Latin American Capital Markets

xxii FOCUS ON CAPITALAlthough derivatives markets are a long way off for many emerging economies,some countries have introduced exchanges and others have introduced syntheticinstruments that are traded either over the counter or as direct relationshipsbetween counterparts. Chapter I I reviews the characteristics of derivatives marketsand discusses the balance among regulation, market oversight and self-regulation.Derivatives markets constitute a complement for cash markets. However, policymakersshould include derivatives markets as part of their strategy for capital marketdevelopment and recognize the trade-off between markets and the role of thegovernment.Chapter 12 looks at the broader relationship between small and mediumsizeenterprises (SMEs) and financing, and focuses on the scope of capital market solutionsfor providing financing to SMEs.The chapter demonstrates that financing SMEsdepends on the stage of development of the SME in its life cycle. Furthermore, thepotential role for SMEs would be more in the context of an advanced stage of development.Many stock exchanges, mostly in industrial countries, are establishing innovativestructures to help SMEs gain access to capital markets. But it seems that inemerging market countries and in Latin America and the Caribbean, there is no clearindication of the potential for SME exchanges to meet the financing needs of SMEs.Chapter 13 shows that ethical behavior—mostly as a form of self-regulationwith disciplinary enforcement as well as a moral stigma—glues together the variouselements that make a capital market work Many reforms of legal and regulatory systems,as well as the introduction of international standards, take for granted an institutionalethical foundation that may not exist in Latin America and the Caribbean.Trust is the cornerstone for ethics. Legal enforcement, which is always regarded as afundamental requisite, provides only an imperfect and partial substitute for trust. Inthis respect, trust is a public good that deserves equal if not greater attention thanmarket infrastructure, legal systems, and benchmarks.Chapter 14 explains why the relationship between capital market developmentand corporate governance is neither trivial nor linear. It is part of a loop, witha continuous interaction of factors that make up the machinery of corporate governancebut are also outside the typical definition of corporate governance.The chapterlooks at the initiatives in corporate governance in emerging market countries andLatin America. An important element of the analysis is devoted to the trade-offbetween public law (law issued by a traditional legislature) and private law (contractsand self-regulation). As do other parts of the book, the chapter advises policymakersto find the right balance between public and private and between regulation and self-Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub