are not captured through traditional measures. in particular, i would highlight the following : • first, a rapid growth of trading book assets relative to traditional banking book assets and a fundamental shift in the types of risks retained in the trading book, in particular those arising from structured credit products. this is a natural consequence of the improvement in financial technology we are seeing, which enables more and more assets to be priced and traded. • second, the growth of the trading book is, in turn, producing a rapid growth in counterparty credit exposures relative to traditional credit exposures. as with market risk exposures, these counterparty exposures are becoming increasingly complex and difficult to measure. • third, the valuation of increasingly complex products presents yet another challenge. many of these products have not been tested under periods of stressed liquidity, which could have a significant impact on valuations. • fourth, the use of traditional approaches by many firms to assess their vulnerability to funding liquidity risk. these approaches may not take into account the growing reliance on active markets to manage the firm ’ s liquidity in an environment that is increasingly capital - markets driven. both the basel committee and the industry are currently exploring issues relating to the management and supervision of funding liquidity. • finally, the degree of risk transfer that is actually achieved through credit risk mitigation and securitisation techniques requires greater scrutiny. in particular, how well do these risk transfers hold up under stress? to what extent will risk be put back to firms if counterparties were to default, if investors were to demand compensation for losses, or if investor risk appetites were to shift abruptly? practical areas of focus for risk managers and supervisors trying to predict how all these risks will play out in practice can be demanding since we have little historical experience to guide us. growth in credit markets, synthetic securitisations, new market players and new risk management techniques have largely taken place over the past five years, that is, after the last credit downturn. i expect we will only experience a true period of stress when we have the combined impact of a credit downturn, a major shift in risk appetites and a withdrawal of market liquidity. firms have been challenged to develop more comprehensive stress tests that cut across risk types and business lines in a true downturn environment. stress tests that are produced on a regular basis are most evolved in the market risk area. regular credit risk stress tests tend to be conducted primarily at the level of business lines. more

. there are differences though at a more detailed level. in the us there is only a narrow exemption from the clearing obligation for non - financial entities that enter into certain hedging transactions. in the eu the clearing obligation applies to financial counterparties when dealing with other financial counterparties ; non financial counterparties only become subject to the clearing obligation when their positions exceed a certain threshold. nevertheless, an obligation to clear eligible derivatives through ccps can only mitigate part of the risk associated with derivatives. after all, there will always be a need for bespoke contracts that cannot be standardised. by implication, there will be an otc derivative market for tailor made or more complex products. therefore, improvements of risks management systems are desirable, also for institutions outside the banking sector. requirements to register derivatives contracts in central repositories, especially those that are not cleared through central counterparties, will contribute to transparency. also, national authorities will have to cooperate closely and share relevant information in order to assess where systemic risk might be building up. certain capital requirements / basel iii another recent initiative to mitigate counterparty risk in the derivatives markets is a proposal of the basel committee for banking supervision. the basis idea is straightforward : the capital weight for derivatives that are bilaterally cleared will be higher than those for derivatives cleared through ccps. in this way, the additional risk for these trades can – at least – to some extent be taken into account. it also provides an incentive to clear derivatives through ccps. the costs associated with the use of a ccp might be a lesser burden if capital needs to be reserved for bilaterally traded derivatives. in addition, the requirements for banks to use internal models for calculating capital requirements for derivatives will be tightened. this proposal also includes a reconsideration of the zero risk weight for ccps, even when the ccp complies with international standards. ccps will become systemically important, as more and more derivatives will be cleared through ccps. there will be a concentration of risks on ccps. therefore, the basel committee also proposes to increase the capital charge for exposure on ccps [ the current charge for ccps is 0 % ]. the capital charges will be calibrated in such way that the incentive to use ccps will be preserved. the establishment of an international dispute resolution facility that contributes to legal certainty in the otc derivatives markets, fits well in a broad range of initiatives to enhance financial stability. dnb therefore welcomes