yandraduth googoolye : strengthening macro - prudential supervision in mauritius address by mr yandraduth googoolye, first deputy governor of the bank of mauritius, at the signing ceremony of the memorandum of understanding between the bank of mauritius and the mauritius revenue authority, port - louis, 31 december 2009. * * * ladies and gentlemen after a comprehensive address by the governor, i will not have much to add to what he has said. but, what i would do is to brief you about the salient features of the memorandum of understanding. but before doing so, i must say that after the global economic crisis, the buzz word all over is macro - prudential supervision. it is built on the clear lessons of the crisis that a set of financial institutions that are sound on a stand alone basis is not an assurance of financial stability. the real economy has to be treated as an endogenous part of the whole framework if systemic stability concerns have to be identified and mitigated. why i am saying this is because the mou that we are going to sign today is a critical part of our effort to strengthen macro - prudential supervision. let us look for instance one of the clauses of the mou. it says that mra will communicate to the bank aggregate data on various taxes collected with a view to allow the bank to gauge activities in the real sectors of the economy. this is an important data input for macro - prudential supervision. in fact this will make the process even more proactive rather than a reactive one. you will all agree that there is no alternative to being able to anticipate events and take remedial measures before a crisis assumes monstrous proportions. let me turn to the broad features of the mou now. this agreement has basically three important aspects : first, it contains the ground rules for cooperation between the bank and the mra. the mou emanates from the respective legislative framework governing the bank and mra. it is therefore subservient to it and furthers the objectives laid out in the respective acts. secondly, it sets out the specific areas for cooperation by detailing broadly the nature of information that one will provide to the other, areas in which they will collaborate with each other and underscores the need for use of technical expertise in one institution relevant for the effective discharge of responsibilities by the other. thirdly, it provides for a joint committee between the bank and mra that will

positioning ourselves a notch or two higher on global financial markets and bringing to ourselves a share of the total incomes generated by the 270 trillion dollar global derivatives market. in addition to the scope that may thus be given to our financial market by fetching international derivative trades to our shores, we will be gradually building up, among business operators, core skills that accompany the development of the derivatives market in general. this is the context in which this workshop and others that will follow it assume a relevance of their own in defining a more diversified future profile of our financial market. i can then look forward to a strong spirit of innovation in developing financial market instruments in this context. this process will no doubt be reinforced by continuous training and the experience gained by our operators through actual operation on the markets. having encouraged you thus to engage in derivative trading to give greater scope to financial business undertaken from mauritius, we can consider the positive spinoffs this will result in as we progress in this area in the future. let us stop and take a look at the challenges of persevering in this line of action. it is generally acknowledged that derivative markets have a positive fallout on underlying markets in so far as they help to redistribute risk and increase market efficiency and liquidity. derivatives have become an indispensable part of a modern financial system and will so remain so long as uncertainties will have to be provided for. in the context of new capital standards being introduced currently for banks, credit derivatives are seen as risk mitigating factors against portfolio risk to the extent they serve to lower capital charges of banks. healthy financial sector development is thus supported by this activity if only by increasing the scope for risk management. the resulting control over volatility in portfolios of financial institutions has, in turn, the effect of improving the risk appetite of market participants for a higher volume of business. in one of shakespeare ’ s plays, it was said that “ security is mortals ’ chiefest enemy ” the size and speed with which derivative markets have grown in the recent past to overcome uncertainties have also given rise to certain apprehensions surrounding derivatives themselves. given also the totally liberalized markets of today, allegations have been made that derivatives would, in fact, be adding to market volatility. this has not been tested and proved. it is therefore not advisable to press down the growth and development of derivative markets and thus risk stifling their development due to such fears. as a regulator, the bank of