THE FINANCIAL MARKETS ASSOCIATION OF MAURITIUS - PRESENTATION OF INTERNATIONAL AFFILIATION TO ASSOCIATION CAMBISTE INTERNATIONALE (ACI)

Address by Mr. R. Basant Roi, Governor, Bank of Mauritius on July 20, 2001

 

 

President of the Financial Markets Association

Fellow Bankers

Ladies and Gentlemen

 

 


            It is indeed a privilege for me to be made the first honorary member of the Financial Markets Association of Mauritius. Thank you, President Sidambaram and the Committee for this kind gesture.

The Forex Association of Mauritius, established in the mid-1990s, was but the inevitable forerunner to the recently constituted Financial Markets Association of Mauritius. In its very first attempt, the Association has been successful in becoming a member of the Association Cambiste Internationale or better known by its acronym, ACI, in May 2001.  I am given to understand that the Mauritian delegation was highly commended by the ruling body of the ACI for the high quality of its presentation in the quest for membership.  Let me also congratulate the Committee on this laudable achievement.

Membership of ACI is a vitally important step for the Mauritian Association in its very short life.  The emphasis of the Association on training and education of its members is indeed a visionary move.  This will enable members to keep abreast of developments in the world’s foreign exchange and money markets which have grown considerably both in size and complexity. I am confident that members of the Association will eventually contribute in a highly professional way to the sound development of the domestic financial markets.

            As you are aware the Bank of Mauritius has steered its policy action in recent years towards a new direction with a medium and long-term objective of promoting micro-economic and macro-economic efficiency. I have to say that the new monetary policy framework has set conditions for efficient and effective liquidity management in the banking system – a corollary of which is the fact that our inter-bank money market is for quite some time much more active than before. As I have said it elsewhere, the more active financial markets are the better are they for the efficient conduct of monetary policy and the more efficiently banks can manage their day-to-day liquidity. Indeed, we, at the Bank of Mauritius, are pleased to note that commercial banks are now managing their liquidity in a much more efficient manner than before.  Overnight surplus balances maintained by banks have fallen dramatically, which is good news, as this efficiency cuts down on unnecessary costs.

            Although the record of the past years shows that substantial progress has been made, considerable challenges still lie ahead.  One area that has been of concern to the Bank of Mauritius has been the lack of activity on the secondary market for Treasury Bills and other securities.  In addressing this issue, the Bank of Mauritius recently produced a report proposing the establishment of a primary dealer system in Mauritius.  The report outlined eligibility criteria for primary dealers and also a set of privileges and benefits which primary dealers would enjoy in exchange for obligations to be discharged by them as market-makers in the secondary market.  I am pleased to say that the Chief Executives of commercial banks agreed to the framework for a primary dealership system in May 2001.  Work is currently being pursued in consultation with the banks and other market participants with a view to finalising the ground rules.  However, skills in primary dealing area are palpably lacking.  The Mauritius Association will have a decisive role in this area. The Bank of Mauritius will fully support any initiative taken by the Association in this area.

            May I share with you some constraints that have been identified as hindering the development of the secondary market in Mauritius.  The BOM findings suggest that many investors in Government securities, both institutional and individual, tend to adopt a passive approach and generally hold securities until maturity rather than trade on opportunity.  As a result, activity in the secondary market is practically non-existent.  Also many institutional and parastatal investors appear to be lumbered with cumbersome decision making procedures, especially in situations where senior management have not delegated appropriate dealing authorities to their treasury staff.  I urge these institutions and parastatals to modernise their investment philosophies and adopt a more proactive and sophisticated approach to their investment portfolios.  The Mauritian Financial Markets Association could play a useful role in this area by inculcating the need for a more positive investment approach by their clients, so as to deepen secondary market activity.

            The Association in Mauritius was originally called the Forex Association and it now behoves me to say a few words about the foreign exchange market. The conduct of exchange rate policy can be quite demanding, particularly when the currencies of our major trading bloc are volatile in the international markets. Think of the foreign exchange markets the world over, including Mauritius, with so many players and forecasters. They remind you of the theological discussions about the number of angels who can dance on the head of a single pin. The general belief among economists is that, left to their own forces, foreign exchange markets tend towards equilibrium. This is not what we observe today. Whether or not financial markets have “Le droit a l’exces”, excesses in such markets are a common feature.  Financial markets have intrinsic forces of unexpectedly turning into a wrecking ball. The domestic foreign exchange market has in the recent past suffered the wrath of wrecking ball. After having gone through a total eclipse, the domestic inter-bank foreign exchange market is regaining its confidence. Self-imposed discipline among players is a necessary condition for the orderly development of a foreign exchange market that is still in a fledgling state.

In this respect I appreciate the collective responsibility of the foreign exchange dealers in ensuring that the local market operates efficiently in a stable environment. The behaviour of players in financial markets has been well analyzed in game theory as illustrated in the so-called prisoners’ dilemma. For an individual it pays to betray. But for the system as a whole it pays to adopt a cooperative behaviour. An overly aggressive approach for short-term gain by any player in a thin market, which is subject to seasonal flows, can prove to be disruptive and unhelpful.  Rocking the boat unnecessarily in choppy waters is tantamount to the practice of hara-kiri! I do trust the competence of the members of the Financial Markets Association in their endeavour to develop the muscles of the financial markets in Mauritius but without flexing their own muscles to rock the boat.

            The forex or financial markets associations the world over affiliated to ACI have undergone a major change in role from that which prevailed about 20 years ago.  In the earlier days the associations or clubs were perceived as centres for after hours drinking after a hard day’s trading.  This image has now changed and the associations are now working more closely with the authorities in enhancing and developing local financial markets, while of course retaining the social dimension!  This is no more evident than here in Mauritius.  I am pleased to report that the Mauritius Financial Markets Committee which comprises the heads of treasuries of the ten commercial banks with the Bank of Mauritius in the chair has met on 18 occasions since its establishment in March 2000.  May I seize this opportunity to extend my appreciation to the members of the Committee for the cooperation and positive approach to the many issues discussed by the Committee. This Committee has led to the enhanced functioning of the domestic markets through a better rapport between the Bank of Mauritius and the market participants.

            It is my earnest desire that this partnership between the Bank and the markets be further strengthened to best serve the economic interests of the country.

            I wish the Financial Markets Association the very best of success in its future endeavours.

            May I once again express my appreciation for honouring the Bank of Mauritius by conferring the honorary membership of the Association upon me.

Thank you.