Latin American Capital Markets

322 CLEMENTE DELVALLEare generally traded in OTC markets, the authority should have access to tradingrecords in order to investigate compliance with the rules.Another important goal of market regulation is to minimize systemic risks,which can be addressed by introducing capital requirements and risk-control systemsto market participants. Capital adequacy has to be carefully considered because nonuniformityof capital requirements within the same class of securities market actorscould increase systemic and credit risks, but different capital requirements across differentclasses of market participants could create incentives for self-regulation. Capitaladequacy must address liquidity and price and credit risk not only for the assets ofthe intermediaries but also for third-party assets. Margin requirement surveillance isalso important for managing risks. In order to minimize systemic risks, the governmentauthority is essential because it generally determines and supervises the margin requirements,capital adequacy, risk control systems, and settlement operations of dealersengaged in the government market. In some countries, part of the authority hasbeen granted to the central bank; however, a clear definition of responsibility will needto be established with the supervisors of the different types of dealers (banks andbrokerage firms) in order to avoid conflicts, excessive controls, or gray areas.In ruling and supervising the secondary market, the securities regulatory agencyis not on its own: the central bank is a relevant participant. Self-regulatory organizationshelp the authorities not only in supervising and implementing rules but also in creating,faster than governments, new regulations in response to new financial products.Finally, regulation must be consistent among financial industries in order toavoid regulatory arbitrages.Two interesting Latin American examples are Mexico andPeru. In the mid-1990s in Mexico, separate agencies regulated banks and mutual funds,which reformed and improved at different speeds. Consequently, banks, which weremore rigorously regulated and supervised, but owned and managed the mutual funds,allocated their funds to their clients through those vehicles in order to avoid the restrictionson banking. During the Mexican and Asian crises, many of the funds wereexposed to large losses that came as a surprise to the investors because there waslimited transparency and weak supervision. Since then, regulation and supervisionhave been strengthened, but the credibility of mutual funds suffered enormously andhas made renewed development of this institutional investor more difficult. A similarsituation occurred in Peru in the late 1990s, when the local securities exchange commissionhad two formal roles: supervisor and market developer In this case, under theflag of being a market developer the commission allowed lax regulation in terms ofestablishing clear "Chinese Walls" on the management of funds; this affected the financialindustry's credibility during the recent international crisis.Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub