Latin American Capital Markets

504 KENROY DOWERS, RUBEN LEE, AND ANTONIO VIVESa domestic government bond market and providing an adequate framework to developcorporate bond markets.Conroy and Zhang (undated) discuss how best to develop domestic bondmarkets.They argue that, at the initial stage, a sovereign debt management project anda bond market development program need to be launched in parallel.This requiresbuilding a consensus between the government and the central bank regarding theimportance of bond market development for effective debt management, consistencybetween bond market development and macroeconomic policies, and an overallstrategy to develop the domestic bond marketIn chapter 10 (this volume), del Valle identifies some specific stages for developingbond markets. In the first stage, the development of an effective primary marketfor government securities is pursued.Treasury bill markets are typically first developed,and the government is encouraged to gradually extend the maturity spectrumof its treasury bonds. Once again, it is vital for the primary market development to beconsistent with the government's sovereign debt management program, including itsfunding strategy and risk management program, and also with the central bank's openmarket operations. Various auction methods may be tested with a view to adopting amodel that best enhances bond-selling efficiency. A primary dealer system may also beestablished to ensure competitive bidding in the auctions.In the second stage, a secondary market for government securities may bedeveloped. Ways to improve market liquidity should be pursued. Market infrastructurecan be enhanced, including clearing and payment systems and the market for repurchaseagreements. Any legal, regulatory, accounting, and tax impediments to investingand trading in bonds should be identified and removed.The role of intermediaries,such as market makers and dealer-brokers, may be enhanced.In the third stage, the development of the corporate bond market may beemphasized.Typically, this requires appropriate corporate transparency and disclosurerequirements, the presence of credit rating agencies, and also the need for relevanttax and other regulatory issues to be addressed. It is important to be flexible whenfocusing on corporate bond market development, which can range from developinga viable commercial paper market to structured products.Market InfrastructureMarket infrastructure is important because all participants in capital markets rely onits smooth and efficient functioning. It represents the intersection of the diverse participantsin the market. It is composed of the institutions, mechanisms, and rules thatCopyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub