Latin American Capital Markets

DEVELOPING BOND MARKETS: A COMPREHENSIVE VIEW 327of intermediary and client assets; acquisition of licenses for brokers and advisors tooperate, but not introduction of barriers to new participants because competition reinforcesprofessionalism among brokers and advisors; and legal resources against marketparticipants and efficient conflict resolution, which means that investors can initiatelegal actions against brokers, dealers, corporate issuers, clearinghouses, and eventhe government itself to exert their bondholder rights.Linkages between MarketsGovernment securities markets and corporate bond markets have strong linkages notonly between them but with other markets as well. Therefore, a comprehensive approachmust be taken in the design and implementation of initiatives. In this process,the government has two roles: first as regulator and developer and second as bondissuer. It is important that authorities keep in mind the global perspective in reconcilingtheir funding needs with their role as developer Essential linkages betweenthese two markets take place via many channels: government benchmark issues, intermediaryexperience, the investor base, infrastructure, disclosure practices, regulatoryframework and the experience of the authorities. In addition, fixed-income marketsare closely related to other markets, such as the derivatives and money markets. Governmentbonds are the principal source of price discovery in other markets, and theshort-term yield curve is especially important to ensure money market efficiency.The government bond market is so important for the corporate bond market thatsome countries, like Hong Kong and Singapore, have taken the initiative of issuing governmentbonds even when they do not carry fiscal deficits. Of course, this is an expensiveproposition that not many countries can afford to implement.Impediments for DevelopmentGovernments can hinder the corporate bond market instead of promoting it bycrowding out the market and setting statutory restrictions. Given that government securitiesare risk free, they are the preferred choice of many investors. Recurrent deficitscombined with market-oriented funding policies could lead to crowding out the corporatebond market. In that scenario, private bond issuers would not find investors fortheir bonds, or would have to issue bonds with high interest rates. Other crowding outpractices are the use of captive sources of funds and the issue of government bondswith special benefits, such as tax exemptions. And statutory restrictions are usually im-Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub