k. brunnermeier ( 2008 ; revised september 2011 ), “ covar ( pdf ), ” staff reports 348 ( new york : federal reserve bank of new york, september ). the distressed insurance premium uses information from firms ’ credit default swap spreads and equity prices to measure the implied cost of insuring a given firm against broader financial distress – an indicator of the vulnerability of the firm to systemic instability ; see xin huang, hao zhou, and haibin zhu ( 2009 ), “ a framework for assessing the systemic risk of major financial institutions, ” journal of banking and finance, vol. 33 ( november ), pp. 2036 – 49. the systemic expected shortfall uses firm equity prices, leverage, and volatility to measure the propensity of a firm to be undercapitalized given a marketwide decline in equity prices ; see viral v. acharya, lasse h. pedersen, thomas philippon, and matthew richardson ( 2010 ), “ measuring systemic risk ( pdf ), ” unpublished paper, new york university, leonard stern school of business, may. bis central bankers ’ speeches as it turned out, the ultimate investors did not fully understand the quality of the assets they were financing. investors were lulled by triple - a credit ratings and by expected support from sponsoring institutions – support that was, in fact, discretionary and not always provided. when investors lost confidence in the quality of the assets or in the institutions expected to provide support, they ran. their flight created serious funding pressures throughout the financial system, threatened the solvency of many firms, and inflicted serious damage on the broader economy. securities broker - dealers play a central role in many aspects of shadow banking as facilitators of market - based intermediation. to finance their own and their clients'securities holdings, broker - dealers tend to rely on short - term collateralized funding, often in the form of repo agreements with highly risk - averse lenders. the crisis revealed that this funding is potentially quite fragile if lenders have limited capacity to analyze the collateral or counterparty risks associated with short - term secured lending, but rather look at these transactions as nearly risk free. as questions emerged about the nature and value of collateral, worried lenders either greatly increased margin requirements or, more commonly, pulled back entirely. borrowers unable to meet margin calls and finance their asset holdings were forced to sell, driving down asset prices further and setting off a cycle

. one factor influencing our choice of which topics to cover in the first phase was our assessment of what issues the market was looking for clarity on sooner rather than later. we have attempted to provide greater clarity on issues such as information sharing and order handling in the document released today. alongside drafting the code, we have also been devoting considerable time and effort to thinking about how to ensure widespread adoption of the global code by market participants. clearly, that has been an issue with the various existing codes that have been in place in a number of markets over many years. it is evident that they were ignored on occasion, wilfully or otherwise. as i said earlier, we are working with the industry to produce a principles - based code of conduct rather than a set of prescriptive regulatory standards. it will not impose legal or regulatory obligations on market participants, nor will it supplant existing regulatory standards or expectations. but we do expect the principles in the code to be understood and adopted across the entire fx market. so we are setting out today our overall approach to adherence to the code and we intend to work closely with market participants in the coming year to facilitate the development of market - based mechanisms which demonstrably embed the global code within firms ’ culture and practices. these mechanisms need to be sensitive to existing law and regulation and to the diverse nature of fx markets globally. hence a ‘ one size fits all ’ approach to adherence would not be appropriate. we need to strike the right balance between respecting the existing diversity across different markets, and establishing globally consistent and effective adherence mechanisms. the success of the global code in promoting integrity and restoring confidence in the wholesale fx market lies in the hands of its participants. that is why the global fxcs have issued today a joint statement of support making clear their intention for the global code to become an integral part of the wholesale fx market. furthermore the bis central banks are today signalling their commitment by announcing that they themselves will follow the code, and that they expect that their counterparties will do so too. bis central bankers ’ speeches