Latin American Capital Markets

PROMOTING REGIONAL CAPITAL MARKET INTEGRATION 203tentially cooperating exchanges are indifferent about where they conduct their business,they will not be concerned about movements in trading volumes between theexchanges, and the intensity of competition between the cooperating exchanges willagain be attenuated. This often occurs when the regional exchanges in a countrymerge to form a single linked exchange, as has taken place, for example, in Australia,France, Italy, and Switzerland. Conflict between cooperating exchanges may also bediminished if the exchanges operate in different time zones because the possibility oftheir members competing may appear less.Credible Contractual CommitmentsA fourth noteworthy aspect of cooperative market infrastructure projects is the difficultyof creating credible contractual commitments between the cooperating partners.Toachieve this, not only do such agreements have to be initially beneficial for theparticipants, they have to continue to be so even in a changing environment. If materialcircumstances vary, as often occurs, one or more of the participating entities maydecide that the original contractual agreement is no longer appropriate. It would normallybe difficult for the other participating organizations to insist that the dissentinginstitution honor its original agreementThe costs of enforcing such contracts are typicallytoo high to warrant a legal attempt to do so, particularly in an international environment.More importantly, even if a participating entity could be forced into an actionit perceived as unfavorable, the market participants the entity represents couldnot be compelled to use it.There is thus little point in forcing an unwilling organizationto continue honoring an initial participation agreement without the active supportof its customers.One of the benefits of a merger over a cooperative venture is precisely thatcontracts do not have to be fully specified in a merger; as they do between cooperatingbut distinct institutions. Internal incentives are normally sufficient for the differentcomponents of a merged entity to work together; even in changing circumstances.A Strategy for Latin America and the CaribbeanThis section proposes a two-stage strategy to promote capital market integration inLatin America and the Caribbean.The first stage should be to develop and implementan institutional mechanism that can both pose and answer some initial key questionsthat need to be addressed in order to promote capital market integration.The sec-Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub