The lesson here is to look at the economic substance, not the legal form. Securities lending Most accounts of the crisis give a headline role to SIVs, money funds, securities dealers and, as I shall come on to, the RMBS market. There has been rather less daylight, especially outside the US, around the somewhat obscure but very significant role played by the securities lending markets. The vanilla securities lending market is straightforward and important: it intermediates the loan of securities (equities, bonds or whatever) by asset managers to short sellers who need to deliver securities to settle their transactions. Securities lending is absolutely vital to effective market making, and thus to efficient capital markets. Asset managers hold their  4  BIS Review 6/2010  securities with custodians and, ultimately, in Central or International Securities’ Depositaries. Many enter into a service agreement under which their securities can be lent out by an agent. That provides the basis of a parallel, financing market. This is big, perhaps $ 6 at its peak. Say a Treasury Bond is lent out not against collateral in the form of securities but against cash, as is normal in the US market and had been growing in Europe before the crisis. The cash collateral can then employed in the market, ie it is lent to counterparties, usually secured. During the boom, risky assets, including ABS and CDOs, were increasingly accepted as collateral via so-called triparty repo arrangements, under which they were sometimes grouped with more innocuous securities with similar ratings.

Let me now touch on several important aspects of the Malaysian Islamic financial markets that are important to issuers and investors. These relate to the freedom to move capital into and out of Malaysia, the availability of credible and timely market information and the capacity of the Malaysian Islamic financial market to allow for greater product diversification and risk management. On capital mobility, Malaysia maintains a highly liberal foreign exchange administration regime. The primary focus of foreign exchange administration is to support the monitoring of flows of funds to promote financial and economic stability. As part of the continuous effort to enhance efficiency and reduce the cost of doing business, the foreign exchange administration rules have been progressively liberalised and simplified. There is free mobility of inward and outward movement of funds relating to both foreign direct investment and portfolio capital investments. Foreigners investing in Malaysia are also free to hedge with onshore banks their committed flow of funds such as the repatriation of investment proceeds, dividend and profits from Malaysia as well as the purchase of ringgit assets in Malaysia. In addition, investors are freely able to obtain ringgit and foreign currency to fund their investments in Malaysia. Strategic measures have also been taken to allow non-residents, in particular, Multinational corporations and Multilateral agencies to issue ringgit denominated bonds in Malaysia. The ringgit funds raised may be used either in Malaysia or outside Malaysia. Both the foreign issuers and investors are free to hedge their foreign exchange exposure from the issuance and interest respectively.