Draft resolution on capital adequacy laws approved for brokerage firms
The board of the Emirates Securities and Commodities Authority (SCA) has approved for the first time a draft resolution on capital adequacy regulations for securities and commodities brokerage firms, which will lead to the protection of funds of investors and clients.
The resolution meets complaints that SCA received from investors and clients who incurred huge losses after they were cheated by some brokerage firms, especially as risks faced by these companies were not in line with the size of capital or rights of shareholders, a fact which exposed them to bankruptcy.
The resolution, which is issued by SCA's board chaired by Economy Minister Sultan bin Saeed Al Mansouri, adopted liquidity and risk regulations as the yardstick for assessing capital adequacy for brokerage companies. With regards to liquidity regulations, the net capital of the liquidity is to be calculated in percentage of the company's commitment in such a way that it will always match with the size of the company's activities and its ability to determine and control them according to its wish and its ability to increase the size of its activities.
As for the risk regulations, the capital is to be earmarked to enable the company face adequately all credit, market and operational risks, whether provision had been made for them or not in the company's budget allocation. They are to be calculated regularly and accurately to reflect the true picture of the company's financial status, its capital adequacy and its ability to meet its obligations towards its clients to win the trust of investors.
Ziyad Al Dabbas, a financial consultant at National Bank of Abu Dhabi, told Emirates Business: "UAE's financial markets expose to high risks currently, especially as the financial brokerage companies give overdraft facilities to some clients, which will increase the risks for both the brokerage firm and client. Therefore, as the new resolution stipulated, the risks should be in line with the size of capital or rights of shareholders so that the brokerage firm does not expose to bankruptcy.
"We live currently in difficult conditions. SCA should ensure that the each brokerage firm has capital adequacy, because the disclosure of any company in the meantime will affect the credibility of financial market. SCA has definitely detailed information that confirmed the presence of gaps in the work of brokerage firms. So, I think the decision is very positive and is in the interests of markets and protects national economy."
However, Ridha Muslim, Director-General of Abu Dhabi-based Truth Economic Consultants, said: "Despite of the importance of the resolution in the protection of investors and markets, it will not solve difficult problems the brokerage firms face.
"SCA previously issued a resolution setting the capital of financial brokerage firm at Dh30 million and it intervenes now in the work of companies and set certain financial percentages for the practice of their activities. Our company drew up many studies on the current difficult conditions of brokerage companies. I think the new decision forms interference in the work of companies and will not solve the big problems."
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