SCA Board of Directors approves the Draft Regulations as to the Derivatives Contracts
5/20/2018 - In line with its pursuit to develop the structure of the business activities and financial services associated with the securities sector in the UAE to live up to the best international standards and practices, the Board of Directors of the Securities & Commodities Authority held its third meeting ...

 

 

In a meeting chaired by H.E. Sultan Al-Mansoori,

 

SCA Board of Directors approves the Draft Regulations as to the Derivatives Contracts

 

The Board approves amendment to the Regulations as to the Business of Administrative Services to Mutual Funds

In line with its pursuit to develop the structure of the business activities and financial services associated with the securities sector in the UAE to live up to the best international standards and practices, the Board of Directors of the Securities & Commodities Authority held its third meeting of its sixth term at the SCA's office in Dubai. The meeting was presided by H.E. Eng Sultan Bin Saeed Al-Mansoori, Minister of Economy and Chairman of the SCA.

During the meeting, the Board discussed a number of important topics and issues relevant to the securities sector as elaborated below:

Draft Regulations as to the Derivatives Contracts

As part of its efforts to promote the regulatory system and the legislative framework to match the best international standards and practices in order to develop and regulate the securities sector in the UAE, and in view of the initiatives of the SCA's strategic and operational plan and its initiatives aiming at deepening the financial market and expanding the investment options available to the customers in the markets, the Board of Directors issued a decision to regulate the derivatives contracts.

Pursuant to the decision, the derivatives contracts are defined as financial contracts with a value specified by the contracting parties. Such contracts derive their value from the value of securities involved and they depend on the change of value of such securities. Further, the decision defines the structured derivatives contracts as derivatives contracts issued based on regulations, rules, conditions, and criteria applicable in the market or the foreign market.

Article (2) of the draft regulations indicates that the derivatives contract is a security governed by the provisions of this decision and that any transaction involving derivatives contracts conducted in violation of the provisions of this decision shall be deemed null and void.

Article (2) classifies the structured derivatives contracts to: derivatives contracts structured on the local securities or indicators issued in accordance with the market's conditions and rules, derivatives contracts structured on the foreign securities, issued in accordance with the market's conditions and rules upon obtaining the SCA's consent, and derivatives contracts structured on the local securities or indicators, issued in accordance with the conditions and rules of the foreign market upon obtaining the SCA's consent.

Article (2) states that listing and trading of the structured derivatives contracts in the market must be governed by the rules issued by the market and approved by the SCA.

Customers who deal in over-the-counter derivatives contracts on the local securities or indicators are required to settle and clear the tradings of these contracts through the Central Clearing Party (CCP).

Obligations of the Market

Article (3) addresses the obligations of the market. In addition to other obligations set forth in the SCA's Establishment Law and regulations, the market is required to continuously disclose and update the securities involved in the structured derivatives contracts in the market.

The market is also required to continuously disclose the types and specifications of the structured derivatives contracts in the market in accordance with its rules, as well as any updates or amendments thereto, provided that they may not enter into force in the event there are pending unsettled structured derivatives contracts.

Additionally, the market may not deregister any security involved, in case pending and unsettled structured derivatives contracts, which include these involved securities, exist in the market.

Further, the market must announce the working days, hours dedicated to trade in the structured derivatives contracts therein, and the opening and closing times.

All transactions shall be settled through the CCP.

The market should specify the number of the structured financial derivatives contracts in the series of contracts. The market should also specify the securities involved, the month of contract settlement, month of contracting, and the expiry date of the contract which may be registered with the market. The market may enforce limits for each structured derivatives contract or for all contracts.

The market should specify the initial margin of the transactions of structured derivatives contracts therewith. The market should also set the conditions and rules governing the structured derivatives contracts therewith, rules of trading and listing thereof on the market, and rules and conditions of licensing practicing of the tasks of derivatives member and the rules of license renewal as well as the obligations of the derivatives member, provided that such rules, as well any update or change thereto, is approved by the SCA before they enter into force.

The market should also abide by the provisions related to the structured derivatives contracts which are compatible with the principles of Islamic Sharia.

Suspension or Delisting of Derivatives Contracts

Articles (4) and (5) address the suspension and delisting of the derivatives contracts as stated below:

  • The SCA or the market, upon the SCA's consent, may suspend or delist any structured derivatives contracts in the market in case of occurrence of extraordinary conditions or an event that undermine proper functioning, or if it deems that trading of such contracts will not serve the public interest or would prejudice or violate the shareholders' rights, or for other reasons.
  • The SCA and the market may decide to temporarily suspend trading or dealing in any structured derivatives contracts in the market in case of occurrence of extraordinary conditions or an event that undermine proper functioning and order in the market, subject to notifying the SCA immediately of the such decision.
  • The structured derivatives contracts in the market shall be governed by the regulations issued by the SCA in conformity with nature thereof and without prejudice to the provisions of this decision and the rules approved by the SCA.
  • The market shall collect a commission on the trading of the structured derivatives contracts in accordance with the regulations of SCA, and is shall collect any other fees stipulated by the SCA in accordance with its regulations.
  • The SCA may decide suspending transactions on the derivatives contracts of the local securities or indicators in the event these contracts affect the market.

Decision Effectiveness Date

Articles (6), (7), and (8) respectively address enforcing of the penalties set forth in the law, or the regulations or decisions issued thereunder which is entrusted to the SCA by the regulations. They further address requesting the entities which deal in the derivatives contracts to regularize their status in accordance with the provisions of this decision within no later than six (6) months from this decision effectiveness date. This decision shall enter into force 30 days after its publishing in the Official Gazette.

Amendment of the Regulations as to Administrative Services to Mutual Funds

In view of the SCA's role reviewing, supervising, and following up enforcement of legislation in the markets, and based on the studies conducted by the SCA and the industry observations received concerning the increase of capital of the companies which wish to exercise the Business of Administrative Services to Mutual funds in light of the business size and the tasks assigned to the company, especially that those companies provide the financial services to the mutual funds only. Additionally, in order to encourage the companies to obtain this license for its importance and relation with the mutual funds, the Board of Directors agreed to amend the Chairman of the SCA Board of Directors' Decision No. (4/R.M) of 2017 concerning the Regulation of the Business of Administrative Services for Mutual Funds. The amendment allows the companies wishing to exercise the Business of Administrative Services to decrease of their capital to one million Dirhams to support such Business.

Government Communication Strategy

The Board of Directors reviewed the SCA's government communication strategy for 2018-2019. The inputs of the strategy include: status quo assessment, Management vision and mission, government communication strategy structure, communication initiative card, operational plan, required resources, evaluation and revision, the next steps to activate the strategy, media messages, and the government communication strategy evaluation form. The Board approved the strategy and ordered to implement its initiatives without burdening the SCA's budget with extra expenses.

The Board reviewed a report on the discussion session held regarding the SCA's initiative to map the sustainable capital markets in the UAE which included the Prime Minister's Office, and representatives of the industry, markets, and government bodies. The report included the outcomes of the session held with the Prime Minister's Office. The report also reflected the outcomes of the meeting held with the representatives of the industry, markets, and government bodies which included the Ministry of Economy, Ministry of Climate Change & Environment, Central Bank of the U.A.E, Insurance Authority, the Federal Competitiveness and Statistics Authority, Dubai Municipality, Dubai Financial Market, Nasdaq Dubai, Dunia Finance, National Bank of Fujairah, and National Bank of Ras Al-Khaimah.

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The SCA's Relationship with Related Authorities

The Board reviewed a report concerning the relationship of the SCA with the related authorities, on top of which, the Prime Minister's Office, Ministry of Economy, Ministry of Finance, Central Bank of the U.A.E, financial markets, the Federal Authority for Government Human Resources, UAE departments of economic development, and the International Organization for Securities Commissions (IOSCO). 

In line with the continuous follow-up of the status of the local listed public shareholding companies to ensure their financial stability, and in compliance with the provisions of the Commercial Companies Law No. 2 of 2015, the Board reviewed a report concerning the financial analysis of the listed public shareholding companies and the sectors in Abdu Dhabi Securities Exchange and Dubai Financial Market of the annual financial statements 2017.

The Board reviewed a report on the results of the legislative impact of the regulations issued by the SCA which includes the results of questionnaires conducted by the SCA regarding the promotion and introduction regulations (a questionnaire to the companies and another to the investors) and well as the questionnaire regarding the decision of regulating the Administrative Services. The Board of Directors recommends conducting questionnaires to measure the effect of the newly issued regulations continuously.

Results of the 12th Meeting of the Board of the UASA

The Board reviewed a report concerning SCA participation in the 12th meeting of the Board of the Union Of Arab Securities Authorities (UASA) in Beirut last March and the issues addressed in the meeting, including considering pricing of companies upon listing thereof, problems of selective and mandatory deregistration, and the dictionary of financial terms frequently used in the financial markets, the multilateral MoU between the UASA-member authorities, and the investor education portal.

The Board of the UASA was informed of the updates of the project of the SCA's basic services system through a report to be filed by the project team, course of the project, status quo, challenges and difficulties, and next steps.  The project, which covers all the services presented by the SAC's sectors, and in particular, the technical departments, comprises of two key parts; reengineering of the operation procedures in the SCA and development of the electronic/smart system.

The Board further reviewed a report on the recommendations of the annual conference entitled “Boosting of Foreign Investment in the Financial Markets" which was organized by the SCA in cooperation with the UASA last April under the title “Boosting of Foreign Investment in the Financial Markets". The conference was attended by a selected group of experts, specialists, and researchers in the field of securities, investment, financial brokerage, and financial regulatory authorities worldwide.

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