Latin American Capital Markets

ENHANCING MARKET INFRASTRUCTURE IN EMERGING ECONOMIES 249errors. Participants at each level of the market—fund managers, brokers, and custodians—mustbe involved, as well as the clearing and settlement institutions. In addition,specialized service providers are offering to support market participants whowant to outsource various parts of the transaction cycle. The scale and scope ofchanges required in IT are such that the overall institutional infrastructure is likely tochange over the next five years. Not every firm will want to be heavily involved in theIT upgrading and changes that will be required, but IT firms or firms specializing in aspectsof IT and market infrastructure will be looking for business opportunities.A good example of the way in which cross-border standards are being developedfor capital market infrastructure can be seen in Rule 17f-7 of the U.S. SEC,which became effective on July 2, 2001.This rule requires global custodians to provideU.S. investment funds with an analysis of risks for each non-U.S. depository thatthey use. The rule identifies key risk areas but does not dictate what and how therisks must be limited or managed.The rule has led not only custodian banks, but alsocentral securities depositories and some private sector entities, to evaluate depositoryrisks in the context of consistent definitions and measures of risk Other regulatorybodies, such as the Financial Services Authority in the United Kingdom, are alsodeveloping guidelines for their institutions that use foreign depositories.In the United States, electronic communication networks and industry effortsto streamline the transaction cycle for securities have also raised competition issues.Two groups of institutions, the Global Straight through Processing Association (GSTPA)and Omgeo, are competing to automate the transaction chain to support aT+1 settlementperiod. Omgeo is a venture between Thompson Financial and the DepositoryTrust and Clearing Corporation (DTCC).The U.S. SEC has required interoperability foOmgeo to avoid undue control over access to the network by DTCC. 5 While it is tooearly to predict the shape of the final market infrastructure that will result from thecompetition, it is certain that the evolving competition policy of U.S. regulators will influencethe infrastructure.The move toward STP is having a major impact on market infrastructure inthe United States, and other markets are moving in this direction. All aspects of capitalmarkets in the United States are being affected, and 90 percent of the cost ofmoving to T+1 is expected to be dedicated to achieving STP In the pre-settlementenvironment, three areas must be covered: a matching engine, information management,and performance measurement tools. Interim solutions will be needed to deawith the various languages in current use, including Financial Information ExchangeCopyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub5 Omgeo is primarily focused on the U.S. market and GSTPA on the cross-border market. While both focus on institutionaldelivery, they are not involved in clearing and settlement or the exchange of the trader