Latin American Capital Markets

318 CLEMENTE DELVALLESecondary Markets and InfrastructureA liquid secondary market for government securities requires the involvement andcommitment of several market participants. Developing a liquid secondary marketcalls for not only sound infrastructure but also an adequate regulatory frameworkSound infrastructure involves trading systems and procedures, market intermediaries,related markets, and settlement and depository systems.Spot trade is the main form of transaction in secondary markets, and governmentsmust ensure that those trades can be executed and settled safely. It is importantthat government securities be perceived as liquid instruments. Therefore,these securities have to have low transaction costs, widely available and continuouspricing, wide access to trading systems and intermediaries that provide immediateexecution, safe and rapid settlement of transactions, and efficient custodial and safekeepingservices (World Bank and IMF 2001).One way to provide liquidity to the secondary market is by using intermediariesin the government bond market. Market makers need to hedge risks; otherwise,the cost of carrying an inventory of government bonds increases. Thus, derivativesmarkets help and complement development of the government securities market Inaddition, the existence of dealer-brokers can improve market liquidity by helping marketmakers execute transactions and the price discovery process.Government bonds have historically been traded in over-the-counter (OTC)markets, where dealers, large investors, or dealer-brokers close the trades by telephoneand confirm the deal by fax. Table 10-3 shows the different markets in whichTable 10-3 | Government Bond Trading by Type of Market(Percent)CountryArgentinaBrazilColombiaCosta RicaHondurasMexicoPanamaPeruVenezuelaStock exchanges1520161001002100Over-the-counter markets858084Most of them98Most of themCopyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pubSource:World Bank (2001).