Opening the Asian Financial Forum on Friday, Tsang suggested that there are a number of concerns for the region, including volatile capital flows and their potential to destabilise a market, particularly an emerging market where infrastructure is immature.

Other concerns include interest rate uncertainty or adjustments triggering a reassessment of risks, possibly resulting in sudden capital flight; and the uncertainty caused by the growing prominence of hedge funds and other largely unregulated entities in the financial market, he observed.

"To address the risks arising from volatile capital flows, regulators should stress test their systems to assess the impact on liquidity and pricing arising from the unwinding of large positions. This should reveal how market stability could be affected and help us prepare for any such shock," the Chief Executive stated.

"The recent sub-prime mortgage problem and the associated liquidity crunch highlighted the importance of prudent and effective risk management and market transparency. Without the necessary transparency to enable the market to evaluate risks, market operators will tend to assume a worst-case scenario and take unnecessary safeguard action, usually aggravating rather than relieving the stress of the crisis. So, there must be better access to reliable information for risk assessment, stress testing and increased regulatory co-operation across jurisdictions," he added.

Tsang pointed out that as markets grow and products diversify, human capital is needed to ensure they work properly.

"We need people with integrity to manage and regulate risks; who will innovate to create new products and access new markets; and who have the necessary experience and background to manage investment. These people do not grow on trees. We will have to train and nourish them. In this I see a considerable scope for co-operation among governments, regulators, market participants and academia. Only through such concerted efforts can we hope to produce enough talent to service the needs of the industry in Asia," he concluded.