Regulations for a custodian bank in Iraq will be ready within the next three months, a move that it is hoped will protect investors from fraud and help attract foreign capital, according to the Iraq Securities Commission (ISC).

Once the regulations are in place, a custody licence can be issued.

“We have the ability to work with international custodies, but since we do not have the regulations, we cannot proceed,” says Taha Abdul Salam, chief executive officer of the Iraq Stock Exchange (ISX).

Custodian banks usually protect their clients and their funds from fraudulent trading activities. As transparency and corruption are still cited as problems in Iraq, the existence of custody would satisfy many foreign investors.

“HSBC is the most serious and so most likely to get the licence,” says Abdul Razzak al-Saadi, chairman of the ISC.

Foreign investment in the ISX will increase once a custodian bank is chosen.

“We are very positive about the ISX, but until custody is in place, foreign involvement in the exchange will be limited,” said Michael Bevan, managing director of equity capital markets at HSBC Middle East at the Rabee Securities capital markets conference in Irbil, Iraq. HSBC refused to comment on the appointment of a specific custody bank in Iraq.

Foreign investment on the ISX amounted to 14 per cent of total investment in 2010, up from just 6 per cent in 2009.