timothy lane : curbing contagion – options and challenges for building more robust financial market infrastructure remarks by mr timothy lane, deputy governor of the bank of canada, to the society for worldwide interbank financial telecommunication annual sibos conference, toronto, ontario, 19 september 2011. * * * introduction good afternoon and, to our guests from abroad, welcome to canada. this conference is taking place at a troubled time. concerns over sovereign debt have intensified, particularly in europe ’ s periphery. economic growth in the united states and other advanced economies now appears to be significantly weaker than expected. in the face of these developments, there has been mounting skepticism in a number of countries over whether policy - makers will be able to do what it takes to address these problems. the current bout of turbulence, like the financial crisis of three years ago, serves as a reminder of why it is fundamentally important to have a resilient financial system. periods of market turbulence are a fact of life. in a resilient system, financial shocks are absorbed, creating losses for individual investors, but leaving the system intact. if the system is not sufficiently resilient, however, shocks can be amplified. we saw this in 2008, when losses in a relatively small segment of the u. s. housing market cascaded into a near - meltdown of the global financial system. that process reflected a mixture of frailties – excessive leverage, reliance on forms of liquidity that proved illusory in stressful times, the use of securitized products with risks that were not fully understood, the complex web of counterparty relationships that spread risk and bred fear in core funding markets, and the absence of resolution mechanisms to deal with insolvency in systemically important institutions without endangering the entire system. in the wake of that crisis, leaders of the g - 20 countries launched a broad agenda of reforms. these reforms aim to ensure that financial institutions have adequate levels of lossabsorbing capital and liquidity to cope with periods of market stress ; to establish robust financial market infrastructure ; and to develop stronger resolution mechanisms for financial institutions, particularly across borders. when implemented, the g - 20 reforms will create a more resilient global financial system. canada will benefit significantly from these reforms. even though our financial system performed much better through the crisis than those of many other advanced countries, we are certainly not immune to events beyond our borders. in my talk this afternoon i want to focus on one element of the g

for commodities. the latter shift has also been encouraged by regulation : many european countries allow such insurance to count as regulatory capital under the basel iii rules. bis central bankers ’ speeches implications so far, i have given you a thumbnail sketch of the changing trends in the financing of commodities markets. but why do these developments matter for the world economy, and particularly for canada? here, i would like briefly to highlight three sets of issues. first, there may be implications for the pricing of commodities. as i have stressed, the broad trends in commodity prices is determined by the fundamentals of supply and demand – notably the long - term growth in demand from asian emerging - market economies. but the functioning of the markets in which commodities are traded has the potential to influence pricing in several ways. the flows of financing for commodity trading activities can affect the liquidity and efficiency of these markets and thus the extent to which prices reflect those fundamentals. as well, the financialization of commodities has the potential to affect the degree of short - term volatility of the markets. although it is too early to assess the implications of the recent changes in financing patterns i have been describing, these developments bear watching. a second set of issues pertains to systemic risk. in particular, the large trading houses, together with the physical trading operations of some large investment banks, are playing an increasingly prominent role in a number of commodity markets. this raises the possibility that some of these institutions are becoming systemically important. just as the 2008 financial crisis revealed the need to assess the systemic importance of institutions that play a central role in particular financial markets, we should be asking the same questions about institutions that are interconnected with various commodity markets. here, i have two general questions in mind : could the failure of one of the large trading houses cause serious disruption in the commodities markets in which it played a market - making role? and, could the losses that a trading house incurs through the positions it has taken in commodities have significant knock - on effects on the financial system? we are far from having answers to those questions, but they need to be addressed. third, commodities trading can potentially be an important link between the financial system and the real economy. with the financialization of commodities, financial system stress has the potential to affect commodities markets. commodities markets, in turn, have an important influence on the economic outlook of a commodity - rich country such as canada. moreover, movements in commodity prices may pose risks to the financial