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New plumbing for securities markets

Building a safe and sound securities system for capital markets is like putting plumbing in a house.

"If a house doesn't have plumbing, who will buy?" asks Antonio Vives, deputy manager of the IDB's Sustainable Development Department. Similarly, if a stock market doesn't have the mechanisms to guarantee that brokers will get their money and buyers will get their stock in a timely and efficient way, who is going to invest?

Vives was the opening speaker at an October 1998 conference at the IDB's Washington, D.C., headquarters on building safe and sound clearance and settlement systems for Latin America's expanding capital markets. The subject is particularly relevant for emerging economies that complete for investment resources that can rapidly evaporate during a financial crisis. Secure capital markets are fundamental for attracting resources needed to fuel economic growth, according to experts from the public and private sectors attending the conference.

William F. Jaenike, chairman and ceo of the Depository Trust Company (DTC) --a co-sponsor of the conference-- noted that a goal for the securities industry in the United States is to reduce the time of clearance and settlement from the present three days to one day by 2003. Completing the transaction in less time, he explained, increases certainty and reduces the risk. "Certainty is the enemy of risk," said Jaenike.

Dennis Earle, managing director of the DTC's Resource Company, said that Latin America and other developing nations must set different and more stringent standards than those used by the Group of 30, the international group of experts that recommends rules for clearance and settlement. "The rules of the Group of 30 were really written for the major stock markets of the industrial countries," he said. "A market like New York is very liquid, and it can absorb shocks that a smaller market can't handle."

In a low-income developing country the basic regulatory structure must be in place to make the capital markets safe and sound, he cautioned, and the Group of 30 standards do not provide sufficient assurance that basic regulatory infrastructure will be in place. If investors suffer a loss because of a systems irregularity in a small emerging market, they will not return to that market, said Earle. "The regulatory framework must be in place to prevent this from happening," he said.

Jesse Wright, an IDB capital markets specialist, told participants that demand was strong in Latin America and the Caribbean to build tighter, more efficient regulatory systems and to achieve greater regional standardization and harmonization for capital markets and clearance and settlement.

The IDB and the Multilateral Investment Fund, a member of the IDB Group, have worked on improving and modernizing clearance and settlement systems in 21 stock exchanges in 16 countries in Latin America and the Caribbean. The national and regional programs aim to strengthen market infrastructure by standardizing public debt, creating securities registries, developing trading systems and central securities depositories, and strengthening supervision.

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