arena. another important challenge for the industry has been leveraging distributed ledger technology while preserving the confidentiality of transactional information. at its core, distributed ledger technology is a shared ledger across multiple nodes in a network, likely representing multiple firms and legal entities. ownership records and transactions flows from accounts on such a ledger are typically copied and stored on all the nodes in the network. the financial industry, however, must develop distributed ledgers that adhere to laws, regulations, and policies that protect important information of the parties and their customers. clearly, a model where every entity on the network can see everyone else ’ s account holdings and transactions history will not satisfy broad industry confidentiality requirements. in addition, stored data that may be protected cryptographically today may not be protected as the technology continues to advance, which adds even more difficulty and urgency to the work on confidentiality. the industry has been working to develop approaches to preserve confidentiality so that only the authorized parties relevant to a transaction can see the details recorded on the ledger. - 11 some of these approaches involve encrypting data on the ledger so that the ledgers can still be copied across all the nodes in the network, but an entity cannot look at any element of that ledger except for transactions in which it has been involved. other approaches include so - called zeroknowledge proofs or ring signatures that allow entities to validate transactions without seeing confidential information. still others are looking at platforms that connect multiple ledgers rather than having one single ledger that is copied across all nodes in the network. while questions remain about the usefulness and viability of each of these approaches, it is important to underscore that preserving confidentiality is an important area of research. finally, perhaps the biggest potential benefit for payments, clearing, and settlement of distributed ledger technology may be resiliency. distributed ledger technology may enable a network to continue to operate even if some of the nodes on the network are compromised because of the ability of the other nodes in the network to pick up the slack and continue processing transactions. one challenge going forward will be to understand the implications that the confidentiality tools and different approaches to consensus under consideration may have on the resilience of the distributed ledger. given that resiliency is a key potential benefit of distributed ledger technology over existing platforms, it is critical to understand the trade - offs between resiliency and a consensus method that focuses on operational speed, or between resilience and confidentiality. conclusion it

typically seen in securitizations. credit default swaps and collateralized debt obligations provide flexibility in tailoring and marketing financial transactions to match the risk appetites of investors. one aspect that we, as bank supervisors, find encouraging about the growth of credit risk transfer activity is the diversification benefit it provides and its potential for greater economic efficiency. by their design, derivative instruments segment risks for distribution to those parties most willing to accept them. a key point, however, is that these parties should be able to successfully absorb and diffuse any subsequent loss. the ability to handle any losses on these instruments requires a recognition and understanding of the underlying risks. it is important to recognize that the market for these instruments is dominated by large institutions and private investors that have specialized expertise in credit analysis and significant historical performance records. as bank supervisors, we are also encouraged by the progress made by the legal profession to resolve legal issues relating to credit risk transfer. the standardization of documentation for credit derivatives transactions and the issuance of legal opinions regarding the enforceability of these contracts have provided increased certainty to the market. in general, the contracts have performed as expected. by way of note, the federal reserve is participating in work commissioned last year by the financial stability forum to gain a broader understanding of issues related to credit risk transfer. i look forward to the conclusions and assessments of this group. little evidence, to date, suggests that the institutions and investors that engage in most of the credit risk transfer activities fail to understand the risks of these transactions. that said, i would offer one critical caveat regarding the use of any model for risk - management purposes, including the pricing and risk management of increasingly complex credit risk transfer instruments. models use historic data and rely heavily on supporting assumptions, including correlations between different reference entities. it is worth reminding ourselves that correlations may behave very differently during times of stress than under normal circumstances. further, these are relatively young products, and the markets in which they trade often do not have deep liquidity. thus, pricing information can be very volatile. given the heavy reliance on models in this arena, it is important that any risk - management framework include an independent model review program. a review should be conducted by qualified independent staff prior to actual reliance on a model, and periodically thereafter. tests should include validation of results, data integrity, and internal controls over changes in model specifications. models should be appropriate for the specific products and the nature of the risks at an institution. enterprise - wide risk