Enacted Summary
The 2004 Financial System Stability Assessment (FSSA) for Chile published by the International Monetary Fund (IMF) found the Chilean financial system sound and resilient to shocks, a sentiment repeated by a 2009 IMF report (published after the global financial crisis). The regulatory system governing the securities markets - post the mid 1990's reform - was adjudged "basically sound" by the FSSA. However, some weaknesses were 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 pertained to, the intervention and enforcement powers of the securities supervisor, the Superintendency of Securities and Insurance, as well as its resources and capacity, and regulatory ambit with regard to market intermediaries and over-the-counter trading activities. The Chilean government has progressively been implementing a series of capital market reforms; starting (in phases) in 2001, to strengthen and deepen capital markets by increasing competition, access, and integration; improve corporate governance standards; enhance regulatory oversight; and update securities legislation. According to the 2004 FSSA, these reforms would either totally or partially address some of its recommendations. In a 2010 comparative study spanning four Latin American countries, Pasquini evaluates Chile as having a strong regulatory regime in the areas of supervisory powers and resources, the self-regulatory organizations, enforcement, and cooperation and information sharing (broadly addressing International Organization of Securities Commission’s (IOSCO) Principles 1 through 13).
General Overview
Per a 2009 Article IV consultation report by the International Monetary Fund (IMF), Chile boasts the most open economy in Latin America, with one of the deepest financial markets in the region. Chilean financial markets were therefore quickly hit by the global financial turmoil, particularly following the collapse of Lehman Brothers in September 2008. The effects of the global crisis, however, were reported by the IMF to be less severe than those affecting other emerging markets. A 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) found the financial system solid overall and resilient to shocks. The regulatory system governing the securities market - post the mid 1990's reform - was adjudged "basically sound" (p. 28) by the FSSA. However, some weaknesses were 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 FSSA also found the effectiveness of the judicial system to be stymied by inordinate delays, and inadequately trained judges to adjudicate complex financial cases. This was observed to have adverse effects on 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 market in the country, at the time of the report, was stated to be large, but limited in terms of liquidity. Further, secondary markets were particularly illiquid in relation to other emerging markets, pointing towards concentration both on the supply and the demand side. The FSSA, all in all, called for strong leadership and a coordinated effort both by the supervisor and the market participants to enhance liquidity and thereby foster capital markets development.
In 2010, Ricardo Pasquini published a comparative evaluation of four countries – Argentina, Brazil, Chile, and Peru – as regards their securities markets regulation and degree of implementation in a book entitled “Capital Markets in the Southern Cone of Latin America” directed by Alberto Musalem. The chapter is introduced as a partial assessment of the implementation of the first 13 International Organization of Securities Commission’s (IOSCO) Principles of Securities Regulation, relating to the regulator, the self-regulatory organizations, enforcement, and cooperation and information sharing, in these four countries. However, as Pasquini clarifies, “the analysis of IOSCO principles covered in this chapter has not been made with the aim of making a full comprehensive study of the aspects related to the principles, but to focus on the most important of them for comparative purposes” (p. 83). Since the results have been gathered from responses of regulators and other agencies within each country, they may be treated as self-assessments. Chile followed Brazil closely to settle at the second position in this comparative assessment, evidencing that it has achieved 80 percent implementation of the indicators selected for the analysis. Overall, the study reveals that for the region as a whole, the priority is, in that order, ensuring greater human and economic resources, regulator’s independence, effective and credible use of regulatory powers, and information sharing mechanisms.
In 2001, per a 2005 U.S. Department of Commerce (DoC) report, the Chilean government launched the Capital Market Reform I (CMRI) project, which was designed to “deregulate the country’s capital markets to stimulate domestic savings and economic growth” (p. 1). CMRI adopted a “three-pillar” approach, introducing tax, institutional, and pension fund reforms, and was reported to have resulted in increased savings, liquidity and competition. The second phase, known as Capital Market Reform II (CMRII), was subsequently introduced in June 2003 and adopted in 2007 under Law No. 20.190. Per the DoC report, CMRII aimed to stimulate the venture capital industry, reduce transaction costs, improve corporate governance standards, enhance regulatory oversight, improve voluntary savings mechanisms, and update legal texts. The 2004 FSSA stated that CMRII, which was in draft form at the time of the report, would partially address the FSAP recommendations concerning embedding the concepts of finality, netting and novation into law, as well as the recommendation on widening enforcement powers of the SVS. In September 2009, Capital Market Reform III (CMRIII) was introduced for the purpose of improving the availability of credit to Small and Medium Enterprises (SMEs), and “internationalizing” Chile’ s capital market, as stated in a 2010 U.S. DoC report. According to news release on the Ministry of Finance’s website, CMRIII is centered on four major objectives: increasing liquidity and depth of the capital market; improving access to the financial system, enhancing competition in the credit market; and facilitating capital market integration. The reforms, amongst other things, broaden the supply of credit, provide greater flexibility to investment funds, as well as provide investment incentives to foreigners. According to a 2010 presentation from Chile’s Finance Minister, there are already plans to lay out reforms to follow those put forward by CMRIII. The reforms, entitled the Bicentennial Capital Markets Agenda, “will take shape through the preparation of various bills and their presentation to Congress” (p. 26) over the next four years.
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), as noted by the FSSA. After registering with the SVS, a 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 also stated 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). According to the 2010 U.S. DoC report, the Chilean government has been consistently increasing the percentage that pension funds are allowed to invest overseas. A 2008 reform package increased the amount from 30 percent to 60 percent of funds.
As previously mentioned, the agency overseeing the Chilean capital markets is the SVS, which along with the Central Bank of Chile (BCCh) and the Superintendency of Pensions (SP), forms a supportive financial regulatory framework for the Superintendency of Banks and Financial Institutions (SBIF). The SVS is "an autonomous corporate body affiliated with the Chilean Government through the Ministry of Finance," as stated by the SVS website, and is headed by a Chairman appointed by the President of Chile. Per a 2009 report by J.F. Hornbeck, the SBIF serves as the “primary regulator” of the financial system, while the SVS is in charge of overseeing brokerages, stock exchanges, securities dealers, mutual funds, and other investment related firms. Many securities and insurance firms in Chile, however, are subsidiaries of banks or other financial institutions, which are regulated by the SBIF. According to the 2004 FSSA, banks and financial institutions 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. They may, however, 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 growing trend of financial conglomerates operating banking, securities and insurance arms, per the FSSA, increases the necessity of establishing 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. According to the 2009 J.F. Hornbeck report, Chile’s three financial superintendencies coordinate regulation under the umbrella of the Financial Area Superintendents Committee. However, as of July 2010, there have been no publicly available updates on the establishment of a Chilean unified financial supervisor.
Chile has three national exchanges, the Santiago Stock Exchange, the Electronic Stock Exchange, and the Valparaiso Stock Exchange. According to the 2010 U.S. DoC, the Santiago Stock Exchange, Chile’s main exchange, “rebounded strongly” from the global financial crisis, rising by over 50 percent in 2009. As reported by the World Federation of Exchanges’ website, the Santiago Stock Exchange had 236 companies listed on it in 2009, and reported USD 230.7 billion in total market capitalization. The SVS is a signatory to Annex B of the IOSCO multilateral memorandum of understanding (MMoU). Being a signatory to the IOSCO MMoU implies that the regulator has been screened by the IOSCO to have the legal capacity to share enforcement-related information with a gradually expanding network of national regulatory agencies. 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. The SVS is also listed as a member on the IOSCO website and it is a member of the President's Committee, the Emerging Markets Committee, and the Inter-American Regional Committee within the IOSCO.
The Principles
II1. The responsibilities of the regulator should be clear and objectively stated.
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 as: "To protect the rights of investors and insurance policyholders, and in doing so, support the development of the securities and insurance markets through regulation and supervision which facilitate their operations in a reliable and transparent way." 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 the foregoing, there is insufficient publicly available information that directly addresses Chile's compliance with this principle.
II2. The regulator should be operationally independent and accountable in the exercise of its functions and powers.
According to the 2010 study by Pasquini, the regulator’s accountability process is “only occasionally adequate” (p. 89); transparency, however, is deemed to be achieved to the maximum degree. The chairmanship of the SVS is not subject to a fixed term, and that in practice, new appointments may be dependent upon the political authority in power. In addition to this, the study also reports that regulator independence is “severely affected by commercial and economic sector related interests” (p. 10). The Pasquini study, however, does not fully address Chile's compliance with this principle.
II3. The regulator should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers.
The 2004 FSSA found that though the legal basis for securities regulation was generally sound, the SVS still "requires additional legal powers and more resources" (p. 39). Therefore, the FSSA recommended increased staff and financial resources of the agency. The FSSA did note, however, that the implementation of CMRII, then in draft form, would partially address its other recommendation on widening the enforcement powers of the SVS. A result of the 2010 Pasquini study, nevertheless, reiterates the FSSA’s former recommendation, reporting the financing of the SVS to be “inadequate.” Per the study, there were 309 professional supervisors in the SVS in 2008, with an annual budget of USD 10 million. However, since the SVS supervises both the securities and insurance sectors, the figures dedicated solely to securities regulation could not be determined. The 2004 FSSA also advised that statutory authority be granted to the SVS to regulate investment advisers and to respond to brokerage firm or mutual fund failures. The above assessments, however, do not fully address Chile's compliance with this principle.
II4. The regulator should adopt clear and consistent regulatory processes.
According to the 2010 study by Pasquini, the regulator’s transparency is deemed achieved to the maximum degree. Transparency involves consultation with the public and review and auditing of funds, as well as, license publication, judicial review, new regulation review, policies disclosure, and costs of compliance. As for the latter two indicators, the study reveals that there is room for improvement. The above study, however, does not fully address Chile's compliance with this principle.
II5. The staff of the regulator should observe the highest professional standards, including appropriate standards of confidentiality.
According to subjective indicators assessed in the 2010 Pasquini study, Chile attains maximum scores with relation to professional standards, including use of information, restrictions to holding and transacting in securities, investigations, conflicts of interest, and administrative sanctions. Further, although the SVS does not have a code of conduct for its staff, Chilean Organic Law and Securities Market Law stipulate some prohibitions and criminal sanctions for violations of confidentiality standards. However, the SVS Internal Controller, which is in charge of monitoring staff activities, predominantly focuses on the supervision of international financial management in practice. Despite the above, the Pasquini study does not fully address Chile's compliance with this principle.
II6. 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.
The 2004 FSSA called for expanded regulatory inspection and oversight functions with the Chilean stock exchanges. The 2010 Pasquini study reports that Chile, according to subjective indicators based on the evaluations of regulators and consultants, achieved maximum scores in the areas of the authority to enquire, authority to investigate, early information provision and SRO standards of confidentiality and procedural fairness. The Pasquini study, however, does not fully address Chile's compliance with this principle.
II7. SROs should be subject to the oversight of the regulator and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities.
See Principle 6.
II8. The regulator should have comprehensive inspection, investigation and surveillance powers.
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 FSSA, however, recommended 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 it was advised that the SVS be given the authority as well as the capacity to obtain financial records and other relevant information from entities not directly regulated by it. According to the 2010 Pasquini study, Chile is deemed lacking in regulatory powers to access customer’s identity since the SVS does not have the authority to surpass banking secrecy regulations in order to gain access to bank information. The above assessments, however, do not fully address Chile's compliance with this principle.
II9. The regulator should have comprehensive enforcement powers.
The 2004 FSSA recommended that the SVS be granted the controversial and disputed authority to engage in negotiated settlements with entities guilty of securities law violations. Results of the 2010 Pasquini study do, however, suggest that the SVS’s enforcement powers are “adequate and in practice the rate of application is frequent” (p. 21). The above assessments, however, do not fully address Chile's compliance with this principle.
II10. The regulatory system should ensure an effective and credible use of inspection, investigation, surveillance and enforcement powers and implementation of an effective compliance program.
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. It also imposes sanctions for breaches of legal, regulatory or administrative rules. The 2010 Pasquini study reports that Chile has adequate established procedures and mechanisms for dealing with market manipulation and insider trading, “although improvement might be needed in the case of the automatic detection of unusual transactions” (p. 101). The Pasquini study, however, does not fully address Chile's compliance with this principle.
ID11. The regulator should have authority to share both public and non-public information with domestic and foreign counterparts.
According to the 2010 Pasquini study, information sharing in Chile, both at the domestic and international levels, is reported to be infrequent, despite powers to do so being adequate. As the study explains, although the SVS does not have explicit powers to share information with other domestic regulators, it does so on an informal basis, “under an assumption of ‘superior interest’; and requiring due reserve of that information (p. 27). On the other hand, the SVS’ power to share information with foreign regulators is explicitly spelled out in the law. Pasquini notes that a General Secretariat has also been created in Chile, which is “in charge of coordinating common efforts in markets development and supervision. This secretariat has been formally created by law” (p. 86, Footnotes). It is, however, observed that banking secrecy regulations could provide obstacles to information sharing on both the domestic and foreign levels. As for domestic information sharing, the 2009 IMF Article IV report mentions that the members of the Superintendents’ Committee, which includes the SVS, SBIF and Superintendency of Pensions (SP), signed an MoU in July 2009 to reinforce coordination in the oversight of financial institutions, pension funds, and securities markets and make information sharing more formal. Chile is, moreover, a signatory to Annex B of the IOSCO MMoU. The IOSCO MMoU, which was endorsed in 2002 to facilitate and reinforce international cooperation among securities regulators, 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. Being a signatory to the MMoU implies that the IOSCO screening committee considers the country's legal framework to be compliant with IOSCO Principles 11, 12, and 13, and that the country’s securities regulator has therefore the legal capacity to share supervisory information with and provide assistance to its foreign counterparts. 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.
ID12. 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.
Chile is a signatory to Annex B of the IOSCO MMoU. For the MMoU procedure, eligibility, and implications for Chile’s compliance with this principle, see Principle 11. 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.
As for domestic information sharing, per the 2009 IMF Article IV report, the members of the Superintendents’ Committee, which includes the SVS, SBIF and SP, signed an MoU in July 2009 to reinforce coordination in the oversight of financial institutions, pension funds, and securities markets. The 2010 OECD report, nonetheless, still points out that co-ordination between the separate supervisors for banking, insurance, securities, and pensions remains limited, and therefore recommends that the Chilean government work to establish group-wide financial supervision in the long run.
ID13. 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.
See Principle 12.
II14. There should be full, timely and accurate disclosure of financial results and other information that is material to investors' decisions.
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 to assess Chile's actual compliance with this principle.
CP15. Holders of securities in a company should be treated in a fair and equitable manner.
The 2003 World Bank ROSC on corporate governance in Chile observed 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 diverged, exhibiting deficiencies.
A 2005 Linneberg & Lefort report noted 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 still 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 real market for shareholder 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 enhancing corporate governance.
ID16. Accounting and auditing standards should be of a high and internationally acceptable quality.
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 has started 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 (superseded by Decree-Law No. 3.621 of 1981) to set accounting and auditing standards in Chile. However, as mentioned earlier, the SVS also plays 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, the 2004 IMF FSSA noted that external auditors were not licensed and that there was also a lack of quality control mechanisms for the auditing profession. These factors weakened the role of external auditors and the effectiveness of the reporting system. Further, the FSSA found that the independence of the auditor was 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 acknowledged efforts by Chile to introduce licensing of the auditing profession. The Inter-American Development Bank (IADB) 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. Per the IADB website, the project was finalized in August 2009. As of February 2010, an International Federation of Accountants (IFAC) report on adoption of ISAs by country classifies Chile as a jurisdiction whose “national standards are the ISAs.” However, there is no specific information on whether Chile has adopted the most recent version of ISAs issued as a result of the Clarity Project.
II17. The regulatory system should set standards for the eligibility and the regulation of those who wish to market or operate a collective investment scheme.
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, approves the internal rules of the funds, and registers 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.
II18. 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.
There is insufficient information publicly available that addresses Chile's compliance with this principle.
II19. 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 investors interest in the scheme.
There is insufficient information publicly available as to Chile's compliance with this principle.
II20. 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.
There is insufficient information publicly available that directly addresses Chile's compliance with this principle.
II21. Regulation should provide for minimum entry standards for market intermediaries.
The Intermediaries Control Division of the SVS is responsible for the authorization, supervision, and control of securities intermediaries, states the SVS website. There is, however, insufficient information publicly available as to Chile's compliance with this principle.
II22. There should be initial and ongoing capital and other prudential requirements for market intermediaries that reflect the risks that the intermediaries undertake.
There is insufficient information publicly available that addresses Chile's compliance with this principle.
II23. 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.
According to the IMF’s 2004 FSSA, the authorization of Chilean securities professionals and intermediaries is not subject to any professional or educational qualifications, or tests for entry. 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, noted 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, recommended 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. Despite the foregoing, as of July 2010, there is insufficient information publicly available that directly addresses Chile's compliance with this principle.
II24. 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.
The IMF’s 2004 FSSA found faults with the Chilean regulatory system in the area of systemic failure or failure of market intermediaries. The FSSA noted 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. At the time of the FSSA, the system required firms to maintain minimum capital positions and obtain private insurance to guard against loss/failure. Instead, the FSSA recommended an administrator to handle failures, safeguard customer assets, and complete open unsettled transactions to minimize systemic damage. The ideal alternative, per the FSSA, was 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, as of July 2010, there is insufficient information publicly available that directly addresses Chile's compliance with this principle.
II25. The establishment of trading systems including securities exchanges should be subject to regulatory authorization and oversight.
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), as found by 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), stated the FSSA. The FSSA also noted the lack of an effective clearance and settlement system for the OTC market and pointed out that it could be a potential systemic risk factor. However, as of July 2010, there have been no further publicly available updates on the implementation of these recommendations, nor is there sufficient publicly available information directly addressing Chile's compliance with this principle.
II26. 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.
See Principle 25.
II27. Regulation should promote transparency of trading.
See Principle 25.
II28. Regulation should be designed to detect and deter manipulation and other unfair trading practices.
The IMF’s 2004 FSSA reported 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). Apart from the above mentioned information, the IMF’s FSSA does not further address Chile's compliance with this principle.
II29. Regulation should aim to ensure the proper management of large exposures, default risk and market disruption.
See Principle 24. In addition, as the FSSA pointed out, the Chilean repo market (called pactos) lacked uniform business practices or regulatory practices to ensure safe and efficient. The participants were 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 were there consistent policies on transfer of collateral nor on audit trails for the repos, observed the FSSA, commenting that they made oversight difficult and created legal uncertainty in the event of a failure. Nevertheless, as of July 2010, there is insufficient information publicly available directly addressing Chile's compliance with this principle.
II30. 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.
The IMF’s 2004 FSSA noted 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 recommended that securities clearance and settlement systems be improved so as to protect investors and reduce systemic failures in the securities markets. Alongside this, the FSSA also stated that the legal foundations for clearing and settlement needed to be enhanced by legally clarifying the concepts of finality, netting and novation. Nevertheless, the FSSA does acknowledge that CMRII would partially address this recommendation. As of July 2010, however, there is insufficient publicly available information directly addressing Chile’s compliance with this principle.
