Al-Mansoori: The regulation will help maintain market balance and boost national economy
Al-Falasi: Precise implementation of the trading rules on the market is key to the success of the regulation in achieving its objectives
Al-Turifi: Market-Maker strengthens the ability of the markets to perform well and achieve their objectives
The board of directors of the Securities and Commodities Authority (SCA) has passed a number of regulations, notable among them being the highly anticipated Market-maker Regulation, as well as other related regulations, including regulations for Securities Borrowing and Lending, Short-selling and Liquidity Provider.
The approval came during a board meeting held here and presided over by the board chairman, HE Engineer Sultan bin Saeed Al-Mansoori, Minister of Economy.
The 13-article market-maker regulation, consists of definition of Market-Maker Regulation, rules governing the licensing of market-maker, responsibilities of license applicant concerning administrative and technical staff and internal supervision, licensing procedures, duration and renewal, rules for registration of foreign market-maker, market-maker’s responsibilities and tasks and facilities granted to market-maker. The Regulation also outlines the prerogatives of the SCA and the financial markets in supervising market-makers, as well as violations, penalties and license suspension and revocation.
In-depth study of the international best practices
HE Engineer Sultan Al-Mansoori, Minister of Economy and Chairman of SCA Board of Directors, emphasized on the importance of the Market Maker Regulations in supporting UAE financial markets as one of the key pillars of the national economy by maintaining the balance in the market; adjusting the pace therein and striving to attract more foreign investments. He noted that SCA remains committed to providing all the elements that contribute to the success of the Regulations to achieve the targeted objectives and to effectively play its role. He indicated that the Regulations were issued after in-depth study of its various implications and after determining the exact roles of the various parties involved. He explained that the process of drafting and issuing the Market Maker Regulations has passed through the following stages, in accordance with the international best practices:
• The SCA conducted an in-depth study regarding the situations of the financial markets in the country and the feasibility of issuing market maker regulations.
• In this study, a specialized consultancy firm met with SCA’s strategic partners and members of the UAE financial industry to explore their views in this regard.
• International practices regarding the market maker were benchmarked by SCA experts, advisers, technicians and specialized companies.
• The experts from the SCA and the two financial markets in the country toured a number of elite international markets of the world in order to identify best practices and practical applications, and to consult with specialists in this field.
• The first drafts of the Market Maker Regulations and associated regulations were prepared.
• Stakeholders were involved in the discussions on the draft regulations; and feedback and suggestions were gathered from partners in the market. This included a workshop involving about one hundred participants from the incumbents of senior positions and decision-makers in Abu Dhabi Securities Exchange and Dubai Financial Market, brokerage companies, listed companies, national and foreign commercial banks, investment fund companies, and other professionals who have deep knowledge and rich experience in market-maker regulations. The workshop brought together representatives from about 45 financial institutions and brokerage firms.
• The workshop addressed the legal structure and requirements for the market maker, as well as the technical aspects and operation mechanisms of the Regulations. The workshop included several sessions with one dedicated for research, dialogue and debate.
• The workshop was also followed by mock sessions and sessions to revise the draft regulations in light of the feedback outcome.
• In addition, comments received on SCA website during the consultation period from a large number of foreign and local financial institutions (legal and professional) were taken into account.
• This was followed by preparing the final draft of the Regulations and forwarding same to the Board of Directors for consideration. Then, the necessary actions were taken to implement the recommendations of the Board thereon.
• The Board's approval was passed to issue the Regulations and implement them after publication in the Official Gazette. Meanwhile, SCA will continue to organize a series of workshops to promote awareness of the proposed new regulations.
Advantages of the Market Maker
HE Mohammed bin Ali bin Zayed Al-Falasi, Vice-Chairman of the Board of Directors, pointed out that the main tasks or basic functions of a market maker can be identified as follows:
- Provision of orders and offers for shares in the main market.
- Provision of continuous and real prices.
- Provision of the required quantities of securities, in the cases of purchase or sale.
- Making the price through the introduction of orders and offers.
He added that the Market Maker Regulations required the issuance of several other associated regulations, including regulations for borrowing and lending of securities, short-selling, and liquidity provider.
He underscored that the success of the market maker to perform its role in UAE markets would base on the accurate application of the instructions and controls governing trading on the market as stipulated by the regulations and legislations concerning the functions of the market. These regulations and legislations stress the need for disclosure and transparency in transactions; prices to be determined based on normal interactions and successful promotional efforts to attract savings and direct them to lucrative investment channels to ensure optimal allocation for individuals and the society.
