The 2004 Financial System Stability Assessment (FSSA) conducted for Chile by the IMF and the World Bank finds the Chilean financial system sound overall and resilient to shocks, a sentiment repeated by a 2007 IMF report. The securities markets in the country are large, but limited in terms of liquidity, notes the FSSA. The regulatory system governing the securities market - post the mid 1990's reform - is adjudged "basically sound" by the FSSA. However, some weaknesses are noted especially in the context of increasing complexities in the capital markets, the consolidation of the financial services industry, the internationalization of the capital markets, and the need to adopt international best practices in regulation and supervision to enhance investor confidence in the Chilean markets. The key FSSA recommendations pertain to supervisory resources and capacity, as well as intervention and enforcement powers of the securities supervisor, the Superintendency of Securities and Insurance. The Capital Markets II Reform Law was enacted in 2007. The Law, according to a 2007 IMF report, is a substantial regulatory step forward by Chile to develop its domestic capital markets and enhance its security and depth.

General Overview

The Chilean financial sector is deep and compares favorably with those of other emerging economies both in its depth and the availability of credit to the private sector, finds the 2007 Article IV consultation report by the International Monetary Fund (IMF). The 2004 Financial System Stability Assessment (FSSA) conducted for Chile by the IMF and the World Bank (which included a Report on the Observance of Standards and Codes on Securities Regulation) also finds the financial system solid overall and resilient to shocks. The regulatory system governing the securities market - post the mid 1990's reform - is adjudged "basically sound" (p. 28) by the FSSA. However, some weaknesses are noted especially in the context of increasing complexities in the capital markets, the consolidation of the financial services industry, the internationalization of the capital markets, and the need to adopt international best practices in regulation and supervision to enhance investor confidence in the Chilean markets. The preconditions for effective securities regulation, per the FSSA, also leave much to be desired. Importantly, the effectiveness of the judicial system is stymied by inordinate delays, and inadequately trained judges to adjudicate complex financial cases. This adversely affects the enforcement program of the Chilean securities regulator, the Superintendency of Securities and Insurance (SVS), due to the perceivably non-credible deterrence offered by the judiciary. The securities markets in the country are large, but limited in terms of liquidity. Further, secondary markets are particularly illiquid in relation to other emerging markets, pointing towards concentration both on the supply and the demand side. The FSSA calls for strong leadership and a coordinated effort both by the supervisor and the market participants to enhance liquidity and thereby foster capital markets development.

The Chilean system of regulating issuers and sellers of securities "is a hybrid of a disclosure-based system with a merit-based system" (p. 41), notes the FSSA. After registering with the SVS, the company has to apply to the Risk Rating Commission (CCR) - "a quasigovernmental Board...composed of senior government officials and private sector representatives" (p. 41) - if it wants to offer its securities to the mandatory private pension funds (Administradora de Fondos de Pensiones, AFPs). Since the privatization of the pension system in the 1980s, AFPs have become by far the dominant institutional investors in the country, and, together with insurance companies, hold a substantial fraction of total bank deposits, public securities, corporate and mortgage bonds, and Chile's external assets. The FSSA noted that there is "room to enhance their impact on the domestic financial system by a judicious relaxation of their overly restrictive investment regime without undermining their fiduciary function" (p. 1). Currently, the CCR determines if the securities are fit to be invested into by the AFPs. According to the FSSA, this situation grants an unduly large power in the hands of the CCR to control access to the Chilean capital markets. The more desirable alternative, per the FSSA, is to allow the AFPs themselves to undergo an internal process of determining what investments are suitable for them.

Other key FSSA recommendations include: (1) significantly increase the budgetary and staff resources of the SVS; (2) grant greater disciplinary and intervention powers to the SVS; (3) introduce minimum entry standards for the industry; (4) create an industry-wide guaranty fund to provide liquidity during failures; (5) introduce internal compliance requirements for securities firms and mutual funds; (6) increase regulatory and oversight powers of the stock exchanges; (7) converge Chilean accounting principles with International Financial Reporting Standards (IFRSs); (8) tighten the auditor independence standard; (9) improve oversight in the over-the-counter (OTC) debt market; (10) re-examine capital adequacy and risk management requirements for supervised entities; and (11) improve the securities clearing and settlement systems in Chile by reinforcing their legal foundations. The FSSA does note that Chile was working towards modernizing its payment and settlement system with the introduction of a real-time gross settlement (RTGS) system. The Central Bank of Chile (BCCh) announced in its 2004 Financial Stability Report the launch of the country's RTGS system on April 2, 2004 and added that it "meets the standards recommended internationally for payment systems of systemic importance" (p. 49).

The 2007 IMF Article IV consultation report mentions the enactment of the Capital Markets II Reform Law in June 2007. The Law introduces "key improvements to domestic capital markets in three broad areas: promoting access to venture capital and funding for SMEs [small and medium enterprises], strengthening financial market security, and promoting the development and deepening of financial markets" (IMF 2007, Statement by Javier Silva-Ruete, Executive Director for Chile and Alvaro Rojas, Advisor to Executive Director, p. 6). The Law exempts capital gains from venture capital investments from taxation, simplifies the legal framework governing the establishment of venture capital funds and their companies, modifies the determination of collateral, and extends the tax benefits on the trading of newly listed stocks for eight more years. Secondly, the Law enhances the legal protection of financial supervisory staff, increases custody requirements for securities in the interest of the security of transactions between buyers and sellers, introduces professional requirements for securities traders and agents working for intermediaries, and provides for dematerialized issuance of stocks. The Law also fosters the development of capital markets by basing the definition of sight and time deposits and reserve requirements on the Basel II guidelines and making way for the further development of the money market, authorizing derivatives netting in insolvencies, increasing investment limits for insurance companies, modernizing the off-shore securities market, introducing collective action clauses for the issuance of bonds, and providing tax benefits for mutual fund investors.

The primary regulatory agency over the Chilean capital markets is the SVS. The SVS is "an autonomous corporate body affiliated with the Chilean Government through the Ministry of Finance," states the SVS website. The SVS supervises all activities and entities associated with the securities markets in Chile. The SVS is headed by a Chairman who is appointed by the President of Chile. Securities are headed by the Intendency of Securities, and four divisions - Enforcement, Financial Control, Intermediaries Control, and Investment Funds Control within the SVS. Banks and financial institutions, on the other hand, are regulated by the Superintendency of Banks and Financial Institutions (SBIF), observes the FSSA, and are prohibited from entering the equity market themselves or for their clients, except via a separate brokerage subsidiary registered with, and subject to oversight by, the SVS. However, they may enter the market for all other securities activities, including for government and corporate debt. This situation leads to two separate regulatory agencies regulating entities engaging in the securities market, the SVS and the SBIF. The situation is compounded by the increasing concentration of financial institutions with one conglomerate holding banking, securities, and insurance arms to form a unified financial holding company. The growing trend, per the FSSA, warrants the establishment of a unified, integrated supervisor of the entire financial services sector with oversight authority over the financial soundness and capital adequacy of the entity as a whole. Chile has three national exchanges, the Santiago Stock Exchange, the Electronic Stock Exchange, and the Valparaiso Stock Exchange. A 2005 report by the U.S. Commercial Service entitled "Capital Market Reforms" documents that, as of that year, there were 250 shares listed on these exchanges, with a total market capitalization of US$87.6 billion, and with over 550,000 individual shareholders (representing 4 percent of the population).

The SVS is listed as a member on the International Organization of Securities Commission (IOSCO) website and a member of the President's Committee, the Emerging Markets Committee, and the Inter-American Regional Committee within the IOSCO. In May 2002, the IOSCO endorsed a comprehensive multilateral memorandum of understanding (MMoU) to facilitate and reinforce international cooperation among securities regulators. The IOSCO MMoU is based on the thirty IOSCO Objectives and Principles of Securities Regulation (IOSCO Principles) adopted in 1998 and the experience gathered by securities regulators in using bilateral memoranda of understanding. The IOSCO MMoU provides a standardized framework for sharing enforcement-related information and a gradually expanding network of participating regulatory agencies. IOSCO members who wish to sign the IOSCO MMoU participate in a comprehensive screening process to establish that they have the legal capacity to fully comply with the terms of the IOSCO MMoU. IOSCO members who complete the screening process but are found to lack the legal authority to fully comply with the terms of the IOSCO MMoU will be invited to become signatories to Annex B of the IOSCO MMoU, provided that they express their commitment to obtaining the necessary legal authority to become full signatories. Chile is a signatory to Annex B, per the IOSCO website.

The Principles

1. The responsibilities of the regulator should be clear and objectively stated.

II

The primary regulatory agency over the Chilean capital markets is the SVS. The SVS is also the securities supervisor and it is "an autonomous corporate body affiliated with the Chilean Government through the Ministry of Finance," states the SVS website. The SVS supervises all activities and entities associated with the securities markets in Chile. The supervised entities include security issuers, listed corporations, joint stock companies, security intermediaries, associations of security intermediaries, stock brokers, stock exchanges, mutual funds and their managers, investment funds and their managers, foreign capital investment funds and their managers, student loan funds, securities and depository companies, mortgage mutual fund manager agents, agricultural and cattle product exchanges, clearinghouses, risk rating agencies, securitization companies and external auditors. The SVS website spells out the mission of the agency thus: "To promote the economic development of the country, to achieve reliable and efficient securities and insurance markets through skillful supervision and modern regulation which protects the rights of investors and policy holders, and to simplify the role of other agents in the market. Our efforts are guided by the principle of good faith and the desire to maintain strong public confidence in our actions." The SVS is headed by a Chairman who is appointed by the President of Chile. Securities are headed by the Intendency of Securities, and four divisions - Enforcement, Financial Control, Intermediaries Control, and Investment Funds Control, states the SVS website. Despite this descriptive information, there is scant publicly available information that directly addresses Chile's compliance with this principle.

2. The regulator should be operationally independent and accountable in the exercise of its functions and powers.

II

There is insufficient information publicly available as to Chile's compliance with this principle.

3. The regulator should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers.

II

There is insufficient information publicly available that directly addresses Chile's compliance with this principle. The 2004 FSSA finds that though the legal basis for securities regulation is generally sound, the SVS still "requires additional legal powers and more resources" (p. 39). The FSSA, therefore, recommends increased staff and financial resources for the agency. The FSSA also advises that statutory authority be granted to the SVS to regulate investment advisers and to respond to brokerage firm or mutual fund failures.

4. The regulator should adopt clear and consistent regulatory processes.

II

There is insufficient information publicly available as to Chile's compliance with this principle.

5. The staff of the regulator should observe the highest professional standards, including appropriate standards of confidentiality.

II

There is insufficient information publicly available that directly addresses Chile's compliance with this principle.

6. The regulatory regime should make appropriate use of Self-Regulatory Organizations (SROs) that exercise some direct oversight responsibility for their respective areas of competence, to the extent appropriate to the size and complexity of the markets.

II

There is insufficient information publicly available as to Chile's compliance with this principle. The 2004 FSSA calls for expanded regulatory inspection and oversight functions with the Chilean stock exchanges.

7. SROs should be subject to the oversight of the regulator and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities.

II

There is insufficient information publicly available that directly addresses Chile's compliance with this principle.

8. The regulator should have comprehensive inspection, investigation and surveillance powers.

II

There is insufficient information publicly available as to Chile's compliance with this principle. The SVS website mentions the Enforcement Division of the Intendancy of Securities within the SVS, which is responsible for initiating and managing the investigations of violations or breaches of securities market regulations by the supervised entities. The 2004 IMF/World Bank FSSA, however, recommends more legal powers to the SVS, including the power to regulate investment advisors not regulated as a brokerage firm or a mutual funds manager. Further, the SVS should be given the authority as well as the capacity to obtain financial records and other relevant information from entities not directly regulated by it.

9. The regulator should have comprehensive enforcement powers.

II

There is insufficient information publicly available that directly addresses Chile's compliance with this principle. The 2004 FSSA recommends that the SVS be granted the controversial and disputed authority to engage in negotiated settlements with entities guilty of securities law violations.

10. The regulatory system should ensure an effective and credible use of inspection, investigation, surveillance and enforcement powers and implementation of an effective compliance program.

II

There is insufficient information publicly available as to Chile's compliance with this principle. The SVS website states that the SVS enforces compliance with all applicable laws, rules, regulations, and by-laws that collectively govern the securities market operations. The SVS can also impose sanctions for breaches of legal, regulatory or administrative rules.

11. The regulator should have authority to share both public and non-public information with domestic and foreign counterparts.

II

There is insufficient information publicly available that directly addresses Chile's compliance with this principle.

12. Regulators should establish information sharing mechanisms that set out when and how they will share both public and non-public information with their domestic and foreign counterparts.

II

There is scant information publicly available as to Chile's compliance with this principle. However, the Council of Securities Regulators of the Americas (COSRA) website mentions the establishment of a Framework for Co-operation in the Americas by the COSRA members (Chile's SVS being one) following a June 1994 meeting. The framework spells out the intent of the COSRA members, including the SVS, to mutually assist member country supervisors in the conduct of their enforcement and regulatory inquiries; coordinate the assistance from all relevant government agencies to provide such assistance; and continually review the assistance arrangement to enhance cooperation in information exchange. The COSRA has also drawn up a set of Principles for Cross-border Surveillance which includes mutual assistance by members in sharing information at their respective disposals and conducting joint supervisory activities regarding investment management firms subject to their mutual jurisdictions.

In May 2002, the IOSCO endorsed a comprehensive MMoU to facilitate and reinforce international cooperation among securities regulators. The IOSCO MMoU is based on the thirty IOSCO Principles adopted in 1998 and the experience gathered by securities regulators in using bilateral MoUs. The IOSCO MMoU provides a standardized framework for sharing enforcement-related information and a gradually expanding network of participating regulatory agencies. IOSCO members who wish to sign the IOSCO MMoU participate in a comprehensive screening process to establish that they have the legal capacity to fully comply with the terms of the IOSCO MMoU. IOSCO members who complete the screening process but are found to lack the legal authority to fully comply with the terms of the IOSCO MMoU are invited to become signatories to Annex B of the IOSCO MMoU, provided that they express their commitment to obtaining the necessary legal authority to become full signatories. Chile is a signatory to Annex B, per the IOSCO website.

13. The regulatory system should allow for assistance to be provided to foreign regulators who need to make inquiries in the discharge of their functions and exercise of their powers.

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See Principle 12.

14. There should be full, timely and accurate disclosure of financial results and other information that is material to investors’ decisions.

II

Chile complies with the Framework for Full and Fair Disclosure, which accepts the COSRA principles of the Fundamental Elements of a Sound Disclosure System pertaining to the character, timing, method and efficacy of disclosure of information, per information on the COSRA website. The SVS website adds that the external auditors are charged with the responsibility of ensuring that the financial disclosures made by the supervised entities to the SVS and to the general public are true. The auditors achieve this by examining accounting documents, inventory, balance sheets and other financial statements, and expressing their unprejudiced opinion on the documents and the financial situation of they project. However, this information is insufficient in terms of Chile's actual compliance with this principle.

15. Holders of securities in a company should be treated in a fair and equitable manner.

CP

The 2003 World Bank ROSC on corporate governance in Chile observes that Chile is fully or largely compliant with the Standards and Codes of Corporate Governance in the areas of "rights to participate in fundamental decisions" "basic shareholder rights," "functioning of control arrangements," "shareholder's annual general meeting rights," and "requirements to weigh costs/benefits of exercising voting rights". In the area of "disproportionate control disclosure," however, the Chilean legal and regulatory framework was adequate but practices and enforcement diverge exhibited deficiencies.

A 2005 Linneberg & Lefort report notes that Chile has been rated highly by international entities with regard to shareholder protection, adding that "the Santander Central Hispano bank rated Chile first among the major Latin-American markets in shareholder protection and McKinsey & Company highlighted the low shareholder protection premium required for Chilean stocks, implying reduced ground for improvement" (p. 3). Moreover, with the enactment in December 2000 of the Law on Initial Public Offerings (IPO) and Corporate Governance No. 19.705 of 2000 that amended the Corporations Law and the Securities Market Law, minority shareholder rights were protected, especially during changes in control. However, a 2008 paper by Allen and Gourevitch notes that "ownership remains highly concentrated and there is little evidence of minority investors actively attempting to improve corporate governance" (p. 13). Furthermore, the paper finds that there is no market for control and that minority shareholder dissatisfaction is "substantial."

Unlike other emerging economies, institutional investors have played a key role in advancing corporate governance in Chile. The pension reform of the early 1980s has led to private pension funds being a large and integral part of the Chilean capital markets. However, currently, the Risk Rating Commission determines if the securities are fit to be invested into by the AFPs. According to the FSSA, this situation grants an unduly large power in the hands of the CCR to control access to the Chilean capital markets. The more desirable alternative, per the FSSA, is to allow the AFPs themselves to undergo an internal process of determining what investments are suitable for them. This could potentially strengthen their role in strengthening corporate governance.

16. Accounting and auditing standards should be of a high and internationally acceptable quality.

ID

Accounting and auditing requirements for corporate entities in Chile are governed by the Corporations Law that lays out two corporate forms - "open" and "closed" resulting in different financial reporting requirements for these entities. As explained in the 2004 World Bank ROSC on accounting and auditing practices in Chile, open corporations are statutorily regulated by the SVS and, therefore, follow SVS issued accounting regulations. The World Bank recommends adoption of International Financial Reporting Standards (IFRSs) for all public interest entities including listed companies, banks, insurance companies, pension funds and large corporations. In line with the World Bank recommendations, per the July 2008 Deloitte IAS Plus website update, Chile will be adopting IFRSs for all SVS registrants over a three-year period beginning 2009 and ending 2011. With regard to enforcement, the World Bank notes that although the SVS has made commendable efforts to improve compliance with financial reporting requirements, there is room for further improvement. Under the Corporations Regulations, the SVS has wide enforcement powers over financial reporting requirements of registered corporations and insurance companies.

The Chilean College of Accountants (CCC) - a voluntary organization - is legally empowered under Law No. 13.011 of 1958 to set accounting and auditing standards in Chile. However, as mentioned earlier, the SVS also play a role in the standard-setting process for the securities sector. As the World Bank notes, "these standard-setting powers extend beyond the form of the financial reporting and include accounting standards" (p. 6). In fact, with regard to the 25 standards set by the SVS, the ROSC notes that these are "more than mere precisions on the CCC Technical Bulletins, and take precedence over [the latter]" (p. 6). The World Bank report recommends establishing a Chilean Accounting Standards Board as the only official body empowered to set accounting standards.

With regard to auditing standards, the 2004 FSSA notes that external auditors are not licensed and there is also a lack of quality control mechanisms for the auditing profession. These factors weaken the role of external auditors and the effectiveness of the reporting system. Further, the FSSA finds that the independence of the auditor is seriously jeopardized by the rule that allows auditors to own up to 3 percent equity in their clients' assets. This is not only against international best practices but strikes at the very cornerstone of securities regulation, comments the FSSA. The FSSA welcomes efforts by Chile to introduce licensing of the auditing profession. The 2004 World Bank ROSC on accounting and auditing adds that Chile has been harmonizing Chilean Generally Accepted Auditing Standards (GAAS) with International Standards on Auditing (ISAs) since 1997, though the GAAS still lack specificity and do not cover important issues. The ROSC, therefore, recommends either direct incorporation of the missing ISAs as Chilean GAAS, or complete adoption of ISAs, as well as the creation of a public oversight board for statutory auditors. The Inter-American Development Bank website provides information on a project called "International Financial Reporting Standards and International Standards Auditing" approved for Chile in January 2004 with the aim of supporting the expedited adoption/adaptation of international accounting and auditing standards in the country.

17. The regulatory system should set standards for the eligibility and the regulation of those who wish to market or operate a collective investment scheme.

II

There is insufficient information publicly available as to Chile's compliance with this principle. The Investment Fund Control Division of the SVS is responsible for the regulation and supervision of the Chilean mutual funds and their fund managers, states the SVS website. The Division authorizes fund managers, approve the internal rules of the funds, and register their shares in the official registry. The Division also oversees the financial evolution of the funds and their market disclosures, and issues instructions under the law pertaining to this oversight.

18. The regulatory system should provide for rules governing the legal form and structure of collective investment schemes and the segregation and protection of client assets.

II

There is insufficient information publicly available that directly addresses Chile's compliance with this principle.

19. Regulation should require disclosure, as set forth under the principles for issuers, which is necessary to evaluate the suitability of a collective investment scheme for a particular investor and the value of the investor’s interest in the scheme.

II

There is insufficient information publicly available as to Chile's compliance with this principle.

20. Regulation should ensure that there is a proper and disclosed basis for asset valuation and the pricing and the redemption of units in a collective investment scheme.

II

There is insufficient information publicly available that directly addresses Chile's compliance with this principle.

21. Regulation should provide for minimum entry standards for market intermediaries.

II

There is insufficient information publicly available as to Chile's compliance with this principle. The Intermediaries Control Division of the SVS is responsible for the authorization, supervision and control of securities intermediaries, states the SVS website.

22. There should be initial and ongoing capital and other prudential requirements for market intermediaries that reflect the risks that the intermediaries undertake.

II

There is insufficient information publicly available that directly addresses Chile's compliance with this principle.

23. Market intermediaries should be required to comply with standards for internal organization and operational conduct that aim to protect the interests of clients, ensure proper management of risk, and under which management of the intermediary accepts primary responsibility for these matters.

II

The authorization of Chilean securities professionals and intermediaries is not subject to any professional or educational qualification nor are they required to undergo any tests for entry, observes the 2004 FSSA. A high school degree, and a clean criminal and bankruptcy record are all that is required to work in the securities industry. Regulation also does not stipulate internal control or risk management programs or internal compliance offices within securities firms to monitor their personnel. Hence, notes the FSSA, the SVS has no benefit of accessing internal compliance records of firms to monitor and enforce their compliance with the law. This can have a potentially detrimental effect on investor (both domestic and international) confidence in the Chilean markets. The FSSA, therefore, recommends the following: (1) regulate investment advisers; (2) set professional competency standards for industry professionals; (3) develop standards for internal controls and compliance in securities firms; and (4) set standards for investment suitability. However, there is insufficient information publicly available that directly addresses Chile's compliance with this principle.

24. There should be procedures for dealing with the failure of a market intermediary in order to minimize damage and loss to investors and to contain systemic risk.

II

The 2004 FSSA finds faults with the Chilean regulatory system in the area of systemic failure or failure of market intermediaries. The FSSA notes that the system does not have adequate powers or capacity to quickly respond to systemic failures triggered by the failure of one or more brokerage firms or mutual funds. The SVS also does not have power to intervene in a failed firm or to appoint a receiver or administrator. As of the writing of the FSSA, the system required firms to maintain minimum capital positions and obtain private insurance to guard against loss/failure. Instead, the FSSA recommends an administrator to handle failures, safeguard customer assets, and complete open unsettled transactions to minimize systemic damage. The ideal alternative, per the FSSA, is to create a central insurance or guaranty fund under the administration of a stock exchange or the Centralized Securities Depository. This fund would provide liquidity to cover unfilled open positions so as to expedite the winding up procedure. However, there is insufficient information publicly available that directly addresses Chile's compliance with this principle.

25. The establishment of trading systems including securities exchanges should be subject to regulatory authorization and oversight.

II

Securities transactions in Chile are mandated to be completed on a stock exchange, unless they are explicitly exempted (including government, BCCh, and other public debt, and non-equity securities issued by a bank or finance company), finds the 2004 FSSA. However, this leaves a large over-the-counter (OTC) government debt market that is not fully regulated or transparent. OTC debt trading must be reported to a stock exchange within a day; however, the same does not hold for bank trading. Banks are dominant players in the OTC market and have established an exclusive private electronic trading system not accessible by brokerage firms or institutional investors. This, coupled with paltry regulation of their trading activities, raises questions on "best execution, market transparency and public availability of market prices for asset valuation by intermediaries" (p. 40), states the FSSA. The FSSA also notes the lack of an effective clearance and settlement system for the OTC market and points out that it could be a potential systemic risk factor. However, there is insufficient information publicly available that directly addresses Chile's compliance with this principle.

26. There should be ongoing regulatory supervision of exchanges and trading systems which should aim to ensure that the integrity of trading is maintained through fair and equitable rules that strike an appropriate balance between the demands of different market participants.

II

See Principle 25.

27. Regulation should promote transparency of trading.

II

See Principle 25.

28. Regulation should be designed to detect and deter manipulation and other unfair trading practices.

II

The 2004 FSSA reports that the private securities (equity and corporate debt) markets are illiquid and as such an easy breeding ground for illegal market activity. Illegal activities in the Chilean market can also be potentially spawned by "the lack of market intermediaries such as market-makers or specialists, few active professional traders, an inability to borrow securities so as to sell short easily, the lack of derivative instruments needed to hedge market risk, no customer margin regulations and long-standing capital adequacy formulas that may be outdated and insufficient to establish that brokerage firms have sufficient capital to operate" (p. 40). However, there is insufficient information publicly available as to Chile's compliance with this principle.

29. Regulation should aim to ensure the proper management of large exposures, default risk and market disruption.

II

The 2004 FSSA finds faults with the Chilean regulatory system in the area of systemic failure or failure of market intermediaries. The FSSA notes that the system does not have adequate powers or capacity to quickly respond to systemic failures triggered by the failure of one or more brokerage firms or mutual funds. The SVS also does not have power to intervene in a failed firm or to appoint a receiver or administrator. As of the writing of the FSSA, the system required firms to maintain minimum capital positions and obtain private insurance to guard against loss/failure. Instead, the FSSA recommends an administrator to handle failures, safeguard customer assets, and complete open unsettled transactions to minimize systemic damage. The ideal alternative, per the FSSA, is to create a central insurance or guaranty fund under the administration of a stock exchange or the Centralized Securities Depository. This fund would provide liquidity to cover unfilled open positions so as to expedite the winding up procedure.

In addition, the Chilean repo market (called pactos) lacks uniform business practices or regulatory practices to ensure safe and efficient. The participants are not bound by any standard master agreement on the terms of the repo or the rights of the participants in the event of market or credit risks. Neither are there consistent policies on transfer of collateral nor on audit trails for the repos, observes the FSSA, commenting that they make oversight difficult and creates legal uncertainty in the event of a failure. However, there is insufficient information publicly available that directly addresses Chile's compliance with this principle.

30. Systems for clearing and settlement of securities transactions should be subject to regulatory oversight, and designed to ensure that they are fair, effective and efficient and that they reduce systemic risk.

II

The 2004 FSSA notes the lack of an effective clearance and settlement system for the OTC market and points out that it could be a potential systemic risk factor. The FSSA recommends that securities clearance and settlement systems be improved so as to protect investors and reduce systemic failures in the securities markets. The FSSA does note that Chile is working towards modernizing its payment and settlement system with the introduction of a real-time gross settlement system in the pipeline. The Central Bank of Chile announced in its 2004 Financial Stability Report the launch of the country's RTGS system on April 2, 2004 and added that it "meets the standards recommended internationally for payment systems of systemic importance" (p. 49). However, there is insufficient information publicly available as to Chile's compliance with this principle.