Latin American Capital Markets

242 ANDREW HOOKissuers, the infrastructure provides the support for issuing equity, debt, and derivativeinstruments. For investors, including banks, market makers, brokers, institutional investors,nonbank investors, and individuals, infrastructure supports their trading activityand provides custody and related information services. For brokers and securitiesdealers, infrastructure supports the clearing and settlement of their own and theircustomers' trades in equity, debt, and derivatives.Institutional SpecializationThe institutional infrastructure framework for capital markets differs from market tomarket but typically there are a number of specialized institutions responsible for differentservices. The key post-trade functions are clearing, settlement, and custody.Clearing involves preparation for settlement, including matching and instructions fordelivering securities and/or funds. Settlement is the actual exchange of securities forfunds or contracts for funds. In both cases, there can be significant economies of scale.In this context, over the years, participants in the markets have developed specializedinstitutions for different parts of the infrastructure. All or some of the participants inthe market often own these institutions.Stock exchanges, clearinghouses, central securities depositories (CSDs), andcentral counterparts are among the specialized institutions providing clearing and settlementservices to the capital markets. Historically, a department of a stock exchangeoften carried out clearing and settlement functions. This department would be responsiblefor the execution of the securities side of the settlement. Another departmentor part of the stock exchange often oversaw the financial settlement of securitiestrades. Over time, these functions could be separated from the stock exchangtand operated as autonomous organizations. 1Globally, CSDs continue to play a key role in securities clearing and settlement.The major trends are toward immobilization and dematerialization of securities,more timely and detailed information for custodians, more automation of servicesand linkages, or mechanisms to provide delivery versus payment The U.S. Securitiesand Exchange Commission (SEC) Rule 17f-7 and similar rules that other regulatorybodies have issued, including IOSCO and regional securities organizations, show thetendency to move CSDs worldwide toward a set of best practices. In a number of1 The demutualization of exchanges to facilitate more rapid and innovative decisionmaking has represented one of themost important trends in the 1990s. In the mutual form, stock exchanges have often been slow to respond to competitionand to adopt new structures and technologies. The new privately owned exchanges, however, pose a wholenew set of regulatory and risk issues. See Karmel (this volume) on demutualization and capital market developmentCopyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub