the twentieth century were, without doubt, a period of dramatic change in financial engineering, financial innovation, and risk - management practices. over this period, firms acquired effective new tools to manage financial risk, one of which was securitization. many assets on a firm ’ s balance sheet, such as receivables, can now be securitized - that is, grouped into pools and sold to outside investors. securitization helps a firm manage the risk of a concentrated exposure by transferring some of that exposure outside the firm. by pooling a diverse set of assets and issuing marketable securities, firms obtain liquidity and reduce funding costs. of course, moving assets off the balance sheet and into special - purpose entities, with the attendant creation of servicing rights and high - risk residual interests retained by firms, generates its own risks. several types of securitization have grown rapidly over the past decade. one of the fastest growing has been asset - backed commercial paper, which soared from only $ 16 billion outstanding at the end of 1989 to about $ 700 billion as of year - end 2002. commercial mortgage securitizations have also proliferated noticeably since the early 1990s. the dollar amount of outstanding securities backed by commercial and multifamily mortgages has risen from $ 36 billion at the end of 1989 to just over $ 400 billion as of this past september. in addition, commercial banks and finance companies have moved business loans off their books through the development of collateralized debt obligations. securitized business loans amounted to $ 110 billion in the third quarter of 2002, up from a relatively miniscule $ 2 billion in 1989. derivatives are another important tool that firms use to manage risk exposures. in the ordinary course of business, firms are exposed to credit risk and the risk of price fluctuations in currency, commodity, energy, and interest rate markets. for example, when an airline sells tickets months before a flight, the airline becomes exposed to fluctuations in the price of jet fuel. a higher price of jet fuel translates directly into lower profits and, perhaps, a greater risk of bankruptcy. firms can now use derivatives options, futures, forwards, and so on - to mitigate their exposure to some of these risks. the risk can be transferred to a counterparty that is more willing to bear it. in my example, the airline could buy a forward contract or a call option on jet fuel to hedge its risk and thereby increase its financial stability. a relatively

by talking about this work strand. then i will try to clarify some aspects of the calibration exercise and, finally, i will address implementation issues of basel ii. when we were in madrid last summer, i mentioned that supervisors were very interested in finding practical and prudent solutions to the treatment of certain exposures under basel ii. these include exposures subject to double default effects, or the likelihood that both a borrower and a guarantor will default at the same time. likewise, supervisors and bankers have long understood that we needed to address a small number of issues closely related to trading activities to avoid inconsistencies. the basel committee wanted to ensure that our approaches to double default and selected trading - related exposures were sound and balanced. as a result, we have been very pleased to work closely with the international organization of securities commissions to engage both banks and securities firms in our review of these special matters. the basel committee and iosco are very close to reaching agreement on a paper that will outline the structure of these proposals. we intend to publish the paper in a few days, for a fast - track consultation with the industry. the paper will address five topics in particular, namely, • first, the treatment of counterparty credit risk for over - the - counter derivatives, repo - style and securities financing transactions ; • second, the treatment of double - default effects for hedged transactions, in relation to trading book, but also banking book, exposures ; • third, the short - term maturity adjustment, under the internal ratings - based approach, for some trading book - related items ; • fourth, a limited number of improvements to the current trading book regime, especially with respect to the treatment of specific risk ; and • fifth, the design of a specific capital treatment for unsettled and failed transactions. we did not intend to overhaul the capital rules for trading book exposures, but rather to seek to address narrowly a handful of concerns that relate either to potential inconsistencies that could arise with the new treatment for banking book assets or to a limited number of issues that have arisen since the adoption of the market risk amendment. i cannot comment on the proposals, given that they have not yet been formally approved by both organisations. as far as the basel committee is concerned, this approval was given yesterday, obviously pending the approval of iosco, which will study it in a few days ’ time. i can tell you that, in my personal opinion, the