EFG-Hermes Offers ISX Shortcut

At the end of last month the Egyptian investment bank EFG-Hermes announced that it would begin offering equity swaps on ISX-listed shares to institutional investors. (See this story.) This new product has the potential to bring about a dramatic increase in foreign participation in the Iraqi stock market.

An equity swap allows an investor to earn the return on the underlying name without actually owning any shares. The issuer of the swap mimics the performance of the stock by doing trades in its own account that parallel clients' buy and sell orders while simultaneously debiting or crediting their cash accounts by the corresponding settlement amounts.

Swaps have three main advantages. First, they replace local counterparty risk with that of the issuer. Second, they eliminate the need for a custodian bank. Third, they can greatly simplify the investor’s back office and audit work.

In a market like Iraq, these are all important considerations. Many foreign institutions will be unwilling to accept the risk of dealing directly with Iraqi brokers. So far no one is offering custody services for ISX-listed shares, which means that many funds cannot invest at all. (See this post for more on custodian banks.) And even when the Iraq Securities Commission finally gets around to issuing custodian banking licenses many investors are still going to find dealing with EFG-Hermes to be a lot less trouble administratively.

In fact, even in markets like the UAE, Qatar, and Kuwait—all of which have custodian banks—many foreign investors continue to prefer swaps solely for the sake of ease of settlement and execution.

The lack of a custodian for ISX-listed shares is suddenly starting to look like a red herring. Institutions no longer need to wait for this problem to be sorted out. Now they can start trading in the time it takes their own legal and compliance departments to review the EFG-Hermes swap agreement. (This is a non-ISDA document so this process may take a bit longer than it otherwise would.) Some may be ready to take the new shortcut to Iraq as early as the end of this month.

13 Responses to EFG-Hermes Offers ISX Shortcut

  1. Andy 14th March 2012 at 20:50 #


    I have a question for you. In past redenominations or LOPs, were US banks still able to do a currency exchange? For instance when Turkey or Russia did theirs?

    If your not sure do you know who I could ask?

    Thank you

  2. Stew 14th March 2012 at 22:44 #

    Not to step on Mark's question... I'd still love to hear his response. But I'm pretty sure almost all redenominations are "in country" only.
    The CBI just made a comment on theis the other day.

    "...... and pointed out that government banks are the only outlet for the process of replacing the currency that will continue over two years."

  3. DeWeaver 15th March 2012 at 01:28 #

    Hi Andy: Sorry, I have no idea. But I bet Stew is right.

  4. EMMETT 15th March 2012 at 07:47 #

    I probblem is no one is offer much for the retial investor to enter the market...

  5. Andy 16th March 2012 at 14:56 #


    What are your thoughts on Warka? Or what is a bank that you feel is accessible from the states in Iraq?

    Yes Stew, I have a few dinar....nothing I can't lose, but this ride has been a lot of fun.

    Thank you both.

  6. DeWeaver 16th March 2012 at 15:09 #

    Andy: My guess is that it will be a long and difficult process even for Warka's local depositors to get their money back. Dar Es Salam Bank is probably the easiest to deal with from the States. Wiring money to them via HSBC is pretty straightforward since HSBC is their majority shareholder.

  7. Andy 22nd March 2012 at 22:16 #


    I called HSBC Intl and they said they won't wire funds due to the sanctions with Iraq. Have you personally completed a wire or any other suggestions?

    Thank you

  8. DeWeaver 23rd March 2012 at 04:22 #

    Hi Andy: Yes I have, though not recently. Do you mean sanctions on Iran?

  9. emmett 29th March 2012 at 09:38 #

    With the latest news from the Iraqi Government it looks like they are bailing out Al Warka...The language explains Warka is just to big to fail and how the CBI went about making Warka raise funds wasnt right...After I learned Warka was on military installation I FELT LIKE WARKA COULDN'T FAIL...I WAS RIGHT....WARKA WILL BE OK...

  10. Julian 29th March 2012 at 22:10 #

    Hello Mark, The Arab Summit is not drawing much US media attention; maybe that's good. It seems to be a big positive for the Iraq Economy. What's your take, and what impact is likely for the ISX?

  11. DeWeaver 29th March 2012 at 22:19 #

    Hi Julian: It seems like this kind of event usually makes markets go up before it happens. So I'm thinking it's already to late for there to be any impact on the ISX at this point.

  12. Stew 30th March 2012 at 01:34 #

    Mark… I’ve seen a number of articles out of Iraq where officials and economist are claiming that the impending currency redenomination will be a bad thing for the ISX.
    I didn’t read further to try to understand their reasoning. Can you shed some light on why they might hold that opinion?
    I can imagine that there are a number of uninformed investors who are in the ISX only because of this crazy dinar phenomenon… and once the dinar is redenominated and they realize this huge windfall will not happen, they might withdraw their money from Iraq, including their holdings in the ISX. I can see that being a problem, but I have no idea what % of foreign investors in the ISX are there for that reason. I still think that has to be a huge concern for Warka bank also. Once the redenomination happens, I would think most all foreign cash account holders will want to bail.

  13. DeWeaver 3rd April 2012 at 14:57 #

    Hi Stew:

    What I heard was that three zeros will be eliminated from the share capital of the ISX listed companies as well as from the number of shares each has outstanding. (This will keep the par value at one dinar.)

    This is supposed to be a relatively straightforward change for the depository center to make. Trading should not have to be suspended for more than a few days and it may be possible to proceed in phases of a few names at a time so that the entire market does not have to shut down during the transition period.

    I don't know why any of this would matter at all.

    Of course it might matter if there is a large withdrawal of funds related to disappointed dinar revaluation expectations. But I think people who invested in the ISX on the basis of the dinar story might be just as likely to stay in. They should have no trouble convincing themselves that the market will go up even if the currency doesn't appreciate by 100,000%. Shifting their attention to the stock market will allow them to believe that they were right all along.