x Abu Dhabi, UAEFriday 21 July 2017

Recovering markets fail to stem loss of brokerages

The industry continues to suffer, with eight more casualties over the past three months despite rising trade activity.

The rebound in local markets has not slowed attrition in the brokerage industry as eight more companies have shut in the past three months.

More than a quarter of the brokerages operating at the start of the year have since closed. There are now 76 companies operating in the country, down from 103 at the beginning of the year, said the Emirates Securities and Commodities Authority (SCA).

"Many are still not breaking even. It is a very tough environment," said Mohammed Hamdy, the general manager of Tadawul Shares and Bonds Mediation.

Just this week Tadawul became the most recent brokerage to apply to SCA for permission to cease operations and laid off 16 employees.

"A lot of my brokers went home. Some are applying to different business lines," Mr Hamdy said. "Many are still looking for a job. It is not that easy for a broker to move to another brokerage firm."

He said some of the remaining firms were surviving on profits from previous years, while others had received capital injections from their owners.

Brokerage revenues dropped sharply at the start of the year as trading volumes slumped badly on both major bourses in the UAE.

Trading activity picked up markedly after Ramadan and the announcement of a Dubai World debt restructuring agreement, with daily traded value averaging Dh449 million (US$122.2m) last week, more than double this year's daily average of Dh176m.

Hatem el Atabani, the managing director of Makaseb Islamic Financial Services, said Dh1.5bn worth of traded value a day was necessary for the next six months for most companies to recoup their losses from recent months.

The Abu Dhabi Securities Exchange (ADX) said yesterday it was sending a proposal to SCA to distinguish between brokerages that actually clear trades and those that merely process, buy and sell orders.

"As the volumes were shrunk, we had some companies re-evaluating the need and the commercial value of their existence," said Elie Ghanem, the head of market and product development for the ADX.

"So we'll have very high capital risk management requirements and quality controls for the high-end clearing members. Small companies that are more likely to close want to ensure that the back office is being handled for them.

"So we'll take some of their major overheads and let them concentrate on buying and selling. That's what they are good at. In my opinion that's the adequate solution for this case."

SCA has said it would introduce a regulation that permitted margin trading by the end of the year. That could add a new level of sophistication to local markets but some observers think it could benefit the larger banks at the expense of small, independent brokerages.

"Financial institutions will have much more financial strength," Mr Hamdy said. "When those business lines are going to be offered, people are going to want it. That will kill the independent brokers except for the traders who don't want to use margin."

* with additional reporting by Farah Halime

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