Dubai’s status as a financial centre rests to a large extent on its advanced capital markets. The city’s various trading floors have played a regionally important role as pioneers of new instruments and market processes, and succeeded in attracting investment from both home and abroad. Competition for scarce liquidity in the Gulf has, however, increased significantly over recent years. With other exchanges in the region overhauling their regulatory frameworks in order to harness investment flows, Dubai’s regulators and exchange authorities are working hard to maintain its position as a key financial centre.
Dubai is home to a number of platforms for trading equity and debt securities, commodities and other assets. The principal equities exchange is the Dubai Financial Market (DFM), which was established as a government-owned platform in 2000, and became the first exchange in the region to list publicly in 2007. As of June 2019 there were 67 companies listed on the DFM, distributed across a broad range of sectors, including banks, investment and financial services, insurance, real estate and construction, transportation, industry, consumer goods, telecommunication and services.
The debt market component of the DFM is small, consisting of 10 bonds and sukuk (Islamic bonds) issued by Dubai’s Department of Finance as of mid-2019. In other areas, however, the market has been expanding its offerings. In June 2016 asset management firm Afkar Capital launched the first exchange-traded fund (ETF) on the DFM under a new set of regulations formulated with the help of global institutions such as S&P Dow Jones and BNY Mellon, among others. The fund grants investors access to the largest stocks in the UAE by market capitalisation. In 2017 the DFM rolled out its trading platform for ETFs, the first of its kind in the region.
The emirate’s other major exchange is Nasdaq Dubai, which is located within the Dubai International Financial Centre (DIFC) – the offshore financial services free zone and one of the key pillars underpinning the emirate’s reputation as a regional financial hub. Nasdaq Dubai was initially created for companies that wish to go public and are doing business primarily on a regional basis, rather than strictly within the emirate or the UAE. Since its establishment in 2005 it has broadened its role to become Dubai’s principal platform for the trading of debt securities, both conventional and Islamic.
The DFM and Nasdaq Dubai are globally significant exchanges, but the potential for damaging competition between them is limited by the fact that the DFM owns two-thirds of Nasdaq Dubai, while Bourse Dubai, the government-owned majority owner of the DFM, retains the other third. As a result of this arrangement, securities from both exchanges are traded through the DFM platform, and trading, clearing and settlement are handled together. Additionally, there is significant cooperation with the Abu Dhabi Securities Exchange (ADX), which is the third major securities exchange in the country. Nasdaq Dubai, for example, signed cooperation agreements in 2017 with both the DFM and the ADX that allow it to offer futures on those exchanges.
As well as its two major exchanges, Dubai is home to the Dubai Gold and Commodities Exchange (DGCX), established in 2005 and owned by the Dubai Multi Commodities Centre. The DGCX aims to develop liquid markets for a range of commodities that physically pass through Dubai or are processed there, as well as currencies and a small number of futures. The Dubai Mercantile Exchange, meanwhile, is located in the DIFC free zone complex and is closely focused on its flagship Oman Crude Oil Futures Contract, based on the crude benchmark historically used to price exports of Middle Eastern oil to Asia. The contract provides individuals and institutions with a direct way to invest according to oil price expectations, mitigating the challenge posed by a lack of listed oil firms on the main exchanges.
While most markets in the region are characterised by an emphasis on equities trading, Dubai is also known for its relatively vibrant debt market. Recent economic conditions have helped to consolidate this reputation. Companies in the UAE have traditionally faced few challenges in securing bank financing, but the recent decline in oil prices and the resulting economic impact on banks has led to a less favourable lending environment. Both the government and domestic corporates have, therefore, found a useful funding alternative in the form of fixed-income securities, which they have issued with increasing regularity. The DIFC is well regarded as a bond and sukuk listing venue due to the alignment of its regulatory framework with international standards, and the growing recognition among global investors that Nasdaq Dubai is a global centre of such products. At the outset of 2019, 14 sukuk were listed, with a combined nominal value of nearly $12bn – making Dubai the largest centre in the world for Islamic bonds by listed value. Five conventional bonds worth a combined $3.74bn were also listed.
The largest sukuk issuer on Nasdaq Dubai, in terms of both value and number of listings, is the Indonesian government. In May 2019 it lengthened its roster of Dubai listings with two green sukuk issuances, one valued at $1.25bn and the other at $750m. The capital raised was directed at a range of projects with an emphasis on sustainable development. Socially responsible investing is an emerging trend in global markets, and following Malaysia’s issuance of the world’s first green sukuk in 2016, Dubai has succeeded in establishing itself at the forefront of its sharia-compliant component. In 2018 Majid Al Futtaim, the Dubai-based retail and real estate conglomerate, used Nasdaq Dubai to list the world’s first benchmark corporate green sukuk, and the region’s first green sukuk issued by a corporation.
With global investors increasingly taking environmental, social and governance (ESG) concerns into account in their investment choices the DFM has sought to boost domestic capability in the area, and held an ESG workshop for stakeholders in 2019.
Over the Counter
Despite Nasdaq Dubai’s prominence as a debt-trading platform, however, the vast majority of trading in fixed-income securities takes place on an over-the-counter basis. This sometimes opaque field of activity has recently become an area of interest for the Dubai Financial Services Authority (DFSA), which is eager to boost the transparency of off-market trading in debt securities.
According to the regulator’s research, for the thirty month period ending June 30, 2017, 51 authorised firms in the DIFC conducted a total of 400,000 fixed-income securities transactions, representing a total transaction value of $1.9trn. While participants in the DFSA’s survey reported that there were no significant barriers to price discovery and liquidity, the regulator raised a number of concerns of its own, most notably the dominant position of a relatively small number of authorised firms. According to the report, just six banks accounted for approximately 82% of fixed-income securities transactions over the observed period, rendering the segment vulnerable to changes in the sector structure, such as a decision by a financial institution to move its fixed-income operations to another platform.
Other challenges to growth in this area include a lack of ratings for fixed-income instruments, which makes them unattractive to international investors, as well as the tendency of banks underwriting fixed-income securities for UAE companies to buy and hold for their own accounts, a practice which limits liquidity in the market.
Dubai’s capital markets are regulated through a multi-tiered system. The Emirates Securities and Commodities Authority (SCA) is a federal body with supervisory powers over all onshore markets, including the DFM. As an offshore market, Nasdaq Dubai is supervised by the DFSA. Developing the regulatory environment of the emirate’s exchanges is therefore a collaborative undertaking. The SCA has expended considerable effort over recent years to enhance the regulatory framework that underpins market activity in Dubai and the wider UAE. Much of the momentum behind its sustained reform effort stems from the nation’s successful bid to achieve an upgrade from frontier to emerging market status by global markets index provider MSCI. This was achieved in 2014 and was responsible for an uptick in inward investment and, more importantly from the perspective of international and institutional investors, a more transparent and soundly regulated market. The process of regulatory and structural reform continues. The most significant recent change came in March 2019, when the DFM reorganised its post-trade services to align them with international best practices. The move involved the separation of clearing services from the listing and trading of securities through the creation of Dubai Central Clearing and Depository Holding. By handing off clearing duties to the new holding company, the DFM is now in step with standards set by the International Organisation of Securities Commissions, and address a key concern of international investors.
Looking offshore to Nasdaq Dubai, the most significant regulatory trend of recent years has been the liberalisation of the exchange through the granting of remote access to investors from foreign markets. The DFSA has been selective in its approach, choosing to cooperate with markets which it considers to be both well regulated and possessing the liquidity necessary to make the effort worthwhile. “This plays into the idea of Dubai as a regional hub,” Eric Salomons, director and head of markets at the DFSA, told OBG. “You have Saudi futures being sold here, for example. Allowing Cairo-based brokers access to the market is part of it also, as is allowing Egyptian construction giant Orascom to list here. We choose to work with jurisdictions where there is sufficient flow, so it is not just a blanket opening up. Once we have decided to work with a jurisdiction, we strike a memorandum of understanding (MoU) with the respective regulator and move forward from there.”
As with other exchanges in the region, the UAE’s markets have operated in a challenging environment since the precipitous drop in oil prices which began in mid-2014. The FTSE Nasdaq Dubai UAE 20 Index, which tracks 20 of the most liquid stocks listed on the DFM, Nasdaq Dubai and the ADX, ended 2018 at 3074 points, down 6.5% from 3289 at the end of 2017. The DFM played a significant role in this downward trend, with the DFM General Index declining to 2530 points at the end of 2018, from 3370 points at end-2017, for a drop of 24.9%.
In 2019, however, the main exchange fared better. By late April 2019 the DFM General Index had recovered to 2820 and – after a brief retrenchment – continued expanding into the third quarter, passing the 2900 mark at the end of July before moderating somewhat to 2760 at the beginning of October. The FTSE Nasdaq Dubai UAE 20 Index showed a similar gentle trend of recovery over the first three quarters of 2019, with the index rising from around 3000 in January to over 3400 by July. As of the outset of October the index had cooled to 3130.
Nevertheless, the market has yet to see a return to the trade values and volumes it experienced in 2014. Boosting exchange activity and deepening liquidity are central concerns for both of the main exchanges. The DFM is currently implementing its five-year development roadmap, the Strategic Plan 2017-21. This aims to enhance the market’s infrastructure, regulations and services, placing a particular emphasis on diversifying products and employing innovative technology.
