Qatar and UAE
15 October 2013
The MSCI upgrade of Qatar and UAE has put elementary structures for lending and short selling in place. But SLT finds out that there are still a lot of hurdles to jump before the region takes an active place in the world’s markets
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The MSCI upgrade elevated the United Arab Emirates and Qatar from “frontier” to “emerging market” status after five failed tries by exchange officials, with official membership in the index expected to take effect in May 2014.
International institutional investors recognised the improvements made by the Emirati regulator (Security and Commodities Authority), the Dubai Financial Market and the Abu Dhabi Securities Exchange with respect to the delivery versus payment (DVP) model.
The majority of market participants have expressed no major concerns over the safekeeping of investors’ assets and are starting to move away from the dual account structure, and a proper false trade mechanism was introduced in May 2013 on both exchanges.
Most significantly, a regulation governing stock borrowing and lending agreements has also been issued and the implementation is expected to be effective in the coming months.
This is not simply lip-service—or it shouldn’t be, considering that MSCI slashed Greece’s status as a developed market in part due to it failing to have proper securities borrowing and lending short selling or transferability facilities.
However, it must be taken into consideration that the two Middle Eastern countries are being upgraded from frontier markets, and may have a lot of work to do to make an impact in a specialist sector such as lending.
Mike Cowley, head of direct securities services (DSS) for MENA at Deutsche Bank, says that he believes the industry needs to be careful with the usage of securities lending in the Middle East.
“Whilst the UAE and Qatar are developing their lending capabilities they are for securities fails and not strategic lending. It is not the strategic lending you see in mature markets.”
Short selling may be on the MSCI’s agenda, but UAE and Qatar still do not really allow this in practice, he adds.
“You still have to have the assets in the account for the orders to go through to the market but we should note there is now more protection for security sales in that a level of asset protection now exists. The receive versus payment/delivery versus payment (RVP and DVP) and processes are recognisable, and as stated there is far more control for the global custodians and their clients than it ever has been. But, we still have a little way to go.”
David Lewis, vice president of Astec Analytics at SunGard’s capital markets business, agrees that it is possible to short sell in the UAE—in a kind of fashion. “It is feasible to short sell, but only with local securities. Its not really how we would recognise the practice in a developed lending market, because the structure is dominated by local investors and brokers who themselves cannot take principal positions.”
As for an example of a Middle Eastern country that is active in lending, Lewis pointed to Turkey as an active market, despite the fact that it is quite small.
However, he states that wealthy GCC funds are already a prime source of lending from an international standpoint, and would be a good basis for activity on the local markets, if lending arrangements are put into place.
“Many of the GCC countries have substantial, well known and respected sovereign wealth funds, many of whom are active securities lending participants. This lending activity is currently restricted to their non-domestic or international assets only of course.”
“The larger local funds are very experienced in securities lending and make significant returns, so I imagine they would be quite active in their domestic arrangements when rules do get put in place.”
But, there are also cultural hurdles to vault before securities lending can fully develop. In opposition to the criteria of the MSCI Global Equity Indices, a paper detailing MSCI Islamic Index series methodology, released in May 2011, says that Sharia investment principles do not allow investment in companies that are directly active in securities lending.
“On principle, Sharia law is against the practice of selling something you don’t own, and some will consider short selling to be an activity that can drive the price of the share downwards, an activity that could also be interpreted as contrary to acceptable behavior,” says Lewis
The fact and nature of Sharia law, a fairly small pool of available securities, and thin stock market volumes could all be possible downsides to the development of securities lending in the Middle East.
Adding to this, there are detractors who say that the UAE and Qatar may be just ticking a box in order to get an upgrade. But, the fact remains that the two countries have agreed to put structures in place. Whether they turn out as we expect, remains to be seen.
International institutional investors recognised the improvements made by the Emirati regulator (Security and Commodities Authority), the Dubai Financial Market and the Abu Dhabi Securities Exchange with respect to the delivery versus payment (DVP) model.
The majority of market participants have expressed no major concerns over the safekeeping of investors’ assets and are starting to move away from the dual account structure, and a proper false trade mechanism was introduced in May 2013 on both exchanges.
Most significantly, a regulation governing stock borrowing and lending agreements has also been issued and the implementation is expected to be effective in the coming months.
This is not simply lip-service—or it shouldn’t be, considering that MSCI slashed Greece’s status as a developed market in part due to it failing to have proper securities borrowing and lending short selling or transferability facilities.
However, it must be taken into consideration that the two Middle Eastern countries are being upgraded from frontier markets, and may have a lot of work to do to make an impact in a specialist sector such as lending.
Mike Cowley, head of direct securities services (DSS) for MENA at Deutsche Bank, says that he believes the industry needs to be careful with the usage of securities lending in the Middle East.
“Whilst the UAE and Qatar are developing their lending capabilities they are for securities fails and not strategic lending. It is not the strategic lending you see in mature markets.”
Short selling may be on the MSCI’s agenda, but UAE and Qatar still do not really allow this in practice, he adds.
“You still have to have the assets in the account for the orders to go through to the market but we should note there is now more protection for security sales in that a level of asset protection now exists. The receive versus payment/delivery versus payment (RVP and DVP) and processes are recognisable, and as stated there is far more control for the global custodians and their clients than it ever has been. But, we still have a little way to go.”
David Lewis, vice president of Astec Analytics at SunGard’s capital markets business, agrees that it is possible to short sell in the UAE—in a kind of fashion. “It is feasible to short sell, but only with local securities. Its not really how we would recognise the practice in a developed lending market, because the structure is dominated by local investors and brokers who themselves cannot take principal positions.”
As for an example of a Middle Eastern country that is active in lending, Lewis pointed to Turkey as an active market, despite the fact that it is quite small.
However, he states that wealthy GCC funds are already a prime source of lending from an international standpoint, and would be a good basis for activity on the local markets, if lending arrangements are put into place.
“Many of the GCC countries have substantial, well known and respected sovereign wealth funds, many of whom are active securities lending participants. This lending activity is currently restricted to their non-domestic or international assets only of course.”
“The larger local funds are very experienced in securities lending and make significant returns, so I imagine they would be quite active in their domestic arrangements when rules do get put in place.”
But, there are also cultural hurdles to vault before securities lending can fully develop. In opposition to the criteria of the MSCI Global Equity Indices, a paper detailing MSCI Islamic Index series methodology, released in May 2011, says that Sharia investment principles do not allow investment in companies that are directly active in securities lending.
“On principle, Sharia law is against the practice of selling something you don’t own, and some will consider short selling to be an activity that can drive the price of the share downwards, an activity that could also be interpreted as contrary to acceptable behavior,” says Lewis
The fact and nature of Sharia law, a fairly small pool of available securities, and thin stock market volumes could all be possible downsides to the development of securities lending in the Middle East.
Adding to this, there are detractors who say that the UAE and Qatar may be just ticking a box in order to get an upgrade. But, the fact remains that the two countries have agreed to put structures in place. Whether they turn out as we expect, remains to be seen.
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