Latin American Capital Markets

DESIGNING A DERIVATIVES COMPLEMENTTO CASH MARKETS 363est are avoided.Typically, regulatory authorities review, or have the capacity to reviewor alter, exchange rules and procedures expressly to ensure that they are fair and equitableand consistent with statutory or legal requirements relating to open and efficientmarkets. A culture of fairness is an objective of financial market regulation and aprecondition of market confidence (IOSCO 2002b).In order to address the concern that the governing boards of exchanges mayact in their own self-interest in exercising their self-regulatory responsibilities, suchboards often are required by law to reflect the various interests of market participants,including end-user interests (IOSCO 2000). Ideally, relevant law would restrictmembers or exchange supervisors, who have the obligation to maintain orderly markets,from voting on proposed exchange emergency actions or other market interventionswhere they have a financial interest in the outcome.This protects the functionalitiesof market surveillance related to maintaining an orderly market, addressingdelivery congestion, or handling a financial emergency and maintains confidence in themarket by ensuring such oversight measures are not misused.Cred/tworth/ness and fitnessTo ensure that users are not disadvantaged, the framework should provide for appropriatedispute resolution mechanisms. Because customers or users of the marketdo not have direct access, they are dependent on intermediaries or others with directaccess; therefore, the framework should provide for the fitness and propriety ofmarket operators, intermediaries that act for customers and custodians of customerfunds, the protection of funds and positions committed to their accounts, and thecreditworthiness of users that have direct access.To prevent so-called excessive speculation,users should be required to have a financial stake in their positions.Confidence in RegulationUsers need to have confidence in the regulators, their independence from the politicalprocess, and their accountability for their performance. This is especially truein emerging markets, where sometimes there is the perception that the rules arechanged to the advantage of domestic users when market instability occurs. Just asusers must have confidence in the rules of the market's fair application, confidence inthe regulatory regime will enhance the public's confidence in the market and the potentialfor outside participation.Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub