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One of the most striking financial developments in recent years was the emergence of sovereign wealth funds (SWFs) – large publicly owned investment portfolios, which until recently were growing rapidly in both number and size. In a global environment already roiled by a prolonged credit crisis, SWFs raise tricky and potentially controversial new questions for international financial regulation. One issue of concern to many in host countries is the possibility that some SWFs might be used for overt or tacit political purposes, posing a challenge for global monetary governance: a Great Tradeoff between, on the one hand, the world community’s collective interest in sustaining the openness of capital markets; and on the other hand, the legitimate national security concerns of individual host countries. Can some balance between the two be found that will be both stable and acceptable to all concerned? Individually as well as collectively, recipient countries have begun to address the regulatory challenge directly. To date, however, accomplishments have been slight and have failed to stem a noticeable drift toward financial protectionism. A review of some recent proposals suggests that there is no foolproof solution to the Great Tradeoff. But the potential for controversy could be significantly reduced by a negotiated agreement among host governments addressing three key issues: (1) definitions; (2) risk assessment; and (3) dispute resolution. The most logical venue for such an exercise would be the OECD, building on its already extensive experience with international investment issues.

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