Latin American Capital Markets

DEVELOPING BOND MARKETS: A COMPREHENSIVE VIEW 321perspective, analyzing its impact in three market dimensions: capital markets as a whole,the government securities market, and secondary markets for government bonds.Regulatory Framework and InformationA sound legal and regulatory framework is a requisite for market development.Therefore, the first stage of development must address legal reform.The governmentsecurities market and the corporate bond market have in common most of the rulesof the secondary market, except those related to information requirements becausethe government does not have to meet disclosure standards. Most countries regulateand supervise the market through a securities regulatory agency although that bodyis not the only one that controls and regulates the market Other government agenciesand bodies, such as the central bank and the ministry of finance, are involved inthe process and need to coordinate their activities. In any case, the legal frameworkhas to achieve three main goals: ensure transparent and efficient markets, reduce systemicrisks, and provide protection for investors.During the early stages, the government acts as a regulator using legislationto set the stage for the market.The congress has to pass bills that include but are notlimited to a securities law, a public offering framework, a bankruptcy law, the role ofthe central bank, and the role of the securities regulatory agency.The principal objectiveof these laws is to establish the rules for the market, including enforcement powerof the central bank and securities regulatory agency, basic practices for disclosure ofmaterial information, legal resources against market participants, and liabilities for organizationsthat manage third-party investment accounts.The legal framework has to be consistent with a market-oriented fundingstrategy. The ministry of finance, or the government body or agency that borrowsfunds, has to be empowered with clear borrowing powers. In general, legislatures establishannual borrowing limits, but this practice needs to be reconsidered because itcould limit a proactive debt management scheme. 4 In that sense, it is preferable thatcongress establishes net borrowing limits rather than gross ones.The regulatory framework of the market should be transparent and efficient,discouraging and sanctioning improper trading practices, including insider trading, useof clients' trading information, fraud, and market manipulation. Since treasury bonds4 If legislatures establish borrowing limits, they may threaten the capacity of the ministry of finance to implement debtCopyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pubswaps and other forms of debt management