To meet these goals, a number of initiatives are being introduced, including a new dividends distribution system, smart services, the overhaul of initial public offering (IPO) listing rules and procedures, corporate social responsibility programmes, artificial intelligence projects, the automation of investor services and blockchain e-services.
Some of these initiatives have already come to fruition. Margin trading, market making, regulated short selling and direct market access are all up and running on the exchange. The DFM has also been actively encouraging brokers to make use of mobile technology as part of its Smart Bourse initiative, and at the outset of 2019 a total of 28 DFM-licensed brokerage firms were offering smartphone trading applications to their customers.
Nasdaq Dubai’s recent strategic focus, meanwhile, has been on deepening the exchange through the development of its young equity derivatives market. The first derivatives were introduced to the exchange in 2016, and since then its management has worked to broaden the offering. The most recent addition to the derivatives market came in January 2019, when Nasdaq Dubai launched single stock futures trading on 12 Saudi Arabian companies. Taken together with derivative instruments offered by the Dubai DGCX, Nasdaq Dubai’s embrace of the derivatives concept is establishing the emirate as a regional pioneer of the instruments (see analysis).
New listings still provide the most direct route to exchange expansion, though this has been constricted by prevailing economic conditions. Oil price volatility remains a hindrance to IPO activity, as does the regional challenge of low trading volumes. According to India-based research firm Marmore MENA Intelligence, the aggregate turnover from new issuances for GCC countries stood at $283bn in 2018, compared to $1trn in 2007. Consequently, companies have preferred to seek international routes to capital markets, choosing markets such as the London Stock Exchange to stage IPOs.
There were no new listings on the DFM in 2018, and the number of equities listed on the Nasdaq Dubai remained static at 19 between 2016 and the end of 2018. The DFM has adopted an accommodative stance to companies that are considering listing, offering alternatives such as main market listing, dual listing and second market listing for private companies. Like many exchanges in the region, the DFM is dominated by financial, real estate and construction firms, which together accounted for more than 80% of market capitalisation at the close of 2018. The exchange therefore sees a growth opportunity in its ability to broaden the sector mix through IPOs from other economic sectors. In 2019 speculation that firms such as Emirates Global Aluminium, Abu Dhabi Ports and Senaat General Holding would seek to raise capital on the Dubai market heightened expectations of a recovery in the IPO pipeline. However, a longterm improvement in IPO sentiment for investors will depend on macroeconomic conditions and the establishment of a deeper and more liquid market.
The continued development of new products and processes therefore remains a priority for both regulators and exchange management. In July 2018 the DFM settled its first repurchase agreement (repo), a new function on the exchange which allows investors to release the value of their securities by selling them to a repo buyer, who then allows the investor to repurchase the securities at a set price after a fixed period of time. This process is the first of its kind in the region. Later in the year the DFM published its rules for the listing and trading of real estate investment trusts, having previously secured approval from the SCA.
Technology is central to market development. In March 2019 the DFM signed an MoU with the National Bonds Corporation (NBC), the government-owned body that offers sharia-compliant bonds and sukuk, to develop an electronic linkage for trading NBC’s saving instruments through the DFM’s licensed brokerage firms, thereby providing investors with a useful liquidity-management tool. Both the SCA and the DFSA are working on regulations to enable the use of more financial technology (fintech) in capital markets, following the 2018 decision of the SCA to contract with consultancy PwC to develop the necessary regulatory framework.
A key element of this drive, which takes place against the wider emergence of a Dubai fintech ecosystem, is the DFSA’s regulatory sandbox, known as the Innovation Testing Licence (ITL) Programme. Like others in the region, the ITL Programme provides successful applicants with temporary flexibility to test and develop concepts. The initiative attracts a wide variety of institutions from across the world to its regular intakes. Success stories from earlier cohorts include companies testing the digitisation of sukuk issuance using smart contracts, and the tokenisation of equities and debt.
Numerous observers over the course of 2019 pointed out the relative value in the Dubai market. Dubai banks, in particular, present attractive valuations over the medium term, as do blue chips such as real estate developer Emaar Properties. Potential catalysts for market growth, however, remain scarce, with a possible increase in foreign ownership caps representing the most obvious one.
Some markets in the region have introduced a foreign ownership limit of 49% for listed companies and have increased their weighting on the MSCI Emerging Markets Index as a result. This remains a useful option for Dubai’s exchange authorities. The need to take an accommodative stance in this regard may increase over the coming year if the more muted oil price predictions materialise. The International Energy Agency’s “2020 World Energy Outlook”, flagged rising shale production, a slowing global economy and the prospect of deepening trade tensions as potential causes of oversupply that year. Against such an environment, the process of market reform being undertaken by local and regional exchange authorities will be all the more important.
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