x Abu Dhabi, UAEWednesday 24 January 2018

UAE brokerages face closure if they make illegal loans

UAE regulator tells brokerages they face closure if they don't stop unregulated lending to buy shares on the booming markets.

UAE brokerages that make under the table loans to clients face being shut down.

In an effort to stamp out unregulated lending to stock-market investors, a federal regulator has warned them they could face fines starting from Dh100,000.

The regulation from the Securities and Commodities Authority (SCA) came into effect on Wednesday and will be felt most keenly by the 37 of 48 UAE brokerages that do not have licences to offer clients margin trading – the regulated practice of lending money to investors who want to leverage their holdings. The practice magnifies gains or losses.

All brokerages in the country were informed that fines of Dh100,000 would be levied on first-time transgressors, reported Al Ittihad, the sister Arabic language publicationof The National.

The SCA warned that repeating the offence would result in the closure of the brokerage and a third infraction would result in the permanent removal of the brokerage from the list of the firms that can operate in the Emirates.

Many of the 37 brokerages that do not have a licence to offer clients margin trading have relied on unregulated loans to meet the demands of clients and generate trading commissions, Al Ittihad reported.

The SCA has also amended regulations for margin trading that may expand the amount of cash available for investors to buy stocks on margin by threefold. The regulator has done that by “making the new rate for margin finance per client 10 per cent of the amount set for margin finance by the brokerage company”, according to a statement on the SCA’s website posted on December 29.

“This amended text replaces the current one which says the amount should be 10 per cent of the total basic capital and additional capital as indicated in the SCA-approved standards for financial adequacy.”

Regulated margin trading was introduced in the UAE in 2012. Before the global financial crisis of 2008, securities firms borrowed from banks and extended them to high-net-worth clients as unregulated facilities.

Brokerages became mired in a spate of legal disputes with their clients when markets slumped and trading volumes crashed in the wake of the global financial crisis.

Tumbling volumes forced dozens of brokerages to shut down. Many of the independent securities companies have had their capital replenished and maintained the bare minimum staff as required by the market regulator: a trading manager and two brokers. At the peak, in 2010, there were 103 brokerages in the UAE.

The 11 brokerages that are licensed to lend on margin welcomed the new regulation and weren’t concerned that the move to eradicate freelance lending would have a negative effect on the stock market, according to Al Ittihad.

Investors, however, were quick to react. The number of shares trading hands on the Dubai stock exchange dived 60 per cent and 65 per cent in Abu Dhabi on December 29 from the day before, but bounced back on December 30.

The benchmark stock index of Dubai more than doubled in 2013, while the key Abu Dhabi measure gained 63 per cent on the back of improving economic fortunes.

Observers said the regulator was now keen for more oversight, to ensure that lending by brokerages to buy stocks is handled in an orderly manner if such loans were to be forcibly unwound during a market downturn.

That is because under the rules of margin trading, investors are obliged to liquidate their holdings to pay back what they owe to their brokerages when declines surpass a limit set by the brokerage.