For example, if national central counterparty is not a viable and efficient model for a small economy, then the cost of hedging would increase with higher risk weight under Basel III. Meanwhile, if derivatives are cleared overseas, through regional or global central counterparties, we need to consider implication for cross-border supervisory coordination, financial stability, and development of local financial market and competition. On a related issue of Dodd-Frank Act, restriction on proprietary trading of US bank could impact the liquidity of US dollar markets abroad, as well as liquidity of foreign government bond markets which are the back-bone of their monetary policy operation. Another key issue going forward is the balance of authority between Home and Host regulators. There are concerns about the proposal of Financial Stability Board on cross-border resolution of Global Systemically Important Financial Institutions, or G-SIFIs. The concern is that some Host regulators may not be included by the Home regulator in the Crisis Management Group or resolution planning, even if the institution is systemically important in their jurisdictions. We are glad to see the FSB taking initiatives to identify potential problems. Now it is the time to work together on solutions in an inclusive manner. This is because the inclusiveness of the process assures acceptability and commitment, and reduces the uncertainty from unilateral action of individual countries. These international regulatory  2  BIS central bankers’ speeches  standards have no direct international enforcement power.

Therefore, we need to recognize the unknown element, that is, we don’t know their full impact on the financial market and global economy. The latest review of the Financial Stability Board of potential unintended consequences of regulatory reforms pointed to these concerns. Emerging markets have raised some concerns about the Basel III capital and liquidity frameworks. These may have negative impact on domestic financial markets, increase banks’ cost, and thus reduce credit and financial market liquidity. In particular, the liquidity standard, which is not yet finalized, the calculation in the framework may not accurately reflect emerging market’s financial market, and the implementation could distort local financial market. There have also been concerns about the treatment of traditionally low-risk trade finance in leverage ratio which may impact growth and development. Emerging Asia is predominantly bank-based; thus, Basel III will affect its financial intermediation relatively more than in the West, just at the time when financial intermediation is critical to support economic development and integration. Some of these standards are still under discussion, and thus Asia-Pacific region already has a proactive regional strategy to help steer these regulatory reforms, such as through EMEAP forum, to reflect our economic and financial market context. With regard to the OTC derivatives reform which aims to move OTC derivatives trading on to exchanges and cleared through central counterparties. There are concerns regarding inconsistency of regulation between countries, infrastructure that is needed, and cost for users.