Latin American Capital Markets

INSTITUTIONAL INVESTORS AND CAPITAL MARKET DEVELOPMENT 147ulation offered by international organizations such as the International Organizationof Securities Commissions (IOSCO) and the Council of Securities Regulators of theAmericas (COSRA) seem fundamental. Furthermore, Latin American and Caribbeancapital markets must establish and maintain technological capabilities that facilitatecross-border transactions, such as electronic trading platforms and efficient and uniformclearance and settlement systems (Dowers, Gomez-Acebo, and Masci 2000).Because investors seek the lowest-cost and most liquid markets, in implementingmeasures toward integration, governments should take action to preservethe viability of the national market and, in particular; foster local institutional investors.Local asset managers are best able to facilitate local financing through their knowledgtof the language and markets. A foreign portfolio manager might not understand theimplications of a piece of market information and respond wrongly. For this reason,to attract investors to a national market and develop a local institutional base, themarket must be made more attractive. One way to do this is to develop the corporatebond market as described above to allow pension fund assets to broaden theirinvestment base beyond government securities. Rather than being based on a desirefor diversification, an investor's decision to invest in bonds is typically based on interestand exchange rates and therefore is more likely to be made in the local market(Gaaand others 2001).Small and Medium EnterprisesIntegration may be a concern for SMEs that are unable to obtain financing abroad.SMEs voiced a similar concern at the initiation of integration of the European Union,although they appear to have benefited from integration developments in the EuropeanUnion. One way to create a financing mechanism for SMEs would be to tap thecapital reserves of banks, which play an important role in the economies of LatinAmerica and the Caribbean.To encourage banks to lend to SMEs, a program similarto the U.S. SBIC program could be adopted under which banks would set up separateunits to lend money. An alternative would be to minimize the costs associatedwith listing to new and smaller firms, such as occurs on the NASDAQ market andmore recent similar markets, such as the Italian Nuovo Mercato, German NeuerMarkt, and Brazilian Novo Mercado. 13 Given the importance of SMEs in Latin Americaand the Caribbean, this measure is associated with high development impact.13 See Takacs and Korcsmaros (this volume) for more on these markets.Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub