Inside the mind of the Investment regulator? - Mondial (Dubai)

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Dr. Al Hamidy 's “realpolitik” was excellent, and for outsiders looking in, a real insight into what might develop n
Inside the mind of the Investment regulator? UAE (and Qatar)- MSCI Market Upgrade due 31st May…then what? The 6th Annual SCA Conference: “Global Standards- The pathway to Deep and Liquid Markets”. KEY THEMES: 

“Best practice”: International Standards and IOSCO (International Organisation of Securities Commissions). Keynote speech focused on the need to build bond markets as an alternative to bank and equity financing. Keynote speech also focused on the need to build a deep pool of institutional investors….pension pots?

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Digging into the mind of the UAE financial services regulators- not the easiest of challenges, but one which is about to endure fascinating change. Well that’s the sense I got from my third visit to the Securities and Commodities Authority (SCA), Annual Conference (SCAs 6th Annual Conference). What I recall from visits one and two was that the content flew largely over-my-head. That’s only partly down to personal stupidity; and partly relates to the fact that much of the UAEs financial services activity relates to the global world in which we live. Mondial’s relationships and interactions are more likely to revolve around London, Mumbai and New York rather than Abu Dhabi. The 6th Annual Conference though brings a hint of change. A breeze rather than a “wind of change”; but definitely change is in the offing. The Keynote speech of H.E. Dr. Abdulrahman Al Hamidy (Director General Chairman of the Board of Arab Monetary Fund) congratulated SCA on the MSCI upgrade noting “this upgrade will not be regarded as a destination, but rather a milestone on the path to ever more transparent, efficient and liquid markets”. This gives you key theme No1: the journey, not the destination. Within the journey Dr. Al Hamidy repeated the theme of SCA’s CEO (Abdullah Al-Turifi) statement that “the main subject of the conference is the significance of focussing on best international standards in market systems, procedures and transactions.”, this all fairly consistent with a visit to the SCA offices where you can see the “Mission Statement” clearly voicing the intention to build transparency and trust into the UAEs capital markets. In short, SCAs current attention remains focused on the integrity of local capital markets, and the MSCI Upgrade is partly a reflection of the market meeting IOSCO standards. A slap on the back for the local regulator…. But what next? BACKGROUND: The tide rises for Arab markets • The AMF Composite Index (which measures the aggregate performance of Arab stock markets) increased by 18.6% in 2013.  

Total purchases of foreign investors of Arab Securities reached USD 57.3 billion in 2013 an increase of USD 20.4 billion! The value of corporate bonds and sukuk’s issued in 2013 reached 30.7 billion, compared to USD 6.9 billion financing through equity markets (IPOs and Rights issues).

BOND MARKETS Taking Dr. Al Hamidy ’s keynote speech as the lead, key areas of “the next step” in the changejourney would seem to revolve around the need to develop the bond market as a means of alternative financing away from banking and the equity market; and the need to build greater depth to institutional fund management. Dr. Hamidy reminded the audience of the last global financial crisis which triggered a decrease in capital flows and cross border banking loans. “It is worth mentioning” Dr. Al Hamidy said, “that these crises have, in the case of Arab countries, highlighted the risks associated with concentration of lending activity through one channel, namely the banking sector”. For Al Hamidy: “the contribution of both non-banking financial institutions and debt capital markets in private sector financing still remains low compared to banking credit facilities in the region”. For investors then, there ought to be more opportunity to diversify fixed income portfolios. After all, this is macro-level pan Arab political powers voicing intent. For Dr. Al Hamidy, government focus should be on building financial stability “from a primarily bank orientated to a multi-layered system, decreasing the maturity mismatch between assets and liabilities and enabling introduction of new financial products which can enhance risk management and curb asset bubbles”. Importantly, the bond journey is not without its challenges. Dr. Al Hamidy listed the lack of benchmark government issuances and the need to modernise the existing legal framework as examples. Nevertheless, it’s an area of change being tackled by SCA and the UAE with what Dr. Al Hamidy called “ground breaking” new rules for bonds and Sukuk ‘s. INSTITUTIONAL INVESTORS Dr. Al Hamidy then concentrated on “the relatively low level of assets under professional management”, based no doubt on the fact that the Gulf Nations in particular have a very high income per head level. From a Mondial perspective we were pleased to hear Dr. Al Hamidy refer to the need “for better regulations and incentive structures to develop non-banking financial institutions that can attract long term savings”. This developed into a call for ways to enhance the development of “collective investment schemes” and institutional investment. And from that, there is a very short step into the call for “Undertaking major structural reforms… for the development of private pension funds”. Ultimately, the Keynote speech and the comments from SCA provide a very useful “state of the nation” as far as regional markets are concerned. The information flow on local/regional markets is improving… but real insight is rare. Dr. Al Hamidy ‘s “realpolitik” was excellent, and for outsiders looking in, a real insight into what might develop next. At the moment maybe just a “wish list” but it’s the “powers that be” doing the wishing!

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