On top of that, the OTC derivative contracts had a daily turnover of $ trillion in 1998, and the notional amounts outstanding at end-June 1998 came to $ trillion. There is no doubt that the growth of foreign exchange and OTC markets, together with advances in information technology, has contributed to cross-border capital flows and enhanced risk management standards. It is, however, legitimate to ask what lies behind these vast numbers. What does it mean for the underlying markets if the financial derivatives trading continues to multiply? Do we understand exactly what these $ trillion worth of derivative positions represent? Do we really understand the nature of the fund flows generated from the financial derivative trading in the OTC markets? The problem is that we do not have the answers to most of these questions. To start with, there is not even an adequate statistical framework to capture capital flow data. The current data on balance of payments, international investment position, or flow of funds accounts have two major short-comings: (a) low frequency of quarterly data; and (b) limited breakdown of data by currency, sector, instrument, etc. The BIS, IMF and OECD are examples of institutions which have made some attempts to collate relevant statistics but they are far from complete or timely. This is not just a statistical issue for the data compilers but a major policy issue for the authorities and other users. The compilation of high-frequency and detailed data is going to be resource-intensive and there is keen competition for statistical resources.

At the current stage of development, however, we need to shift from purely qualitative judgements to quantitative analyses of what has caused the real exchange rate appreciation trends in many accession countries. For example, the majority of empirical studies of the well-known Balassa-Samuelson effect have concluded that this hypotheses explains only 1-2 percentage points (or even less) a year of the observed real appreciation in Central European countries. This necessitates searching for other influential factors and forecasting their development for the future. The implications of the real appreciation process are probably different for those countries with hard pegs against the euro compared with countries that have floating exchange rates. In the case of currency boards, the only channel of real appreciation is an inflation differential. As the Maastricht inflation criterion is relatively strict, even a relatively modest pace of real appreciation might lead to complications. It will be certainly interesting to hear today if these countries really perceive this challenge as serious and what alternative policies - such as fiscal policies and/or income policies they can use to overcome the problem successfully. For countries with more flexible exchange rates, the Maastricht exchange rate criterion is less binding, and a modest nominal appreciation trend can be accommodated within its fluctuation bands. It will be interesting to hear whether we all share this view. Another question is whether we see any implications of the real appreciation process for designing the details of our ERM2 membership, such as its duration or the chosen central parity.