It is true that fewer countries now operate with the fixed but adjustable exchange rate pegs - the middle ground that characterized much of the emerging world up to the crises of the late 1990s. But many still make monetary policy subject to the overriding objective of limiting the variability in the exchange rate against their major trading partners. 2  BIS Review 102/2006  Viewed through this lens, it becomes apparent that the dramatic rise in the level of official reserves in much of the emerging world is not simply the consequence of a desire for a greater financial cushion against external vulnerability. It also results from the lingering aversion to letting exchange rates adjust upwards in response to market forces. As capital markets become more open, this middle ground is harder to sustain. The broadening recognition of this is leading to a gradual increase in exchange rate flexibility, and this process is likely to continue. The pace of progress, progress in the direction of more openness to capital flows and greater exchange rate flexibility, will depend in part on the pace at which these governments are able to strengthen the resilience of the domestic financial system and set in place the broader institutional framework and supervisory regime that are vital for an open economy. For those countries that are less far along in this transition, policy still reveals a substantial degree of ambivalence about the benefits of integration; and doubts about their ability to limit the risks in greater exposure to volatility.

In this area, Islamic finance instruments will have to comply with conventional or general financial regulation, while maintaining their specificities. In particular, the contractbased nature of Islamic finance normally linked to an underlying asset poses challenges in areas such as risk weight analysis and the fiscal treatment of Islamic-type instruments. BIS central bankers’ speeches  1  Financial instruments have to be carefully calibrated to take due account of the risks linked to the underlying asset and its liquidity. In taxation, there are problems of double or multiple taxation and equality of treatment with interest-based instruments that also need to be addressed. Several European countries are adapting their legislation in this respect. In addressing these regulatory challenges, the IFSB is playing a very important role by providing a forum for coordination and dissemination of better international practices. It is also contributing to the integration of Islamic finance into the general framework of conventional finance regulation, as established by international bodies, such as the FSB itself and the Basel Committee on Banking Supervision. In parallel, other institutions such as the G20, the IMF and the World Bank are stepping up their efforts to further the analysis of Islamic finance and to identify the necessary reforms to its insertion in the international financial system. Many of these issues will be dealt with in the different sessions of today´s Forum. The agenda includes four technical sessions on regulatory aspects and the specific challenges regarding Sukuk markets, equity-based financing and financial inclusion.