Dealers run large securities financing “matched books” in which they borrow cash against securities, lend cash against securities, borrow securities against cash, lend securities against cash and borrow securities against other securities. At first hearing, that sounds like a rather pointless daisy chain. But securities financing markets are important (Chart 4). First, reverse repo transactions (short-term cash loans against high-quality bonds) provide moneylike assets for risk-averse wholesale investors, like money funds and sovereign reserves managers. As Zoltan Poszar has shown, their demand for money, particularly in US dollars, far outstrips traditional supply in the form of insured bank deposits or Treasury bills (Poszar 2014). Securities financing markets fill the gap. Second, acting as prime brokers, dealers finance the long and short positions of leveraged investors such as hedge funds. Third, securities financing markets facilitate the flow of high-quality securities from their underlying beneficial owners, such as pension funds and insurance companies, to banks and dealers which increasingly need to use and reuse them in order to meet regulatory requirements to collateralise their obligations: for example, to other banks and dealers and to central counterparty clearing houses. Securities financing markets may be important but the financial crisis demonstrated that they can also be fragile. Securities thought to be “safe” collateral, such as AAA-rated mortgagebacked securities and peripheral European sovereign bonds, became “risky” collateral. Haircuts on lending against those securities increased (Chart 5).

Given the global dimension of these building blocks, international cooperation and collaboration is significantly vital to advance these important agendas. Regulatory harmonization Commanding the highest level of international cooperation is particularly vital in the implementation of common prudential standards to safeguard the stability of the Islamic financial system. This will contribute towards the harmonization of the regulatory and supervisory framework in Islamic financial systems across borders. Of importance is advancing the international standards and best practices that takes into account the distinct characteristics of Islamic finance. Such prudential regulation that considers the unique mix of risks associated with Shariah-compliant financial business would enhance the effectiveness of the regulatory outcomes intended for Islamic finance. Much progress has already been made by the IFSB in promulgating an extensive set of prudential standards for the Islamic financial services industry since its establishment in 2002. The IFSB has already introduced standards for capital adequacy, risk management,  2  BIS central bankers’ speeches  corporate governance and Shariah governance. This important work has been significant in promoting international uniformity of regulatory frameworks and international best practices for the Islamic financial system in different jurisdictions. Its significant progress has benefited from the strong international cooperation and collective support from its member countries and global institutions. Indeed, as an evolving global industry with varying stages of development across borders and various business structures and operating models used in the different markets, this close engagement has also allowed for the attainment of balanced views.