2  BIS central bankers’ speeches  How should Switzerland deal with these extreme conditions, overcome the difficulties and maintain its current high living standard? To answer this question, I will now step back for a moment from current events, and highlight some of the factors that, historically, have been instrumental in allowing Swiss businesses to seize opportunities abroad and cope with an ever-changing environment. 3. A tradition of political independence  However, let me first briefly turn to our tradition of independence. Although mostly favouring a free-trade approach in its economic relationships with the outside world, Switzerland has traditionally been very reluctant to relinquish political sovereignty. In particular, federalism, direct democracy and citizen involvement are seen by the Swiss population as crucial elements of their identity. They are considered key factors to ensure the cohesion of a country made up of different linguistic and cultural groups. External neutrality helped Switzerland to escape the tragedies which devastated the European continent during the last century, while maintaining internal cohesion. Hence, the two world wars fostered Switzerland’s attachment to its political autonomy. But autonomy does not mean isolation, or neglect of what happens abroad. Switzerland’s political neutrality has often put it in a good position to mediate during conflicts and provide active solidarity. Our country has made very active use of this comparative advantage. The most well-known example is the Swiss engagement in the International Committee of the Red Cross (ICRC). It has also a long and well-established tradition of offering its good offices for diplomatic negotiations.

While this measure may appear harsh, it has worked to some extent to reduce the NDF related flows into the onshore financial market. In mid-2016, following extensive discussions with financial market players through the FMA, we reviewed the ringgit fixing mechanism to enhance its integrity. The new fixing, now known as KL 2/5  BIS central bankers' speeches  USD/MYR reference rate, uses transaction data in the determination of the reference rate. While it enhances the credibility of the fixing mechanism, the new methodology has also greatly reduced the ability of the offshore NDF related transactions to capitalize on the reference rate process. The initiative, which was implemented smoothly with positive market response, also had the desired outcome in further reducing the volume of ringgit speculative flows. Throughout the year, we have also strengthened our monitoring of compliance to the existing Foreign Exchange Administration (FEA) rules. FIs have been strongly reminded to be cautious in facilitating FX transactions, particularly with NRFI, to ensure that they do not become unwitting facilitators of ringgit speculative activities. Accordingly, we expect banks to conduct robust due diligence and Know-Your-Customer (KYC) process to fully understand clients’ transactions. We believe that the enhancement of such processes will enable banks to detect transactions that could be related to NDF activities in ringgit. Prompt supervisory intervention will be taken against any individuals and banking institutions that are found to facilitate NDF market activities. Another area which we looked at was the exchange traded ringgit products in the offshore markets.