LONDON, July 6 (IFR) - The first derivatives central counterparty clearinghouse in Lebanon is under development, paving the way for exchange-traded futures and options and over-the-counter swap products that could play a vital role in the country's wider capital markets development.
Midclear, which offers custody and clearing for financial instruments in Lebanon and the Middle East, has partnered with exchange technology provider, GMEX Group.
The London-based technology provider, which last year worked with the Hanoi Stock Exchange to build a new derivatives exchange and clearinghouse, will provide its AvenirClear CCP technology for the latest venture. The technology will provide Midclear with real-time risk management and a clearing and settlement platform that is fully compliant with CPMI-IOSCO principles for market infrastructures.
"The derivatives CCP will be a key piece in the future landscape of Lebanese capital markets and it will need to meet all international standards,” said Fouad El Khoury, CEO of Midclear.
According to Hirander Misra, chairman & CEO of GMEX Group, the new CCP will play a central role in building a domestic derivatives market. Lebanese investors currently trade futures and options very actively in foreign markets, but without membership of international clearinghouses they rely on third-party correspondent clearing banks to gain access.
"If attractive products can be launched with central clearing offered locally, it will encourage those banks to trade those products locally and should also encourage international banks to come in to the domestic market, given the reduction in counterparty risk," said Misra.
The clearinghouse is expected to cover a range of derivatives asset classes including FX futures, equity index futures and options, and commodity futures, including precious metals. Without an established on-exchange derivatives market and no clear roadmap of products, however, the central bank required a flexible approach to development.
"The key benefit was that we set this up with a robust risk model that's asset-class agnostic so the central bank can quite readily pick and chose what products can be included in the project without delays or deviation," said Misra.
The project represents an important milestone in Lebanon's strategic capital markets plan, which saw the creation of the country's Capital Market Authority in 2011, led by the Central Bank of Lebanon. Other efforts to build the country's capital markets include the development of more liquid corporate and government debt markets. With US$11bn of gold reserves, the country is also considering initiatives to digitalise gold investment.
Alongside its capital markets plan, the central bank is also positioning the country as a fintech hub for Africa and Asia. A fintech ecosystem has already begun to emerge after local banks were encouraged to allocate up to 3% of available funds to start-ups, with the central bank offering guarantees on those equity investments.
With a nine-month build time, the new CCP is expected to be up and running in 2018. “Our ability to deliver robust solutions within tight timeframes is key for market infrastructure decision makers," said Misra. (Reporting by Helen Bartholomew)