 Good morning, everyone, and welcome to the ECB and to this conference organized by the ESRB. It is for me a pleasure to speak here today at this conference on macroprudential margins and aircuts. In my view, macroprudential margins and aircuts have the potential to become tools for controlling the build-up of excessive leverage in the financial system. Importantly, these tools should reach beyond the banking system and also address the build-up of leverage and liquidity risks in parts of the financial system where we have been seeing rapid growth in the past few years. Today, in my remarks, I will dwell on the specific need for macroprudential margins and aircuts, what tools are in visit and how to implement such tools. In recent years, convincing evidence has been provided showing that excessive leverage, credit booms and subsequently leveraging episodes are at the heart of recurrent episodes of financial instability since the late 19th century. Let me single out two major crises where the build-up of leverage and subsequently leveraging played a key role. First, the stock market bubble of 1927 to 29 and the following Great Depression of 1929 were accompanied by an extraordinary growth and finally contraction of leverage trading in stock markets amplified by margin calls. The Great Depression that followed came with severe real economic consequences and while there is still debate on its ultimate causes, the Great Crash is widely considered as a major factor. Notably, the Great Crash motivated the establishment of the so-called regulation T which allowed the Federal Reserve Board to set minimum margins for partially loan finance transactions of stocks. From 1947 until 1974, the Federal Reserve Board frequently changed these minimum margin requirements. The evidence on the success of this macro potential tool in curbing excess credit in security transactions and stock market volatility is at best mixed. Importantly, however, the conclusion of the more recent literature is that the limited scope of regulation T in terms of the securities that were subject to the regulation and the fact that it allowed investors to avoid its impact by substituting other forms of borrowing for margin loans has been identified as a key flaw of that regulation and I will return to this issue later. The second major crisis, the recent global financial crisis is still fresh in the minds of all of us and needs little elaborating from my side. I believe it is fair to say that the buildup of excessive leverage and subsequent deleveraging in the banking sector and within financial markets more generally is widely viewed as one of the main causes of the global financial crisis. Notably, an important conclusion of literature is that leverage and liquidity were closed, interlinked and reinforced the stress in the financial system. One of the key lessons from the history of financial crisis is that the negative externalities of excessive leverage and associated liquidity risks that give rise to systemic risk provide a fundamental rationale for macroprudential policies to limit the buildup of leverage in the financial system in the preemptive manner. In pursuit of excess returns, market participants at times engage in excessive leverage without internalizing systemic costs of their risk-taking behavior such as spillovers to counterparties and financial networks or asset price declines triggered by fire sales. A large and growing literature supports the conclusion that these systemic externalities of excessive leverage call for macroprudential policies. The next crisis will likely come in a different form and involve perhaps different markets and entities, but history tells us that it is a fair bet to say that excessive leverage will again play a major role. To the extent that derivatives and securities financing transactions as SFTs are the main means to create leverage in particular in the non-bank financial sector, these calls for preemptive regulatory action in these markets. Let me now explain in more detail why I believe we should keep macroprudential authorities with new competences. Margins and air cuts are a determinant of the buildup of leverage via derivatives and FSTs and are strongly interlinked with the prosyclicality of that leverage. For the derivatives, the initial margin determines the amount of exposure that can be created for a given amount of equity. In turn, the size of the air cut on SFT collateral, particularly in repos, determines the amount of funding market players can obtain for a given amount of collateral. Importantly, in the current situation where margin and air cut setting is left to the discretion of market participants, margins and air cuts are strongly prosyclical. In exuberant times, low volatility and risk aversion as well as competitive pressure lead to low margins and air cuts supporting the buildup of leverage and the creation of inside liquidity in the system. When the cycle turns, higher volatility and higher risk aversion feed into higher margins and air cuts amplifying the leveraging pressure and fire sales. As a result, a vicious cycle can emerge where higher margins and air cuts force the leveraging and more sales generating a liquidity spiral. This is what Gary Gorton call the run on repo during the recent financial crisis. The crisis revealed the important contribution of these dynamics in derivatives and FST markets to systemic stress. Financial stability concerns related to derivatives and to securities financing transactions are now widely discussed in a growing academic literature highlighting the systemic relevance of these markets. For derivatives, the most prominent example relates to the case of AIG whose significant positions in credit default swaps were a major factor that triggered its bailout. The buildup of its large derivatives portfolio was facilitated by the ability to avoid posting margin on these trades creating serious stress when facing margin calls. For FSTs particular repose a key concern relates to excessive reliance on short-term wholesale funding via these transactions and I also had through the creation of chains of inside liquidity that were present before the crisis and contributed to systemic risk when those chains of inside liquidity collapsed. Indeed SFTs were identified as a major source of leverage in the financial system as an important determinant of banks vulnerability to funding and liquidity shocks. For example evidence for US broker dealers showed that their leverage was strongly pro cyclical and changes in repose were the primary driver of adjustment in their balance sheets. In regulatory circles the potential for setting margins and aircuts as a policy tool to address systemic risks in derivatives and FST markets was already identified shortly after the global financial crisis. Indeed the committee on the global financial system CGFS that works in the BIS concluded that margining practices in OTC derivatives and air cut setting in SFTs are a source of prosyclicality in the financial system recommended enhancements to these practices in order to dampen the buildup of leveraging good times and soften the system-wide effects in bad times and that was in the report of 2009. Furthermore the CGFS encouraged market potential authorities to consider measures that involve counter cyclical variations in margins and air cuts. Since then regulatory progress has been made to limit systemic risk using arising in derivatives and SFT markets. In 2009 the G20 committed to major reforms in the OTC derivatives market including the aim to significantly increase central clearing of derivatives and where appropriate to move them to organized markets. Moreover this has been a little bit forgotten the later part. Moreover several reform packages have been agreed at the international level. These include the financial stability board regulatory framework for air cuts on non-centrally declared SFTs. The FSB work on standards and processes for global securities financing data collection and aggregation. The Basel committee on banking supervision and board of the international organization of securities commission IOSCO in the report margin requirements for non-centrally clear derivatives and the committee on payments and market infrastructure and IOSCO principles for financial market infrastructures for cleared transactions. One aim these rules have in common is to limit the prosyclical effects of margins and air cuts. For example the BCBAS IOSCO rules authorize the inclusion of periods of stress in internal models and provide for standardized margin and air cuts schedules as an alternative to calculations with internal models. In turn the FSB minimum air cut framework provides for a backstop against excessively low air cuts. At the U level a large part of the international framework has been already implemented in the European market infrastructure regulation and the securities financing transactions regulation. However there are some limitations in these current frameworks. For example with respect to the scope of coverage the framework for non-centrally cleared OTC derivatives exempts counterparties with gross notional OTC exposures below euros 8 billion. An uncomfortable high threshold in my view effectively exempting a large number of non-bank financial entities from the shadow banking sector. More importantly none of the current rules covering derivatives and SFTs provide authorities with specific macro potential tools to set and if necessary change minimum margins and air cut levels to prevent the build up of excessive leverage in the financial system. While both the BCBAS IOSCO margin framework as well as the FSB minimum air cuts framework note the possibility for national authorities to use macro potential margins and air cuts such tools have not yet been developed and implemented in Europe to date. The key question that comes up is this what macro potential tools should be made available? What tools can be effective both in limiting the build up of leverage and in dampening the prosyclical and potentially destabilizing influence of margin and air cut increases in the downturn to the cycle. In the ECB response to the European Commission consultation on the review of the European market infrastructure regulation, Emir, we stated that and I quote, macro potential intervention tools should be included in level one of Emir and we also added that two policy instruments that potentially could reduce or limit leverage through derivatives and SFTs and the prosyclicality of margins and air cuts are a permanent minimum requirements and b time-varying minimum requirements or buffers end of quote. A special feature article in our latest financial stability review provides further analysis of the merits of these different policy tools. Allow me to share these analytical results before I conclude on how to implement such macro potential tools in practice. The special feature combines recent theoretical insights with a new empirical analysis and the key results are threefold. First, macro potential powers to set margins and air cuts should have a broad scope. That is, any regulation should capture both derivatives and SFTs and both centrally cleared and non-centrally cleared transactions. This is the key result from the calibrated general equilibrium model which shows that regulation with limited coverage is doomed to be ineffective due to leakages. Notably, the potential for regulatory arbitrage in case of tools that only target specific markets is a central issue in macro potential policy more generally. Moreover, as I already noted, research shows that the fact that the Federal Reserve Board had the limited power to only set time-varying margins on listed equities bought on margin was an important reason for the limited effectiveness of regulation Q in the regulation T. Sorry, regulation Q is more well known, but it's a different thing kept on interest rates on deposits, as you know. The reason for the limited effectiveness of regulation T in the decades after the great crash of 1929. The second key result of that special feature is that setting minimum margins and air cut floors on a broad scale would limit the buildup of leverage and reduce the prosyclicality of current margin and air cuts setting practices. With minimum margins and air cuts, the same minimum quantitative requirements would apply over the financial cycle. Basically, such a minimum floor assures conservative margins and air cuts and would have prevented the very low baseline margin and air cut levels that we have seen before the global financial crisis. Importantly, introducing minimum floors can also limit the need for market participants to raise margins and air cuts in a downturn since the initial margin and air cut levels would be already higher when the cycle turns. Third and finally, both theoretical and empirical results suggest that allowing competitive authorities to add time-varying add-ons on top of minimum margins and air cut requirements could have the potential to increase welfare even more than does a minimum floor. Overall, the theoretical and empirical findings in our special feature support intervention powers for macro-potential authorities. Taken together, the key message is that only a comprehensive regulation of margins and air cuts applied on several different types of securities or transactions can reduce the buildup of leverage and asset market volatility in an economically meaningful way. Therefore, in practice, I envisage minimum margins and air cut floors on both centrally cleared and non-clear derivatives and securities financing transactions as an important reform to make the financial system more resilient. Let me now step away from these analytical underpinnings and conclude with few remarks on how to design and implement such macro-potential tools. The existing evidence and experience in previous times justify them. Obviously, for the next steps of designing and implementing such a framework, there is a range of practical and governance issues that need to be overcome and agreed upon. Let me outline three important issues that warrant special attention. First, to facilitate implementation and to ensure that macro-potential tools effectively complement existing micro-potential rules on margins and air cuts, setting practices, the macro-potential frameworks should build on the current regulatory frameworks and policy recommendations as applicable to derivatives and SFTs at the UN global level. These frameworks include standardized margin and air cut schedules that are simple and transparent and should form the basis for setting macro-potential margins and air cuts. These schedules would serve as a starting point to calibrate minimum margins for the various classes of derivatives as well as for minimum air cuts applied to different types of securities serving as collateral. Second, ensuring non-bank entities are appropriately affected by margin and air cuts requirements would be a key aspect of any future macro-potential regime. To a significant extent, non-banks currently access derivatives markets indirectly by channeling their activity through larger financial institutions which act as principles to the transactions. Macro-potential tools would need to be designed at the level of transactions and their participants to ensure they can be fully passed through to non-banks. Third and finally, the calibration and institutional design of the tools would need to avoid arbitrage across products and across jurisdictions. The tools would need to be applied consistently across cleared and unclear transactions so as to preclude a shift away from central clearing. The tools would also need to be designed in such a way that counterparties cannot evade them by booking their transactions in a different jurisdiction. A sound implementation principle would be to apply these tools directly to transactions regardless of the market, jurisdiction or infrastructure where the transactions were booked which would ensure CCP neutrality in what regards the implementation of these instruments. One way to ensure consistency and avoid arbitrage would be to set these requirements via market-wide regulations in union law, in line with the implementation approach recommended by the FSB for their minimum haircut framework. With such an approach, any derivative transaction or SFT by a European entity would be subject to a margin or haircut floor irrespective of whether this transaction is with an EU or a non-EU counterparty or irrespective of the centrally clearing entity used. Let me conclude. As I stated in the recent speech, one of the overreaching principles of macro-potential policy is to act in the preemptive and strongly counter-cyclical manner against the build-up of systemic risk. To fulfill this role, macro-potential authorities need to be equipped with tailor-made tools. For the banking sector, macro-potential policy is already operational. We all ever need to avoid that reforming regulation on banks increase the incentives for risky leverage build-up outside the banking sector. Non-banks and market-based financing expanded enormously and continued to increase their importance in financing the economy. This diversification of financial, of finance sources has many positive aspects, but creates to the regulators the responsibility of taking care that it does not ease the build-up of systemic risk in the financial system as a whole. Thank you for your attention.