The financial crisis of 2007 and 2008 to be the most severe we have experienced in the post-war period, according to the Counterparty Risk Management Policy Group - which includes representatives from Goldman Sachs, JPMorgan Chase, Merrill Lynch, Citigroup, HSBC, Lehman Brothers and Morgan Stanley.

Chaired by a Goldman Sachs managing director, Gerald Corrigan, the group was formed in April to explore ways of preventing another financial crisis like last year's credit crunch.

The group has now delivered a lengthy report detailing measures to reduce risk. These include controversial measures such as the restriction of high-risk complex financial instruments to only the most "sophisticated investors" as well as call for increased stress testing at banks.

The group is also pushing for more reform of the over-the-counter (OTC) derivatives markets. The report calls for electronic T+0 matching of trades by the end of 2009 and the establishment of a clearing house that would begin clearing credit default swaps in the fourth quarter of 2008.

Last week The Federal Reserve Bank of New York said a group of Wall Street's largest dealers had committed to establishing a clearing house for the credit derivatives market by the end of the year.

The dealers also pledged to expand electronic trade matching and processing in other OTC derivatives markets in the letter to Fed president Timothy Geithner, dated 31 July, that detailed progress made on moves to cut backlogs in OTC derivatives markets.

In its report, the Policy Group says: "The challenges of developing a CCP for the CDS market can and will be addressed by the industry in close consultation and cooperation with the official sector, as has been demonstrated in the creation of other CCPs that have served to enhance market resilience."

Corrigan says the recommendations require market participants to change business processes and make costly investments in infrastructure - both human capital and technology. Banks will also have to accept changes to market practices that in the past have "generated sizeable revenues but at the cost of weakening the underlying foundation of the markets".

"Costly as these reforms will be, those costs will be minuscule compared to the hundreds of billions of dollars of write downs experienced by financial institutions in recent months to say nothing of the economic dislocations and distortions triggered by the crisis," says Corrigan.

Earlier this year The Basel Committee on Banking Supervision issued new draft guidelines for the management and supervision of liquidity risk, aimed at making the global banking system more resilient and addressing weaknesses revealed by the credit crunch.

You can read the Counterparty Risk Management Policy Group report here.