Latin American Capital Markets

DESIGNING A DERIVATIVES COMPLEMENT TO CASH MARKETS 383market, however, has experienced growing pains and makes clear that policymakersseeking to promote derivatives market risk management solutions must be preparedto explain how they took steps to address potential risks as well as the rewards ofsuch markets in their jurisdictions.Policymakers must not only keep each of these considerations in mind whenevaluating tradable instruments, the development of liquidity, and credit enhancementin order to ensure success, they must also carefully consider the type of product totrade, the best trading structure (type of auction, algorithm, or other method of specifyingtrading rules), and whether it is possible to build a derivatives market where itis necessary to develop both the derivative and the cash component This has beenthe case in some bond markets.A further consideration in making these determinations is whether there areeffective financial and commercial institutions in place that have the cultural and economicimpetus and expertise to use a derivatives market for risk-shifting functions.One reason perhaps that the history of nonfinancial derivatives markets has been oneof evolution from commercial markets is that such markets can provide users and potentialusers the necessary experience in risk shifting and trading. In some situations,the educational exercise of determining what types of risk management and marketand/or counterparty structures make sense in a specific economy will be as importantas the development of the optimal regulatory framework and choice of product.Appendix.The Brazilian ExperienceThe Sao Paulo Commodities Exchange (BMSP) was founded in 1917 by exporters,businessmen, and commodity producers to trade primarily forward in agriculturalcommodities, including coffee, live cattle, and cotton.This was an unregulated marketused by big commercials and food processors. In the mid-1970s, the Rio de Janeiroand Sao Paulo stock exchanges began trading options on equities among local participants.Theseventures were successful. At that time, there was no competing AmericanDepository Receipts market. Appendix table I I -1 summarizes basic economicand capital market indicators for Brazil.In 1986, the Brazilian Futures Exchange of Rio de Janeiro (BM&F) began tradingfinancial assets. In 1991, it merged with the BMSFJ and in June 1997, it merged withthe Brazilian Futures Exchange of Rio de Janeiro, which had been founded in 1983using a British model. In January 2000, BM&F joined the Globex Alliance through theFrench electronic trading system NSC.Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub