Allow me now to share 3 points concerning risk management opportunities in the wake of developments emerging in the international financial landscape. The first point is that regional integration offers increased opportunities for OTC financial derivatives in managing financial risks. The second point is that the new Basle II Capital Accord must be studied carefully to ensure that the portfolio of derivative products is profitable and innovative while remaining in compliance with the riskweighted capital requirements, and thus preserving the financial stability of the institution. The third point is that the growth of Islamic banking and finance offers substantial new opportunities with respect to designing OTC derivatives compliant with the Syariah principles and appropriate for commercial use. As bankers and legal practitioners involved in the OTC derivatives industry, I believe these points will be of relevance to you in providing quality services to your clients and in developing your organisation’s OTC business portfolio. There are significant opportunities emerging in the Asian region. Regional integration has become more pronounced in recent years with the more rapid expansion of intra-regional trade in Asia. Intraregional exports account for about one third of total exports of the region. Intra-regional trade with the ASEAN nations accounts for about 24% of the region’s total trade, exceeding ASEAN’s trade with the United States. Trade with China, India and Korea has increased significantly. Notably, since 1993, China’s role in the region has reversed from that of a net exporter to a net importer. East Asian exports to China have doubled during the past decade.

The financial and banking system provides vital financial services to the public. It is also a channel through which the central bank’s monetary policies are implemented. In the efforts to preserve financial stability, a careful balance is made in achieving the objectives of a sound and stable financial system with that which is efficient and effective in meeting the requirements of the economy. This is so that the system is innovative and competitive, while at the same time, the risks do not undermine the stability of the system. In Malaysia, derivatives are generally used as hedging instruments and to a limited extent to enhance yield. Derivatives have allowed banking institutions to increase product innovation without losing their ability to manage the increased risks. With the advent of credit derivatives and Basel II proposals, derivatives have been more widely recognized as a risk mitigation technique which could also economise on capital adequacy requirements. In 2003, it is estimated that the notional value of total outstanding OTC derivatives, comprising interest rate and foreign exchange forwards, swaps and options, grew by more than two fold in Malaysia, to RM 171 billion over the last four years. It is important to note that statistics on OTC derivatives are difficult to capture, and that notional amounts are not an accurate reflection of the actual risk exposure to financial institutions. Between 1999 and 2003, it is estimated that the average annual growth in interest rate and foreign exchange OTC contracts collectively and in aggregate is about 40 percent.