term customer relations. credits to small and medium - sized companies are predominant. the banks ’ exposures to companies traded actively in the credit derivatives market are relatively small. moreover, the banks have had plenty of capital and the need to sell credit risk to outsiders has been limited. the number of deals in credit derivatives has increased in recent years, but the total exposures remain small, on the whole. the major part of the trade has been on behalf of customers. this means that the banks mediate deals for customers, for instance, insurance companies, which for various reasons want to buy or sell credit risk. if we look ahead, there is reason to believe that credit derivatives will gain increased significance. this is partly related to the new capital adequacy rules, basel ii. the basel rules, the old and the new, regulate how much capital a bank needs to cover the risks in its credit portfolio. the risks depend, for instance, on how well - diversified the credit portfolio is. the more concentrated it is to certain industries and countries, the greater the capital requirement. a portfolio where the risks are well spread instead reduces the total risk in the portfolio and thereby the capital requirement. this means that the banks may have reason to sell some of the risks that arise in their own credit granting and to buy others instead. the current rules do not allow the banks to reduce their capital very much when they use credit derivatives. basel ii increases the opportunities here. it is also likely that the credit derivatives market will to a greater degree develop to include traditional loans. it is already possible to obtain prices for credit derivatives for companies that do not have bonds issued on the bond market. this is on condition that the loan documentation meets the predetermined requirements. it increases the opportunities for swedish banks to use credit derivatives to sell parts of their own credit risk. concluding remarks let me round off. my assessment is that the advantages of credit derivatives exceed the risks for the economy. they have revolutionised the trade in credits in important aspects. the problems related to the market infrastructure are being dealt with successfully and there are many indications that the risks in this field are declining as the market matures. the financial sector has also improved its routines for risk control over the past ten years. i am therefore not particularly worried that the situation in the credit derivatives market could cause serious problems for financial stability. the important thing is that the systemically - important banks manage exposures to their counterparties – that is, that

a time on what i regard as the four major causes of concern with regard to the credit derivatives market. 1. operational and legal risks the most concrete source of concern is how the trade is conducted in practice. the existing infrastructure in the market has not managed to keep up with the rapid development. because of the explosive increase in the number of contracts, routines and handling procedures have lagged behind. the back - office functions at the largest counterparties have not been able to confirm all of the deals in time. this has entailed a risk of problems if " large ” credit events were to suddenly occur. in these situations there could be confusion as to which deals have been completed and which positions are actually held, and these paves the way for legal disputes. the large number of outstanding contracts also makes the settlement process particularly sensitive. if many contracts have to be settled at the same time, there may be disruptions. the credit risk in one and the same bond may have been resold through a large number of derivative contracts. problems can arise in this type of chain, particularly if the underlying bonds need to be delivered physically. but much has already been done to reduce the problems in this area. the market participants have themselves made large investments to reduce the number of confirmations ending up in a queue. today there are automatic systems for confirmations and these now process most contracts. experiences have also shown that the settlement process can be managed smoothly even when a large number of contracts are settled at the same time. an increasing number of contracts are also being settled in cash rather than through delivery of an underlying bond. on the legal side, there is always the fear of disputes. will the person taking over the credit risk actually pay when a credit event occurs? it is not unusual for major disputes to arise in the insurance market regarding the interpretation of policy terms. but the problems of unclear rules and practice that existed when the market was new now seem to have been resolved for the most part. this is because they use almost exclusively international, standardised contracts. however, the possibilities for completely standardised solutions are still limited. there are so many different types of more or less complex credit derivatives. according to the market participants themselves, the legal risks in credit derivative trading have not been completely removed. 2. counterparty risks the second source of concern is risk management. a bank that buys credit protection through credit derivatives will get rid of the credit risk, but instead expose itself to counterparty risk, that is