Latin American Capital Markets

60 REENA AGGARWALhelped to lower the cost of capital. It is important to embrace policies that will continueto allow these companies to raise capital globally.The entrance of foreign financialinstitutions and foreign investors has resulted in greater transparency, better accountingstandards, and improved corporate governance because these investorsrequire the local market to follow global standards. Markets should focus on developingnew international and domestic instruments (for example, exchange-tradedfunds) so that investors have a choice of investment vehicles.What challenges does globalization pose, and how should they be addressed?Globalization has sometimes resulted in less liquidity for local markets, as trading inblue chip companies moved out of the country. Foreign money can quickly flow inand out, causing short-run volatility in the market.These issues could be addressed intwo ways. First, the country could develop a plan to encourage small and mediumfirms to raise capital in local markets. Some companies will grow and form the futurepipeline for active trading.These firms are the engines of growth for the local economy,and thus it is important to have a strategy for their growth and developmentSecond, the country could make an effort to increase local savings and thelocal investor base in order to reduce the impact of foreign investors on portfolioflows. Investor education conducted by the stock exchanges, securities commissions,governments, and regional organizations, such as COSRA, should be an integral andcentral part of the capital market development strategy. Dual listings might be helpful.In Israel, for example, all the high-tech companies have gone to NASDAQ and leftthe Tel Aviv Stock Exchange with the smaller, less well-known, and less liquid stocks.The regulator has aligned disclosure with the United States to encourage dual listingsand the return of companies to the country.In what areas must global standards be adopted? It is necessary to adoptglobal standards and use the guidelines provided by international organizations, suchas IOSCO and FIBV The standards and guidelines refer to the regulation of financialmarkets, functioning of SROs, timely disclosure of information, accounting practices,corporate governance, and, most important, methods for enforcement of regulations.The strategy should be to strive to meet the global standards of best practice. Bothregulators and market operators need to pay attention to these standards.What are the benefits of regional alliances, and what are the best ways tostructure such alliances? So fan there has been a lot of talk about partnerships and alliances,but little has actually been accomplished.This will require thinking about whatcountries should be included and how far this concept can be stretched.How can trading across borders be simplified with low transaction costs? Regionalharmonization could occur in several areas, including trading systems, clearanceand settlement, membership, listings, SROs, and regulations.Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub