that reduces the credit standing of one or more large institutions, or leads banks to take on riskier strategies in order to reach a desired level of profits, could have systemic implications that authorities need to be aware of. a critical question for the stability of global financial markets is whether the core intermediaries – the fifteen or twenty large global firms that make markets in the most widely traded derivatives and act as prime brokers to hedge funds – are adequately managing their counterparty and principal - based trading activities. the large dealers firms manage counterparty exposures through a combination of initial margin, variation margin, and allocations of their own capital. so far, these firms seem to be keeping their direct credit exposures to hedge funds and principal trading under control. however, there is evidence that competition for hedge fund business may be putting margining arrangements under pressure. it is also unclear whether firms have adequately protected themselves against indirect exposures to the consequences of greater leveraged activity, such as the risk of a sudden global shock to liquidity as i mentioned a moment ago. firms are still devising methodologies to model such events and incorporate them in stress tests. but ultimately the best safeguard will be adequate capital and liquidity cushions. 3. implications for financial stability policy what do these developments mean for financial stability policy? in the new environment, risks seem to be dispersed more widely, but transparency about where risks are located has declined. this reduces the sectoral impact of real and financial shocks, but may also make it harder to anticipate which sectors are vulnerable to a shock. even more than before, policy needs to move from a reactive orientation, where we intervene in response to problems and threats, to a preventative stance in which systems are made more robust to potential shocks. certainly it ’ s not the task of the official sector to stand in the way of innovation or improved efficiency. however, we do need to minimize the moral hazard risks that might come from the increased risk capacity of regulated firms. one way to do this is to redouble our efforts to use regulatory tools – riskbased capital requirements, prudential rules, disclosure that is aimed towards strong market discipline – to align the decisions of regulated firms more closely to market signals. new instruments and trading patterns also call for the expansion or adaptation of the market infrastructure that underpin financial activity. here, collective action problems among market participants can arise that prevent the market from finding appropriate solutions on its own. giving the impetus that the markets need

zeti akhtar aziz : the takaful industry in malaysia speech by dr zeti akhtar aziz, governor of the central bank of malaysia, at the launch of prudential bsn takaful berhad, kuala lumpur, 8 august 2006. * * * ladies and gentlemen, the takaful industry in malaysia today is poised for greater dynamism and growth, within the expanded domestic and international frontier of the islamic financial system. this reflects the culmination of the wide - ranging strategies that have been implemented over more than two decades for the full potential of islamic finance to be now realised. however, to ensure that the momentum in the development of islamic finance is sustained in a now more challenging and fast changing international financial environment, it not only requires continued development of the islamic financial infrastructures, and the range of products and services it offers, but also an increase in the number of players and an enhancement of their capacity and capabilities in terms of size and quality of their participation in the financial system. the launch of prudential bsn takaful berhad today marks a new phase of development in the malaysian takaful industry. prudential bsn takaful berhad is one of four successful consortia that has been identified to conduct takaful business. with the entry of the four new players into the financial system, the competitive element that is injected into the market structure of the industry can be expected to contribute to accelerate the pace of industry development. the enhanced and robust competition in the marketplace would lead to greater consumer benefits in terms of improved business efficiency, product development and service quality. it is envisioned that the achievement of these imperatives will ensure that the malaysian takaful industry is well - positioned to successfully make the transition from being " good - to - great " and, insyaallah, will remain as the global leader for takaful and retakaful. ladies and gentlemen, the overarching objective of our regulatory policies is to ensure that the financial system is in a position to serve the public with the best range and quality of products and services, that the interest of the consumer is at all times protected, and that best practices are adopted to ensure the soundness and stability of the system. it must be emphasised, however, that the ultimate responsibility for ensuring this rests on the players in the financial system, in particular, the senior management and the board of directors. this is particularly important to ensure