likewise, providers of short - term secured funding through repurchase agreements ( repos ) and other forms of secured funding, including money market mutual funds and other conservative investors, could have unexpectedly found themselves holding various forms of collateral rather than the liquid funds they were expecting. these investors would probably have been hard - pressed to dispose of this collateral and to manage their liquidity needs in a highly stressed environment. more generally, in this scenario, sharply increased uncertainty about the liquidity and financial strength of a wide range of counterparties would likely have greatly reduced the willingness of financial market participants to engage in normal transactions. the federal reserve, together with other regulators and the private sector, is engaged in a broad effort to strengthen the financial infrastructure. in doing so, we aim not only to help make the financial system better able to withstand future shocks but also – by reducing the range of circumstances in which systemic stability concerns might prompt government intervention – to mitigate moral hazard and the problem of " too big to fail. " 3 for example, since september 2005, the federal reserve bank of new york has been providing leadership for a major joint initiative by the public and private sectors to improve arrangements for clearing and settling credit default swaps ( cds ) and other otc derivatives. as a result, derivatives dealers and other market participants have taken a number of steps to enhance post - trade processing of cds, and in 2006, they expanded the effort to otc equity derivatives. however, the infrastructure for managing these derivatives still is not as efficient or reliable as that for more mature markets, as was evident last summer, when a surge in cds trading volume greatly increased backlogs of unconfirmed trades. the new york fed and other supervisors are working with market participants to fundamentally change how cds and other otc derivatives are processed by applying increasingly stringent targets and performance standards. they are also emphasizing that dealers must demonstrate their capability to adequately manage the failure of a major counterparty, including calculating exposures rapidly, having clear management procedures, and conducting internal stress exercises. finally, they are encouraging the development of wellregulated and prudently managed central counterparty clearing arrangements for cds trades. bank - affiliated primary dealers are already subject to mandatory consolidated supervision, but the focus of that supervision has been on limiting risks to the banks and other insured depository institutions within the holding company. existing provisions may need to be modified to provide regulatory authority to assess and limit risks to all functionally regulated entities, including securities subsidiaries

, as well. on the problem of " too big to fail, " see for example gary stern and ron feldman ( 2004 ), too big to fail : the hazards of bank bailouts, washington : brookings institution press. the federal reserve and other authorities also are focusing on enhancing the resilience of the tri - party repo markets, in which the primary dealers and other large banks and brokerdealers obtain very large amounts of secured financing from money funds and other shortterm, risk - averse investors. for some time we have been working with market participants to develop a contingency plan should there ever occur a loss of confidence in either of the two clearing banks that facilitate the settlement of tri - party repos. recent experience, including bear stearns'liquidity problems, demonstrates the need for additional measures to enhance the resilience of these markets, including the development of contingency plans for dealing with the sudden loss of confidence in a large tri - party borrower. given the critical role that these markets play in our financial system, we need to proceed in a prudent manner in making changes, especially as long as the broader financial markets are experiencing stress. nonetheless, over time, a stronger financial system may require changes in the way borrowers and lenders use these markets, as well as in the settlement infrastructure operated by the clearing banks. more generally, both the operational performance under stress of key payment and settlements systems and their ability to manage counterparty and market risks are critical to the stability of the broader financial system. currently, the federal reserve relies on a patchwork of authorities, largely derived from our role as a banking supervisor, as well as on moral suasion to help ensure that the various payments and settlements systems have the necessary procedures and controls in place to manage their risks. by contrast, most major central banks around the world have an explicit statutory basis for their oversight of payment systems, and in recent years a growing number of central banks have been given statutory authority to oversee securities settlement systems as well. given how important robust payment and settlement systems are to financial stability, a strong case can be made for granting the federal reserve explicit oversight authority for systemically important payment and settlement systems. preventing or mitigating future crises the financial turmoil is ongoing, and our efforts today are concentrated on helping the financial system return to more normal functioning. it is not too soon, however, to begin to think about the steps we might take to reduce the