pressure points and concentrations across a broad range of relationships with many different hedge funds is not easy, but it ’ s necessary. and, the results of these tests need to inform judgments by the firm on the scale of exposure that it is willing to take to individual funds, groups of funds with similar strategies, and to hedge funds as a whole. moreover, firms need to find ways to consider assessments of their stress - level exposures to hedge funds in tandem with stress tests of their own market risks to inform an overall judgment on the extent of capital market trading - related risks that the firm is taking on - especially in relation to low probability but high impact events. third, and especially in light of the current competitive climate, we believe it is appropriate for dealers to have more exacting standards for the overall due diligence process, and to adjust credit terms on the basis of those higher standards. this is particularly important in those cases where there has been innovation in the manner in which credit is extended. for example, it is much more common today than in 1998 for hedge funds to seek arrangements that provide contingent credit and thus provide the hedge fund with protection against the need to liquidate positions too rapidly. similarly, many hedge funds are today seeking to base margining agreements, including initial margins, on the results of var calculations that incorporate the effect of netting across multiple products. while both of these developments have their basis in sound risk management principles, firms extending such credit should carefully examine the impact of these and other innovations on their potential exposures to hedge funds in stress conditions, and set the terms for such credit accordingly. a reinforced due diligence process also is critical in assessing the operational capabilities of the hedge funds, the quality of their risk management process and execution and compliance infrastructure. this may sound self evident, but it is not as common as one might think. timely access to forward looking measures of risk by hedge fund counterparties is obviously important for assessing the risks in firms ’ exposures to hedge funds as a group, and for assessing the impact of hedge funds ’ activities on a firm ’ s own positions. to the extent that information is not made available, and there seem to be a number of legitimate reasons why hedge funds may resist providing it and are sometimes successful in doing so, then it makes sense for the dealer to reduce the exposure it is willing to take to that fund. in general, credit terms should be calibrated to the quality of the information provided by the hedge fund counterpart

the board of governors on its upcoming review of whether the liscc operating committee receives information that is sufficient to reach sound supervisory decisions. one subset of this system - wide inquiry will analyze regulatory capture – specifically, how divergent views are presented to decision makers at the board. the review is expected to take several months. effective supervision means tough supervision and demands a focus on large banks that pose systemic risk. bank supervisors cannot prevent all fraud or illegal conduct or forestall all undesirable behavior in large, complex financial institutions. but we can help create more bis central bankers ’ speeches resilient, less complex, and better managed organizations that promote, rather than undermine, financial stability. v. conclusion the federal reserve will continue to improve its supervision and regulation of financial institutions. we understand the risks of doing our job poorly and of becoming too close to the firms we supervise. we work hard to avoid these risks and to be as fair, conscientious, and effective as possible. of course, we are not perfect. we cannot catch or correct every error by a financial institution, and we sometimes make mistakes. but in my view, a good measure of the effectiveness of supervision is the improved strength and stability of banks since the financial crisis. thanks in part to enhanced supervision and regulation, banks “ have the ability to meet their financial obligations and continue to make a broad variety of financial products and services available to households and businesses even in times of economic difficulty. ” 12 i can promise you that we will always strive to improve and that we will work hard to earn and retain your trust. i look forward to taking questions. scott g. alvarez, regulatory rulemakings, testimony before the committee on financial services, united states house of representatives, april 8, 2014. bis central bankers ’ speeches