provide some protection against the fire sale externalities we saw during the crisis : forced asset sales, falling asset prices, leading to rising capital losses at other firms that led, in turn, to further funding difficulties, asset sales and so on. on the supervisory side, firms are now increasingly being evaluated on a cross - industry basis in order to identify best practices and to identify laggards that need to upgrade areas such as mis, governance, model validation, and risk management practices. activity restrictions are another potential means to reduce the risk of failure. the biggest initiative in this area is the volcker rule. by limiting proprietary trading activities, the volcker rules seeks to reduce trading risk and the likelihood of failure. earlier this month, the financial stability board published a list of 28 global systemically important banks or g - sibs that will be subject to capital surcharges. the firms were arrayed in four buckets, with an increasing capital surcharge as a percent of risk - weighted assets imposed as one ascended upward to the higher buckets. bis central bankers ’ speeches in addition, the financial stability oversight council ( fsoc ) is in the process of identifying those non - bank financial firms that are systemically important. these firms will be subject to tougher prudential standards and supervisory oversight by the federal reserve. some argue that this designation process merely creates more tbtf firms. i see it differently. the system risk externalities do not depend on whether we label them systemic or not. if these risks are present, then we should face up to the issue with tougher standards and enhanced supervisory oversight rather than leave the issue unaddressed. this has to be a superior approach relative to pretending these firms could not be tbtf and the problem doesn ’ t exist. policy measures to reduce the adverse systemic consequences from failure because no plausible level of capital and liquidity standards will be sufficient to reduce the probability of failure to zero, it also makes sense to work on the other major margin – to reduce the cost of the failure of a large, complex financial firm. we can do this by making changes so that such failures are less likely to impair the functioning of the broader financial system. in this area, although many initiatives are in train, i would conclude that we are still very far from where we need to be. one simple but meaningful step that already has been enacted is to put a brake on the ability of the largest and most complex firms to become even larger and

the margin provisions in a way that takes appropriate account of the relatively low systemic risk posed by most end users. for example, we are considering if it would be appropriate to allow a banking organization that is a dealer or major participant to establish a threshold with respect to an end - user counterparty, based on a credit exposure limit that is approved and monitored as part of the credit approval process, below which the end user would not have to post margin. the board appreciates that posting margin would impose costs on end users, possibly inhibiting their ability to manage their risks. the board also believes that the margin regime should be applied only to contracts entered into after the new requirement becomes effective. a much - discussed part of the act is the requirement that banks push portions of their swap activity into affiliates or face restrictions on their access to the discount window or deposit insurance. under the push - out provisions, banking organizations with deposit insurance or access to the federal reserve ’ s discount window will have to reorganize some of their derivatives activity, pushing certain types of swaps out of subsidiary banks and into separate legal entities that will require separate capitalization and separate documentation of trades with existing customers. the act permits domestic banks to continue to engage in derivatives activities that have been a traditional focus of banks, including hedging activities and dealing in interest rate swaps, cleared credit default swaps, and other swaps that reference assets that banks are eligible to hold. however, because of the specific language contained in the act, this exemption for traditional bank derivatives activities does not apply to foreign banking firms that have access to the federal reserve ’ s discount window through their u. s. branches. a possibly unintended effect of the act ’ s push - out provision may be to require some foreign firms to reorganize their existing u. s. derivatives activities to a greater extent than u. s. firms. conclusion as the implementation process for the act continues, the challenge facing the board is to enhance supervision, oversight, and prudential standards of major derivatives market participants in a manner that promotes more - effective risk management and reduces systemic risk, while retaining the significant benefits of derivatives to the businesses and investors who use them to manage financial market risks. the board is working diligently to achieve these goals. bis central bankers ’ speeches