New capital markets instruments increase trading activity in Dubai

Part of Dubai’s financial sector strategy is to develop its capital markets in a way that reflects the local economy and real economic activity within it. The plan for futures and spot contracts based on local commercial communities features two trading platforms situated in two separate free zones. Dubai Multi Commodities Centre (DMCC), the UAE’s largest and fastest-growing free zone, is majority shareholder of the region’s largest derivatives exchange, the Dubai Gold and Commodities Exchange (DGCX).

The Dubai Mercantile Exchange (DME) is housed within the Dubai International Financial Centre (DIFC) and focuses on a tighter range of products, led by a crude oil futures contract.

As in other areas of the sector, activity outside the DIFC is regulated by the Emirates Securities and Commodities Authority (SCA), which is a federal-level body. The Dubai Financial Services Authority handles all DIFC activity and oversees the DME.

Increasing Awareness 

While sukuk (Islamic bond) and equities may have captured more attention, the current focus on adding new derivatives instruments to broaden the offering is expected to increase trading activity and awareness of the markets. “We see a future in that market,” Nabil Al Rantisi, managing director of Menacorp, one of Dubai’s largest securities brokers, told OBG. “The more products they put on the table the better it will get.”

Volume on the DGCX was valued at $349.9bn in 2014, with 11.8m contracts changing hands. That represented a 14% fall in volume, according to the SCA, albeit a smaller drop than the global average of 25%. A 20% fall in currency trading activity in 2014 set the tone for overall performance. However, other areas grew, such as precious-metals contracts as a group, which saw a 13% increase in volume overall.

In 2015 the DGCX posted record-high trading volumes with contracts volume growing by 23%, exceeding 14.5m, with contracts valued at $379bn. The first half of 2016 recorded an all time high, with DGCX exceeding 9.5m contracts traded. DGCX has also added exciting new contracts on global single stock futures and Dubai India Crude Oil.

The exchange now offers trading in over 40 types of contracts, with Indian rupee futures representing 85-90% of activity, thanks to the volume of Indian traders operating through Dubai. “Traders have significant risk to manage when they are trading internationally, so they hedge their risk through the DGCX’s rupee contracts,” Meng Chan Shu, head of product management at the DGCX, told OBG.

DMCC, a Dubai government authority, was set up in 2002. DGCX is a subsidiary of the DMCC, which is the fastest-growing free zone in the UAE. There are over 12,000 member companies in its free zone today.

Commodities

The strategy of aligning trading instruments with real economic activity led to the introduction of a plastics contract. Another newer offering is DGCX new spot gold contracts, as Dubai has become a global price-discovery centre through its traditional gold souq in the Deira and Bur Dubai districts. The emirate’s proximity to the Indian subcontinent, which is a global driver of demand for gold jewellery, makes it a natural centre for trading and refining of precious metals.

At the DME the main focus is the establishment of a high-volume trade in contracts for Omani crude, the benchmark oil grade for the region. It is seen as offering an additional trading benchmark for Asia, to complement West Texas Intermediate and Brent, the two main global benchmark grades of crude which most derivatives contracts are currently based on.

As of October 2015 the DME reported around 90 market participants active in the oil futures contracts, with a balanced market share in which no one participant accounted for more than 10% of activity. Some 1.7m contracts were traded on the DME in 2015, a drop of 19.3% from the previous year.