to the risk preferences of an individual investor, the harder it is to find another investor willing to trade that exact instrument in the event of a shock to those risk preferences. 32 in other words, the improved matching of risk to an individual ’ s risk profile has given rise to an increase in basis risk within the system. as one illustrative example, any investor wishing to hedge any exposure to the us sub - prime mortgage market over the past year or so would have little alternative but to trade in the standardised abx indices ( which themselves have often been relatively illiquid ) rather than in the specific instrument they held. the developments over the past year have illustrated that hedges have often provided less effective than envisaged, and that there was a significant under - pricing of the inherent basis risk of many innovative structured instruments at the point of origination, given the lack of secondary market liquidity for such specific risk. looking forward, it is quite likely that there will be greater unbundling of complex instruments into standardised components that are likely to be liquid and readily traded with low transactions costs, and bespoke elements that will command a higher risk premium given their inherent illiquidity. strengthening financial infrastructure 33 because of the specificity of the risk, innovative financial products are rarely exchange traded. non - standardised products require the services of a broker - dealer to trade. but over the counter ( otc ) trading is vulnerable to many operational risks. in particular, investors are exposed to the default of the major broker - dealer counterparties. this was a significant concern to counterparties of bear stearns when it was in distress before being taken over by jp morgan. to moderate such concerns in the future, private sector initiatives are being developed to introduce a central clearer to the cds market. such initiatives are very welcome. although the net positions of cds dealers generally represent only a very small fraction of their gross positions, because these gross positions have grown so rapidly in recent years, inter - dealer positions can sometimes be very significant – even after netting. a central clearer that would offset any long bilateral positions that one bank had with another with any short positions that the same bank had with a third bank, could significantly reduce the counterparty risk in the cds market. a leading proposal at present is centred on the clearing corporation, which is jointly owned by eleven major banks and other trading platforms. 34 counterparty risk, as described above, is particularly corrosive for liquidity in financial markets.

benoit coeure : four years after pittsburgh – what has otc derivatives reform achieved so far speech by mr benoit coeure, member of the executive board of the european central bank, at the at joint bank of france, bank of england and ecb conference on otc derivatives reform, paris, 11 september 2013. * * * i wish to thank patrick foll for his contributions to this speech. i remain solely responsible for the opinions expressed herein. introduction ladies and gentlemen it is a great pleasure for me to speak here in paris and to welcome you, on behalf of the ecb, to the conference on the otc derivatives reform. the over - the - counter ( otc ) derivatives markets were at the heart of the financial crisis and several root causes on what went wrong were identified. increasingly complex and opaque financial products, combined with a lack of transparency, were contributing factors, but also the failure of public authorities to appreciate and address adequately the risks building up in the financial markets. not only did regulators and supervisors not keep up with financial innovation, but they lacked the tools to monitor the risks adequately. regulation also failed to keep up with the dynamics in the otc derivatives markets over the last two decades, which saw an explosion in outstanding contract volumes. post - trading infrastructures had become increasingly inadequate for coping with the growing volumes and complexity of such trades. in an unprecedented act of international cooperation, the g20 leaders met in 2008 and 2009 in washington, london and pittsburgh to coordinate action and address the regulatory gap. as the crisis has shown, deregulation and reliance on self - regulation just do not work. in the area of otc derivatives, the objective was to have all standardised otc derivatives contracts traded on exchanges or electronic trading platforms and cleared through central counterparties by the end of 2012. otc derivatives contracts were to be reported to trade repositories, and non - centrally cleared contracts subject to higher capital requirements. no doubt, a vast amount of technical work has been undertaken during the last four years, and substantial progress has been made in regulatory and supervisory reform in response to the financial crisis. just to mention some examples : the committee on payment and settlement systems ( cpss ) and the international organization of securities commissions ( iosco ) issued, in 2012, new and more demanding international standards for payment, clearing and settlement systems and trade repositories, and have also recently published guidance on authorities ’ access to data stored at trade repositories