Latin American Capital Markets

DEVELOPING BOND MARKETS: A COMPREHENSIVE VIEW 319government securities are traded; it shows that most government bonds are traded inOTC markets, especially in countries that have reached a certain level of developmentTo provide liquidity in the early stages of market development, the authoritiescan require that specific market participants trade government securities in specificplaces. Trading and information systems that facilitate efficient completion of transactionsare essential for effective secondary market infrastructure. In the early stages, marketsare thin and illiquid, but liquidity can be gained by implementing short trading sessions(that is, periodic markets); when markets are more liquid, they can move tocontinuous trading. In the more developed stages, market volumes and activity grow,and electronic trading systems may provide the lowest cost for trades and the possibilityof selling and distributing government securities to final investors. Therefore, thegovernment has to remove entry barriers to the market for corporations that ownthose trading systems. Brazil has developed one of the first transactional electronic systemsfor trading government securities in the region, using part of the infrastructure ofthe Rio de Janeiro Stock Exchange, but creating a new organization with a different governancestructure in which banks are the major players. In Colombia in 1998, the centralbank introduced an electronic trading platform for the dealer community and, morerecently, the Colombia Stock Exchange introduced another electronic trading platformaimed at providing a platform for dealers to trade with their institutional clients (thesecond tier).The settlement system is one of the key aspects in developing a securitiesmarket. Dematerialized bonds not only help the settlement process because they canbe processed quickly and cheaply but also provide protection to investors becausethey cannot be destroyed or lost. Therefore, one of the first steps in improving settlementprocedures must be to change paper government securities for dematerializedones. Moreover; a key decision in settlement design is to determine the gap betweentrade execution and settlement The gap is related to the infrastructure of thesettlement system; the shorter the gap between execution and settlement, the lowerthe risks. Nevertheless, in order to reinforce the view that government instrumentsare very liquid, some government securities, such as treasury bills, can be settled inshorter periods (that is,T+1) than other government bonds can.To reach DVP transactions, it is necessary to provide a settlement systemthat supports large-value trades.Thus, it is preferable for members of the depositorysystem to have accounts at the central bank, which can be credited and debited inorder to ensure settlement of both the securities and payment sides of the trade.In order to provide transparency and security, a separate clearing and settlementagency or corporation is required. In OTC markets, those functions work bilaterally,Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub