An important step: Launching a dedicated financial zone

While the Abu Dhabi Securities Exchange (ADX) continues to formulate instruments aimed at deepening the emirate’s markets, 2013 brought a fresh development that has the potential to radically transform the financial sector. At the end of April 2013, after months of speculation in the local press, Sheikh Khalifa bin Zayed Al Nahyan, the president of the UAE, passed a federal decree establishing a new financial free zone in Abu Dhabi.

The decree was shortly afterwards supplemented by a Cabinet decision that declared Al Maryah Island (already the home of a new 114-ha mixed-use financial, retail, residential leisure and commercial development) as the dedicated zone area.

A New Financial Free Zone

With details of the development now in the public sphere, some assessments of the emirate’s long-term ambitions with regard to what it has called the Abu Dhabi Global Market (ADGM) are possible. One point of interest is that the concept of a financial zone in Abu Dhabi is not a new one, and was first mooted for the emirate’s Saadiyat Island during the 1990s. While that project did not progress, neighbouring Dubai adopted the idea and went on to establish what has become the Dubai International Financial Centre. Abu Dhabi’s ADGM is to be developed under the same Federal Law of 2004 regarding financial free zones that the Dubai initiative was established.

The new zone, therefore, bears some resemblance to other financial zones in the UAE and wider GCC region. According to the information released to date, it will have its own regulatory structure which will most likely cover the areas of employment, companies and insolvency, although details regarding regulations have yet to be announced. An independent Companies Registrar will be created to oversee the registration and regulation of companies established within ADGM’s jurisdiction.

However, given the zone’s focus on financial activity, another source of regulatory oversight will come in the form of a Financial Services Bureau, intended to act as a financial regulator in the same manner as the Financial Services Authority of the UK.

The zone will also operate according to its own legal system, the Global Market’s Courts, comprised of a lower court as well as a court of appeal, both of which will be overseen by a chief justice. The interaction of this system with the UAE legal system, which has important implications with regard to enforceability, will apparently be effected by memoranda of understanding between it and other judicial authorities in the country.

Vision

The financial activities listed in its announcements to date give a clear indication of the Abu Dhabi government’s vision for the new zone. These include a raft of financial and banking services, both conventional and sharia-compliant, including securities and foreign exchange brokering and trading, funds management, commodities and commodity trading, insurance and reinsurance, and support services such as legal and accounting operations.

Mahmood Ebraheem Al Mahmood, CEO and chairman of ADS Holding, told OBG, “The ADGM aims to complete the global financial highway by covering the trading gap which currently exists between 3.00am and 7.00am GMT. At present, liquidity in this time zone is weak, and spreads widen and risk increases. The ADGM will allow market makers to set up and operate from Abu Dhabi, and it is expected they will set a price and maintain a tradable market throughout this time period, managing flows from the East (Singapore) all the way through to Europe (London)” (see interview in Economy chapter).

The anticipated influx of businesses conducting this activity promises to transform Abu Dhabi’s image as a centre for “buy-side” financial activity, a reputation that is has built up as a result of the presence of large investment firms, such as the Abu Dhabi Investment Authority, to a jurisdiction which also encompasses a significant “sell-side” component.

Mohammad Al Murtada Al Dandashi, a partner and the managing director of Al Ramz Securities, told OBG, “The establishment of the ADGM will certainly have a positive impact on the country. Simply by attracting more financial institutions to Abu Dhabi, it will generate more business opportunities for local financial services companies.”

Incentives

First, though, the ADGM must attract the wide range of business that it needs in order to establish itself as a full-service financial zone, and in this regard a number of incentives have already been proposed. Companies established within ADGM can be 100% owned by non-UAE nationals, as opposed to the 49% limit that is currently applied; a 50-year tax exemption will be granted on the profits of companies and their employees arising out of their activities in the zone; and exceptions from Customs duties will be offered to licensed businesses. Similar entitlements have been successfully applied elsewhere in the GCC, and Abu Dhabi is proposing a tried-and-tested formula. However, questions remain as to the final implementation of the regulations which establish the incentive structure, and the next year will therefore be an interesting one for market observers as the future path of the emirate’s bold strategy becomes clearer.

One of the most central issues regarding the ADGM initiative relates to the nature of its legal system, and whether it will be derived from the civil code or common law models. Given the global orientation of ADGM, the adoption of the latter system is more likely. In its assessment of the ADGM project, regional law firm Al Tamimi and Co. points out that the word “trusts” has been used in the list of activities proposed for the zone, and that trusts as a concept are known in common law systems and not in systems run according to a civil code. The nature of the legal system, in turn, holds implications regarding the language which is to be used in the laws and regulations that will govern activity in the zone. While no announcement regarding an official language has yet been made, the fact that most common law lawyers are English-speaking rather than Arabic-speaking, combined with the fact that the zone is intended to attract businesses from the global market, suggests that the regulatory structure is likely to be delineated in English. If this is the case, the workings of the zone’s separate legal system are also likely to be conducted in the English language.

Effect On The Market

The question of how the new zone will affect companies that have already established on Al Maryah Island for some time has also risen to the fore since details of ADGM were first made public. The office towers of the island’s commercial centre, Sowwah Square, are already in place and are home to international financial companies such as JP Morgan; accounting specialists like Deloitte; and legal firms such as Reed Smith, Al Tamimi, White & Case and Clifford Chance.

Other companies have purchased plots elsewhere on the island, with a view toward later development. These businesses, many of which have a long history in Abu Dhabi, are at present conducting their operations in an “onshore” capacity with the rest of the UAE. However, common practice in other UAE free zones is for businesses to conduct their activities with the wider UAE through a registered onshore agent, and therefore the change of status of Al Maryah Island from financial hub to financial free zone brings the possibility of a similar structure.

One potential solution to this issue, should it arise, resides within the Federal Law of 2004 under which ADGM is to be developed. According to its provisions, the Cabinet is able to pass a resolution to waive the prohibition on onshore business for as many as four years as a transitional period. Another possible solution, and one with a longer-term application, would be for companies that have already established themselves in what will become ADGM to be given the ability to opt out of the zone’s regulatory regime whilst retaining their real estate within its physical boundaries. This geography-dissociated approach has already been implemented with some success by the Qatar Financial Centre in Doha.

While it is important that answers to these questions become available, for many observers of the sector, the most interesting question of all is how the new zone will fare in the competitive environment of the overall GCC. There is already a similar initiative just along the coast in Dubai, and there are further zones at regional level – all of which have been established by governments to address the common challenge of diversifying their economies away from reliance on hydrocarbons.

The supporters of the ADGM initiative point out that in other parts of the world, a number of financial centres have managed to thrive in relatively close proximity, like those in Frankfurt and London, or New York and Chicago. The implementation of this plan over the next year might be viewed as a crucial moment in the emirate’s economic development.

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The Report: Abu Dhabi 2014

Capital Markets chapter from The Report: Abu Dhabi 2014

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