jerome h powell : central clearing in an interdependent world speech by mr jerome h powell, member of the board of governors of the federal reserve system, at the clearing house annual conference, new york city, 17 november 2015. * * * thank you for inviting me to speak today. 1 i attended the clearing house annual meeting in 2013 and spoke about financial market infrastructure reform. two years have passed, and this is a good opportunity to take stock. i ’ ll start by reviewing the progress made in strengthening central counterparty ( or ccp ) clearing, and then offer some thoughts on expanded central clearing for repurchase agreement ( or repo ) markets – an area of significant current interest. in the years leading up to the financial crisis, the over - the - counter ( otc ) derivatives market experienced rapid growth and an underappreciated buildup of risk. the huge losses suffered by the american international group ( aig ) on its derivatives positions and the lack of transparency about the exposures of aig ’ s counterparties were major accelerants to the financial panic that reached its acute phase in september 2008. in response, in 2009 the group of twenty nations committed to moving standardized derivatives to central clearing, and to requiring posting of margin for derivatives that are not centrally cleared. 2 i am a believer in the potential benefits of central clearing under the right circumstances. but central clearing is not a panacea. charts similar to that in figure 1 are often used to illustrate the netting of exposures and simplification that central clearing can bring to an otc market. the tangled and highly opaque picture of a purely bilateral market is replaced by the neat hub - and - spoke network in which a ccp is buyer to every seller, and seller to every buyer, allowing netting and greater transparency for participants and regulators alike. of course, reality is not so elegant, as figure 2 illustrates. there are multiple ccps, even within product classes, and major dealers act as clearing members across a broad network of ccps. clearing members also perform a range of services for ccps, including custody, liquidity provision, and settlement. by design, increased central clearing will concentrate risks in ccps ; it is essential that, as these risks accumulate, the ccps build up their ability to manage them. it is often noted that ccps made it through the recent financial crisis without direct government assistance. but many of their major clearing members did receive such assistance. cc

##ers are among the most prominent cash providers in segment 4, while securities dealers are the primary borrowers of cash. dealers may use this cash to fund their own portfolios ; they may also lend it to other dealers in the general collateral finance ( gcf ) repo market ( segment 5 ). this segment is cleared through the fixed income clearing corporation, and is currently the only segment of the market that is centrally cleared. based on figures from september 2015, the size of the tri - party repo market, segment 4, was approximately $ 1. 5 trillion and the gcf market ( segment 5 ) was approximately $ 300 billion. the general lack of data on bilateral repo activity makes it difficult to know the precise size of each individual segment of that market, but bilateral repo and securities lending taken together accounted for approximately $ 1. 7 trillion in outstanding activity. 7 general collateral or gc repo involve repo transactions secured by a range of treasury or other assets that are accepted as collateral by the majority of intermediaries in the repo market. gc repo assets are high quality and liquid, but not subject to exceptional specific demand. these estimates are based on the methodology described in adam copeland, isaac davis, eric lesueur, and antoine martin ( 2012 ), “ mapping and sizing the u. s. repo market. ” bis central bankers ’ speeches given its vast scale and position at the center of the wholesale finance markets, repo is without doubt a critical activity. repo is a key source of financing for a wide range of firms, and an important “ safe asset ” for investors. the gcf segment, although modest in size compared to the overall market, is a key source of financing for smaller dealers, particularly in times of financial stress. the availability of repo funding for a diverse range of participants supports market liquidity by enabling them to make markets in treasury and agency securities. ccps themselves also rely on these markets, often using repo to earn interest on cash collateral and counting on access to repo markets in their liquidity planning. the fsb has called on authorities to “ consider the pros and cons of broadening participation in repo clearing arrangements. ” 8 what are the potential benefits of greater clearing in this market? in addition to the potential netting benefits i mentioned earlier, a ccp typically performs three other beneficial economic functions : 1 ) a reduction in the potential cost of counterparty default coming