To promote research in Islamic finance, the International Shariah Research Academy (ISRA) was established this year to conduct applied Shariah research on the contemporary Islamic  BIS Review 136/2008  3  finance issues. ISRA also provides a platform that promotes active engagement and dialogue among global Shariah scholars that promote mutual respect in Shariah and the convergence of views from different jurisdictions in the global Islamic financial system. The third strategy is to promote greater financial integration with the global Islamic financial system. The Malaysian Islamic financial system has also been progressively liberalised to allow for increased foreign entry and participation in our financial system, thus facilitating greater cross border flows and thus strengthening the international financial inter-linkages. This has taken the form of issuance of new licences and increasing foreign participation in both Islamic banks and takaful companies to 49%. New licences were also issued to foreign fund managers and foreign stockbrokers. In this new phase of development for Islamic finance, Malaysia as an international Islamic financial hub, has increasingly become a meeting place for businesses from different parts of the world that need to raise funds and for investors that have surplus funds for investment. Islamic finance going forward There is now a strong and growing demand for Islamic financial products in the global market, far exceeding the current availability of financial products and services being provided by the Islamic financial institutions. Going forward, there is therefore tremendous upside potential for Islamic finance.

Notwithstanding the emergence of new automated vendor services in recent years, OTC derivatives trades continue to be cleared and settled on a predominantly bilateral basis. Hence, a party to such a transaction is dependent upon the ongoing creditworthiness, liquidity and operational robustness of its counterparty over the life of the contract. A sound legal basis for the trade is, of course, also critical. Rising volumes (and values) and the development of new, and often more complex, products have placed a strain on existing arrangements, exposing capacity constraints in existing procedures. Questions have also been raised over the risk implications of deficiencies in post-trade processes, most notably in the assignment of credit derivatives contracts. Progress towards addressing these deficiencies was initially relatively slow, held back by coordination failures in the dealer community, until the regulatory community took an interest in 2005. The issue was noted in the Bank of England Financial Stability Review and the UK’s Financial Services Authority helped to bring the issue to public attention. The Federal Reserve Bank of New York (FRBNY) later convened a group of 14 dealers and their regulators, encouraging them to set targets for the reduction of processing backlogs in credit derivatives and to put in place mechanisms for speedier post-trade processing going forward. The dealers were encouraged to embrace existing automated services for  BIS Review 77/2007  5  the delivery and matching of confirmations, and the industry was propelled rapidly towards the adoption of a Protocol for communicating trade assignments.