Latin American Capital Markets

ENHANCING MARKET INFRASTRUCTURE IN EMERGING ECONOMIES 243countries, central banks are recognizing the marketwide importance of delivery versuspayment (DVP) for securities markets, and some central banks are providing servicesthat can reduce overall settlement risk. 2Central CounterpartsIn the interests of reducing risk and increasing efficiency, exchanges have introducedcentral counterparts in securities settlement. Traditionally, derivatives clearinghouseshave used central counterparts, as in the case of the Chicago derivatives exchanges.Recently, institutions outside the United States have considered, and in some casesadopted, central counterpart structures. A central counterpart in a typical case becomesthe counterpart for each trade and maintains risk measures in order to limitsettlement and counterpart risk This type of model can provide advantages for participants,in terms of capital requirements, and offers the advantage of anonymity fortraders. It can also present participants with a new set of risks, which may be difficultto manage. For example, under this new framework, custodians, who traditionallyhave maintained an agency relationship with securities clearinghouses, may now takeon a principal relationship vis-a-vis the clearinghouse.This changes the entire risk profile of the custody business, which could drive institutions to exit the business.Cross-border LinkagesCross-border linkages between central securities depositories are still relatively limitedin number and usage; however, Europe and other parts of the world are payingincreased attention to them. A variety of custodian banks, commercial banks, and securitiesfirms support cross-border securities functions on a company basis. If centralsecurities depositories or central counterparts were to extend their services, in particularto provide more real-time information on the settlement process, this couldimprove efficiency. It also could represent competition for the financial institutions currentlyproviding these services to institutional investors and other clients.Several recent developments underline the growing importance of crossborderlinkages of securities markets and infrastructure: the formation of a CentralCounterpart Group (CCP-12), the Group of 30 review of global clearance and settlement,and the Committee on Payments and Settlement Systems (CPSS)/IOSCOrecommendations on securities settlement systems. In 2001, 12 of the world's lead-Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pubDelivery versus payment refers to the extent to which market participants can safely exchange funds for securities.