The UAE’s Securities & Commodities Authority (SCA) is working on new regulations for the local stock exchanges that could pave the way for the introduction of short selling.

The new regulations cover stock lending and borrowing and need to be in place before short selling is permitted.

There is currently no timeline for the introduction of stock lending rules, but local exchanges have welcomed the news as short selling would enable investors to profit from a fall in the value of shares, and boost liquidity on the trading platforms.

“SCA is working on the regulations for stock lending and borrowing,” says Jeff Singer, chief executive officer of the Nasdaq Dubai. “They need to take the next step and include short selling in those regulations.”

Regional markets are continuing to suffer from negative sentiment and low trading volumes. The Dubai Financial Market (DFM) is down to 2263 points on 25 October, from 1743 points a year ago.

By permitting short selling, it would encourage investors to keep trading despite the fall in prices, boosting liquidity. “Short selling would be a useful tool for the UAE markets,” says Fahima al-Bastaki, senior vice-president for market development at the Dubai Financial Market, speaking at the MEED Capital Markets 2010 conference.

The Dubai-based head of asset management at one international bank says short selling would attract a lot of international investors. “A lot of investors would welcome the opportunity to look at the regional markets from both ways,” he says.

Short selling involves traders borrowing shares that they expect to fall in value, which they then sell. Later, they buy the shares back at a cheaper price and return them to the original owner while profiting the difference between the sale and buyback prices.

Singer says that because stock markets across the region hold shares bought by investors, rather than them being held by brokerages as in the West, it would enable the regulator to better monitor who is short selling. This would prevent market abuses, he adds.