Latin American Capital Markets

360 A. M. CORCORAN, R. B. HOBSON, G.J. KUSERK, K. K.WUERTZ, AND QWESThedge that properly takes account of this basis risk, the ability to make an analysis ofthe terms of the futures contract regarding the deliverable commodity in relation tothe reliable availability of (or a substitute cash settlement price for) the deliverablecommodity is necessary (Tokyo Communique 1997; IOSCO 1998). As cash and OTCmarkets continue to evolve, more transparency may be brought to other trading venues,and this in turn may enhance the capacity to design futures markets. In any event,many derivatives markets make available substantial information on the cash marketthat sets the reference price for the derivative and, where there is physical delivery, onthe status of deliverable supplies. 34 Traders are interested in market participation as awhole.This information assists users in deciding how to use the market and in assessingliquidity and is publicly available in certain jurisdictions. 35The practices of the market regarding the price at which positions are carriedalso may assist or adversely affect market users. If original trade prices are preservedand not adjusted or marked to market at least when positions are rolled forward,losses may be hidden, and this may lead to market failure. 36 If customer positions arereported and margined net of each other, then losses may be disguised to the creditprovider Simultaneously, holding open positions on both the long and short side candisguise losses and real open interest.This can adversely affect the market as a pricingmechanism. 37 An advantage of a centralized clearing function and the attendant dailymark-to-market is that it disciplines the accumulation of credit risk and provides informationon actual positions and their relative riskTransparency of Contract Terms and Market RulesContractual clarity is important because a futures market is a financial market in propertyinterests that are themselves contract rights. A contract for future settlement is34 Access to reliable delivery mechanisms and/or storage mechanisms can be an issue in developing economies. Insome countries, delivery for many commodities is not centralized, and elevators or storage facilities may not be subjectto oversight (World Bank 1999).35 After the Sumitomo crisis, the London Metal Exchange acted to make large exposure information more transparent,and the Osaka Futures Exchange makes the 10 largest positions available to the public.The CFTC Commitmentof Traders Reports are the most visited part of its website at http://www.cftc.gov/cftc/cftccotreports.htm.These reportscontain aggregated commercial and speculative interest figures by contract36 This issue apparently helped to disguise losses in the copper market in the Sumitomo and Codelco cases (Securitiesand Investments Board 1996).37 For example, the CFTC required a purchase and sale statement for each transaction and disclosure of the practiceof taking positions on opposite sides of the market Although usually less significant than in equity markets, accountingrule differences also can lead to misunderstandings as to whether the criteria for access to the market are met.In addition, poor risk management practices by a market can have inequitable effects. If some participants are allowedto limit liability for personal trading, the risk of that trading may unexpectedly be transferred to other participants.Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub