rundheersing bheenick : the first pan - african derivatives exchange in mauritius address by mr rundheersing bheenick, governor of the bank of mauritius, at the seminar on currency derivatives, organised by global board of trade, port louis, 16 july 2009. * * * it is a great pleasure for me to be with you this morning at the opening ceremony of this seminar on currency derivatives, organized by the global board of trade. the launch of the first pan - african derivatives exchange – which is what gbot is – here in mauritius marks a milestone in the development of our financial sector. the waves of financial sector liberalization first touched our shores in a big way in 1994 with the suspension of exchange control which was how we had kept our external accounts in balance until then, supported much of the time by steep import tariffs, administrative controls, lending ceilings and directed interest rates. our financial sector has attracted favourable reviews from international financial institutions and has emerged over the past few years as an important contributor to the economy. it has also been a key driver in our efforts to participate fully in globalization, supported by other measures such as tariff reduction and fiscal consolidation. in 2008, the financial sector was the second - fastest growing area of activity, just after the booming construction sector, with a growth rate of 10. 1 per cent, against 7. 5 per cent in 2007. it employed 12, 500 persons and its share in gdp was just below 11 per cent. and this year, when the global economy has stalled as western economies have nosedived in what has been called the great recession, our financial sector continues on its growth path. its contribution to gdp is predicted to rise to 11. 5 per cent in 2009 and to keep rising thereafter as the contributions of traditional sectors to gdp continue on their declining trend. although our financial sector witnessed an impressive development over the last decade following the suspension of capital controls, the focus remained on sound bank lending, securities issuances and trading, and foreign direct investment. we relied on domestic retail deposits, not foreign wholesale money markets. we, as regulator and supervisor, did not fall asleep at the wheel and our banks have continued to be profitable and have not become wards of the state! our financial system is of course far from perfect and suffers from several deficiencies – e. g. markets for bonds, currency and derivatives are thin! in a brief interview i had given to the “ business standard ” newspaper in india in march last year,

as spot trades, forwards or plain foreign exchange swaps. in the wake of the financial crisis, it has been found that the explosion of the derivatives markets was partly due to speculation and an abuse and misuse of derivatives. the ballooning of trade in derivatives across all categories to a staggering total of $ 596 trillion in december 2007 was driven by strong speculative interest and did not reflect economic fundamentals. in the two years to december 2007, currency derivatives grew by 78 per cent to reach $ 56 trillion. the semiannual statistics on otc derivatives of the bis indicate that currency derivatives had fallen to $ 50 trillion by december 2008. the growth in the market for currency derivatives is likely to decline further as regulators contemplate limits on trade in view of large losses which drove the south korean won to a decade low ; led to lawsuits in india ; and caused shares of china's citic pacific ltd. to collapse. so, there is a downside and it is as well that we should be aware of the potential dangers that lie ahead and that we should guard against. i must say that i have seen lately the first encouraging signs of the maturity of our exchange arrangements : the recognition of the greater role assigned to market forces in determining the exchange value of the rupee. i have already mentioned recently the proposal of the imf to reclassify our exchange rate regime from “ managed float ” to “ free float ”, based on our performance in the recent past. we have come a very long way indeed since the collapse of the bretton woods system of fixed exchange rates in 1971. countries of our size were paralysed by the fear of floating. they did not have the credibility to have independent monetary and currency regimes. by being recognized as a free - floater, we have truly come of age as an independent nation, with an independent currency. as an aside, let me recall that currency futures, which we are discussing this morning, were also made possible by the collapse of the system of fixed exchange rates. the chicago mercantile exchange launched the first forex future in 1972. let me make a few comments on our exchange rate policy! over the past year, the bank has limited its interventions in the foreign exchange market but we have nevertheless ensured that the rupee did not suffer from any undue volatility despite the spillover effects of the financial turbulence in other parts of the world. if we are upgraded to the category of “ free floater ”, this would mean