OBG talks to Essa Kazim, Chairman, Dubai Financial Market (DFM), and Governor, Dubai International Finance Centre

Interview: Essa Kazim

What djustments and upgrades need to be considered following the MSCI upgrade from frontier market status to emerging market?

ESSA KAZIM: Since 2006, when the DFM became the only publicly listed exchange in the Middle East, it has undergone a dramatic improvement to back-office operations and operating efficiency. These advancements have helped to attract significant liquidity into the system, which in turn has generated new revenue and kept the exchange profitable. Furthermore, for the past five years we have been publicising our listed companies to foreign and institutional investors through DFM-sponsored international roadshows.

As a profit-driven enterprise, listed companies are DFM’s products and we feel these products need to be properly marketed. Following years of preparatory measures, many listed companies already meet the emerging market criteria. We would actually be surprised if the top 10 largest companies listed on DFM do not qualify for emerging status when the upgrade is finalised in mid-2014. Because we were not previously a part of the emerging market index, the type of investment DFM companies would receive in the past were mainly hedge funds. However, we are now hoping for more long-term institutional investors, which will add a much-needed new dimension to foreign capital flow. As for the magnitude of investments that the MSCI upgrade will trigger, they could be as low as $400m or as high as $2bn. A strong point is that 40% of the DFM’s daily activity already comes from non-UAE nationals.

In what ways has trading activity been expanded and how can further listings be encouraged?

KAZIM: We recently introduced rights issues trading, and now moving towards bringing covered warrants trading to the market. Then there are other areas we would like to see prosper as well, such as the introduction of exchange-traded funds (ETFs), which DFM fully supports but cannot directly influence. Going forward we need to continue to encourage initial public offerings (IPOs), so that the exchange better represents the make-up of Dubai’s economy. Today the exchange remains dominated by financial services, real estate and construction, whereas in reality these sectors only contribute to 30% of the emirate’s total GDP. This equates to a major underrepresentation of logistics, tourism, education and health on the bourse. We continuously engage in dialogue and seminars with joint ventures and family businesses to encourage listing. Overall, success will be determined by a combination of regulatory changes and DFM’s own outreach efforts.

How has the passage of four new laws in 2012 affected the market, and what further regulatory changes are needed to support the bourse?

KAZIM: Looking at rules and laws passed in 2012 by the Emirates Securities and Commodities Authority, many carry sizeable technological implications and require major work with vendors before being fully implemented. The new regulations are designed to help us address concerns raised in the past regarding the Delivery Versus Payment model, and their introduction also spurred the implementation of Buyer Cash Settlement for trades. Furthermore, these laws gave DFM the necessary positioning for the June 2013 MSCI upgrade.

All of these adjustments fall in line with our longer-term development strategy to perform in line with the Group of Thirty recommendations and of course the International Organisation of Securities Commissions conditions. In the medium term, what we feel is critical to further development of the market is the approval of the new Commercial Companies Law, which is to be enacted by the end of 2014. The most critical item in this legislation is that the 55% share ratio for IPOs will be reduced to a minimum public offering requirement of only 30%. This will obviously greatly enhance the number of companies willing to consider public listings. Other than this issue, the most important concerns are generally related to market sentiment, liquidity and other aspects of the Commercial Companies Law.