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05 June 2023

SCA issues regulations for issuing covered bonds

By Wam

The board of directors of Securities and Commodities Authority (SCA) has held at its Dubai headquarters a meeting, presided over by its Chairman, Sultan bin Saeed Al Mansoori, Minister of Economy, during which the board issued a regulation for covered bonds.
As part of a review of the SCA regulation for listing of bonds, the board deliberated on a comprehensive report on studies conducted on the best way to develop the UAE bond market, based on best international practices which include a report of the International Organisation of Securities Commissions (IOSCO) and other selected reports on emerging bond markets. The board gave the directives for quick completion of studies on the regulation so that it can be passed in the first half of the current year. 
In-depth study of best international practices

As part of the SCA’s sustained efforts to enhance the legislative system of the local financial markets, the board approved the Regulation for Covered Bond.
Commenting on the development, Sultan bin Saeed Al Mansoori underscored the significance of the regulation, which will allow the practicing of activities like the issuance, listing and trading of Covered Bonds on the local markets, a move which will certainly boost the local financial markets, arguably one of the pivots of the national economy.
The minister said the SCA has provided all the elements of success for the regulation to enable it achieve its targeted objectives and to play its role effectively, adding that the SCA had coordinated efforts with the concerned stakeholders in the local markets and the financial services advisory committee before issuing the regulation.
He pointed out that the process of preparing and issuing the regulation had passed through various stages according to best international practices. He said the new regulation provides a new investment tool for market investors, thus diversifying further investment tools options available to them and adding greater in-depth to the country’s financial markets.
The regulation outlines the conditions for acquiring license to practice the activities of issuing, listing and trading covered bonds, as well as disclosure requirements for that activity.
By virtue of the new 15-article regulation, nobody is allowed to issue covered bonds without obtaining first a license from the SCA to practice that activity.

 Licensing conditions
To obtain a licence from SCA to practice the activity of issuing covered bonds, the body should be a commercial or investment bank, a financial institution or branch of a foreign bank which had obtained approval of the Central Bank to practice the activity of issuing covered bonds, or must be a company or establishment that had been set up in the country according to the Commercial Companies Law, and must be licensed by the SCA to operate in the securities sector, within the SCA rules that prohibit conflict of business activities. 
For the institution to qualify to practice that activity, it must have a minimum capital of Dh100 million, an appropriate premise and all the necessary administrative and technical capacity and cadres. It must also have an efficient risk management system, safe technical system and procedures, vibrant disclosure and internal control systems capable of qualifying it to issue covered bonds and that must be according to the rules outlined by the SCA. The institution must also have financial adequacy capable of enabling it meet its obligations and must abide fully by SCA rules in this regard. It must also have detailed internal procedures for the issuance of the covered bonds, conflict of interest procedures and must have paid the license fees stipulated by the SCA.
The institution must apply to the SCA for the licence to practice the activity of issuing covered bonds, meeting all the conditions outlined in the special form for that and providing all the necessary documents. The SCA has the right to demand further explanation or documents when necessary. It also has the right to approve, delay approval or reject the application according to the current market situation and public interest. This will be done within a period of thirty days from the date of submitting the application.
The validity of the licence, according to the regulation, shall be one year ending on 31 December of every year, but the validity of the first license shall start from the date of its issuance to the end of the same year. Dues payable for the year shall be paid according to the date of issue of the license in the year, while any portion of the month shall be regarded as a full month. Renewal of license shall be made by application to the SCA before the end of November of the year. The SCA Chief Executive Officer has the right to stop the applicant from operation if the latter failed to apply on time for renewal of the license within the stipulated period.
 Issuer disclosure requirements

The issuer shall - continuously - inform the SCA and the market immediately of any material changes to the information or documents previously submitted to the SCA, or those that have been updated at a later time.  The Issuer shall disclose to the SCA and the market immediately any material developments or any decisions that may affect the price of the Covered Bonds, or may affect its ability to meet its obligations, or any amendments to the process of calculating the price of bonds.

The issuer shall publish any explanatory information concerning its positions and activities so as to ensure sound transactions and assure investors when requested to do so.  The issuer shall notify the SCA when it applies for the listing of Covered Bonds on the market or upon its application to cancel the listing at the end of the time period set out therefor; and shall also notify SCA of the fact that the market has suspended the trading of those bonds or the assets underlying the bonds.

Approval to issue Covered Bonds

The SCA shall issue its approval to issue Covered Bonds once the Issuer has satisfied the financial solvency criteria to cover the value of the issue to be approved, in addition to submitting a statement confirming that the issue is guaranteed by an entity, bank or other financial institution that meets the requirements of solvency and the deposit of assets underlying the bonds, as the case may be, which the Issuer intends to issue the Covered Bonds backed by them with the clearing house of the market or with an independent custodian licensed by the SCA.  Such assets underlying the bonds may not be sold, mortgaged or transferred or make any disposal thereof throughout the period of validity of the bonds or until their maturity date.

Issuance and listing of Covered Bonds

To approve the issuance and listing of Covered Bonds, an application to approve the issuance and listing of the Covered Bonds must be submitted to the SCA on the form prepared for this purpose together with the documents supporting the application for each issue made by the issuer, in particular :

1.  The prospectus, which should contain all the conditions and necessary information, including the price, type (buy/sell ), execution price, conversion rate of the note, and the method of settlement (cash /in-kind ), the method of calculating the settlement price, the price of the index point if the bonds are issued on index, the set date for the expiration of the note, and the minimum allocation, if any.

The approval is also subject to the requirement to specify the number of Covered Bonds which the Issuer wishes to issue, provided that it should not be less than one million bonds corresponding to at least one million units of the assets subject of the contract.

It is also required that the issuer should be responsible for the pricing of all Covered Bonds, and provide the market maker functions or must appoint another market maker in accordance with the applicable regulations in this regard .

The shares based on which the Covered Bonds will be issued should be tradable in the market, convertible without restrictions and has sufficient liquidity in accordance with the controls set by the markets.

It is also required that the number of issues of Covered Bonds to be issued in addition to the bonds that have been issued before and still outstanding may not be in excess of 50 per cent of the total number of issued shares of the company, if the bonds are issued on the shares.

It also required that there should be a disclosure mechanism - to the SCA and the market – about the acquisition of the Covered Bonds in cases where disclosure of the ownership of shares based on which those bonds were issued.

Payment of the fees prescribed by the SCA

The SCA shall issue its decision to approve the issuance and listing of the Covered Bonds according to market conditions and the public interest requirements within thirty days from the date of submission of an application satisfying all conditions and requirements contained in the provisions of this Regulation.

 Listing and trading of the Covered Bonds

The application for the listing of Covered Bonds on the market shall be submitted enclosing the required documents and information in accordance with the internal procedures applicable in the market.  The maximum limit (up or down) for the price movement per day stipulated in the Regulations as to Trading, Clearing, Settlement, Transfer of Ownership and Custody of Securities or applicable in the market shall not apply to the trading of Covered Bonds.

Without prejudice to the provisions of this Regulation, the Regulations as to Trading, Clearing, Settlement, Transfer of Ownership and Custody of Securities shall apply to the trading of Covered Bonds.

The authority may suspend the listing of Covered Bonds in the event the listing of underlying assets of the bonds is suspended.

Settlement of Covered Bonds

Covered Bonds shall be settled once the owner of the note uses the option granted to him.  Settlement can be in kind or in cash according to the method of settlement specific in the Prospectus.

The in kind settlement shall be made by handing over the underlying assets of the bonds - as the case may be – to the owner of the note as per the agreed conversion rate and execution price through the settlement systems in place in the market.

The cash settlement shall be made by paying the difference between the execution price and the settlement price to the owner of the note.

The settlement shall be always in cash if the Covered Bonds are issued on an index, and if the Covered Bonds are issued on underlying assets issued outside the State or in a financial free zone within the State, and if the in-kind settlement will influence the proportions of ownership of citizens as stipulated in the Commercial Companies Law or in the Articles of Association of the company.

The note owner may not recover the value of the note in any case.

Regulations and Procedures of the Market

Subject to SCA approval, the market shall develop a number of regulations and procedures as follows:  the internal procedures and controls necessary for the application of this Regulation; the technical controls for the market maker of Covered Bonds; the listing fees and trading commissions for Covered Bonds, and the proportion for the SCA and the market therefrom.

 Violations and Sanctions

In the case of violating the provisions of laws, applicable regulations, this Regulation or the prospectus, the SCA may impose a sanction as follows: a warning and a fine not to exceed the maximum limit stipulated in the Law and the regulations issued pursuant thereto; deprive the Issuer of approval for any new issues and revoke the license of the Issuer.

The decision to cancel the license of the Issuer shall be published in two daily newspapers issued in the State, at least one in Arabic language, at the Issuer’s expense.

In case of cancellation of the Issuer’s license, the current legal positions shall be dealt with until fully settled in accordance with the controls set by the SCA.