UAE market regulator shakes up brokerages with new rules
Opens the industry up to greater international competition and tightening oversight on lending to clients.
July 12, 2014
Updated: July 12, 2014 04:00 AM
The stock market regulator yesterday approved new rules that will shake up the UAE’s brokerage sector, opening the industry up to greater international competition and tightening oversight on lending to clients.
The Securities and Commodities Authority has introduced two classifications for brokerage firms in an effort to reduce capital requirements.
The capital required to operate a brokerage house had been increased to Dh30 million from Dh20m at the start of the financial crisis to encourage consolidation in the sector.
But yesterday in a dramatic turn of events, the regulator said it had approved draft regulations that classify brokerages into two groups: “those which engage in trading only while the clearance and settlement operations are conducted through clearance members” and “those which engage in trading clearance and settlement operations for their clients”.
If signed into law, trading brokerages now require a paid-up capital of Dh3m, whereas trading and clearance brokerages will need Dh10m, the SCA said in an emailed statement yesterday.
Stockbrokers, however, voiced dismay at the new rules, citing potential threats from regional and international banks that could take advantage and impact the local industry.
“SCA met with the brokerage community, and those who attended that meeting a month ago all indicated they liked the capital to stay as is,” said Mohammed Ali Yasin, the managing director at National Bank of Abu Dhabi’s brokerage arm.
“It can be used as a way for regional and international banks to go around the local brokers to trade on behalf of their clients and it will hurt the brokerage community immensely. I believe it will also reduce transparence and the ability of SCA to regulate in that framework as it has no authority of seeing any transaction of institutions in other jurisdictions.”
The regulator declined to comment further on the potential impact of the rule changes.
SCA has introduced new regulations in recent weeks geared towards confidence-boosting measures and strengthening its legal framework after markets experienced widespread panic following a sell-off triggered by the resignation Arabtec’s chief executive Hasan Ismaik and the redundancy of hundreds of staff, provoking concerns over the prospects of Dubai’s biggest construction company.
Last week, the regulator said it had created a committee that included the Central Bank and the main exchanges – the Abu Dhabi Securities Exchange and Dubai Financial Market – whose job will be to monitor CEO statements to ensure they are accurate and truthful and monitor their subsequent impact on the stock price.
The SCA also said it plans to scrutinise bank lending on shares.
It will “review and amend regulations regarding lending by banks operating in the UAE against shares if found necessary”, the regulator said last week
In a bid to strengthen its oversight on the UAE’s banks, the regulator yesterday also said it had amended regulations on margin trading.
“SCA is eliminating ambiguities on how margin accounts work,” Mr Yasin said.
“What they are doing is to emphasise separation of cash accounts for margin from any account for the client. This is mostly geared to the banks, as brokerages already do this: they have a separate cash account for the client’s trading account, and a separate cash account for the client’s margin account.
“They are trying to size how much leveraged cash is in the stock market, which will be helpful to gathering statistics. Today banks can hide this by having other collaterals like real estate and other items. It will help to separate facilities given to clients as part of other collaterals, against the ones given just against shares.”
The SCA yesterday also amended the definition of a “cash trading account” and authorised brokerage firms to make purchase orders on behalf of the client without a cash balance as long as payment of the value purchased comes before the settlement date (t+2), and in the case of delinquency on settlement date, the broker is in violation.
“This regulation is related to leverage provided for intraday trading where the account is closed by the end of the day,” said Fathi Ben Grira, the chief executive at Mena Corp, an investment company in Abu Dhabi. “So now you are allowed to do it as long as the client gives the money when the trade is settled.”