Steps to open the Dubai capital markets to further investment

The focus on adding new instruments in Dubai – among them futures and options swaps – is being spurred on by the drive to boost liquidity on the emirate’s trading platforms. It comes with an emphasis on foreign institutional investors, with those from what are considered well-regulated markets being granted remote access to the trading platform, rather than being required to go through a local broker. The options for trading will also give investors exposure to Saudi stocks, which were introduced in 2018 as well.

The process is in part guided by the criteria of MSCI, the global provider of market data, including indices that track equities worldwide. The UAE was upgraded from frontier to emerging market status by the MSCI in 2015, and is now aiming for developed-market status.

Short Selling

Short selling was introduced in 2017 for certain stocks trading on the Dubai Financial Market (DFM). Short selling is now allowed for 19 companies, including the two largest by market capitalisation, Dubai Islamic Bank and Emaar Properties. The move makes the DFM the third bourse in the GCC region to allow short selling, along with the Abu Dhabi Securities Exchange and the Tadawul in Saudi Arabia. On the Nasdaq Dubai most trading activity is in debt securities. However, futures trading gained traction in 2017, as 2.5m in equities-futures contracts worth Dh464m ($126m) were exchanged. The heaviest trading took place in contracts for three real estate developers, Emaar Properties, Union Properties and DAMAC Properties. Contracts on a total of 16 stocks on UAE exchanges can be traded.

REITs

Nasdaq Dubai is also working to popularise real estate investment trusts (REITs), an investment vehicle in which a company pledges to distribute most or all of its income to shareholders, and typically limits itself to owning and operating existing assets rather than developing new ones. Emirates REIT became the first of its kind in the region in 2014, after a $175m initial public offering. There is now a second REIT, Emirates NBD REIT, which began trading in March 2017. The offshore exchange has also established index futures, in a contract based on the benchmark DFM index, the Dubai Financial Market General Index, and in one based on the Abu Dhabi General Index, which tracks Abu Dhabi Securities Exchange equities. “Index futures further strengthen Dubai’s position as an international capital markets hub offering a wide range of opportunities, and are likely in particular to attract more foreign investments from large funds,” DFM chairman Essa Kazim said at a launch ceremony in February 2018.

Foreign investors from the EU have enhanced access to the trading platforms for these new instruments after a March 2017 decision by the European Securities and Markets Authority to recognise Nasdaq Dubai’s clearing infrastructure, which will allow EU banks to become clearing members on the Dubai exchange.

Saudi Futures

In July 2018 Nasdaq Dubai announced a next step – single-stock futures on Saudi Arabian companies, denominated in Saudi Arabian riyals. The 12 stocks involved had $229bn in market capitalisation as of the middle of 2018, and accounted for 43% of total market value. The move comes ahead of a structural leap in demand for Saudi stocks. MSCI upgraded its market from frontier to emerging as of June 2018.

Going Beyond

Both in the private and public sectors, investors and officials are looking for new ideas. Some that are under implementation or discussion include a new exchange solely for companies in free zones, to be established by the Dubai Airport Free Zone Authority and called the Free Zone Exchange. It is hoped it will allow foreign investors in the emirate’s free zones to access capital within the domestic market. The plan includes a simplified regulatory environment with fewer of the conditions and procedures that add expense to the process of a conventional equity listing. Another idea in the pipeline is a distressed debt market for the GCC. This would require legal reforms, but would help reallocate troubled loans and other debts to the types of investors who are specialists in recovery efforts.