UAE Regulator Cuts Minimum Sukuk Size, Eases Securities Borrowing

The United Arab Emirates’ financial market regulator has set new rules for Islamic and corporate bonds to encourage trading in them, and amended rules on securities lending and borrowing to make it easier for foreign institutions to operate.

The changes are part of plans to introduce at least two new rules covering the stock exchanges every year, in an effort to have the Arab world’s second biggest economy upgraded to developed market status in 2018, said Abdullah Salem al-Turifi, chief executive of the Securities and Commodities Authority.

UAE equity markets are expected to see more participation by foreign investors after late May, when international index compiler MSCI will raise the country to emerging market from frontier market status.

“We have a very ambitious plan to be upgraded to developed market within five years. I don’t want to be over-optimistic, but this is our target and we are working towards that,” Turifi said at a conference on Sunday.

“What is needed is a new set of rules and regulations that are being studied and will be introduced, hopefully two or three every year, including options, futures, depositary receipts, fund administrators, nominee accounts and many others.”

The new rules for sukuk spell out standards for their issuance, listing and trading, treating them “as an ownership tool and not a debt one” – a key principle in Islamic finance, which stresses the importance of investors sharing profits and losses.

This is in line with Dubai’s drive to develop as an Islamic financial centre, the SCA said in a statement on its website.

The rules ease requirements in some areas; the minimum size of a sukuk listing is now Dhs10 million ($2.7 million), down from Dhs50 million previously.

But strict requirements are specified in other areas. Sukuk issues must be approved by the sharia committee of the applicant for listing, or by a sharia committee accredited by the regulator of the issue. While listed sukuk may be traded outside the market, the trading must follow market procedures.

The new corporate bond rules include a requirement for a joint stock company’s general assembly to approve any issuance of bonds.

A change to rules for lending and borrowing securities will facilitate borrowing, the SCA said; if brokerages fail to deliver securities under Delivery versus Payment procedures, they can borrow the securities they need without necessarily having to seek SCA approval. This may reduce the risk of investors’ trades not being completed.

The amendment also allows foreign institutions to lend and borrow securities between themselves through direct clearance, which will encourage them to operate in UAE markets, the regulator added.

Turifi said a new framework allowing shares in private joint stock companies to trade on a “second market” of the stock exchanges would be introduced in the third or fourth quarter. It will aim to encourage trade in shares of small and medium-sized enterprises.