Latin American Capital Markets

DESIGNING A DERIVATIVES COMPLEMENTTO CASH MARKETS 381ConclusionPolicymakers confronted with the choice of determining whether to build derivativesmarkets to complement cash or other capital market or real economy risk managementenhancements need to carefully consider the necessary preconditions for suchmarkets and for their effective oversight This involves assessing a number of competingmatters:• Alternative risk management methods that could be equally effective (OTCsolutions, other markets, or host electronic facilities)• The possibility of developing a standardized product in the area for which aderivative is desired• Whether there are adequate institutions to provide liquidity• The possibility of designing a market structure that will support the expectedlevel of trading activity• The infrastructure listed in box I I -2 and whether it can be put in place toensure that the credit enhancement and trading mechanisms can function reliablyand effectively.In any case, an evaluation of the amount of volatility in underlying prices, and henceof the demand for risk management, is also essential.Development of effective derivatives markets in and outside Latin Americaappears to require that a commercial need be wedded to the appropriate infrastructureand economic environment Such an environment requires an amenablepolitical and macroeconomic context as well as an appropriate legal framework Theappropriate framework should support the trading and credit enhancement mechanismand ensure certainty in the transfer of contracts representing the underlyingvalue or product. Policymakers must be prepared to address the following:• Transparency in the rules of the market, the terms of contracts offered,and prices• Governance and accountability of market operators• Criteria for access and handling of customer funds and trades• Risk management, including treatment of funds and customers in the eventof default• Enforcement and investigative powers• Market oversightCopyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub