"Defining the new financial architecture is a matter of urgency and the international financial community has been dragging its feet for the last two years," the second finance minister said at a meeting of Commonwealth finance ministers at the Cayman Islands.
"We support the Commonwealth secretary-general's view to set up a ministerial group which would better represent the interests of all countries," Mustapa added.
Mustapa reiterated that the new IFA should address the fundamental weaknesses of the free market system, especially with regard to destabilising short-term capital flows, and said Malaysia was pessimistic about the potential outcome of the FSF.
"Of greatest concern is the prevailing view that fundamental changes are not needed to the current financial system," he said.
Mustapa said the new IFA should be premised on avoiding disruptive capital flows so that maximum benefit could be derived from globalised capital markets and on containing the adverse impact of currency trading, especially on small economies.
"It should also attempt to limit the contagion effects arising from future crises and achieve symmetry in good behaviour of governments and the private sector," he said.
Mustapa noted that currently, not much was known about the work of the FSF and that greater transparency and more interaction with emerging economies would lend support to the forum's recommendations.
"While some emerging economies are involved in the working groups, more effective participation is still required ... expanding the membership of the FSF is therefore a priority," he said.
The FSF was set up by the Group of Seven (G7) major industrial power in February this year and comprises the Netherlands, Australia, Singapore and Hong Kong, apart from the G7 nations.
Mustapa said it was essential for the G7 to acknowledge that globalisation would not have some adverse outcomes and that unfettered free markets would subsume small nations.
"Therefore, some 'management' of globalisation is required to maximise its benefits and the new IFA should seek to bring about equitable rules which apply to both the owners of capital and the host countries where the capital is invested," Mustapa said.
He said that the rules should accord equal emphasis to how owners of capital could maximise profits as well as how host economies could safeguard their domestic interests.
Mustapa said that central to the issue of reform of the IFA was the need to address volatility of capital flows, particularly via regulation of hedge funds and highly leveraged institutions (HLIs).
"There should be direct regulation of hedge funds and HLIs which have the financial muscle to manipulate capital markets of smaller economies," Mustapa said.
He said the reluctance of western nations to accept the damaging role played by HLIs in the recent crisis was reflective of their belief in the supremacy of the free market system.
"HLIs tend to operate from offshore financial centres (OFCs) due mainly to minimal regulation and, therefore, there is also a need for greater regulation of OFCs to ensure best practices," Mustapa said.
However, FSF head Andrew Crockett had said in Paris last week that direct regulation of HLIs was unlikely and that the FSF would probably present recommendations for enhanced disclosure by such institutions in April next year.
Another area where Malaysia feels no progress has been made concerns the activities of international credit rating agencies.
"Despite being provided with comprehensive information, these agencies failed to make objective assessments and their continuous downgrading of countries' sovereign ratings during the crisis undermined investors' confidence which precipitated panic selling," Mustapa said.
He said these agencies needed to be more transparent about their rating process and be made accountable for their actions.
"If no changes are made in the governance of rating agencies, we will not be able to develop mechanisms to encourage creditors to maintain credit lines in times of crisis to avoid contagion," Mustapa said.