in response, many firms have changed their compensation practices since the crisis to better align incentives between individuals and firms, particularly through enhanced deferral of incentive compensation, with delayed vesting and the possibility of more robust forfeiture in a broader set of circumstances. we have strongly encouraged these reforms in our supervision of these institutions. in my view, the reforms are both essential and generally on target. the u. s. financial regulators, including the federal reserve, are also preparing for public comment a proposed new rule on incentive compensation that will codify and strengthen these initiatives. as the review notes, greater transparency can also help curb market abuses and strengthen competition. in the united states, we have had over a decade of experience with the trade reporting and compliance engine ( trace ) in over - the - counter corporate bond, mbs and abs markets. the municipal securities rulemaking board provides similar data for municipal bonds. the dodd - frank act also imposed rules requiring greater transparency in over - the - counter derivatives markets through the use of central clearing, trade repositories, and swap execution facilities. given the issues around otc derivatives during the recent crisis, these clearly are important initiatives. but despite significant progress, there are still a number of impediments to bis central bankers ’ speeches sharing trade report data across regulatory agencies and jurisdictions, leaving us with only a piecemeal picture of the overall market rather than the full transparency that we desire. the issues around foreign exchange ( fx ) benchmarks serve to illustrate one of the important challenges discussed in the review – the difficulty of managing the potential conflicts of interest associated with the traditional market - maker model. in fx markets, a wide range of end users seek to guarantee trade execution at the wm reuters fixing at 4 : 00 p. m. u. k. time each day. this practice results in dealers having advance information about flows, and at the same time places them at some risk, as they are agreeing to execute these orders at an unknown future price. this advance information can create a perception that dealers are trading ahead of their clients, and it certainly created incentives to attempt to influence the fixing price. the recent financial stability board ( fsb ) report on foreign exchange benchmarks 1 made a number of recommendations designed to address these issues in this specific market, including use of trading platforms to maximize the netting of fixing orders, encouraging dealers to charge a transparent bid - asked spread or other fee to compensate them for the risk they take, and

strengthening dealers ’ internal systems and controls to better manage potential conflicts of interest. of course, similar challenges exist with market - making in other ficc markets. many firms have taken up these challenges with their own reforms, and their efforts serve to emphasize how complicated these issues can be. dealers must communicate with other firms, within their own firms and with their clients, and must execute their clients ’ trades. the challenge is to identify and preserve the legitimate benefits of such communication and trading while safeguarding against improper uses of information. it may be that these challenges can be addressed through coordinated private efforts ; for example, through such bodies as the foreign exchange committee and the treasury market practices group, sponsored by the federal reserve bank of new york. these groups are actively working on industry best practices in their markets and have often played a constructive role on market practices that enhance market functioning. it may also be that further supervisory or regulatory action is needed. turning to our work on interest rate benchmark reform, it is worth recalling that, before the scandal broke, the london interbank offered rate ( libor ) was not regulated. u. k. authorities have now addressed this shortcoming by making both the submission and administration of libor regulated activities. the process by which firms make their libor submissions is now subject to careful monitoring. the new libor administrator, ice benchmark administration, now regulated by the financial conduct authority, is evaluating changes to libor so that it can be based as much as possible on actual arm ’ s - length transactions from a broader base of funding transactions. with surveillance and penalties in place, and a new administrator, one might be excused for thinking that there is nothing more to be done. in fact, some people do think that. that is emphatically not the view of the fsb official sector steering group that i now co - chair with martin, which concluded that it is essential to develop one or more risk free ( or near risk free ) alternatives to libor for use in financial contracts such as interest rate derivatives. the reasons are related to the structure of both libor and the market that underlies it. unsecured interbank borrowing has been in a secular decline for some time, and there is a scarcity, or outright absence in longer tenors, of actual transactions that banks can use to estimate their daily submission to libor or that can be used by others to verify those submissions. libor is huge – there are roughly $ 300 trillion in gross notion