UAE exchanges should consolidate back offices, says DIFC head

26 September 2013

Need for larger, more diverse UAE market to prepare for MSCI upgrade to emerging markets status

The UAE’s stock exchanges would benefit from consolidating their back offices, says Jeff Singer, chief executive officer (CEO) of Dubai International Financial Centre (DIFC).

“It would reduce costs for brokers, free up capital, and send a signal that the UAE is serious about capital markets,” he says.

“A good time to do that would be now, because of the expected inflows related to the MSCI upgrade next year. They do not need to merge, that is not necessary, but by consolidating the back offices you would get the benefit of scale.”

Bringing together the stocks of the UAE’s three exchanges – the Dubai Financial Market (DFM), Nasdaq Dubai, and the Abu Dhabi Securities Exchange (ADX) – on one platform would lead to a larger, more diverse offering. Both the DFM and the ADX have seen their trading volumes rise significantly this year, but most trading is in a limited number of companies, each exchange’s top five weighted stocks account for about half of total trading volume. On the Nasdaq Dubai, interiors company Depa and ports operator DP World account for the most trading activity.

In addition, difficulties in managing trading accounts and cash processes, is another issue that hinders more investments from coming into UAE stock markets.

There is significant potential for foreign investments to grow, however. MSCI’s decision to upgrade Qatar and UAE to emerging markets status in May next year is expected to lead to $800m in passive fund inflows, according to UK bank HSBC. Beyond that, improvements will be needed to spur further growth.

“The MSCI upgrade was huge step, which puts us on a more global platform. It is a good compliment. In terms of further development, the most important thing will be to win IPOs [initial public offerings] for the local markets [rather than having UAE-based companies listing overseas],” says Singer.

It is important the markets increase scale through automation of processes in order to attract investors, adds Arindam Das, regional head of HSBC Securities Services, HSBC Middle East and North Africa.

“There have been significant improvements through the introduction of a fail trade mechanism and buyer cash compensation. A lot of risks have gone, but there needs to be work on the efficiency side of things,” says Das. “Markets need to move to next phase automating flows of information between custodians, brokers and investors, resulting in scale and cost efficiencies.”

Corporate actions, such as the distribution of dividends, rights, and bonuses, are not yet really efficient either, as a lot of payments are made by cheques, he says.

“Depositories should look at introducing an electronic payment mechanism for distributing dividend,s similar to that used for settlement of trades,” says Das. “The MSCI upgrade is a milestone, not a destination in itself. We have to keep moving. More money coming in as a result of the upgrade is welcome, but will not be sustainable unless there are more investable stocks and sectoral diversification.”

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