x Abu Dhabi, UAE Friday 21 July 2017

Delivery payment system is no cure-all

A key settlement system expected to be enforced on UAE bourses by the end of this month will not necessarily lead to the country's inclusion on MSCI's emerging market index

The markets welcomed a decision this week to enforce a key settlement system as a boost to the UAE's chances of earning MSCI's "emerging market" status.

But the announcement of the delivery versus payment (DvP) system is not exactly a cure-all for market woes.

DvP, where securities are delivered and cash received on the same day, will help to minimise the risks from the delivery and receipt of securities, the Emirates Securities and Commodities Authority (SCA) said this week.

But it is not clear if all brokers are ready for the change.

"If SCA is ready for it, it doesn't mean the brokers are," said Fathi ben Grira, the chief executive of Menacorp Alternative Investments in Abu Dhabi.

Mr ben Grira is among several sceptics who think brokers will have difficulty implementing the system effectively by June, when MSCI is expected to make a decision on the UAE's status.

"I don't think that many brokerages are aware of and have a proper understanding of the DvP system," he said. "It's not a complex system but it is new."

The MSCI index is tracked by thousands of fund managers and directs billions of dollars' worth of liquidity from international investors. The company classifies six of the Gulf's seven bourses, including the UAE's, as "frontier markets".

This designation typically applies to less developed, more volatile financial markets from which most international fund mangers shy away.

The exchanges have been testing the DvP system for the past few months as pressure mounts to address MSCI's concerns about it, which the company detailed in its report last June.

"We need to see proof that it actually works," said Julian Bruce, the director of institutional equity sales at EFG-Hermes in Dubai. "There needs to be a trial period as soon as possible."

Short selling, another important component for a potential upgrade, is expected to be introduced in Abu Dhabi and Dubai this year, the exchanges' chiefs have said.