Part of the initiative must begin at home, since without effective domestic management international initiatives will lack a sound foundation. The Asian crisis has demonstrated that the approach towards capital account liberalization in some Asian economies was clearly inappropriate, given the weaknesses in domestic financial sectors. Poor supervision, lax accounting standards, close relationships between lenders and borrowers, and inadequate prudential safeguards all conspired with “hot” capital inflows to fuel the crisis. Again, it is worth pointing out that this is not purely an Asian problem, as the LTCM episode revealed. Prudential regulation begins at home, but it must also be extended into a global prudential and regulatory framework, which would be an aid, not a hindrance, in the general trend towards a more liberal financial environment. A third part of the reform must address cross-border manipulative practices in financial markets. Rules exist against the cornering of domestic financial markets. The blatant collusion and coordination in the various recent attacks on Hong Kong’s markets, and the phenomenal financial resources the manipulators have been able to muster, underscore the need for domestic anti-trust principles to be applied to cross-border financial speculation. These are matters of some urgency, and there is already a clear international consensus that they are necessary. Measures of the kind that I have just outlined are under active discussion in various international forums, including, at the latest count, the IMF, BIS, APEC, EMEAP, G7, G10 and G22 or G26.

Margin call clearly and inevitably puts pressure on those on the wrong side of derivatives contracts. Given its importance in the system, we need to be as sure as we can that margin call, both between CCPs and clearing members and between clearing members and their clients, is both prudent and justified. In particular we should look at whether under-calibration of margin in normal times led to ‘catch-up’ margin calls in the stress. We should also revisit whether there is more that can be done to reduce procyclicality of margin call under stress by building larger buffers in normal times. Some jurisdictions have, for example, introduced specific measures to mitigate procyclicality in margin requirements and we should examine how these performed in the March stress. But given that clearing and margining are important risk mitigants in the system, the answers may lie more in ensuring that that financial market participants, be they hedge funds or pension funds, understand how margin call can evolve in a stress and have the resilience to manage the consequent liquidity pressures. As the search for liquidity intensified, money market funds (MMFs) came under pressure. Post crisis reforms in the US and in other jurisdictions had sought to make MMFs stable under stress, to reduce ‘first mover’ advantages and incentives for investors to ‘run’. However, under the recent stress, MMFs appear again to have been a source of vulnerability in the system. As the demand for liquidity grew and market participants drew down their investments in money markets, MMFs saw substantial withdrawals.