Also commenting on the issue, HE. Abdullah Al-Turifi, SCA Chief Executive Officer, said the issuing of the Market Maker Regulations is within the framework of the regulatory and supervisory role of SCA and within the duties of SCA to regulate and develop the functions of the financial markets, adding that the four new regulations are a significant addition to the legislative system of the UAE financial markets as they will augment the markets’ capacity to discharge their duties and achieve their objectives.
“The market maker is a securities’ company with the desire and capability to trade in certain securities, and can tolerate the risks of retaining a certain size of stocks as a depository or to sell such securities for which the company acts as a market maker from the available depository,” he explained.
Furthermore, he said, the market maker is an entity licensed to continuously offer a price for one particular stock or more in order to achieve "liquidity" demand and supply for that stock or Security. The market maker realizes profits by performing its functions."
Al-Turifi pointed out that in the presence of a market maker there would be a flow of sale offers and corresponding purchase orders or purchase orders and sale offers on the other side, thus the market would always maintain a state of balance between supply and demand and the gap between bid and offer rates would decline. He said the most important function of these markets would be realized, namely the ability to liquidate stocks quickly and easily, and to maintain a continuous balance between supply and demand, thus limiting price fluctuations, to have a fair price and to ensure continuity of the market’s ability to carry out its duties and achieve its goals.
Coordination between SCA and the Markets
For his part, HE Mohammed Ali Ahmed Al-Dhahiri, also a SCA Board Member, pointed out that the drafting and development of the Market Maker Regulations were made in full cooperation and coordination with both Abu Dhabi Securities Exchange and Dubai Financial Market. "It is expected that the markets will make some changes to their own regulations and techniques to adapt to the new Regulations; and will team up with SCA in carrying out training and awareness-raising activities for dealers in the markets,” he said, adding that the markets will also organize mock sessions on how the Regulations will perform and how efficient they will be.
He said the markets will set the standards by which securities shall qualify for market making, and will show in details which securities can be allocated and to whom. “All such information will be posted on the websites of the financial markets,” he added.
Managing the price margin
On how market makers will manage the price margin, H.E. Abdulla bin Ali Al-Hamli, also a SCA Board Member, explained that the order system will be used so that many market makers can access the same securities. “Investors will be trading among each other on Abu Dhabi Securities Market or Dubai Financial Market. A market maker may trade only in the securities available to it as a trader. In the event of any disruption of the balance, the market maker will then intervene. In general, the markets will decide what they deem appropriate with respect to the intervention mechanism,” he explained further.
He pointed out that this tool was benchmarked with the international best practices. “It is designed to promote and enhance the capital market activities. It is expected that the implementation of the Regulations will start by the end of 2012,” he said.
He added that the 30 million Dirhams limit prescribed by the Market Maker Regulations represents the minimum capital requirements. “The market maker will, at a certain point of time, find out that due to the higher volume of activities, it should increase the size of its capital,” he explained.
Regulation for securities lending and borrowing:
The regulation for securities lending and borrowing regulates the temporary transfer of securities ownership from one party to another in accordance with a contract signed by the two parties and the rules outlined by the regulation, which also regulates the role of securities lending and borrowing agent, making it compulsory for the latter to have the approval of the SCA before practicing this activity after meeting the laid down requirements.
The regulation also outlines eligible cases and scopes of securities lending and borrowing, regulates other related issues like guarantee and the responsibilities of the lending and borrowing agent, the prerogatives of the SCA and the markets in supervising the lending and borrowing agent, as well as the powers vested in the SCA concerning the handling of violations committed by the lending and borrowing agent.
Regulation for securities short-selling:
The regulation outlines situations when short-selling of securities can be transacted and the types of securities allowed to be involved in this transaction. It highlights the SCA’s unfettered right in halting temporarily or permanently a short-selling transaction of some or all securities anytime it saw necessary in extraordinary situation. It also regulates the responsibilities of all parties involved in short-selling transactions, mandates the disclosure of short-selling centers, regulates the responsibilities of the market and its supervisory role in short-selling transactions and outlines the authority vested in the SCA regarding violations and penalties.
Regulation for liquidity provider:
This regulation allows listed companies to contract any licensed market-maker to act as such for the company’s securities in order to improve its liquidity on the market. This is by virtue of an agreement known as Liquidity Provider Agreement mandated by the regulation, outlining requirements to be met by the two parties involved to safeguard minimum rights and responsibilities. The regulation also outlines disclosures regarding the source of securities, the responsibilities of liquidity provider and mutual responsibilities, as well as the market’s supervisory responsibilities in this regard. It also outlines the SCA’s supervisory rights in this transaction, as well as in penalizing violators of the regulation.