Latin American Capital Markets

380 A. M. CORCORAN, R. B. HOBSON, G.J. KUSERK, K. K.WUERTZ,AND QWESTBackstop to Inappropriate Government InterventionInvolving the market in its own oversight, in some cultures and situations, may provean effective counterweight against inappropriate government tampering because itprovides an organizational factor to market interests. The general elements of selfregulationtranscend distinctions based on type of financial instrument (securities orderivatives), market structure (electronic versus physical on-floor auction markets),nature of market users (institutional or retail), and nature of transactions (principal,agency, or both). Specific elements must be tailored to the goals, objectives, and needsof each market and regulatory regime. Indeed, the flexibility of design of self-regulatoryprograms is one of the hallmarks of self-regulation and a significant benefitAs a result of advances in technology and telecommunications, financial marketsare increasingly global and trade without regard to national boundaries. Themarkets are increasingly integrated through market users, market intermediaries, andpayment systems, and distinctions between exchange and OTC market structures areblurring. The regulatory framework must be continuously evaluated in light of thechanges that are occurring and will occur The regulatory framework cannot undulylag behind or act an as impediment to market innovations.Endorsement of self-regulation is an acknowledgment that, because the regulatorcannot be everywhere, regulation must impose responsibility on markets andpersons with access to markets directly and on intermediaries to self-monitor andhave compliance functions. This enhances confidence that markets will be properlyrun and supervised from the perspective of customer protection, market integrity, andfinancial integrity. While not a substitute for the important elements of regulationspecified above, self-regulation is a powerful and potentially extremely effective complementIn fact, as markets become more complex and diverse, some aspects of regulationmay be privatized.Ideally, a regulatory approach should be the ultimate goal of any regulatorystructure. A regulatory approach should minimize cost burdens, maximize investorconfidence and fairness in the market, and contribute to the reduction of systemicrisk If the costs of regulation outweigh the benefits, businesses can migrate to marketswith lower costs. However, market abuses or failures related to insufficient regulationalso deter participation and result in reduced liquidity, so the appropriate balanceis critical. Properly implemented, self-regulation is not a form of deregulation, buta form of promoting strong internal and operational controls. As such, where the circumstanceswarrant, it is an important part of a model of efficient and broad-basedregulation.Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub