SCA opens door for licensing of margin trading

The Emirates Securities and Commodities Authority (SCA) has opened the door for licensing of companies interested in engaging in margin trading.

It has also started issuing licences to financial analysis companies and giving accreditation to financial analysts in accordance with rules outlined in the Margin Trading and Financial Analysis regulations.

The SCA Board Regulation No (25/R) of 2000 defines margin trading as: "Funding of a brokerage company in a percentage of the market value of securities authorised to be traded on margin, having as collateral these same securities or any other collateral in the cases exhaustively stated in this decision".

For a brokerage company to be licensed to practice margin trading, it must have the technical and administrative capabilities and resources to conduct margin trading and manage the accounts therefore, it must have the necessary financial solvency in order to conduct margin trading, in accordance with the criteria issued by the SCA Board in that regard. The brokerage company must not have committed any material contravention of the criteria for financial solvency or the rules concerning the separation of accounts approved by the SCA within the six months preceding the date of submitting the application for a licence.

The company must obtain the SCA's prior approval for the model account-opening format and the model margin trading agreement format that shall contain the information and particulars specifically stated below, The SCA shall be at liberty to require any amendment it saw necessary for such model format.

The information and particulars include: a statement of what is to be understood by the margin trading service, and the risks to which the client could be exposed in consequence of that, a statement of the initial margin and the maintenance margin pursuant to the percentages prescribed, a statement of the amount of the commissions, expenses and costs chargeable to the client in return for such service, a detailed exposition of the rights and obligations assumed by each of the client and the brokerage company, a detailed exposition of the powers of the brokerage company in the event of non-compliance by the client with any of his obligations, and in particular as regards the making of dispositions in relation to the securities funded on margin, including the event of the client's not subscribing shares in an increase of the capital, confirmation of the client's right to pay the balance of the price of the securities in the account at any time, an undertaking by the client to replenish the margin trading account if the percentage of client's ownership falls below the maintenance margin, after having been notified by the brokerage company.

The regulation states that the SCA shall be at liberty to add any requirements, conditions or rules, in accordance with the requirements of the public interest.

In the case of financial consultancy and financial analysis, SCA Board Regulation No (48/R) of 2008 defines financial analysis as: "The scientific systematic processing of data in connection with the position and performance of the companies in the past and at present, and future forecasts of the results of their business, the securities, commodities, commodity contracts, price trends and the trading volumes for the purpose of obtaining information used to take decision at the time of providing a financial consultation." In order to obtain a license to practice the activity of financial consultation and financial analysis, the resolution outlines the following conditions, which must be met by applicants. It says the applicant must be a juristic person established in the UAE, must have one of the forms as set forth in Federal Law No (8) of 1984 pertaining to commercial companies, and at least 51 per cent of its share capital is held by natural or juristic persons who are UAE nationals or GCC nationals, subject to the principle of reciprocal treatment. The purposes of the company must include practicing the business of financial consultation and analysis, and the memorandum of association of the company must be written in Arabic and authenticated by the relevant official authorities.

The resolution also states that the paid up share capital of the company must be, at least, Dh1,000,000. The company must have the required qualified technical and administrative personnel to practice the business of financial consultation and financial analysis. It must have an internal control and regular audit system to ensure the proper application of the law, the regulations and resolutions issued thereunder and the internal bylaws applicable by the markets. It must provide the SCA the names of those in charge of the internal control of the company and must report to the SCA any violation of the law, the regulations or resolutions issued thereunder or the internal bylaws applicable to the markets.

The licensed company must fulfill, on a continuous basis, all the licensing conditions and requirements. If any of the licensing conditions as set forth in this resolution is not met the board may cancel the license granted to the licensed company.

The resolution also states that the SCA may add any other requirements or conditions and may exempt any company of such requirements or conditions in accordance with the functioning requirements of the markets or for the sake of public interest.

Furthermore, the resolution allows foreign companies, licensed by similar regulatory authorities in their own countries, to practice the business of financial consultation and financial analysis, provided that such companies have, at least, five years of experience and that they meet the conditions set forth in the resolution.

On the accreditation of financial analysts, the resolution states that a financial analyst may not assume his work with the licensed company until after having been approved by the SCA, which shall establish a register for the accredited financial analysts where their names, addresses, numbers and date of registration would be recorded.

The SCA shall accredit a financial analyst by virtue of an application submitted to it (SCA) on a special form prepared for that purpose, attached with the supporting documents, statements and information. The SCA may request for any other documents, statements, information or clarifications and shall issue its decision on the application for approval within 30 days from the date of submitting the completed application, having met all conditions and requirements.

The financial analyst must pass the prescribed tests as per the rules set by the SCA. The general manager or the chief executive officer and any of the approved financial analyst, researchers and technicians to be appointed by the licensed company must be a natural person, having full capacity, must be of good conduct and behaviour and must never have been sentenced to a freedom-restraining penalty for any crime related to honor or honesty, unless he has been cleared of those charges by a competent court of law.

He must also never have been declared bankrupt by a final court ruling, unless otherwise cleared from those charges by a competent court of law. He must be a full timer.

The resolution says the above condition shall apply to the general manager or the chief executive officer if the company is only licensed to practice the business of financial consultation and financial analysis.

The SCA may exempt any person from sitting for any or all tests required to approve the financial analyst if such person holds exceptional qualifications or experience required to practice the business. The accredited financial analyst may move to work for another company after obtaining the prior consent of the SCA, the resolution states.

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