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Terms of Reference Liberalization of Cross-Border Capital Flows and Effectiveness of Institutional Arrangements against Crisis in East Asia Background An important development in international financial markets over the last ten years is the rapidity and magnitude of the resurgence of private capital flows to East Asia since the 1990s. While the growth in private capital flows to East Asia is only expected in light of the increasing integration of the region’s capital markets, managing these flows has become an important challenge for most countries in the region, particularly in dealing with surges in short-term flows and their impact on macroeconomic stability. Given that most capital markets in the region have been small relative to global markets, their lack of depth and liquidity makes the region vulnerable to sudden movement in (large) capital flows. While an effort has been made and still on-going to promote further development of both debt and equity markets, the development process could take some time. There is therefore a need for effective prudential measures to minimize market distortions and promote the orderly absorption of foreign capital. Over the years East Asian countries have undertaken various liberalization measures on cross-border capital flows. The liberalization efforts are expected to intensify as the region becomes more closely integrated economically as well as financially. As direct controls on capital flows are removed to allow for freer flows of capital, the need for enhanced disclosure, harmonized accounting standards and good governance has become indispensable in prudential management of these flows. In particular, the development of effective prudential measures, including quality monitoring and supervision as well as the above institutional arrangements, is seen as essential in managing capital flows to ensure that they do not lead to excessive risk taking. Objectives This study will specifically look at the regulatory implications of crossborder capital flows in East Asia. In particular, the study aims to: 1. Review and assess the effectiveness of current regulatory and supervisory regimes on cross-border capital flows in East Asia, including application of governance measures, disclosure, and accounting standards, in ensuring the efficient management of capital flows. 2. Review and assess regulatory and supervisory practices being adopted in other regions, particularly in developed countries in North America and Europe, and how they are effectively implemented in the liberalization of their capital accounts. 3. On the basis of (1) and (2), identify necessary institutional arrangements and develop best regulatory and supervisory practices that could enhance management of capital flows in East Asia and the region’s capacity to effectively address any adverse movement of these flows. Output 1. A comprehensive and comparative analysis of existing regulatory and supervisory regimes in East Asia, including a stock take of existing regulations and measures being implemented in each country. 2. A comprehensive and comparative analysis of regulatory and supervisory measures implemented in developed countries and their implications and possible application to East Asian countries. 3. A list of best regulatory and supervisory practices, including policy frameworks and policy recommendations on how to build more effective regulatory and supervisory capacity to better cope with increasing cross-border capital flows under a more liberalized regime in East Asia.