Latin American Capital Markets

DEVELOPING BOND MARKETS: A COMPREHENSIVE VIEW 307ExpansionDuring the second stage, governments have to deal with various challenges and undertakefour essential initiatives: building the money markets (repo markets); designingand implementing a market-oriented funding strategy; establishing a basic and safemarket infrastructure and regulatory framework; and promoting and improving competition.Theministry of finance and the monetary authority must coordinate effortsto develop money markets and liquid repo markets in particular; the former will provideinstruments, such as treasury bills, and the latter will conduct monetary policy.The ministry of finance must design a debt strategy that includes better auction procedures,transparent government securities operations, standardization of instruments,and development of a short-term yield curve. However, the most important initiativeis government movement away from captive sources of funding and implementationof a market-oriented funding strategy.At this stage, banks and money market funds are essential players that supportthe achievements of the first two initiatives.The legal framework has to be adapted tomeet market-oriented legal requirements. Complex infrastructure is not needed at thistime, but it must provide a safe environment. One of the actions that has to be implementedat this stage is to encourage and promote competition among the participantsin the market, establishing the pillars of a more diversified base of investors. This willbe especially challenging in those economies where the banking industry is verticallyand horizontally integrated. Some Latin American countries have allowed internationalbanks to enter their domestic markets, bringing know-how in treasury managementand competition. In fact, some long-term initiatives to diversify the investor base andmarket participants, such as pension fund reform, which takes years to implement,could be initiated in the early stages; the same could apply to mutual funds. In any case,the results of these initiatives will be seen in the mid and long term.MaturityThe last stage of the development process presents new challenges. Lengthening thematurity of government securities by issuing fixed interest rates or indexed bonds isone of these challenges. Government debt managers are vital at this stage, and thegovernment has to ensure that the "debt team" has the needed resources to implementa debt management strategy with special focus on managing risks properly.The key step in the third stage, to ensure and promote liquidity in secondarygovernment securities markets, will require market infrastructure and regulation. InCopyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub