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SCA’s Advisory Board explores ways to have market makers play a more active role in the UAE capital markets and examines standards and controls for launching platforms for SMEs

Facilitating the access of SMEs to funding helps to promote GPD growth and create job opportunities.

The Advisory Board of the Securities and Commodities Authority (SCA) held a meeting chaired by H.E. Dr. Obaid Al Zaabi, SCA’s CEO, with the participation of SCA’s managers and advisors and financial market representatives.

At the start of the virtual meeting, Dr. Al Zaabi presented key projects and initiatives that SCA is currently undertaking along with the latest developments in this regard.

Participants in the meeting discussed matters listed on the agenda and put forward recommendations to help elevate the industry. These recommendations dealt mainly with the role of market makers in the UAE capital markets and the creation of platforms for small and medium enterprises, known as SMEs.

Market makers

The discussions lead to a range of recommendations intended to encourage market makers to have a more active role in the capital markets operating in the country, including luring them with incentives, such as rebates, tax exemptions, and forgiveness of short-selling obligations. The recommendations also indicated the need to have written agreements with all market makers in regulated markets to oblige them to continuously quote prices in accordance with the nature and the volume of trades completed in these markets as well as the need to determine the obligations of market makers.

The recommendations further stressed the importance of balancing incentives with obligations and highlighted the need for small-cap and large-cap market making and the need to provide market makers with short-selling and exchange-traded tools, among others.

The outcomes of the meeting indicated that having market makers ensures price transparency and that a number of aspects should be taken into consideration prior to the introduction of market makers, such as liquidity, the size and structure of the market and trading features. The outcomes further suggested that regulated market makers must provide continuous liquidity and that they may be asked to act as “liquidity providers”. They indicated that there may be liquidity shortage in times of volatility if market makers are not regulated or their obligations not determined. Market makers also need to trade in high volumes to earn commissions and make gains that encourage them to “make the market”. Regulatory authorities, on the other hand, must be aware that some market makers may resort to wash sales to increase the commissions they earn.

Platforms for SMEs

 As to launching platforms for SMEs, members of the Advisory Board said that securing access to funding through capital markets can help promote GDP growth and create job opportunities for many years to come. It is important that regulators be concerned with approving the structure of the platform, such as creating rulebooks and safe-keeping and membership arrangements, instead of examining the prospectus or other listing-related matters.

When creating platforms for SMEs, many methods and approaches must be taken into consideration, such as the partnerships between the private and public sectors. The board of directors must also be independent and protection should be provided to minority shareholders. Furthermore, third-party agreements must be disclosed and the information held by the internal management should be monitored. Nevertheless, there is a need for sponsors since SMEs have limited experience when it comes to governance and reporting. Utilizing modern technologies, such as blockchain and AI, can also provide solutions aimed at reducing costs and ensuring efficiency and effectiveness.

The discussions concluded that these companies will be targeting retail investors as institutional investors have limited interest in small stocks since they will find it hard to exit. The discussions also stressed the importance of creating a balance between protecting investors and easing requirements while keeping in mind the classes of investors that will be participating in this sector.

Broadly speaking, it is important to determine what SMEs are, what the float percentage is, and whether trades will continue to be executed on these platforms. The recommendations stressed that the success of creating “platforms” for small companies at their early stages will help pave the way for the introduction of more regulatory requirements upon their transition to the main market.

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