Latin American Capital Markets

310 CLEMENTE DELVALLEIn recent years, monetary operations have been implemented more andmore through indirect monetary instruments, such as open market operations. Indirectinstruments improve the efficiency of monetary policy by allocating financial resourceson a market basis. In order to develop a money market the role of the centralbank is essential, thus encouraging participants to manage risks actively and tradein that market.The monetary authority can do this by lengthening the reserve complianceperiod, excluding interbank transactions from reserve requirements, adopting a costlyaccommodation policy, and maintaining the daily level or excess reserves close to thatdesired by the banks (World Bank and IMF 2001).When markets are thin, the ministry of finance and the monetary authoritycan use the same short-term instruments, the former to fund short-term cash flowneeds and the latter to implement indirect monetary policy. In these cases, informationbecomes very important, and it must be ensured that funds raised by the monetaryauthority will not be used to provide funding to the treasury. In other circumstances,when the treasury bill market is developed, bills issued by the central bankmight fragment the market.Once again, the discussion shows that coordination between the ministry offinance and the central bank is both essential and unavoidable. The former has tomake known its intentions to raise funds and provide a daily forecast of its revenuesand expenditures; the latter must provide information about money market conditionsand the best time for tapping the market with issues.Government Securities Issuance Strategy and the Primary MarketsThe government bond issuance process has a direct impact on government securitiesmarket developmentThis process is an essential component of the debt managementstrategy, and both must be viewed as means to achieve a major end: securities marketdevelopment. A sound debt management strategy sets some of the groundworkon which the credibility of the market is built. Commitment to market practices andtransparency combined with a market funding policy implies a long-term view of marketdevelopment. In addition, an adequate regulatory framework is important in orderto support market development.A market-oriented strategy shows commitment to market practices, reinforcedduring the first stages when, in the short term, the cost of funding may increasecompared with other sources of funding. It is essential that governments move awayfrom captive sources of funding. In the medium term, the government can concentrateCopyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub