system tends to shift towards the higher cost cards over time, average interchange fees have tended to rise during each three - year period. this in turn has had the paradoxical effect that the actual weighted averages for the visa and mastercard schemes have been almost always above the cap. the board ’ s intent, however, is that average fees should be below the cap, not above it. that is what a cap means. the review process is consulting on options to tighten the compliance mechanism in keeping with that intent. a related question on compliance concerns the possible regulation of scheme payments to issuers. these marketing and incentive payments are bilaterally negotiated and can be quite material in value, and the flexibility of such payments means that they can be structured in ways to circumvent interchange regulation. internationally, regulators have moved to limit these types of payments. under european regulation, for example, they are treated as if they were interchange payments. as part of its review, the board is considering whether a similar treatment should be adopted here. the preliminary position announced in december was in favour of that option. surcharging the third main area under review by the board is surcharging. as i have already mentioned, the board has long held the view that the ability to surcharge for more expensive payment methods is part of an efficient payment system. the ability to surcharge expands the options available to merchants beyond a binary decision to accept or reject a card, and it allows price signals to pass through to the consumer who decides which payment method to use. bis central bankers ’ speeches nonetheless, efficient surcharging should reflect the cost to the merchant. when the board ’ s initial surcharging reforms were put in place in 2003 it was expected that market forces would provide a sufficient discipline on surcharging behaviour. since then, however, evidence of excessive surcharging in some industries has accumulated. the board revised its regulation in 2013 to give schemes greater power to prevent excessive surcharging, but those arrangements proved difficult to enforce. this has prompted a further review by the board as part of its current process. as well as consulting with the full range of interested stakeholders, the bank has had discussions with the accc and treasury about possible policy approaches. the board ’ s proposed response builds on the recent government measures to strengthen accc enforcement powers in this area. the main elements of the coordinated approach were set out in the december consultation paper. these are, that :

to particularly noteworthy levels. for example, there was relatively little spillover to emerging markets. this is in stark contrast to similar episodes in the past. the fact that these products were particularly associated with volatility in us equity prices appears to have contributed to the limited contagion. also noteworthy is how short - lived the rise in volatility has been ( to date ). in discussions with market participants, one possible cause of this is that the unwinding of volatility positions has been largely confined to the retail market, which was relatively small in size. there does not seem to have been much adjustment in the volatility exposures of large institutional market participants to date. that said, it is conceivable that this episode gives a foretaste of the sort of market dynamics that might occur if there were to be a further rise in yields as the market reassesses the outlook for output and, particularly, inflation. demand and supply dynamics another consideration in thinking about future developments in the yield structure is the balance of demand and supply in the sovereign debt market. it is often difficult to assess the degree of influence that demand and supply dynamics have on the market. but there are some noteworthy developments occurring at the moment that are worth highlighting. graph 8 shows the net new debt issuance by the governments of the us, the euro area and japan, and the net purchases of sovereign debt by their respective central banks. it shows that the peak net purchases by the official sector occurred in 2016. this happens to coincide with the low point in sovereign bond yields, but i would not attribute full causation to that. the central bank purchases are a reaction to the macroeconomic conjuncture at the time which itself has a direct influence on the yield structure. that said, one of the main aims of the central bank asset purchases was to reduce the term premium. 10 / 14 bis central bankers'speeches but in 2018, there is going to be a net supply of sovereign debt to the market from the g3 economies for the first time since 2014. this reflects a few different developments. the federal reserve started the process of reducing the size of its balance sheet last year by not fully replacing maturing securities with new purchases. while this is a very gradual process, it is a different dynamic from the previous eight years. at the same time, the us treasury will issue considerably more debt than in recent years to finance the us budget deficit, which has grown from 2 per