quiet successes over the last few years in developing an advanced and robust interbank payment and settlement system or in stimulating the development of a local debt market. the hong kong method is for such projects to be done, where possible, as partnerships between government and private sector, with a heavy emphasis on private sector involvement. nevertheless, the role of government is essential in getting them off the ground and in mobilising resources that cannot always be easily provided by the private sector. 18. secondly, the government provides regulation and protection. this ranges from the highly visible, and currently much debated, rule of law, which is the ultimate guarantee of contracts between individuals, to the day - to - day regulation of the markets themselves. much of the activity in this area is also left to the private sector : only a small proportion of contracts are ever disputed in the public courts, and a large part of the regulation of the markets and the professions is self - regulation. once again, however, government involvement is of key importance. the government is there in the background as the last resort when conflicts arise, and, in consultation with market practitioners, it takes the initiative to reform regulatory systems when new conditions require it : the far - reaching reforms proposed for hong kong ’ s securities and futures markets in the recent budget are a good example of this. 19. finally, the government is prepared to intervene in isolated, clearly identified cases where markets appear to be malfunctioning. in this respect, the hong kong monetary authority has a special role to play within the financial sphere. one of its primary tasks is to promote the stability and integrity of hong kong ’ s financial system, and one of its tools – in addition to the linked exchange rate, banking regulation, and the financial infrastructure – is the exchange fund, our official reserves. the exchange fund, among other things, is available to be drawn on to maintain the stability and the integrity of the monetary and financial systems of hong kong. this is done rarely and sparingly, but it is necessary to have this provision for reasons that should be readily apparent. in addition to being a free market, hong kong is also an open market. this gives it one of its main strengths as an economy, for our links with overseas markets are a vital part of our success as a financial and commercial centre. but it also renders hong kong exposed, and therefore vulnerable, to economic and other forces that are entirely beyond its control. we would not have it any other way,

co - operate at the international level. financial innovation, e. g. derivatives trading, creates transparency problems for regulators, because of the speed and complexity of risk transformation. the appropriate response of market transparency is more extensive disclosure of financial information. but in the context of fast - moving derivatives business the difficulty is to formulate effective disclosure rules that do more than provide an outdated snapshot of risk exposures. for management of financial institutions, the main emphasis must be on internal controls. external regulators, such as the basle committee and iosco, have responded and issued detailed guidelines on risk management. as trading position can be transformed swiftly through the use of derivatives and hence may not be reliable, regulatory focus has shifted to assess internal risk models, rather than the instruments held at a point in time. in addition to external regulation, the group of thirty in its 1993 study of derivatives made recommendations at strengthening risk - management techniques and procedures. another industry initiative was jp morgan ’ s decision to release its own proprietary risk - management model for general use. in addition, changing consumer behaviour resulting from aging population, for example, calls for new and sophisticated products like pension funds and long - term debt instruments. also, consumers ’ expectations are likely to be higher as they now have access to more choices from more diversified markets. finally, de - regulation has occurred because old regulations have not prevented the massive losses incurred by worldwide bank failures. in many countries, the losses caused by bank failures have been as high as 15 % of gdp, with bank losses in japan and france at an estimated 8 % of gdp. in the light of these heavy costs, governments around the world have begun to look seriously at the cost of regulation. the latest initiative include the japanese big bang, which would be complete by 2000. should the central bank also act as the supervisor? there are several arguments in support of the assumption of the supervisory role by the central bank. the first is efficiency consideration. there is huge overlap between the areas of interest of, and information required by, and available to, both the supervisor and the central bank. second, rescue or liquidity crisis will normally involve and require the immediate provision of liquidity, which can only be done by the central bank. this is facilitated by internalising the supervisory body within the central bank. others argue the reverse. first, since the finance of any large rescues involves government funding, the politicians have a direct interest and involvement in financial regulation. this may undermine the independence of a central