Latin American Capital Markets

352 A. M. CORCORAN, R. B. HOBSON, G.J. KUSERK, K. K.WUERTZ,AND QWESTtween contract design and surveillance needs, and, in particular the need for reliableand deliverable supply. In September 1998, the Technical Committee of the InternationalOrganization of Securities Commissions (IOSCO) 21 adopted versions of theseguidance papers related to financial derivatives contracts in addition to physical commodityfutures, pointing out that even cash-settled contracts must be based on reliablepricing sources. 22Regulatory Infrastructure: Preconditions for Successful,Well-Functioning MarketsWhen policymakers assess how to advise developing markets about designing successfulderivatives markets, it may seem difficult to decide which comes first, the necessaryregulatory infrastructure or a product. In fact, if the market, user; and local economicconditions will not support an indigenous exchange from a business perspective(as opposed to an OTC market or use of offshore markets or other alternatives), theexistence of the infrastructure needed for successful capital markets will not changethat resultFor example, Brazil has one of the largest, most successful exchanges in theworld. Nonetheless, the coffee contract traded on the BM&F, which is approximatelyone-third the size of the U.S. contract equivalent, traded adjusted for size 167,401(CSCE equivalents) to the coffee, sugar and cocoa exchange's annual volume of2,199,371 for the same year (2001). Chile has tried several times to offer an equityindex product and has one of the most fiscally responsible Latin American systems,but the market has not yet succeeded. In this connection, it is worthwhile for countriesdesiring to add derivatives to their capital market structure to compare their developmentexperiences. See, for example, Corcoran (2000) and table I I -3 on derivativesmarkets in Mexico and South America.In the past, in the United States and many other jurisdictions, most derivativesmarkets evolved from cash markets. The regulatory requirements applicable to suchmarkets also evolved, taking account of the rules market members developed forthemselves. Nonetheless, although private regulation of markets through contract ispossible in jurisdictions that honor contract obligations, like other markets for financial21 IOSCO is the international standard setter for financial markets and comprises 110 jurisdictions in various stagesof development.22 The Tokyo Communique (1997) cites the following elements of contract design: accountability, economic utility, correlationwith cash market settlement and delivery reliability, responsiveness, and transparency. See also IOSCO (1998).Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub