There has been a worldwide wave of consolidation among financial institutions, stock and derivative exchanges, and even regulatory bodies. In 1999, there were 900 merger-and-acquisition (M&A) transactions among banks, worth $ 300 billion worldwide.2 The securities industry has been no less active, with exchanges and clearinghouses in a flurry of mergers and alliances. While globalisation and integration are established features of capital markets, two more recent trends are noteworthy: firstly, stronger linkages between capital market and treasury activities, and secondly, the impact of technology and the internet on capital markets, particularly in the securities industry. MAS’ guidelines on treatment of credit derivatives and securitisation The links between capital market and treasury activities reflect an increase in cross-border transactions. In the US and Europe, the spate of mergers and acquisitions has boosted the volume of foreign exchange flows. The mergers have also led to greater use of securitisation and credit derivatives, and caused European credit derivative markets to expand significantly.3 1 2 3  1999 Survey of the Singapore corporate debt market. “European banking turns decisive corner on road to consolidation”, International Wealth Management, July 2000. “Use of credit derivatives in bank mergers soars”, International Financing Review, March 2000. 1  BIS Review 69/2000  In Singapore, the burgeoning capital market has similarly benefited our treasury industry. Increased debt issuance has led to more swaps and other money market activities. Participants are using more sophisticated treasury and capital market products. We must keep our regulatory framework up-to-date, so that it provides clarity, and allows growth and innovation.

In this environment, product innovation needs to be escalated accordingly in particular, to respond to the growing need for managing risks to realign the risk-return profile of assets and liabilities for financial institutions and investors in reaction to fast changing economic variables. This is made more pronounced by the fact that increasingly, with the unprecedented economic integration, financial markets across the globe are not immune to financial volatilities. Therefore, it is crucial that market participants have the necessary tools to manage financial risks prudently and this is where derivatives can be applied. Application of derivatives will yield benefits to the general public as spread of risk among economic agents will mitigate risk of financial shocks to the financial markets at the macro level and individual institutions at the micro level. As a result, the financial system becomes more robust, stable and resilient to extreme volatilities in the financial markets. The introduction of derivatives in the Islamic finance with adequate legal, regulatory and corporate governance framework will enhance the development of the functioning of the Islamic financial system. Developing the relevant indicators The pricing mechanism for the Islamic financial instruments has so far been based on the prevailing interest rate framework. There appears to be no real difference in both the conventional and Islamic instrument. In order for the Islamic financial instrument to be efficiently priced, it needs to have its own indicator.