Since the start of the crisis in 2008, Malaysia has experienced three episodes of large foreign capital outflows. Thankfully, our policy framework, a healthy level of foreign exchange reserves, and the robustness of our financial system, have enabled us to withstand such flows without significant disruption of domestic economic and financial activity. The third form of risk is through interest differentials. Very low interest rate in the AEs do not just attract yield-searching foreign funds to the higher yields in the emerging markets (EMs), they also create a very strong temptation for residents in EMs to borrow from abroad. We saw this type of vulnerability in this region in the period before the Asian financial crisis and more recently, in the Eastern European economies. The build-up of unhedged foreign currency debt by residents can be a significant source of vulnerability during times of economic and financial upheaval. Then there are global liquidity spillovers into domestic liquidity that put downward pressure on domestic interest rates. We see this most evidently with the negative interest rates of the ECB, which has resulted in capital flows to the neighbouring countries and pressure on their exchange rates. As a consequence, interest rates in neighbouring Denmark, Sweden and Switzerland have all also become negative. Such contagious fall in interest rates can lead to excessive borrowing, a decline in savings, increases in asset prices, and increases in leverage, which in turn increase the risks of financial imbalances developing and undermining financial stability.

These measures align financial market infrastructures for FX transactions with international standards and promote the development of the financial market and incorporate international standards The Central Bank has also been focused in improving the adequate functioning of the foreign exchange market, taking several steps in that direction. In terms of the “life cycle” of a transaction, we are interested in having a more competitive market, to which nondiscriminatory access to FX trading platforms is very important. Through a recent regulatory change, the Central Bank requested banks and other entities of the formal exchange market to verify that the trading platforms that they use fulfill basic conditions on risk management and access conditions. Lastly, advancing in the incorporation of the Chilean peso as an eligible currency in the Continuous Linked Settlement (CLS) international payment system remains a priority for the BCCh, so it continues to urge the necessary measures to materialize this initiative. Significant technical progress was made with CLS, and two commercial banks already showed interesting in participating. Next step is the implementation of correspondent accounts as previously mentioned. (ii)  More secure short-term funds availability  For quite a while now, access to and availability of short-term funding and the need to develop a private repo market (or lack thereof) has been a policy concern among local financial authorities. Historically, the main participants in the private sector repo market have been almost exclusively broker-dealers and their most sophisticated clients. However, repos are absent in other market segments, most notably the interbank market.