information endowment – another way to define asymmetric information – are likely to lead to differing behaviour by different classes of agents. this will have an impact on price formation and will affect market exchange. the first example is known as adverse selection and derives from akerlof ’ s seminal contribution on the market for “ lemons ” ( 1970 ). for those of us who are not native english speakers : in colloquial english a lemon is a good of very low quality. what is going on in a market for “ lemons ”? according to akerlof the seller knows the intrinsic quality of the good or services supplied, while the buyer has no means of knowing it. the buyer will then be ready to pay a price reflecting an average quality. however, since the price of the high quality good or services lies above that average price the seller who has high quality items will withdraw from the market. therefore only a market for medium and low quality goods will emerge. consequently most buyers will be disappointed and the high quality suppliers will be frustrated. ultimately this might even lead to an extinction of the market for those goods and services the quality of which cannot be correctly assessed by buyers. to eliminate this breakdown of market exchange due to adverse selection quality screening is required. market utilities such as csds, icsds or ccps contribute to soften the problem of adverse selection. indeed, these utilities may monitor their participants by defining financial and technical criteria to be met permanently. this ensures a certain quality of the participants. for example i may refer to central counterparties who have long recognised the value - added of such a monitoring function. as you know, ccps replace numerous bilateral counterparty risks that market participants face through a single counterparty risk towards itself. this transfer of risk tends to be efficient since the ccp is best positioned to monitor the risks of all the participants of the system. another means to soften the problem of adverse selection is the provision of delivery - versus - payment mechanisms since they eliminate principal risk in securities settlement. all in all, market utilities that ensure a certain minimum quality of the participants and reduce principal risk contribute to limiting the damage of adverse selection. the second example based on asymmetric information is moral hazard. while adverse selection stands in the way of the closure of deals, moral hazard occurs after a contract was concluded. if these contracts are insufficiently structured counterparties have an incentive to adopt a behaviour which is undesirable to their partners. moral

and settlement services. let me concentrate on the latter, i. e. on the provision of clearing and settlement services. there is no doubt that central securities depositories ( csds ), international central securities depositories ( icsds ) and central counterparties ( ccps ) are among the crucial building blocks of any wellorganised financial system. they facilitate the allocation of resources and their deployment within a financial system by reducing risk and transaction costs. by facilitating market exchange of complex financial services they can be taken as a means to achieve efficiency gains within a financial system. various mechanisms are provided to clear and settle securities transactions. common features of these mechanisms are, e. g., that they provide for a technical infrastructure to exchange payment and settlement instructions and that they rely on commonly agreed rules and processes. there is widespread agreement that these mechanisms have been fairly successful in reducing settlement risks and transaction costs. with respect to the business activities of market utilities i can mention, e. g., the dematerialization and immobilisation of securities or the increasingly pervasive application of the delivery - versus - payment principle. in essence the clearing and settlement function provided in a financial system contributes to the reduction of imperfections and thereby makes possible increasingly more integrated and efficient economic systems. this improvement, in turn, facilitates capital accumulation and technological innovation that underlie the implementation of investment projects. thereby a long - term economic growth process is supported and, correspondingly, welfare is improved. let me state the obvious with levine ( 1997 ) : “ the development of financial markets and institutions is a critical and inextricable part of the growth process [ … ] ”. however, despite the tremendous efficiency gains obtained through the emergence of the financial system, the improvement process is far from being over. in reality there continue to remain some important imperfections, which have always been with us and which tend to re - emerge in a new shape whenever measures are taken to eliminate them. i would now like to discuss some of these imperfections and their implications for your industry. 2. some imperfections of the financial system among the imperfections that affect the smooth functioning of a financial system i shall focus on asymmetric information, on negative externalities and on limited competition. a first imperfection that typically impairs the smooth functioning of a financial system is asymmetric information ( mishkin, 1997 ). indeed, information may not be universally or commonly shared within the financial system. differences in