SCA in final stages of regulating margin trading

Dubai Financial Market has applied for Emirates Securities and Commodities Authority (SCA) approval for two initiatives intended to improve its performance, revealed its Executive Chairman Essa Abdulfattah Kazim.

A trading in rights scheme will allow investors who are eligible for bonus shares to trade in these shares during the period between their allocation and inclusion in the market.

The second initiative is the implementation of a delivery versus payment (DVP) settlement system that will replace the current transaction plus two (TP2) system, which carries a greater risk as the payment of the transaction proceeds can be delayed for two days.

In this exclusive interview with Emirates Business, Kazim highlights the importance of continuously developing market practices to keep up with international standards.


What are the benefits of DFM's two new initiatives?

We are talking to SCA about allowing trading in rights because sometimes companies issue shares, as bonuses or to increase their capital, to their current shareholders at prices lower than the market prices. Allowing the rights issues listing to be traded will give a new tool to diversify investment options for investors. Right issues trading will give shareholders the opportunity to preserve their rights, especially those who are not subscribing to the capital increase. Moreover, it will secure liquidity for investors without the need to sell their shares, as they will be entitled to sell their rights to other investors. Shareholders who don't have enough liquidity can partially sell their rights and use the proceeds to subscribe to new shares. In addition, as part of our development and to increase the efficiency of the market and bring DFM in line with international recommendations, we are discussing with SCA plans to introduce a DVP system. That would require some amendments from SCA and to our system. We hope to get SCA approval by the end of this year and will then start operating the DVP system soon afterwards.

There are unregulated practices on DFM such as margin trading and short selling that need to be controlled by new regulations. What is your views on this?

SCA is in the final stages of regulating margin trading on the UAE's stock markets. It is making sure that the participants, such as brokers, are well positioned to implement that practice in terms of regulations and systems. Short selling is not regulated at present and the DFM system does not allow short selling because any investor should own shares to be able to sell. Also lending and borrowing shares is not allowed on the market. If some institutional investors are practising this for their clients, we cannot control this.

DFM launched its Guide to Going Public last week. What is its purpose?

We talked to all participants in the capital markets including audit firms, investment banks and legal firms because they are the organisations in direct contact with potential listed companies in the region. We issued the guide to support local businesses through a step-by-step system for private and family businesses planning to go public. The new guide highlights the benefits of taking private companies to the public arena, demonstrated by case studies.

DFM has issued the guide at a time when the IPO market is on hold. When do you expect the market to revive?

Going for an initial public offering is a strategic decision. We had discussions with large businesses regarding listing during the third quarter of last year. As it is a strategic decision it can be impacted by market sentiment in the short term. We think when the market situation is favourable they will come back to tap potential financing, probably by the end of the year. Also, there are different reasons to go for a public listing from one tranche of companies to another. Family businesses might not be very keen to go public to meet their financial requirements because the wealth they created over decades is sufficient for them to continue in business. But they may go for a public listing for other reasons such as changing the structure of their companies as they are keen to implement better corporate governance, run by boards rather than individuals. Other businesses that are owned by UAE nationals and foreigners on a 51-49 per cent basis are keen to have a wider range of investors and to call on more capital for growth and expansion in the region. We have good examples in the market such as Arabtec and Aramex. Through listing they can go to the market at any time to raise capital or issue bonds. This is very important because no company outside the market could issue bonds except Emirates airline, which is a unique case.

What is the impact of the current tightness in liquidity, especially from foreign institutions, on the IPO market?

IPOs in the UAE in the past have tapped the liquidity of international institutional investors. Companies will be reluctant to go for IPOs at the current stage because they are not targeting local liquidity only, they are aiming to bring in foreign liquidity as well. What is a good sign for Dubai is that we have very successful entities developed over many years that have become very mature. We have a mismatch between the market and the economy. For example logistics and tourism are among the fastest-growing sectors and we do not have a single logistics company listed on DFM. We even have a brand, Jumeirah, which was generated in Dubai and is not represented on the market. In manufacturing we have very big names in some industries that are not listed. The shipping industry is very big and we have only one listed company, Gulf Navigation. The transportation sector is very promising as we have Emirates, flydubai and the Roads and Transport Authority with buses, taxis and Metro services. This situation offers attractive opportunities for expansion of the listing process. The potential is huge once companies decide to tap the capital market for financing instead of the banking sector.

There are accusations that hot money and foreign institutions played a role in the sharp decline of DFM general index.

If we open our economy to overseas investors in return for that we have to accept that this money sometimes might exit. If we allow money to come we have to allow money to go out in the same way. We have to accept the two-way flow of money. We have different types of investors with different attitudes. If we impose any restrictions on buying and selling, investors will not come to the market. If we see that foreign investors are selling at very low prices and this has a negative impact on our market, I think local investors should take advantage and buy at these prices. Foreign institutions also had to sell due to deleveraging and redemptions during the crisis and the situation during the past nine months was unique.

When can we expect to see a market maker on DFM?

In my opinion there is no need for a market maker. Market making is usually associated with the old way of trading on markets, which needs specialists in certain companies to provide liquidity. Our market has a fully electronic trading system where supply and demand is coming through orders, which are in hundreds and sometimes in thousands. So there is no role for a market maker. The market maker can also operate when there is a sufficient spread between buy and sell orders so he can make money out of this spread. The spread on DFM is only one fils for most transactions and this will not enable market makers to operate. The other issue is that most active stocks are very liquid and there is no role for a market maker. But market makers can be a good idea for certain stocks that are not very liquid.

Do you think DFM has bottomed out and is heading for recovery after the strong rally of the past two months?

His Highness Sheikh Mohammed bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, emphasised that the worst has passed, and we see increasing evidence that the markets have bottomed out. Recent reports by global rating agencies and major banks show that DFM is the best market in the region in terms of evaluation. However, the pace of recovery will vary from one region to another and I think the Gulf Co-operation Council will be able to recover faster than other parts of the world. Equity markets tend to react on indicators of the future trend of the real economy six to nine months ahead and the current reaction in the market reflects the outlook for the UAE and Dubai economies. From the activity we have seen in May and early this month there are signs that DFM is reviving. The volume has picked up sharply in June. There is a consensus that the global economy has bottomed out, but uncertainty remains regarding the pace of recovery, whether it will be a V or U shape recovery.

Uncertainty remains about the global recovery. How do you assess the situation in the GCC?

The most important sign of recovery is the oil price, which has jumped above $70 per barrel. This is very important for the fast recovery of the region because everybody indicated that trading between $70 and $90 is crucial for the regional economy to create more liquidity. The really important issue is that oil prices should be based according to the demand, not the supply. If oil-producing countries continue to produce at the current rate reserves will last for 40 to 50 years and we will see oil trading well above the current prices. I think the GCC is much better positioned for a recovery. It is a global crisis and the region was becoming more open to the international economic system. From time to time we see signs of decoupling between the region and the global economy. I think we will grow based on our internal strength due to liquidity generated from oil revenues. Dubai, specifically, is becoming a hub for almost all major service activities such as networking, trading, logistics and financial services. So we will capitalise on our own domestic activities. No one was immune to the crisis but the recovery may lead to a decoupling in the region in the near future because we expect the GCC to recover faster than the rest of the world.


PROFILE: Essa Abdulfattah Kazim Executive Chairman, DFM

Kazim was DFM's Director-General from its inception in early 2000 until its incorporation in 2007.

He is the Chairman of Borse Dubai, the holding company of both Dubai exchanges – DFM and Nasdaq Dubai. He is the Chairman of Dubai Statistics Centre and Co-ordinator-General of Dubai Quality Award. He is also a board member of many other organisations in Dubai.

Kazim holds a Masters degree in economics from the University of Iowa, US.

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