Latin American Capital Markets

CHAPTER 8Enhancing Market Infrastructurein Emerging EconomiesAndrew HookIn today's competitive capital markets, improvement of capital market infrastructureshould be an integral part of any capital market reform or modernization program.Capital market infrastructure constitutes the set of systems, procedures, processes,and regulations that assure the trading, settlement, and clearing of capital markettransactions. Compliance with evolving international standards—whether for clearing,settlement, or custody of securities—is necessary in order to assure investors that appropriatecare is being taken of their investments. In a number of countries, the publicsector is taking a proactive attitude by participating in international forums and encouragingthe implementation of legislation, rules, and other measures to reduce therisks and inefficiencies associated with financial sector infrastructure. In addition, strongand effective competition among markets, financial sector participants, and specializedinstitutions is further driving institutions to develop and/or upgrade capital and financialmarket infrastructure that will make the country more competitive.The results ofthese actions from various sides are shorter settlement cycles, increased reliance ontechnology, and a premium on liquidity.Prompted by high-profile disruptions of capital markets and by the public sector's emphasis on financial stability, investors in many countries are directly or indirectlytaking the condition of capital market infrastructure into account in deciding inwhich markets to invest. Issuers are shifting their activity to the most liquid marketsto reduce costs, and less liquid capital markets are losing some of their most activelytraded securities and business. Without improvements in clearing, settlement, andtools for liquidity management, it will be difficult for many capital markets to flourishin the years ahead.Although financial sector infrastructure is complex, its basic function is simple:to assure that trades of securities and derivatives are carried out promptly and with-Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub