financial institutions hold against risk, which is in part a function of the strength of risk management systems. in both of these areas, market practice has made significant progress over the past decade, and further improvements are underway. a few quick points about two areas in which we believe further progress offers the highest possible return in terms of improving the overall resilience of the financial system. in the broad area of market infrastructure, we think the greatest near - term imperative is to strengthen the post - trade processing systems that underpin the rapidly growing over - the - counter derivatives market. the major dealers and the buy - side investors are making substantial investments in improving the process around the credit derivatives market. the overall strategy outlined in the public letter signed by the 14 major market participants on march 10, 2006, offers the prospect of a more automated confirmation and settlement process, with significantly less operational risk than has existed in these markets since their inception. looking beyond the specific objectives for reducing confirmation times and backlogs, we hope to see agreement over the next several months on a new isda® protocol for net physical settlement in the event of default and progress toward adoption of emerging utilities for centralizing certain processing and information functions that can facilitate netting and matching of payments and collateral. alongside these improvements in what we call infrastructure, this is a moment where it is important to see more care and attention and greater conservatism applied to the discipline of risk management. this is most critical in the areas that are hardest to do well. the challenges seem most exacting in the firms ’ abilities to capture the exposure of the institution to stress scenarios that lie outside the range of recent experience, and to set exposure limits and calibrate margin and credit terms accordingly. the challenges here are magnified by the changes i described earlier, including the rapid growth in complex structure products with imbedded leverage, uncertainty about liquidity in many instruments in less - benign financial conditions and other features of the present environment. a credible stress - testing process has to try to account for not just the effects of a discrete change to some dimension of market risk or some constellation of asset prices, but the effects of those changes on, for example, the behavior of financial market participants and on the broader macroeconomic conditions that might affect credit. it is also critical that firms assess their concentrations not only under current conditions, but also determine how firmwide credit concentrations to names, sectors or counterparties could build up under more stressful economic and financial market conditions.

intelligence, as well as the increased operational coverage and resiliency that support adaptation to changes in market structure or operating directives. but diversity also entails complexity and requires initial and ongoing investment in infrastructure to support a wider range of firm types. evaluating and onboarding firms, setting up transactional systems and account arrangements, and monitoring and evaluating counterparty performance and risk all take time and resources that must be balanced against the potential benefits of a larger list. 7 one final consideration that bears mention is the concept of an imprimatur that some market participants associate with status as a new york fed counterparty. despite this long - standing perception among some market participants that primary dealer status represents an endorsement by the new york fed of a financial institution ’ s creditworthiness or ability to provide efficient execution of large transactions, we have repeatedly stressed the importance of other market participants ’ engaging in their own assessment of potential counterparties ’ capabilities. recent history provides several reminders that the primary dealer designation provides no guarantee against credit risk or other counterparty risks. while the new york fed certainly performs its own due diligence, we do so in pursuit of our unique business objectives, which may differ from those of private agents. market participants should therefore be since july 2013, the desk has conducted pilot programs with seven smaller firms outside of the primary dealer system in order to explore how to conduct open market operations in treasury and mortgage markets with firms that are considerably smaller than existing primary dealers. the treasury operations counterparty ( toc ) and mortgage operations counterparty ( moc ) pilot programs have provided valuable insight into the appropriate size and operational capacity of open market operation counterparties. bis central bankers ’ speeches engaging in the appropriate level of due diligence required by their fiduciary responsibilities in the context of their specific business requirements. such independent assessments are in our collective interest because they foster market discipline and a safer, more secure financial system. primary dealer history the pursuit of these objectives is reflected in the history of the fed ’ s counterparty framework, of which the primary dealer system has long formed the foundation. but before i review that narrative, i must acknowledge that most of what i know about the history of primary dealers i ’ ve learned from ken garbade, who kindly introduced me tonight. along with his superb analysis of the evolution of the treasury market, exemplary work for the tmpg and critical contributions during the financial crisis, ken has expertly researched more than 100 years of history concerning the financial