Latin American Capital Markets

DEVELOPING A STRATEGY FOR REFORMING CAPITAL MARKETS 23• A computerized, automatic, matching trading system to enhance markettransparency despite the fact that this system is not the best suited to increasingliquidity for large orders• Systems to facilitate the comparison of trade details between the counterparts(again, computerization is cost-efficient for all but the smallest markets)• Clearance and settlement systems to accomplish settlements by a deliveryversus payment system with same-day funds• Risk control systems to reduce the operational risk and problems with losttransactions, bad record keeping, or computer problems• Independent central depository systems for the safekeeping of securities,with an independent registry of registries to encourage immobilization anddematerialization and facilitate the settlement process and other aspects ofcustody.All these systems represent the steps in a market transaction. They should grow togetherin order to establish an active and dynamic market.Market institutions include private sector members and perform importantpublic sector goals. Institutions can play a central role in advancing the reforms to enhanceliquidity, as has been the case in several European countries. Isolated interventionsby the public sector lack sustainability; market innovation has to come fromwithin the markets themselves. Only market institutions, as intermediary associations,can combine interests that have the necessary amount of leverage and sustain a competitivedrive. They boost the integration processes that generate the critical massneeded for the survival of these markets. Hence, public sector support for organizedmarkets should be seen not as a subsidy for a private project, but as a measure toprovide the financial systems of the region with a relevant development instrumentSimultaneously, market institutions have to ensure wide access for brokerdealersby providing incentives for their activities while ensuring that self-regulatingstructures are created to monitor these activities. However; the present situation is farfrom perfect, as in many cases there are important structural deficits (particularly insmall, concentrated markets) that lead to development of fragmented markets andclub structures.These structures reduce market integrity and hinder market competitiveness.The trend in many countries is toward the creation of holdings that bringmarkets together as well as clearance and settlement agencies to avoid insufficientinternal competition. These holdings also allow markets to dispose of redundantstructures by sharing systems and professional management. Moreover, they reducethe requirements for collateral, allowing for a better use of capital.Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub