Latin American Capital Markets

370 A. M. CORCORAN, R. B. HOBSON, G. J. KUSERK, K. K. WUERTZ, AND D. WESTmeasures of capital can be used, but the guidelines for risk management remain thesame.That is, assets should be discounted to reflect the cost of liquefying them in timeto support funding of variation and settlement necessary for the market clearing functionperformed by the central counterparty. And capital should take into account unsecuredliabilities and be sufficient to carry the volume of business and risk undertaken. 49Other MeasuresIn futures markets, transaction costs must be limited if hedging tools are to be economic;the time horizon for the quantification of risks secured by margin, daily settlement,and capital is short; and the exchange systems' projections of risk are estimatesat best. Risk management controls and supervision of exposures by exchange compliancestaff and personnel independent of traders are critical to maintaining financial integrity.Requirements for and oversight of these functions should be a self-regulatory aswell as regulatory concern.This puts a premium on mandated self-regulatory financialsurveillance responsibilities coupled with such oversight. Regulators should reinforcethe commercial incentive to promote the integrity of the system by requiring marketparticipants to be financially accountable and by promoting clearing arrangements thatreinforce these incentives. These could include required shareholdings, provision ofspecified/collateralized guarantees, bonding or insurance, or security deposited with athird-party clearer In some electronic markets, funds are directly deducted from users.Some of the other risk management measures or features of the exchangemarketplace that address the quantification and management of risk are transparency,price limits (or circuit breakers), large trader position reports, and delivery period positionlimits.These measures are directed at maintaining market integrity from the perspectiveof both price and financial integrity.Typically, in most mature jurisdictions, regulationsupports these types of measures or other measures intended to protect thepricing process from market abuses associated with concentrations of market power50Surveillance, Enforcement, and Market OversightIn addition to appropriate contract design, credit criteria for access and risk management,and fair governance, derivatives markets require effective oversight because49 Futures markets also ordinarily require self-cleared proprietary trading to be guaranteed by a parent if done on itsbehalf, so that firms can limit liability to the central counterparty's common bond arrangements, but not for their owntrading.50 In developing markets, reference also should be made to available guidance on clearing and settlement. SeeCPSS/IOSCO (2001) and Corcoran (1994).Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub