There is still considerable debate amongst Islamic scholars about the acceptability of the various forms of derivative products from the perspective of Islamic jurisprudence. Hence, there is a need for more investment in intellectual capital in the field of Islamic finance to promote innovation that  BIS Review 11/2004  3  integrates the appropriate Syariah principles within the Islamic financial instruments. Our efforts to keep abreast with such developments will facilitate more rapid development of Islamic financial instruments for the purpose of risk management, using derivatives. It is evident that the derivatives business has global opportunities since risk in today’s financial environment is a product of uncertainties prevailing in the global markets, whether financial or non-financial. The ISDA Master Agreements have been the universal means of bringing order and certainty to the complex and rapidly developing world of OTC derivatives. The culmination of the new 2002 ISDA Agreement, 10 years after its predecessor, comes in the wake of many financial crises. Legal documentation of derivative transactions has a role in mitigating risks for banks and businesses. The world has changed considerably in this recent 10 years - financial liberalization driven by rapid advances in information technology is altering the financial landscape at an unprecedented pace. The legal and regulatory infrastructure must keep pace. We must continuously learn, un-learn and re-learn. The acquisition and application of knowledge must be a deliberate strategy and activity in pursuing the path of excellence.

There has also been a trend towards greater intraAsian investment flows in the region. This includes higher investment of surplus funds into the region, in the form of foreign direct investments as well as portfolio capital flows. These regional developments will lead to greater demand for OTC financial derivatives, which can be met by any of the major national, regional or global financial institutions operating in these markets. Malaysian banking institutions must be prepared to compete in this highly innovative and agile global industry by staying ahead on the learning curve for writing OTC derivatives that precisely match the risk management characteristics needed for effective hedging. At the same time, banking institutions must take into account the need for robust internal controls specifically in the area of credit, market, operational and legal risks to prevent the failure of any derivative contract. 2  BIS Review 11/2004  My second point concerns the New Basle II Capital Accord. The International Swap Dealers Association, as the global trade association representing the leading participants of the OTC derivatives industry, has provided its views to ensure that the capital requirements of the New Capital Accord’s will reflect the actual amount of risk that a bank is exposed to in a particular derivatives transaction. According to the recommendations put forth by the Basle Committee, capital requirements to support off-balance sheet derivatives are calculated by reference to the credit risk of the item adjusted for credit quality of the counter party.