Latin American Capital Markets

DEVELOPING A STRATEGY FOR REFORMING CAPITAL MARKETS 17local capital markets will need to become more attractive to investments. Ideally, domesticcapital markets must also be seen as one of the most effective ways of protectingagainst market turbulence and contagion.Given the relevance of capital markets, current circumstances raise severalcritical questions. What should be the role of the public sector in market development?What is an appropriate sequence leading to capital market development? Whatareas should be targeted as crucial second-generation reforms? While the private sectorplays a pivotal role in the development of capital markets, Latin American governmentsmust take bold and unequivocal steps to ensure that local markets canprosperA Strategy to Promote the Development of Capital Marketsin Latin America and the CaribbeanSecond-generation reforms for capital markets assume that the foundation and fundamentalsfor capital market activity are in place. The goal of these reforms is tocreate mechanisms to increase market activity and liquidity, broaden market participation,and increase the variety of instruments traded to make the markets more attractiveto investors. We propose that a suitable capital market strategy should focuson the proper functioning of three basic aspects: building an enhanced regulatoryframework; broadening the role of market institutions and actors; and supporting regionalefforts and activities for capital market integration.Enhanced Regulatory FrameworkFor many countries in the region, it is necessary to restructure the regulatory frameworkto ensure market viability.The regulatory framework should guarantee that theincentives and structure of the market are consistent with efficiency, fairness, andsafety. Market participants, rather than governments, should be mainly responsible forestablishing and enforcing market regulations. Nevertheless, adequate official oversighshould be provided to verify that the rules are indeed fair and evenly enforced andinformation asymmetries minimized. For some countries, particularly small, emergingeconomies, the battle between self-regulation and optimal supervision depends onregulatory capacity.The legal regulatory structures currently in place seek to increase security andinvestor protection and, to a lesser extent, to encourage internal competition betweenCopyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub