Latin American Capital Markets

240 ANDREW HOOKout error in an orderly manner The best type of infrastructure is virtually invisibleto the investor—like the plumbing in the house—in that the investor never needs tothink about what is happening or how it works.The clearing or preparation for settlementof securities and funds is reasonably simple, but it becomes more complexdue to the variety of intermediaries. The settlement or actual exchange of value ofsecurities or contracts and funds is equally simple but becomes complex due to thenumber of intermediaries and the interaction of securities and payment systems.Under these circumstances, a major benefit of including financial infrastructurein capital market reform is that it improves the competitiveness of the overallmarket and, in particular, cross-border investors. However; even if other markets offersettlement atT+1 (where T+1 denotes trade date plus one, andT+0 is the same dayof the trade), the movement of funds across borders could take longer than T+1. Forexample, the move toT+1 in the United States and Canada will likely be for domestictransactions only. Some in the industry also believe that the move to T+1 couldcreate liquidity problems because international investors may have to pre-fund toensure timely cross-border flows. If other markets offer straight-through processing(STP), some investors may well make this a decisive factor in determining where toinvest. A market that requires less liquidity on the part of investors, in terms of positioningfunds or credit for settlement, will be more attractive than one requiring more.An up-to-date infrastructure that complies with international standards and best practicesis much more likely to attract a critical mass of investors than one that does not.An additional benefit from including financial infrastructure in capital marketreform is that it provides a vehicle for mobilizing marketwide support for the reform.A comprehensive strategy of capital market reform that includes infrastructure couldimprove the framework for decisionmaking, identify more viable alternative approaches,add another dimension to the reform effort, and more confidently developa long-term perspective.This chapter focuses on some of the issues that policymakers have to face ibuilding market infrastructure in emerging economies.The underlying idea is that developingor upgrading capital market infrastructure is a key ingredient for effectivecapital market development. Designing and operating infrastructure that performswith a minimum of errors and delays and that can interact with other financial and informationsystems is a major challenge for policymakers in emerging economies andin Latin America and the Caribbean in particular. At the same time, policymakers haveto regard this particular activity as part of the larger strategy for capital market developmentand provide the right incentives for the private sector to be part of thisinitiative.Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub