United Arab Emirates: The Common Share Trading Platform in Dubai - How It Works and What It Means

On 11 July 2010 share trading began on the new common platform in Dubai. All the equities listed on both the Dubai Financial Market ("DFM") and on NASDAQ Dubai can now be traded on this one platform. All the equities appear on the same screen, and the settlement procedures are common to all (excluding the currency of payment).

In this article I address these questions:

• Why did the two financial markets merge their platforms?
• How does it work?
• What does it mean for investors and what are the issues involved?

The new common platform is calculated to diversify the DFM's offerings, increase the liquidity and activity of NASDAQ Dubai, stimulate the market capitalization of companies listed on both exchanges and restart the expansion of Dubai as a financial centre following the global financial crisis.

Two Financial Markets or One?
If you think of the DFM and the NASDAQ Dubai as restaurants, and not financial markets, then in the common platform they have merged their "front of house" but not their kitchens. The two kitchens are still sourcing their supplies, preparing their food and cooking their meals in the same way and still rely on exactly the same methods as before to monitor the quality of their offerings. But the dishes appear on one menu, are served in the same dining room and the diners pay at the same cash register. However, they still have to pay in two different currencies (AED or USD), depending on the dish they order!

Background
The DFM was established in 2000 to be one of the two stock exchanges listing "onshore" UAE companies (the other being the Abu Dhabi Securities Exchange, the "ADX").

NASDAQ Dubai (formerly known as the Dubai International Financial Exchange) is the stock exchange operated from the Dubai Financial International Centre ("DIFC") free zone since 2005, and regulated by the Dubai Financial Services Authority ("DFSA").

The DFM (and the ADX) operate subject to a tightly controlled regulatory and listing regime common in GCC countries. In contrast, the regulatory and listing regime applying to NASDAQ Dubai is a simplified version of the UK regime.

The move to a common Dubai platform was driven by a need to boost the liquidity in stocks traded on NASDAQ Dubai, and to give both financial markets added critical mass.

NASDAQ Dubai was originally conceived as a market for institutional investors but since its establishment the ranks of GCC investors continue to be dominated by retail investors.NASDAQ Dubai and the DFM continue to operate as separate legal entities registered in two different jurisdictions, namely, the "onshore" UAE and the DIFC, and are still supervised by the Securities and Commodities Authority ("SCA") and the DFSA, respectively.
The listing requirements of each of the DFM and NASDAQ Dubai have remained unchanged, which means the ongoing obligations of listed entities are completely unchanged by the common platforms.

The licensing process for members of the exchanges is still separate and in order to trade in DFM-listed securities the broker is required to obtain the SCA license and the DFM membership whereas trading in stocks of NASDAQ Dubai requires that the broker concerned acquires a status of a member of NASDAQ Dubai.

Consolidation of Ownership
The establishment of the common platform was preceded by a consolidation of ownership. Previously, the shareholding was held through Borse Dubai Ltd, an entity owned by the Dubai Government enabling the DFM to acquire 100% of NASDAQ Dubai.

On 25 May 2010, the DFM acquired 10 million shares in NASDAQ Dubai. At the same time, The NASDAQ OMX Group Inc. acquired 80 million shares in the DFM representing 1% of its total issued share capital.

The final step of the consolidation, i.e. acquisition of a stake in NASDAQ Dubai by the DFM from Borse Dubai, is expected to occur later in 2010.

Separate Pathways to New Listings Remain Open to Issuers
The establishment of the common trading platform has not affected either set of listing process and requirements for NASDAQ Dubai or the DFM. The core differences in the listing and ongoing requirements between the two markets remain, even though the equities in both markets are now traded on one platform.

These include, in particular:

Trading
Since 11 July 2010, brokers licensed by the SCA and the DFM as members of the DFM are able to offer their customers seamless access to NASDAQ Dubai securities provided that they have been licensed by NASDAQ Dubai as members of the exchange.The listing, trading, clearing and settlement of the DFM securities continue to take place in AED. NASDAQ Dubai equities, however, are listed and traded in USD and clearing and settlement of transactions that are carried out in NASDAQ Dubai stocks is affected in USD. Investors can manage their portfolios through Euroclear and Clearstream.

At present, not all DFM brokers are registered, but this is expected to change over time particularly as most brokers will wish to be able to trade DP World shares, which is a NASDAQ Dubai listing.

According to NASDAQ Dubai, more than half of the total value traded on the DFM in 2009 was carried out by the brokers who also trade on NASDAQ Dubai. To further allow retail participation though other UAE brokers, NASDAQ Dubai plans to work with its regulators to create a "fast track" application process for qualified DFM members to become members of NASDAQ Dubai.

Trading in equity products listed on both exchanges has become possible with the use of the National Investor Number ("NIN") and consequently the same trading account can be used for NASDAQ Dubai and DFM transactions.

NASDAQ Dubai trading hours have changed and are now from 10:00 a.m. to 2:00 p.m. UAE time (6:00 p.m. to 10:00 a.m. GMT) Sunday to Thursday which conforms with opening hours and trading days for the DFM.

Institutional investors may continue to trade in NASDAQ Dubai equities through NASDAQ Dubai brokers in exactly in the same way that they do now, including through an omnibus account. They do not need to take any action to keep trading. However, those who possess, or obtain, a NIN may use it to facilitate trading in equities of the DFM (including NASDAQ Dubai equities that can be now traded in through the DFM platform).

The trading features and functions of NASDAQ Dubai's trading system have been replaced by those of DFM's trading system, which includes pre-validation of traders.

Although trading on NASDAQ Dubai has continued to be governed by the Business Rules, these have been revised (Version 7.5, For Equities, Rulebook 1 and Version 7.6 For Derivatives and other Products, Rulebook 2).

Finally, although a transaction in NASDAQ Dubai listed stocks can be negotiated off-market, the resulting trade will have to be executed on-exchange, through DFM's pre-validation system.

The common platform does not extend to derivatives, debt securities (e.g. Sukuk or conventional bonds) and structured products which continue to be traded, cleared and settled through NASDAQ Dubai's own systems.

Interestingly, short selling in NASDAQ Dubai equity has not been prohibited although it is not permitted in DFM listed shares.

Clearing and Settlement
Settlement for NASDAQ Dubai-listed stocks moved from a T+3 to a T+2 settlement cycle which is the DFM system.

As of today, Emirates NBD, Standard Chartered Bank and HSBC are approved settlement banks for NASDAQ Dubai. To the extent that a NASDAQ Dubai member defaults on cash payment and the bank guarantee is in default, NASDAQ Dubai will meet the member's obligation through NASDAQ Dubai's Clearing Guarantee Fund.

Depository
Existing NASDAQ Dubai accounts have been migrated to the DFM's central securities depository.

Conclusion
The ambition underlying the introduction of the common platform in Dubai is to increase liquidity in both markets (particularly the NASDAQ Dubai market) and strengthen Dubai's role as capital markets hub.

There are still aspects of the common platform which require further work, e.g. AED trading, clearing and settlement on NASDAQ Dubai and a "fast track" application process for DFM members to be licensed as NASDAQ Dubai members.

We will not be able to gauge the level of success or acceptance of the common platform until the GCC equity markets make a solid recovery. However, if the common platform proves the catalyst for improving the liquidity of both Dubai markets (as it is designed to do), then issuers will eye the NASDAQ Dubai/DIFC option as an attractive and flexible pathway to listing.

Issuing through NASDAQ Dubai offers real advantages namely, the transparency and certainty of its detailed requirements, the modest free-float requirement, the bookbuilding pricing model and the ease of conducting sell-downs. Although an issuer on NASDAQ Dubai takes a different path than the issuer on the DFM, both issuers arrive at a common destination on the common platform, with their shares displayed on the same trading screen.

Issuing through NASDAQ Dubai offers real advantages namely, the transparency and certainty of its detailed requirements, the modest free-float requirement, the bookbuilding pricing model and the ease of conducting sell-downs. Although an issuer on NASDAQ Dubai takes a different path than the issuer on the DFM, both issuers arrive at a common destination on the common platform, with their shares displayed on the same trading screen.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.