that, along with applicable law, regulations, and supervisory expectations, encourages continuous improvement of front, middle, and back offices. for example, the tmpg has a series of practices directed at managing large positions with care. implementing them requires compliance functions to be thoughtful in determining how to identify large long or short positions, given the uncertainty of tradable float. it also challenges staff to consider which trading strategies may have adverse implications for market liquidity and whether they warrant policies around them. further, the tmpg ’ s best practices note that responsibility for establishing and maintaining a rigorous internal control environment within an organization rests with its senior management. neither best practices nor laws nor regulations can guarantee a lack of bad behavior. recent failures illustrate the adverse consequences that behavioral weaknesses can have for those who rely on financial services. it also underscores the importance of adopting a culture that creates an environment in which laws, regulations, and best practices are valued and upheld. to that end, regulators and supervisors in various jurisdictions have heightened their focus on firms ’ corporate governance programs and emphasized the need for instilling values that promote proper behavior and sound decision - making throughout the firms. for example, the new york fed has been working to advance industry driven culture reform in the financial services industry over the past few years. 19 we are joined by other official institutions and groups across the globe, such as the group of 30 and the basel committee, in pushing for heightened standards of market practice and behavior. 20 promoting adoption of best practices ideally, best practice standards should become an integral part of the market, observed consistently and transparently by participants across various segments. however, unlike regulations or supervisory standards, compliance with the best practice standards developed by our committees is not mandatory for the broader market. furthermore, there may be instances where implementation may vary given the diversity of entities in the market and the different profiles of market engagement. this is particularly relevant for the global fx market, with its range of market participants. 21 central banks play an important role in convening industry stakeholders to develop high standards of behavior that promote fairness and integrity, and in pushing the industry to affirm them. nonetheless, central banks are not acting as regulators when they sponsor these committees, even when they have relevant regulatory powers. since best practice standards that are articulated by the committees that we work with are not, in and of themselves, binding, promoting their adoption is both challenging and important. we work on a number of fronts in this effort. we

william j mcdonough : risk management, supervision and the new basel accord remarks by mr william j mcdonough, president and chief executive officer of the federal reserve bank of new york, at the bond market association : 2003 legal and compliance conference, new york city, 4 february 2003. * * * thank you, paul, for your kind introduction. it ’ s a pleasure to be here today, especially since the important work that compliance and legal officers carry out in their own institutions complements very well the responsibility financial supervisors have to promote safety and soundness across the entire financial services sector. as legal and compliance professionals, the issue you are really addressing is how, and to what extent, your institution is managing risk. to outsiders, this process can appear, superficially, to be formulaic and rules - based. you and i know, however, that corporate governance depends on more than just a company ’ s compliance with rules. we are all learning that effective corporate governance emerges from the business culture that a company nurtures throughout all of its operations. in recent months, we ’ ve witnessed what happens when firms fail to develop the commitment to manage risks appropriately. avoiding the corporate debacles of the recent past requires a clear and consistent message, as well as a transparent pattern of behavior, that must first emerge from the boardroom. it must then filter down to the executive offices, the front offices, and the back offices. in a similar vein, the work of financial supervision is moving away from a purely retrospective, rulesbased approach. this is particularly true in the banking world. bank supervisors in the united states and many countries around the world are assessing the safety and soundness of banks based less on the strength of the balance sheet today, and more on the strength of controls that will safeguard a bank ’ s financial health tomorrow. still, we believe that evaluating the strength of controls is, in itself, not enough. indeed, the tremendous competitive spirit and ingenuity of the financial services sector drives rapid innovation in the goods and services offered. as those offerings evolve, so, too, must the structures evolve that are intended to control the associated new risks. against this backdrop of constant evolution and inventiveness, the job of bank supervisors is certainly not to hinder the responsible pursuit of new opportunities and profits. rather, it is our job to encourage banks to ensure that their controls evolve with their businesses. the members of the basel committee believe that public policy can best support