Stock markets in the United Arab Emirates should unify their back office operations and processes for settlement and regulation, the chief executive of the Abu Dhabi Securities Exchange (ADX) said on Sunday.
Last year Abu Dhabi and Dubai hired banks to advise on a possible state-backed merger of the ADX with the Dubai Financial Market (DFM), which would be one of the biggest reforms in the UAE's financial industry in recent years.
Rashed al-Baloushi, addressing a news conference at a financial event in the UAE capital, declined to comment on progress in the talks or say whether a merger was likely.
But the ADX head said if a merger did not happen, consolidating the exchanges' back offices would be a good alternative. Other bourses in the Gulf Cooperation Council could unify their back offices with the UAE's combined system later, he added.
Fund managers and analysts have said consolidating back office operations of the ADX and the DFM could cut costs and, by creating a single framework for settling trades, make it easier for more foreign investors to enter the UAE.
Baloushi said the ADX was initiating the idea of combining back offices and was recommending it to all stake holders, including investors, listed companies and brokerages. He did not say when it might take effect.
The ADX expects this year to introduce market makers, dealers which maintain trading liquidity by undertaking to buy or sell at specified prices at all times, Baloushi added.
Meanwhile, Michael Foot, the Vice Chairman of Promontory Financial Group, said on Sunday that “all the evidence shows that regional consolidation of exchanges is an absolute must”.
He said that in his keynote address to the ADX Market Maker Conference, Abu Dhabi, on February 16th, 2014.
“Where consolidation has not occurred, the result has been relative stagnation”, and “certainly the limited size of the relevant exchanges in this region suggests that, to date, none have achieved the economies of scale that they need for real growth. In short, where there is no consolidation, it seems that everyone may suffer.
“In large part, this is because of the very obvious economies of scale that consolidation can bring, especially in areas such as the IT support for the trading platform. But the fact is that these possible economies run through many more areas than just basic IT. Good corporate governance of Exchanges does not come cheap, for example, nor do the systems needed to monitor insider trading and other market abuse. In areas such as this, the relative costs of good practice per trade can fall very sharply indeed as volume increases.
“In terms of some of these economies and for the vital but less easily mapped issue of trying to get business skills to congregate in one location, consolidation of Exchanges is essential.”
He said: “Especially where, in a region, there are a number of possible locations for cross-border trading activity, the existence of such value-hubs can be critical in determining that Center A grows, rather than B or C.”
He concluded that in addition to “the potential value of regional consolidation, another lesson, from the exchange mergers that have taken place, is that growth and prosperity only go to the committed. It is also vital then to provide ‘best in class’ services -whether that be corporate governance, IT, infrastructure or the rules environment in which the Exchange itself functions. The rewards go only to those who are indeed ‘best in class’ and who, one way or another, have something a little better on offer than the geographical rivals who may be next door.”