more generally the risk of erosion in the value of the asset. a smooth functioning of the financial system requires that this problem is adequately addressed. 5. derivatives play an important role in addressing the risk inherent in financial transactions. a derivative has traditionally been defined as a contract whose value derives from and is dependent on the value of an underlying asset, such as, a commodity, currency, or security. the concepts of various derivatives have been known since antiquity – the oftcited anecdote of the sixth century bc philosopher thales buying options on olive pressing mills is too well known to recount here. various forms of derivatives – mostly forwards and futures – have traded off and on in the seventeenth and eighteenth centuries, for example, forwards on tulips and futures in the yodoya rice market in japan. the major milestones in the history of derivatives are the establishment of the chicago board of trade ( cbot ) ( 1848 ), establishment of the chicago produce exchange ( 1874 ), which was converted to chicago mercantile exchange ( cme ) ( 1919 ) and the formation of futures clearing houses ( 1925 ). i may mention in passing that notwithstanding the increasing activity in the commodities derivatives markets, there were always apprehensions about the impact of derivatives trading on the cash market which led to frequent bans on commodity derivatives. 6. the history of derivatives on financial securities is rather short. following the breakdown of the bretton - woods, which led to floating exchange rates, the cme introduced the first currency futures in 1972. in 1975 cbot created the first interest rate futures contract to which cme responded with treasury bill futures contract in 1975. in 1977, cbot created the first treasury bond futures contract. in 1982, kansas city board of trade launched the first stock index futures followed by the cgot ’ s futures contract on s & p 500 index in the same year. in 1983, the chicago board of exchange ( cboe ) introduced an option on an index of stocks. 7. during the 1990 ’ s, there was huge outcries over a series of debacles over derivative trading with market participants reporting large losses. the cases of proctor & gamble ( swaps ), showa shell ( forwards ) metallgeselschaft ( futures ), allied irish bank, barrings bank ( options ) & orange country ( swaps ) have become standard case studies in the academic curriculum. the discourse that followed sometimes blamed the products and often the entities trading these products. the markets continued

that without this moral hazard behaviour induced by the harmonisation of the dgs rules the impacts on the system would not have been so pronounced. or take another example. the regulatory debate on financial benchmarks in the world ( and within the eu ) influences sometimes adversely the willingness of banks to contribute to the benchmarks also in the markets where no improper behaviour of contributors has been proven or even detected so far. so it is great to harmonise and to coordinate. but you always have to bear in mind that you should not harmonise and coordinate towards rules that are riskier than the previous uncoordinated rules were on average. the third constraint is the one claudio borio of the bis calls the “ time inconsistency of financial stability policies ”. he says : “ policies that are too timid in leaning against financial booms but that are then too aggressive and persistent in leaning against financial busts may end up leaving the authorities with no further ammunition over successive financial and business cycles ” 1 yes, this is the case in many countries, including the czech republic now we have reached the zero lower bound. so, to put it more bluntly : the problem also might be that we central bankers are sometimes more procyclical and less symmetric in our thinking than we should be. and the fourth constraint is our own disbelief in the power of monetary policy. our experience – even in a small open economy – is that autonomous monetary policy can be very much of help, if not key, in stabilising the general macro - environment compared to the situation where monetary policy is just being passively accepted from abroad. and i say that despite the fact that inflation stabilisation in the current circumstances is a necessary but not sufficient condition for long - term financial stability. as the debate today shows, what this sufficient condition for long - term financial stability is, is not entirely clear and remains to be determined. but i would tend to believe that if there is any way forward in the area of financial stability, monetary policy will have to play an absolutely key role – a bigger role than many now think or admit. thank you. borio, c. : monetary policy and financial stability : what role in prevention and recovery?, bis working paper no. 440, january 2014 bis central bankers ’ speeches