Latin American Capital Markets

326 CLEMENTE DELVALLEstandards of information aimed at reaching the international ones, which include internationalaccounting and auditing standards. In addition, improvement in corporategovernance promotes transparency and helps disclosure standards. The credit ratingsystem represents an important complement of the disclosure system. Credit ratingagencies encourage transparency, increase information flows, and improve accountingand auditing practices.These companies provide an independent and objective viewof instruments and their issuers. A low credit rating implies that the issuer might notafford debt services properly; therefore, these ratings have a direct impact on corporatebond interest rates because the lower the rating, the higher the interest rate.Thataspect constitutes an incentive for companies to improve both their financial structuresand operations.The government can promote credit rating agencies establishingthat certain investors, such as pension funds, can only buy rated instruments. It isimportant to note that competition among credit agencies is essential. Finally, a bankruptcylaw is vital for developing the corporate bond market, defining the boundaryof the investor's legal ability to force a bankrupt issuer to service obligations and proceduresto reach that limit In addition, it is important to have an efficient mechanismfor the bond issuer to recover investments and determine the priority or subordinationof an investor's right to that of other creditors.Regulatory Framework and InformationAn important goal of the legal framework is to ensure a transparent and efficient market,discouraging and sanctioning improper trading practices. Information disclosure requirementsare especially important for corporate bonds, not only in primary marketsbut also in secondary ones. The regulation has to enforce that corporations releaserelevant information expeditiously, reaching all market participants at the same time toavoid inside information practices. In order to build sound information disclosure procedures,it is desirable that countries adopt international standards of information disclosurenot only in terms of prospects for primary markets but also in periodic informativedisclosures. Credit rating agencies are especially important for the corporatebond market because they have a direct relationship with companies and provide anindependent view that ensures investors a good credit risk assessment.Another main objective of market regulation is investor protection, whichcould be achieved by means of a sound legal framework and transparent informationdisclosure. A sound investor protection framework includes bankruptcy law, which isespecially important for corporate bonds in order to determine rights and obligationsof market participants; best execution of trades; separate treatment and managementCopyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub