. 457 – 68. for an analytical perspective on the development of central counterparties and their functions in the context of the 1987 stock market crash, see ben s. bernanke ( 1990 ), “ clearing and settlement during the crash, ” review of financial studies, vol. 3 ( 1 ), pp. 133 – 51. see u. s. securities and exchange commission ( 1988 ), the october 1987 market break : a report by the division of market regulation, u. s. securities and exchange commission ( washington : government printing office, february ) ; and u. s. commodity futures trading commission ( 1988 ), follow - up report on financial oversight of stock index futures markets during october 1987 ( washington : cftc, january ). see presidential task force on market mechanisms ( 1988 ), report of the presidential task force on market mechanisms ( washington : government printing office, january ), pp. 52 – 53. the task force was headed by nicholas brady. for a discussion of potential reform initiatives. see working group on financial markets ( 1988 ), interim report of the working group on financial markets submitted to the president of the united states ( washington : government printing office, may ). bis central bankers ’ speeches discount window lending and special liquidity programs, also indirectly eased liquidity pressures on the clearinghouses. in the global foreign exchange market, cls bank international, a system that began operating in 2002 with the purpose of addressing settlement risk, is widely credited with maintaining confidence for continued interbank trading and settlement of foreign exchange. overall, the historical record shows that clearinghouse arrangements have generally withstood even severe crises. this solid performance reflects good planning and sound institutional structures but also some degree of good luck, as crises have also revealed important vulnerabilities, vulnerabilities which prompted subsequent reforms by both the private and public sectors. clearly, if we do not want to put all our trust in continued good fortune, we will have to continue to be proactive in identifying and remedying weaknesses in these critical infrastructures. clearinghouses and financial reform broadly speaking, the recent financial reform legislation bears on the future structure and role of clearinghouses in two different ways. first, it aims to increase the resilience of these critical institutions against severe financial shocks, the issue that i have emphasized thus far. second, it also encourages the greater development and use of clearinghouses to address weaknesses identified in other parts of the financial system. of course, increased reliance on clearing

, clearinghouses reduce the costs and operational risks of clearing and settlement among multiple market participants. in many cases they also act as a guarantor of transactions – the counterparty to every trade – thereby helping to reduce counterparty credit and liquidity risks. however, the flip side of the centralization of clearing and settlement activities in clearinghouses is the concentration of substantial financial and operational risk in a small number of organizations, a development with potentially important systemic implications. because the failure of, or loss of confidence in, a major clearinghouse would create enormous uncertainty about the status of initiated transactions and, consequently, about the financial positions of clearinghouse participants and their customers, strong risk management at these organizations as well as effective prudential oversight is essential. a historical perspective is helpful for understanding the economics of clearinghouses and the implications of their operations for financial stability. the first important clearinghouse in the united states, the new york clearing house, was founded by new york city ’ s commercial bis central bankers ’ speeches banks in 1853 to streamline the clearing and settling of checks. by one account, before the new york clearing house was set up, the clearing and settlement process involved employees from 60 banks crisscrossing each other ’ s paths through the city streets to present checks, a time - consuming process filled with “ confusion, disputes and unavoidable blunders. ” 1 the establishment of the clearinghouse improved the situation almost immediately, resulting in significant savings in time, effort, and financial costs. 2 by the late 19th century, check clearinghouses had been established across the united states. 3 large segments of the financial system came to rely on the efficiency and integrity of daily settlements by the clearinghouses. indeed, as these institutions developed, the roles of clearinghouses and clearinghouse associations – the groups of firms that used and supported individual clearinghouses – went well beyond purely operational functions : in the years prior to the establishment of the federal reserve, to increase public confidence in banks, clearinghouse associations at times took on quasi - governmental supervisory functions – for example, by examining the financial condition of members rumored to be experiencing difficulties – and even served at times as lender of last resort to individual clearinghouse members. in the securities and derivatives markets, the story unfolded a bit later and was more complex than in the case of checks. nevertheless, many of the essential themes are the same. in 1892, on the centennial of the famous buttonwood agreement, the new york stock exchange took its