Latin American Capital Markets

362 A. M. CORCORAN, R. B. HOBSON, G.J. KUSERK, K. K.WUERTZ, AND QWESTcontract because this could have an external effect on pricing—which is why indexesmust be calibrated to address the effects of substitutions. Fair governance of the marketand equitable application and consistent enforcement of the rules are critical irrespectiveof the structure of the market and of whether the market is a mutual orfor-profit model. However; as the structure of a market can affect its efficiency and reliabilitystructure must be taken into consideration when finding an appropriate productand in matching the governance to the trading structure. For example, establishedcash markets with expert commercials or financial intermediaries may lend themselvesto self-regulation, whereas newer created markets may not.In ensuring fair treatment of nonmember participants in organized exchangederivatives markets, the same issues arise as in public companies: adequate disclosureabout financial integrity and hence viability of the market, prohibition of self-dealing orconflicts of interest, and fair governance or representation of relevant stakeholders.Some additional issues, such as fair treatment of orders, are important.The applicablerules—that is, the regulatory and legal infrastructure or custom and practice—mustbe designed to overcome any concern that members or insiders may act to the detrimentof nonmembers and other users. In this regard, regulatory authorities usuallyprovide that customer orders must be fairly treated, that professional traders cannotfront run or otherwise take advantage of customer orders, and that the market environmentmust otherwise be fair In fact, provisions that protect outside stakeholdersand customers should protect market insiders as well because confidence in continuationof the market is in their self-interest. In the United States, futures marketsare required to enforce their own rules and the terms and conditions of contractsfairly and equitably, subject to government oversight. Other jurisdictions have accordedmarkets more or less legal or quasi-government responsibility consistent withthe experience of market operators and the jurisdiction of such markets. Becausesuccess is linked to the perception of fairness, market insiders have the incentives tomake the market operate in a fair way, and rules and oversight can and should bestructured to enhance these incentives.Avoidance of ConflictsLike ensuring fair pricing, a principal function of government oversight is ensuring fairoperation of the market, so that self-regulation by market operators ensures consistentand equitable rule (or contract) enforcement Such oversight, for example, shouldprevent anticompetitive activity by market insiders and ensure that conflicts of inter-Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub