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	Table of Contents
p. 18 of 58 BACK | NEXT Purpose and Structure of the Toolkit Part One: Introduction and Overview Part Two: Preconditions and Infrastructure for Financial Sector Development I. Preconditions for Financial Sector Development II. Institutional and Market Infrastructure A. Insolvency B. Corporate Governance C. Financial Information D. Payment and Settlement E. Market Functioning Part Three: Financial Regulation and Supervision Part Four: Regional Financial Integration Part Five: ADB's Intervention in the Financial Sector Bibliography Glossary and List of Abbreviations Acknowledgements

Financial Sector Legal and Regulatory Toolkit : Part Two: Preconditions and Infrastructure for Financial Sector Development

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II. Institutional and Market Infrastructure

This section highlights the elements of institutional and market infrastructure which are essential to support financial market functioning. It therefore considers the supporting institutional and market infrastructure necessary for developed and sophisticated financial markets to operate, namely: insolvency regimes, corporate governance, accounting and auditing systems, and payment and settlement systems. These are supported by appropriate measures to protect market integrity and thus inspire confidence in the financial system. It is only when both the foundations and the supporting infrastructure are in place that financial market regulation and supervision, in conjunction with financial liberalization can function properly to support developed and sophisticated financial markets.

The following list comprises some of the important core areas to create the necessary environment for the development of viable financial markets. It should also be combined with an appropriate "second level" of financial regulation and supervision discussed in Part Three.

First, adequate company law and securities regulation incorporating principles of good corporate governance are essential for corporatization, privatization, and the development of a decentralized financial system. Prospective investors need to be assured that the legislative and contractual frameworks within which corporate entities operate provide adequate protection of their legitimate interests and expectations. The importance of effective corporate governance has been underlined by Organisation for Economic Co-operation and Development (OECD), and recent international financial crises, as well as ever-increasing demands from markets, especially institutional investors and rating agencies.

Second, effective insolvency provisions, including for financial intermediaries (addressed in Part Three), should enable redirection of capital and closure of inefficient enterprises, hence improving governance and performance. Experiences in East Asia have underlined the significance of functioning insolvency procedures, not only for economic renewal, but also for adequate protection of investor rights in case of a business failure.

Third, financial markets require information. Accounting and auditing standards are central to the provision of information to markets. Accounting and auditing are also supported by other information infrastructure, including credit information systems, credit rating agencies, and a free financial press. In this area, as a result of the global financial crisis, much attention at the international level is now focused on rating agencies.

Fourth, in order for a financial system to perform its key function of resource allocation, stable, secure systems for payments, and settlement of transactions must be put in place. As a result of the global financial crisis, international attention in this area is particularly focused on settlement arrangements for OTC derivatives, especially central counterparty arrangements for CDS.

Fifth, financial markets are based on confidence. A key aspect of confidence relates to preventing to the greatest extent possible use of the financial system by criminal elements. Recent focus has been on money laundering and terrorist financing. There is also now greater attention on off-shore financial centres, especially on improving their transparency.

Sixth, in addition to the above elements, governments often play a key role in establishing the underlying baseline from which market prices are extrapolated, through government securities and the creation of a yield curve.

These elements-all to some extent addressed by international standards-build upon the underpinnings discussed in Section I and are necessary for the financial market regulatory systems discussed in Part Three to function properly in a market economy.

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