Muhammad bin Ibrahim: Pilot platform for cross-border investment and settlement of debt securities Remarks by Mr Muhammad bin Ibrahim, Deputy Governor of the Central Bank of Malaysia, at the press conference for the launch of the pilot platform for cross-border investment and settlement of debt securities, jointly with the Hong Kong Monetary Authority and Euroclear Bank, Hong Kong, 13 March 2012. *  *  *  The world as we know is changing. Many aspects of how the global financial landscape will change have been discussed. One key area of focus has been the uneven growth momentum across the world, which is expected to persist for some time, and this development will have an impact on the trends and direction of the flows of trade and capital across the world. In essence, the nature of trade and capital flows will be significantly different from what we have experienced in the past decades; gross capital flows from across the globe between the east and the west, the north and the south, will be larger in size and more robust, going forward. These developments may pose risk in particular, to open economies like Malaysia and Hong Kong. A key safeguard to manage the risks that may arise from this transformation would be by strengthening our financial systems, to further develop the capital markets and to strengthen the regulatory and supervisory frameworks. In the Asian region, accentuating this global transformation are the rapid regional economic and financial integration and the expansion of domestic demand.
5 / 15  BIS central bankers' speeches  Policymakers have indicated that they want the portfolio’s size to decline “in the background,” and that the federal funds rate be the primary instrument of monetary policy. Rapid portfolio runoff could lead market participants to overestimate the total decline that will occur in the Federal Reserve’s securities holdings, and thereby accelerate the rise in term or mortgage risk premia associated with balance sheet normalization. This could complicate policymakers’ economic forecasting and make it more challenging to determine and communicate the appropriate monetary policy stance. The FOMC’s plan addresses these concerns about gradualism in two ways. First, it begins at a low rate of redemption, increases this slowly and in small amounts, and then continues at a specified maximal rate of runoff. These amounts should result in transitions that are within the market’s capability to absorb. Second, because the plan explicitly and numerically communicated the FOMC’s plans, it should promote stability in market estimates for the future size of the balance sheet, and confidence that the FOMC will not unintentionally create market stress. Predictability The second goal is to provide the public with a degree of certainty that, as the Federal Reserve reduces reinvestment, the market will not be asked to absorb securities at a speed that unexpectedly changes in a significant way. I’ve already discussed why it is important that the flow of securities back into the market be gradual.