By separating the provision of liquidity from exposure to credit risk, credit derivatives, and the related developments in structured finance, give non-banks new ways of accessing credit risk. As well as more dispersed risk buttressing systemic stability, the innovation of credit derivatives has plausibly taken us a further step towards complete markets, in effect providing a richer market for credit insurance than previously existed. Investors and others may, therefore, be able to get a little closer to the portfolios they really want to hold, which would facilitate a better allocation of risk and so bring broader welfare benefits. This works in the direction of reducing the price of risk, which would reduce the risk premium used to discount uncertain future cash flows. There are, therefore, tangible benefits from the new derivative markets for unbundling and transferring credit risk. And the same can be argued for the earlier development of interest-rate, foreign currency and equity derivatives. So where’s the catch? Short-option positions and market dynamics Everyone is familiar with the risk present in markets if ‘everyone’ tries to sell – or buy – at once. Various features of markets can create the conditions for, or reinforce, such herd-like behaviour. Panic in the presence of excess leverage is the familiar culprit, and goes back to well before the invention of derivatives, as various authors have documented in the context of the Great Crash. Derivatives have not altered the firmament in some deep, unrecognisable way. But they have introduced some novel variations on old themes.

Malaysia has always been open, friendly and fair to foreign investors. Foreign investment in Malaysia dates back to more than a hundred years ago. In fact, foreign investors have been major partners of our economic growth. Foreign investment had contributed significantly towards the expansion of the country’s manufacturing sector, the creation of employment and the birth of economic hubs. Today, foreign investors remain key allies in our quest to become a high income nation. Periodic reviews and dismantling of burdensome regulations have been our ethos. In 2009, we reduced barriers for partnership with local companies and liberalised 27 service subsectors. Since then, at least 15 more subsectors have been liberalised. These measures have boosted investments in many corridors around Malaysia. Malaysia is a profit centre with no restriction in repatriation of profits even during difficult times. Foreign investments have indeed yielded significant returns for investors. Returns on FDI have grown by an average of 13% per annum, higher than Malaysia’s nominal GDP growth of 7.7% and one of the highest in Asia. Clearly, Malaysia is a regional profit centre where foreign investments are protected and is allowed to operate in a conducive environment. More importantly, profits by investors are freely movable. Malaysia does not impose any restriction on the repatriation of profits, even during difficult times. A fact sometimes missed by analysts. Even during the 1997 crisis, we did not restrict the movement of profits from Malaysia. Our compass in attracting investment has always been guided by seeking quality, rather than quantity, of investments.