Latin American Capital Markets

374 A. M. CORCORAN, R. B. HOBSON, G.J. KUSERK, K. K.WUERTZAND QWESTgets its credibility from the government framework and from the fact that the governmentprotects the public interest in the prices determined in the marketplace.However, self-regulation may not work in jurisdictions where there is no tradition ofmarkets or trading expertise. When self-regulation may not be appropriate, policymakersin some jurisdictions have created the market as a public entity and then withexperience ceded responsibility for its operation (for example, in Italy).With for-profitmarkets, regulators and policymakers are reassessing what is the appropriate balanceof self-regulation and government oversight As a result, in the United States, so-calledindependent self-regulatory authorities (with statutory powers) have solicited certaincompliance responsibilities formerly undertaken by exchanges.Consideration of what elements of self-regulation might be appropriateshould at least be of interest to policymakers and market developers, especially in abottom-up development situation. This is because self-regulators typically combineprivate and government interests, efficiently supplementing government regulation.IOSCO views the use of self-regulatory organizations (SROs) within statutoryoversight frameworks as permissible but optional. As stated in IOSCO (2002b),SROs can be a valuable component to the regulator in achieving the objectives of securitiesregulation. IOSCO recommends an inquiry into how use of SROs with directresponsibilities in their areas of competency can be appropriate, given the size andcomplexity of a particular jurisdiction's markets, in assisting regulators to meet theirregulatory objectives. In fact, industry representation and self-regulation are integralparts of most regulatory schemes, affecting derivatives markets, at least where thereis a history of forward markets. Where the government itself is developing a market,the use of self-regulatory expertise may be less feasible or may have to be importedfrom another marketplace or a specialist provider Derivatives markets depend on thefrontline, day-to-day and, in some cases, minute-to-minute operational oversight thatusually is more readily achieved by self-regulatory than government authorities.Therefore.theauthorities should carefully consider a framework that permits the use of theself-regulatory governance systems that are in place or that might evolve over time.Where a derivatives market is not imposed, but grows out of an existing welldevelopedcash market, it is important to take into account participants that have intimateknowledge of the market, including how to maximize regulatory benefits (orderlymarkets, customer protection, and reduction of systemic risk) while minimizingbusiness costs. Where commercials and financial institutions have intimate knowledgeof the market, this knowledge can be exploited to support a self-regulatory complementto regulatory oversight, which is perceived as appropriate and reasonable byboth regulated individuals and market users.This perception, in turn, results in greaterCopyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub