Latin American Capital Markets

DESIGNING A DERIVATIVES COMPLEMENTTO CASH MARKETS 351properly, are readily achievable electronically, and should be strongly supported by therelevant market authorities and regulators.Regulatory Implications of Market Structure and Contract DesignThe importance of contract design is underscored by the fact that international regulatorsof derivatives markets have incorporated many of the principles relating tostandardization of terms and the relationship to the underlying market discussedherein into their frameworks. For example, the U.S. Commodity Futures Trading Commission(CFTC) relies on its Guideline No. I, a checklist of contract design principles,in evaluating new futures and options contracts and in reviewing changes to existingcontracts.This type of contract review or oversight is not limited to the United States,but is fairly common to regulated derivatives markets generally—as the terms andconditions of contracts are viewed as rules that must be either approved or subjectto a nonobjection process—for antitrust protection and price integrity purposes. 19Some jurisdictions combine these two means of oversight by permitting a certificationprocess subject to regulatory power to amend or otherwise affect the contractif the certification that the contract meets relevant criteria and does not violate existinglaw is incorrect.More generically, in 1997, futures and options regulators from around theworld met in Tokyo and reached an international consensus on regulatory concernsrelated to physical derivatives markets of finite supply. The meeting was prompted bySumitomo's manipulation of the copper market. 20 At the end of the meeting convenedby authorities from Japan, the United Kingdom, and the United States, the participantsissued the Tokyo Communique, which, among other things, endorsed twoguidance papers. One paper was on best practices for the design and/or review ofcommodity derivatives contracts, and the other was on market surveillance and informationsharing relative to derivatives markets.This guidance represents the first occasionon which regulators responsible for overseeing commodity derivatives marketsfavorably considered international standards for the supervision of such markets andunderscored the essential elements of well-designed contracts, the relationship be-19 CFTC (1999a) addresses Australia, Canada (Ontario and Quebec), France, Germany, Italy, Singapore, Spain, Switzerland,and the United Kingdom.20 Australia, Brazil, Canada (Grain Commission), France, Germany, Hong Kong, Hungary, Italy, japan (Ministry ofAgriculture, Forestry, and Fisheries and Ministry of International Trade and Industry), Korea, Malaysia, the Netherlands,Singapore, South Africa, the United Kingdom, and the United States.Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub