mr greenspan discusses financial derivatives and the risks they entail speech by the chairman of the board of governors of the federal reserve system, alan greenspan, before the futures industry association, boca raton, florida, on 19 march 1999. by far the most significant event in finance during the past decade has been the extraordinary development and expansion of financial derivatives. this morning i should like to evaluate the scope of these markets, the nature of the risks they entail and some of the difficulties we encounter in managing those risks. at year - end, u. s. commercial banks, the leading players in global derivatives markets, reported outstanding derivatives contracts with a notional value of $ 33 trillion, a measure that has been growing at a compound annual rate of around 20 percent since 1990. of the $ 33 trillion outstanding at year - end, only $ 4 trillion were exchange - traded derivatives ; the remainder were off - exchange or over - the - counter ( otc ) derivatives. the greater use of otc derivatives doubtless reflects the attractiveness of customized over standardized products. but regulation is also a factor ; the largest banks, in particular, seem to regard the regulation of exchange - traded derivatives, especially in the united states, as creating more burdens than benefits. as i have noted previously, the fact that the otc markets function quite effectively without the benefits of the commodity exchange act provides a strong argument for development of a less burdensome regime for exchange - traded financial derivatives. of course, notional values are not meaningful measures of the risks associated with derivatives. indeed, it makes no sense to talk about the market risk of derivatives ; such risk can be measured meaningfully only on an overall portfolio basis, taking into account both derivatives and cash market positions, and the offsets between them. clearly, the degree of counterparty credit risk on derivatives depends critically on the extent to which netting and margining procedures are employed to mitigate the risks. in the case of exchange - traded contracts, of course, daily variation settlements by clearing houses strictly limit, if not totally eliminate, such counterparty risks. in the case of otc derivatives, counterparty credit exposures are far larger, though still a very small fraction of the notional amounts. on a loan equivalent basis, a reasonably good measure of such credit exposures, u. s. banks ’ counterparty exposures on such contracts are estimated to have totaled about $ 325 billion last december. this amounted to less than 6 percent of banks

##ued exchange rates which have given asia an unfair competitive advantage. while there is little justification for such concerns, they may result in protectionist responses from the us and the eu. a related development is that more countries in asia and the oil - rich countries are establishing sovereign wealth funds to invest their excess reserves. the us and europe may react nationalistically over the prospect of losing their strategic assets to foreign sovereign investors. asia therefore needs to work with g7 countries and multilateral institutions to address these policy and political challenges posed by global financial imbalances and sovereign wealth funds. second, asia ’ s rising affluence has been accompanied by increasing income disparity. by and large, this is not a case of the poor getting poorer. but because the rich gets richer faster than the poor, the widening income gap may nevertheless erode social unity and political stability which are the very pre - requisites of growth. third, unrestrained economic growth often leads to environmental degradation. with heightened global consciousness over global warming, asia will have to find ways to grow rapidly and sustainably. it has to address problems like inefficient energy use, carbon emissions and depletion of natural resources like water supplies and agricultural land. however, the responsibility is not asia ’ s alone. maintaining ecological sustainability requires global initiatives, advances in technology, and changes in policies and consumption patterns. to its credit, china is serious over environmental issues. the recent 17th ccp congress reaffirms chinese leaders ’ pursuit of “ harmonious development ”. it also explains why premier wen jiabao agreed readily to my proposal that singapore and china jointly build an eco - city in china – a city where people, economic activities and the environment co - exist in harmony. we are in the process of choosing a non - agricultural site which lacks water, so that the ecocity there could be a model for china ’ s new cities. priorities of asean southeast asia is an important piece of the regional structure and will play its part. later this month, the asean and east asia summits will be held in singapore. singapore, as asean chair, has identified climate change and the environment as key agenda items. this will sustain the momentum of discussions on such issues until the december un framework convention on climate change meeting in bali. in practical terms, singapore and malaysia are working with neighbouring indonesian provinces to tackle peat land fires and develop sustainable land - clearing practices. while myanmar will no doubt grab media attention at the