x Abu Dhabi, UAEWednesday 17 January 2018

Connection is the key to markets

Arab stock markets are in talks to unify a key settlement system by the end of the year, said the secretary general of the Arab Federation of Exchanges yesterday

All Gulf stock markets except Saudi Arabia are still categorised as "frontier".
All Gulf stock markets except Saudi Arabia are still categorised as "frontier".

Stock markets in Arab countries are in talks to unify behind a key settlement system that forms a major part of the UAE's push to upgrade from a frontier to an emerging market.

Fadi Khalaf, the secretary general of the Arab Federation of Exchanges, which counts 16 stock markets as its members, including all GCC states, said he was "confident" the markets would "connect together" by combining their clearing and settlement systems in the next 12 months.

The settlement system, so-called delivery versus payment (DvP), in which securities are delivered and cash received on the same day, is a key component for upgrading the UAE and Qatar to the MSCI's "emerging market" index, from their current designations as "frontier markets".

Investors and fund managers shy away from investing in frontier markets, which are considered volatile and risky. However, emerging markets are perceived as more stable and they direct billions of dollars worth of foreign investment into countries' economies.

At present all GCC markets, with the exception of Saudi Arabia, are categorised as "frontier".

The DvP system helps to minimise the risks from the delivery and receipt of securities. Using one clearing and settling system across the region would streamline transactions and reduce errors.

But Mr Khalaf said final implementation depended on different countries reaching agreement.

"We are in negotiations [to combine the settlement system across countries] but it depends on who will sign it," he said at the Abu Dhabi Securities Exchange (ADX).

Last week, UAE bourses gave brokers and custodians until May 29 to switch to the DvP system, which is a global standard.

The UAE and Qatar, both rejected twice for upgrades, have moved to address key issues cited in MSCI's review last year by introducing the system.

Rashed al Baloushi, the deputy chief executive of the ADX, has been calling for the enforcement of more complex financial transactions, including short selling, to increase the chances of an upgrade.

'The checklist that [MSCI] had, we got ticked in all except DvP," said Mr al Baloushi. "Now that is ticked. We are positive."

Market commentators said unifying the DvP system across all Arab markets would reduce confusion among brokers.

"If a clearing and settlement system such as Euroclear [a European cross-border DvP system] were replicated across all Arab markets then it would be simple, familiar and little could go wrong," said Julian Bruce, the head of institutional sales at EFG-Hermes in Dubai. "But the political will is lacking."

Potential mergers between international stock markets bring into focus the possibility of stock market consolidation in Arab countries.

Germany's Deutsche Boerse is in advanced talks to buy NYSE Euronext, while the London Stock Exchange is also working towards a merger with the owner of the Toronto Stock Exchange.

Mr Khalaf said a merger of all Arab stock markets had not been discussed, but the consolidation of a country's stock markets made more sense.

Speculation that the Dubai and Abu Dhabi markets will merge has been ongoing for more than a year, with many market commentators, including Jeff Singer, the chief executive of Nasdaq Dubai, supporting such a move.