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:
NASDAQ Dubai |
DFM/ADX |
Minimum free float requirement: 25% |
Minimum free float requirement: 55% (for family business 30%) |
Valuation to be approved by an accountant appointed by the issuer |
Valuation to be approved by a committee appointed by the Ministry of Economy |
Pricing based on market established upon bookbuilding |
Offer pricing approved by the SCA |
Employee share plans facilitated |
Employee share plans not recognized |
Usually, shareholders' lock-in for 12 months required by contract with NASDAQ Dubai |
Mandatory founding shareholders' lock-in for 2 years |
3 financial years' track record |
2 financial years' track record |
Documents in English |
Documents in Arabic |
Sell down to the public or capital increase |
No sell down to the public permitted (only capital increase ) |
Preference shares can be issued |
No preference shares can be issued |
No restriction on the value at which shares can be issued (provided they are not issued at a discount from par value) |
Shares must be issued at AED 1 up to AED 100 each |
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.