Esca gets inside market problem

The new regulations from the Emirates’ Securities and Commodity Authority (Esca) are to be welcomed. It is the first time Esca has tackled the tricky issue of “insider trading” – without naming it as such – and the proposals will go some way to tackling the problem, which bedevils stock markets around the world. But I feel they should have gone further to stop this abuse, one of the big factors affecting confidence in the UAE markets.

Esca’s aim is laudable – to improve transparency and levels of disclosure in the markets it regulates, principally the Dubai Financial Market and the Abu Dhabi Securities Market, and to clarify the functions of corporate executives and brokers in the investment process.

One contentious point, on which Esca should be congratulated for sticking to its principles, is its determination to push through a clear separation between brokers and investors cash accounts. Such a proposal is so standard in the rest of the world that the requirements of international best practice mean it should be implemented here soon.

The new restrictions on who can trade, and at what stage in the corporate cycle, are also welcome. Chairmen and directors, and other senior employees with access to confidential information, are to be banned from trading within a 10-day period of the announcement of news regarded as price sensitive. Esca says the restriction applies to dealings either “personally or through others”, but I would have liked to see Esca being a bit more specific here.

Most insider dealing information comes from the vast army of advisers, assistants and counterparties that accompany any corporate transaction. In London, for example, a major insider dealing scandal was broken up when the printing firm responsible for producing listing documents was found by police to be leaking that information to City brokers ahead of publication.

I wonder too whether Esca should have given some thought to making it a crime to transmit price-sensitive information to any unauthorised personnel. Under the new proposals, the offence is to trade on such information, not to transmit it. If it were made illegal to disclose information about impending deals it might be easier to implement.

In London, where tough legislation against insider dealing has been in force for more than 20 years, it has proved very difficult to actually prosecute offences, even in the most blatant of circumstances. The law requires the authorities to prove intent and awareness of insider information simultaneously with a transaction, and that has not been easy. Only a handful of cases resulted in convictions. We will see how many are convicted in the current probe into the affairs of HBOS.

On another thorny issue – margin trading – Esca seems to be holding back from making a final decision. The UAE stock markets were spooked earlier this week on reports that the minimum margin for market trades might be raised from 10 to 50 per cent – meaning traders would have to put up at least half of the cash for a transaction, rather than borrowing up to 90 per cent, as at present.

I am undecided on margin trading. The West love it, but such low levels of margin were an undoubted factor in the recent financial crisis. Low margins are an incentive to trade and therefore good for liquidity, which the UAE badly needs. On the other hand, they also increase the risk of what the Americans call “moral hazard" – ie, serious financial problems that risk pushing the whole system to collapse.

Esca has to reconcile the interests of big international investors, who probably have enough asset backing to make responsible use of such low margins, with its clear responsibility for the financial well-being of small investors. Increasing the levels of margin for small investors, even as far as 50 per cent, might also reduce the volatility of the UAE equity markets.