Latin American Capital Markets

DESIGNING A DERIVATIVES COMPLEMENTTO CASH MARKETS 371they ordinarily operate by rules that are largely self-enforced. Furthermore, effectivelydesigned surveillance can compensate for smaller markets and contracts designed onunderlying markets that are not optimal. As stated more generally in IOSCO (1998;2002b):• The regulator should have comprehensive inspection, investigation, and surveillancepowers.• The regulator should have comprehensive enforcement powers.• The regulatory system should ensure effective and credible use of inspection,investigation, surveillance, and enforcement powers and implementation ofan effective compliance program.Market SurveillanceDerivatives markets essentially are secondary markets for transferring risk Surveillanceof the market is especially important because it ensures that the trading andcredit enhancement facilities of the derivatives market function and complement theprotections of contract design. In turn, it ensures that market abuses do not distortprices, otherwise impair the risk shifting and price discovery functions, adversely affectcash market prices, or permit the accumulation of excessive exposures.The components of effective surveillance have been set forth in the TokyoCommunique (1997), in which derivatives regulators from 16 different national jurisdictionsset forth best practice guidance for derivatives regulators on components ofmarket surveillance and information sharing.These include the following:• A framework for undertaking market surveillance• Access to and collection of information on a routine and nonroutine basis,which permits analysis of the composition of the market, including informationon concentrations of positions and cash markets related to the derivative• Analysis of information, based on collection of information that permits timelyaction• Analysis of market abuse, the power to investigate abuse, and clarity as towhat constitutes congestion, provision of false information, or manipulativeactivities• Intervention powers to address disorderly conditions and clarity as to whensuch powers can be exercised• Disciplinary sanctions against members of the market and power to addressabuses of nonmembersCopyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub