SCA to examine bank lending for share purchases

It will “review and amend regulations regarding lending by banks operating in the UAE against shares if found necessary”, according to an emailed statement.

Hadeel al Sayegh

July 7, 2014

Updated: July 7, 2014 04:00 AM

 

The Securities and Commodities Authority (SCA) plans to scrutinise bank lending on shares, the regulator said yesterday. It will “review and amend regulations regarding lending by banks operating in the UAE against shares if found necessary”, according to an emailed statement.

Excessive margin trading helped trigger last month’s equity rout as investors rushed to sell positions following Arabtec’s share plunge.

For years, the use of leverage in UAE financial markets were considered taboo as the SCA did not recognise margin lending as a legitimate service that brokers could provide. Brokerage firms, however, in practice offered leverage to clients on a case-by-case basis.

The practice of buying on margin involves the client borrowing money from a broker to purchase shares. This allows the client to hold more stock than normal and multiplies both gains and losses. In a falling market, margin accounts are susceptible to margin calls when the broker forces the client to deposit more funds or sell the stock to pay down the loan.

But the 2008 global financial crisis triggered a series of legal disputes between brokerages and their clients who refused to pay back loans. Much of that lending was taken as corporate debt from banks, with the fallout resulting in more than 50 per cent of brokerage companies shutting down. There are currently 48 active stock brokerages from a peak of 103 in 2010.

In 2012 the SCA passed regulations on borrowing and lending, effectively legitimising margin account activity for brokerage firms. It then proceeded to provide margin lending licences to a handful of brokerage firms that fulfilled its criteria. But for companies that were not awarded a margin licence, a minority continued to provide unregulated lending to maintain their clientele amid heightened competition.

In January this year, the SCA warned that brokerage companies that make under-the-table loans to clients face being shut down and fines starting from Dh100,000.

Stockbrokers said yesterday that while the regulator is stepping up to address concerns raised by the financial markets industry, including the question of bank lending and excessive margin trading, there are still black holes in the legislative space that the SCA cannot control.

“It’s good that they finally saw the issue,” Mr Ben Grira said. “But the problem is that you can have a foreign bank financing in the UAE whose brokerage is based here. And these are real examples.”

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