stefan ingves : ongoing changes in securities markets speech by mr stefan ingves, governor of the sveriges riksbank, at the nasdaq omx, stockholm, 4 december 2008. * * * counterparty risks and functional aspects at present a lot is happening in the financial markets. besides being in the midst of the current crisis, we are experiencing functional changes in the securities market. these changes can improve the workings of the market, which is particularly important in connection with financial turbulence. however, the changes also make greater demands on cross - border cooperation. one change, which began some time ago, is that the swedish systems for handling securities are becoming increasingly integrated with systems abroad. other changes are reducing the counterparty risks of financial players and making securities trading more transparent. in a discussion of changes in securities markets, it should be born in mind that an effective monetary policy also requires an efficient fixed - income market. the vocabulary for my discussion of these changes and of the importance of a properly functioning fixed - income market is somewhat technical, particularly in the sections on integration and counterparty risks. that should not be a problem for my audience today. many of you are occupied with precisely these matters. changes in the securities markets i shall begin with a brief account of the financial infrastructure. it is made up of systems, instruments and routines that together constitute the conditions for making payments and securities transactions in ways that are safe and efficient. if the financial infrastructure does not function, payments and securities transactions cannot be made, which would bring the economy more or less to a halt. it would also prevent the riksbank ’ s interest rate from exerting an impact on the economy. this means that the financial infrastructure and the ongoing changes in securities markets are relevant for the riksbank ’ s two primary functions, namely to safeguard both financial stability and price stability. it is therefore important that we closely follow developments in these respects. increased integration as many of you are already aware, major changes are currently in progress in the securities markets and the financial infrastructure. in recent years we have seen a number of tendencies whereby trading in financial instruments is becoming more integrated. such tendencies have also been evident recently in clearing and settlement – the processing of securities transactions that follows the trade as such. 1 in a world conditioned by further globalisation, increased competition and advances in technology, companies use mergers and acquisitions to adjust. in the field of financial instruments, the creation of nasdaq omx group in february 2008

and about $ 400 billion of reverse repos. before the crisis, the balance sheet was much smaller, at around $ 900 billion. it reached its present size as a result of the fomc ’ s large - scale asset purchase programs. those programs were undertaken to support the economic recovery by easing financial conditions to a greater extent than could be achieved solely through reducing the federal funds rate, once that instrument became limited by the zero lower bound on interest rates. these asset purchases 2 / 7 bis central bankers'speeches greatly increased the size of the asset portfolio, and equally increased the size of the federal reserve ’ s liabilities, largely through growing the stock of bank reserves. 5 the composition of the balance sheet also changed. on the asset side, the most important compositional changes were the addition of agency mbs and a substantial increase in the maturity of the fed ’ s treasury holdings. for many years, the fomc has made it clear that it did not intend for these changes to the balance sheet to remain forever. 6 instead, through its statements and its september 2014 policy normalization principles and plans, the fomc indicated its intention that, in the longer run, the federal reserve will hold no more securities than necessary to implement monetary policy efficiently and effectively, and that it will hold primarily treasury securities. the fomc also communicated its intention to reduce the federal reserve's securities holdings in a gradual and predictable manner, primarily by ceasing to reinvest repayments of principal on its securities holdings. starting in its december 2015 statement, when the fomc first started to raise its federal funds target range away from zero, the fomc also indicated that it anticipated continuing reinvestment until normalization of the level of the federal funds rate was well under way. the fomc ’ s strategy of waiting to begin reducing the balance sheet until normalization of the federal funds rate was well under way has had several advantages. most importantly, it reduced the likelihood that an unexpected adverse shock to the economy would have necessitated a return to the zero lower bound on the federal funds rate and potentially a reversal in balance sheet normalization. second, the fomc ’ s approach promotes the use of the federal funds rate as the active monetary policy instrument, an instrument with which the fomc has much greater experience. in addition, delaying balance sheet normalization allowed the fomc to meaningfully assess the efficacy of its tools to control short - term interest rates with a