efforts are intended to reduce systemic risks and offer my views on how to ensure that they are effectively implemented. the enhanced role of central counterparties in otc derivatives markets by design, central clearing offers important advantages over a bilateral market structure in which no participant can know the full extent of its counterparties ’ risk exposures. the huband - spoke structure of central clearing enables the netting of gains and losses across multiple market participants, which has the potential to significantly reduce each participant ’ s aggregate counterparty risk exposure. central clearing can also improve transparency, which is important in reducing incentives for market participants to pull away from other institutions in times of stress.

). see ben s. bernanke ( 2011 ), “ clearinghouses, financial stability, and financial reform, ” speech delivered at the “ 2011 financial markets conference : navigating the new financial landscape, ” sponsored by the federal reserve bank of atlanta, held in stone mountain, ga., april 4 – 6. bis central bankers ’ speeches infrastructure. regulators, clearing members, and their clients also must be engaged in making sure ccps are safe and effective at managing the risks, interactions, and interdependencies inherent in the clearing process. i will now turn to some key aspects of the regulatory framework for ccps that will strengthen the financial system and help reduce systemic risk. three keys to ensuring central counterparties are effective in mitigating systemic risks there are three key dimensions to making the reform program work in practice : enhancing supervision and regulation of ccps, strengthening ccp risk management and governance, and promoting the stability of clearing members. enhancing central counterparty supervision and regulation the decision to require central clearing of standardized derivatives as a foundation for reform has raised the stakes for ccps, clearing members, regulators, and the general public. at the international level, financial regulatory authorities addressed this challenge by updating, harmonizing, and strengthening the minimum risk management standards applied to financial market infrastructures, including ccps. the new principles for financial market infrastructures, commonly referred to as the pfmis, set a higher bar for risk management to strengthen these core market infrastructures and promote financial stability. 6 just last week, the cftc finalized its adoption of the pfmis for the derivatives clearing organizations it regulates and supervises. 7 the pfmis require that a ccp develop strategies to cover its losses and continue operating in a time of widespread financial stress. in particular, the pfmis require that a ccp maintain financial resources sufficient to cover its current and potential future exposures to each participant fully with a high degree of confidence. ccps must maintain additional resources to cover the failure of the clearing member with the largest exposure under extreme but plausible market conditions. in the case of ccps with more complex risk profiles or those that are systemically important in multiple jurisdictions, the ccp must have adequate resources to handle the failure of the two clearing members with the largest exposures. finally, the pfmis require a ccp to identify scenarios that may potentially prevent it from being able to continue operations, including so - called end - of - default waterfall issues