UAE is building capital markets infrastructure for the long-term
Successful capital markets are built by developing sound infrastructure. It’s the glitzy IPOs and exciting market swings that catch the headlines, but to realise the maximum potential of the markets and benefit all stakeholders involved, an integrated infrastructure is needed that connects local participants to the global capital markets network.
In the last few months the UAE has taken two critical steps that expand its infrastructure, which are unique in this region. They confirm the UAE’s regional leadership role in capital markets development and will in due course lead to the kind of upsurge in market activity that will benefit all parties involved locally and regionally.
So, what has changed in the past few months?
First, Nasdaq Dubai opened an equity futures market on in September 2016 that offers investors a new investment choice that includes hedging, short-selling, and leveraging possibilities. The futures market witnessed strong growth during its launch phase as open interest grew by 796% in the first three months and continues to sustain its development.
Then in January 2017, the regulatory framework for central counterparties (CCPs) of the UAE’s Securities and Commodities Authority (SCA), as well as that of the Dubai Financial Services Authority (DFSA), were recognized by the European Commission as equivalent to that of the European Union. This recognition, following a positive assessment by the European Securities and Markets Authority (ESMA), makes the UAE the only country in the Middle East and Arab world to attain such international acceptance.
Simply put, CCPs reduce the risk of default that exists in every trade by guaranteeing that both sides of the trade will be honored. The new equivalence of the SCA and DFSA regulatory frameworks encourages participation by overseas firms in UAE markets that operate a CCP.
The two CCPs in the UAE are Nasdaq Dubai CCP and Dubai Commodities Clearing Corporation (DCCC), operated by Dubai Gold and Commodities Exchange (DGCX). Dubai Financial Market (DFM) plans to open a CCP in 2019; this will be in a position to benefit from the pioneering work carried out by the established CCPs.
The implications of the recognition of the SCA and DFSA by the European Commission are enormous. It will greatly enhance the UAE’s competitiveness and attractiveness in becoming a regional clearing hub in the medium and long term.
The recognition also promotes cross-border investment, not only from Europe but elsewhere in the world, as a result of lower systemic and regulatory risk in UAE markets.
Participants in Nasdaq Dubai’s futures market will be major beneficiaries of this recognition, as they can invest in a market that is both attractive to international investors and familiar to regional investors. The futures market offers much needed depth and diversification in the regional capital markets. The hedging opportunities that it provides, together with the ability to make gains when share prices are falling as well as rising, will support the further expansion of the underlying equity markets.
Trading in equity derivatives globally rose from 7 billion contracts in 2005 to more than 12 billion in 2015, according to the World Federation of Exchanges. From now on the UAE will be part of this expanding market, backed by clearing infrastructure that has gained an international seal of approval.
In 2017 and beyond, the UAE is set to maintain its leading role in developing the region’s capital markets. Nasdaq Dubai looks forward to increasing its participation in this process, both in product development and regulatory excellence.
About the author
Chief Executive Officer, Nasdaq Dubai
Mr Ali was appointed Chief Executive Officer in July 2013, after serving as Acting Chief Executive Officer since August 2012. He previously served as Executive Director of Nasdaq Dubai from 2006 to 2008. His experience includes serving as Chief Operating Officer of DIFC Authority and most recently as Executive Director at the Dubai Knowledge & Human Development Authority.
Mr Ali played a key role in the development of the Dubai Strategic Plan 2015 and participated in number of strategy development exercises. These included Nasdaq Dubai’s strategy in 2006 where he had the role of overseeing the implementation of the Market of Markets strategy expanding the exchange’s activities beyond the equity and debt markets into derivatives and other sectors.
Mr Ali holds an Executive MBA from London Business School, a B.Sc. in Applied Computing from Leeds Metropolitan University, and a Master Certificate in Project Management.