Although this shift in clearing activity still has some way to go, the proportion of centrally cleared trades will continue to rise as legacy trades mature. A third important structural change is the increased focus on the strength and resiliency of CCPs. Because CCPs are now going to play a more significant role, they must be strong and resilient. There have been many important initiatives in this regard. Foremost, perhaps, is the promulgation of the international standards embodied in the Principles for Financial Market Infrastructures (PFMI)—which were developed when I chaired the Committee on Payment and Settlement Systems (CPSS)—and the work currently underway on financial market infrastructure resolution. A fourth significant structural change has been reform of the U.S. money market mutual fund industry. The October 14th implementation of floating net asset values (NAVs) for prime institutional money market mutual funds has dramatically reduced their use and has encouraged banks and other borrowers to find sources of funding that are less prone to runs. The financial crisis exposed two important flaws of the money market mutual fund industry. First, the fixed NAV structure created a first-mover advantage that encouraged runs. That is, if a fund came under stress, investors who quickly withdrew their funds received par value. Second, although money market mutual fund investments are often collateralized, the funds themselves have no desire to take possession of the collateral in a crisis. Instead, they tend to head for the exits at the first sign of trouble, which makes the financial system less stable.

It is crucial to ensure, however, that this does not result in unchecked increases in risk appetite or compromises the quality of risk management practices. What was once a “black swan” event has increasingly become more common due to the high inter-linkages between international economies. As such, we need to be vigilant and ensure all potential risks are addressed and comprehensive risk management measures are adopted, both at the macro and micro levels of the economy. Regulatory reforms in line with risk management Let me turn now to the regulatory reforms in line with the risk management practices. The global financial crisis has exposed weaknesses in the existing international financial architecture and highlighted the fragmentation of regulatory rules across different jurisdictions. It has been a wake-up call for the world to come together to implement regulatory reforms to strengthen the foundations of financial stability and address the issues in the international financial system. For Malaysia, the recent global developments will not alter much the fundamental tenets of Bank Negara Malaysia’s approach to the regulation and supervision of the financial institutions. During the past decade, we have developed and implemented our Risk Based Supervisory Framework and our Risk Based Capital regime. Under these benchmarks, regulatory capital requirements and Bank Negara’s expectations in terms of governance and risk management are already well aligned with the specific risk profiles of individual institutions. The risk assessment and supervision of individual institutions are also further complemented with macro-prudential assessments to monitor the aggregation of risks in the financial system.