Latin American Capital Markets

GLOBALIZATION.TECHNOLOGY AND REGULATION IN CAPITAL MARKETS 57SRO rules and regulations will only complement the statutory requirements that alreadyexist.There are costs associated with operating an SRO, and the industry directlyor indirectly bears these costs. Many stock exchanges in emerging markets with lowliquidity are rightly concerned about the costs of the SRO function. These costs areassociated with human capital, training of employees, and the need for updated technology,among others factors. In the early stages of development of the SROs, it isquite likely that that there will be considerable duplication of effort by the SRO andthe government regulatorThe securities commission may have to continue performingthe same functions as the SRO until it becomes credible and market participantsare satisfied by its fair policing activities. If the SRO is able to conduct its operationseffectively and efficiently, then the government regulator should be able to reduce itsbudget and pass the savings to market participants. It takes time for SROs to establishcredibility based on their track record.Self-regulation ensures that transactions are executed by member firms accordingto preset rules and conditions. Regulation of member firms ensures that theadmission criteria are set clearly and firms can become members only if they satisfyminimum capital requirements, creditworthiness, risk management capability, and otherrequisites. Rules are also laid down about conducting business and ethical standards.The procedures for sanctions in case of noncompliance are also laid out. Dispute resolutionis an important part of the SRO's responsibilities (box 2-6).SROs have a business interest in making sure that their markets functionsmoothly. Reputation capital is very important in this business.Therefore, SROs haveincentives to implement rules that are consistent with the business model.The industryhas a business interest in operating a fain transparent, and competitive market inBox 2-6 |Regulation of market transactionsRegulation by Self-regulatory OrganizationsEffective surveillance of marketsInformation disclosure and disseminationRegulation of member firmsCriteria for membership (capital requirements, risk management, andtechnical requirements)Rules for conducting businessCompliance with rulesSanctionsCopyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub