As a veteran of the US Securities and Exchange Commission (SEC), Paul Maco has had a unique role in helping to shape debt markets. When he started out in the New York SEC office as an enforcement lawyer in the late 1970s, debt instruments such as bonds went largely ignored in favour of the more popular equities markets. However, when US interest rates started pushing 20 per cent, markets began to create short-term lines of credit to create more flexibility in the capital markets.
"This was the very beginning at looking at the combination of different types of financial instruments in order to address a real market volatility," Mr Maco said. "There was this transformation, really, in the modern financial markets, but there wasn't a lot of focus being paid to it at the SEC." Lines of credit led to other types of securities, which were then hedged against other investments. While that might sound like dry stuff, those technical equations, powered by computer programming, invented modern finance. It enabled, for better or worse, the sort of financial products that allowed ordinary people to invest globally and acquire loans that would have previously been unavailable.
Mr Maco went on to establish and run the first SEC Office of Municipal Securities and eventually served as its chief enforcement lawyer. He returned to private practice in 2000, joining Vinson and Elkins, a law firm based in Houston. He began travelling to Dubai five years ago and was just reappointed to the Emirates Securities and Commodities Authority, which regulates the financial markets in the UAE. His comments came in an interview.
Q Why didn't the debt markets attract the same sort of attention as equities? A There wasn't a lot of focus being paid to it at the SEC because a lot of these products did not directly affect, at least at that time, the entities that registered with the SEC. They were incremental to (companies') balance sheets rather than their main business and the risk component that they posed really wasn't something as dramatic as, say, the share price. So lot of people just focused on equities and disclosure. Now there were people who were looking at what are these things: are they securities? Are they exempt and are they registered? And, of course, [all of this deliberation] generated a well of expertise. But largely it was in that kind of analytical framework rather than "what does this mean for markets? What is this stuff doing? How does the fixed-income debt market really effect what is going on"?
Talk about teaching securities law and some of your work at the SEC that dealt with other nations' debt markets. A I'm trying to explain to students, many of whom are from outside the US - really, really smart young people - why it is that we have the SEC and the Commodities Futures Trading Commission. Why does the US House of Representatives agriculture committee have anything to do with derivatives? That it's politics, but that also the origins go back to ranchers and farmers getting their products to Chicago and what they're going to get paid when they get there. I get to the SEC and they're doing technical assistance trying to create markets. One thing that's not happening - with the focus on equity markets - is that some of the countries that we were working with were still primarily agricultural. There's not a ready-made opportunity for companies that are going to issue stock and do something. The economy just hasn't quite evolved to that point.
But there are things - highways, water systems, electrical systems - many of which were owned by the state but were now transferring out to private ownership that need to raise capital. Well, they do that through the debt market. But in the debt market, like anything else, there must be a certain health, a liquidity behind it, so you're not always stuck with something for 30 years. So you can load it off if your needs change, your risk profile changes or whatever. So I argued the case that they really needed to start shifting towards and including a debt market component [at the SEC] and they did.
How does that work tie in with what you are doing today in the UAE? A When I went to V and E, my goal was not to just focus on municipal markets but to focus on capital markets generally and capital markets development, from the securities regulatory aspect. I was and am the point person in the Washington office for anything that's happening at the SEC in terms of financial markets regulation. Likewise with what's happening in Congress with respect to financial market regulatory reform - to the extent that that's happening - and we had the opportunity shortly after we opened our office here to become involved in working with providing input and consultation to the regulators.
We began working together on a variety of different projects. I was appointed to the advisory board of the Emirates Securities and Commodities Authority, and about three years ago, at the same time, was also working on practical projects in the region: sukuk financing, fund creation, hedge-fund investment restrictions and barriers to marketing and distribution of such collective investment vehicles. The regulators in the region have begun to focus on increasing the level of sophistication of the regulatory systems here as they apply to various financial projects.
What was the environment around the financial markets here when you first began travelling here five years ago? A What I saw was an area in transition, that had the beginnings of a regulatory framework that goes back to 2000. Aside from the very important activities of the Central Bank, in terms of the securities markets and commodities market, that really began in 2000. Right around that time, just around the time that the DIFC [Dubai International Finance Centre] was really beginning to get on its feet and had just really put in place its rule book, which they did in a very thoughtful and comprehensive way, there still was a need for additional framework, infrastructure. But I also saw a tremendous level of awareness and commitment to it. These are very energetic and committed people who really want to achieve the best possible result for the region and for the UAE.
The creation of the financial market is something that does take time. I think there's been quite a bit of growth. I was honoured three years ago to be asked to go on the board of advisers to the Emirates Securities Commodities Authority and was just reappointed this past summer. Tell me more about your work with the authority. What can you do with this group? A We're really a sounding board. What that exposes me to is some very dedicated people who are really looking at all the options and really trying to do their homework and get it right, particularly for the region.
When you're creating an infrastructure, it has to be something that's meaningful to the intended participants. You can't just pull it off the shelf and drop it in. New York is different from London and different from Singapore. And any of these three models, you don't just pick them up and drop them in here or in Qatar or Bahrain. You have to, in my view, be very attuned to the people that you're trying to bring in and participate domestically as well as internationally and create an environment that's going to be responsive to both. I think there are important factors in the region. Islamic finance is an important vehicle in this region, it's intrinsic to the region. That is not the case in New York.
What are your thoughts about how Dubai is emerging from the global recession? A I am a lawyer, not an economist, so I'm not sure I'm really qualified to give you a competent answer to that. One of the reasons I'm here is to work with my colleagues who are putting on seminars for some clients and potential clients talking about the growth of regulatory structures that encourage creation of mutual funds and other collective investment vehicles. That's something that is happening, both in Islamic and non-Islamic products.
My particular reason for being here is because the US market is really interested in products outside the US. There is in the US a substantial Muslim community, middle-class or upper-middle class, a fairly prosperous group of people. And there's also not a particular market right now in the US that's Sharia compliant. But that aside, even just your run-of-the-mill US investor remains interested and may even be much more interested in this region, because it appears to be emerging from the crash ahead of others.
In terms of potential for growth, this remains, and is even more so, a very interesting part of the world, as financial products funds are being created, both Islamic and non-Islamic. There's investor interest. @Email:email@example.com