Speech – Governor Jerome H. Powell At the “The New International Financial System: Analyzing the Cumulative Impact of Regulatory Reform”, 17th Annual International Banking Conference, Chicago, Illinois. November 6, 2014.

“Prior to the crisis, the then highly opaque market for OTC derivatives grew at an astonishing and unsustainable pace of nearly 25 percent per annum in a context of relatively light regulation and bilateral clearing. With the benefit of hindsight, we know that along with this torrid growth came an unmeasured and underappreciated buildup of risk. The spectacular losses suffered by American International Group, Inc., or AIG, on its derivatives positions, and the resulting concerns about the potential effect of AIG’s failure on its major derivatives counterparties, serve as particularly apt reminders of the wider failures and weaknesses that were revealed by the crisis. The threats posed were global, and the response was global as well. In September 2009, the Group of Twenty (G-20) mandated that all sufficiently standardized derivatives should be centrally cleared–a sea change in the functioning and regulation of these markets. And in the five intervening years, substantial progress has been made in the United States and abroad to implement this reform and begin to reduce systemic risk in these markets. According to public data, roughly 20 percent of all credit derivatives and 45 percent of all interest rate derivatives are now centrally cleared–amounts that have grown substantially since 2009, when central clearing of credit derivatives began and the amount of cleared interest rate derivatives was at roughly one-half of its current level. These amounts should continue to grow over time as central clearing and, especially, client clearing requirements take effect in more jurisdictions.”