Managing Risks in Financial Market Development: The Role of Sequencing
IMF Working Papers, June 1, 2003
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- Managing Risks in Financial Market Development: The Role of Sequencing
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Bibliographic details
- Published: June 1, 2003
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451853957.001
Summary
- Proposes an integrated and risk-based approach to the sequencing and coordination of reforms to develop domestic financial markets.
- Argues there is a hierarchy of financial markets that reflects the complexity of risks in each market and the interlinkages among markets.
- Presents a sequencing of market development and risk-mitigation measures to minimize both macroeconomic and financial risks.
- States that capital account opening can complement (but not substitute for) domestic institutional and market reforms to support the growth of local financial markets.
- Emphasizes that domestic institutional investors are critical to market development and risk mitigation.
Key findings
- There exists a hierarchy of financial markets tied to the complexity of risks and market interlinkages.
- Sequencing reforms according to that hierarchy reduces macroeconomic and financial vulnerabilities.
- Capital account opening is supportive of local market growth only when domestic institutional and market reforms are in place; it cannot substitute for them.
- Strong domestic institutional investors are essential for deepening markets and mitigating risks.
Proposed sequencing and risk-mitigation measures
- Develop markets and implement risk-mitigation measures following a hierarchy that accounts for:
- Complexity of market-specific risks.
- Interlinkages among markets (e.g., money markets, government bond markets, debt securities market, derivatives market).
- Prioritize domestic institutional and market reforms before or alongside capital account opening.
- Coordinate market development measures to ensure price discovery, market liquidity, and robust primary and secondary market functioning.
Policy implications and recommendations
- Adopt an integrated, risk-based framework for sequencing reforms across money markets, debt markets, securities markets, and derivatives.
- Strengthen domestic institutional investors to provide stable demand and improve market resilience.
- Use capital account liberalization as a complement to domestic reforms, not as a substitute.
- Enhance financial regulation and supervision, market rules, and infrastructure to manage market risk and support continuous markets and active markets.
Subject coverage and keywords (as listed)
- Subjects: Currency markets, Financial markets, Financial regulation and supervision, Market risk, Money markets, Securities markets, Stock markets
- Keywords: active market, Asia and Pacific, capital account liberalization, capital markets, central bank, continuous market, Currency markets, debt market, debt securities market, E. derivatives market development, East Asia, financial condition, financial markets, Global, government bond, interbank market, interest rate, market development, market development policy, market liquidity, market participant, Market risk, market rule, Money markets, price discovery, primary market, secondary market, Securities markets, sequencing, Stock markets, WP
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- Managing Risks in Financial Market Development: The Role of Sequencing