Exchange and settlement systems for securities transactions

The Beirut Stock Exchange – BSE

Equity trading in Lebanon takes place mainly on the Beirut Stock Exchange (BSE). The main securities traded are issued by the Lebanese Real Estate Company, Solidere (whose main purpose is the reconstruction of Beirut city centre) banks, financial institutions and other private companies.

Law No. 308 dated 3rd April 2001 sets the terms and conditions for the negotiation of Lebanese banks’ shares as well as the issuing of bonds. It stipulates that Lebanese banks’ shares are issued under one category abiding by the same rules and the listing of these shares is subject to prior authorization from BDL. These shares are to be in the nominal form and placed in the custody of Midclear where they are dematerialised and only kept as accounting records.

 Trading on the BSE is limited to brokerage firms licensed by the BDL and the BSE. Before placing an order on the BSE, it is necessary to open a securities account with a brokerage house. The market operates strictly on a cash basis. The trading session occurs between 10:00 AM and 12:00 PM. The brokers deliver the tickets of orders that have been partially or totally executed to the stock exchange and the BSE prints out detailed reports about the trading operations that had been executed during the day.

 Trading is continuous during operating hours and is computerized. It was previously based on a price-fixing procedure that took place once a day for all the stocks except for those of Solidere, which were priced twice daily. As an interim measure, the BSE Commission adopted a mixed “Continuous Trading and Price-Fixing-System” on October 17, 2000. Under this system, the BSE began each day with a price fixing, followed by two hours of continuous trading. As a further step, the BSE Commission moved to full adoption of a “Continuous Pricing System” on 23 June, 2001, under which the daily closing price is calculated as the weighted average of the prices of the last 5 trades of that trading day. The new system would enable investors to place orders at any time during working hours, whereby the session starts with a pre-opening phase that leads to an opening auction, followed by a continuous trading session. In June 1999, the BSE Commission signed an agreement with “Paris Bourse S.A.“ whereby the latter would provide a new computer software (NSC-UNIX system) that will allow for continuous electronic trading. The installation of NSC-UNIX system is still in progress.

Other, Over-the-Counter trades OTC)

Brokerage houses may undertake Bloc Trades (direct transactions) with each other outside the BSE with minimum quantities determined by the BSE for each instrument but all these trades must be reported to the exchange and printed out together with details of payment and delivery conditions for every brokerage house. The BSE notifies the brokerage house once the order is executed, and the brokerage in turn relays this information to its customer. Global Depository Receipts (GDRs) from Lebanese issuers are also traded on the Lebanese OTC market, as well as on the Luxembourg Stock Exchange. There are four issuers- Solidere and three banks, Banque Libanaise pour le Commerce, Banque du Liban et d’Outre-Mer (BLOM), and Banque Audi. The BLOM GDR is also traded on the BSE. Total GDR issues as of 31 December 2001 amounted to USD 170 mn.

Midclear

The   clearing and settlement of financial instruments in Lebanon is carried out through   Midclear- the Custodian and Clearing Centre of Financial Instruments for Lebanon and the Middle East- which is also the central depositary for Lebanon by virtue of Law No. 139 dated October 1999. Midclear also became the central registrar for banks’s shares in April 2001, when these were dematerialised by virtue of Law No. 308 dated April 2001.

Trades received from the BSE are settled three working days after the trade date, i.e. T+3. DVP instructions received directly from members on securities traded over-the-counter are settled on the requested settlement date. All instructions transmitted to Midclear from the BSE for settlement purposes are considered irrevocable. All over-the-counter instructions are considered irrevocable unless cancelled by both parties (Deliverer and Receiver). Midclear operates according to the recommendations of the Group of Thirty (published in 1989, see Annex 3) except for Recommendation 2 (Trade Comparison) and Recommendation 8 (Securities Lending and Borrowing).

The settlement procedure of Midclear is based on the simultaneous net settlement of securities and funds transfers. As described by The Committee on Payment and Settlement Systems of the Bank for International Settlements, Midclear follows settlement Model 3: Transfer instructions for both securities and funds are settled on a net basis, with final transfer of both securities and funds occurring at the end of the processing cycle. Settlement occurs once a day and no trades are partially settled. The securities settlement system maintains book-entry securities accounts for participants. Funds accounts are maintained by the central bank. During settlement, running balances of debits and credits to funds and securities accounts are calculated. All funds and securities transfers are provisional until the end of the processing cycle, at which time book-entry transfer of securities take place. If and only if all participants have sufficient balances of funds and securities, final transfers of the net securities balances and net funds balances are executed.

 All Midclear members are requested to verify their holdings of securities and cash before the start of the settlement process. In the event of a deficiency in cash or securities, Midclear selectively removes the failing member’s individual transaction(s) until the resulting net debit can be covered by the balance on the member’s account (security or cash as the case may be) and the BSE is informed of the failure. The resulting impact on the counterparties to the failing member is managed by informing the BSE, who will take the appropriate action by forcing the failing member to either Buy-in (securities deficiency) or sell-out (cash deficiency). In the meantime the failed trade will be retried up to a maximum of nine days for securities deficiency and one day for cash deficiency.  If at the end of the retrial period the failed transactions remain unsettled, The BSE will take necessary measures in accordance with established procedures, including the use of the bank guaranty of the failing member.

 All cash settlements are carried out in the books of the BDL, which acts as clearing bank. Each member entitled to open an account at the BDL is requested to open, for each currency used, a separate sub-account designated for the settlement of cash transfers related to securities transactions only. The balances of these accounts are transmitted daily by the BDL to Midclear and the system will verify whether balances are sufficient to settle the trades after the netting of cash movements has taken place. Netting means that one net amount is booked to the cash account of the broker, representing the net result of its trades carried out on a single day. Midclear then transmits the net cash positions to the BDL, which makes the necessary final entries in the cash settlement accounts. When a member does not wish or is not in a position to open an account at the BDL, it can designate another member to settle transactions on its behalf.

Midclear has an account at the BDL to clear trades of affiliates not eligible to have their own accounts. In this connection Midclear’s tasks include: 

	Supervising trade settlements in line with instructions;
	Providing same-day information on securities received and/or delivered;
	Providing same-day information on refused receipts and deliveries;
	Providing information about open positions on a regular basis;
	Supervising interest/dividend payments as well as the transfer of rights related to trade settlements.

Journal entries at Midclear for the deposit, withdrawal and transfer of stocks are for same-day value. Trades executed for value are recorded three working days after the trade date. Transfers of securities not requiring cash entries can be requested for dates up to 30 days in advance.