In 2000, the UAE enacted the Securities and Commodities Authority (SCA) to realize many objectives. SCA offers a chance to fund and invest savings in Securities and Commodities in an organized way to achieve the national economy's interest (Mahomed, 2017). Besides, it secures accurate transaction and integrity, and make sure there is the interaction between demand and supply forces to protect the investor and determine prices by creating a just environment among different investors. SCA strives to improve investment awareness by presenting recommendations through various studies. Securities and Commodities Authority seeks to secure economic and financial security.
In the UAE, two financial exchange markets are highly popular under SCA, namely the Dubai Financial Market and Abu Dhabi Securities Exchange (Akhtar & Jahromi, 2017). The two markets are associated with the Emirates Securities Market. In the UAE, the financial markets primarily handle Sukuk, derivatives, stones, metals, currencies, commodities, mutual funds, futures, bonds, securities, and equities.
Abu Dhabi Securities Exchange was established in 2000 as a stock exchange located in Abu Dhabi. The purpose of ADX was to provide funds investment chances in securities for national economic growth. Like a stock exchange, the primary services entail bonds, funds, and equities (Baydoun & Anwar, 2018). ADX developed investment awareness to make sure that savings are invested in every productive sector to maintain economic and financial stability.
Dubai Diamond Exchange is a Dubai Government initiative and DMCC platform which is based in the Middle East and is the World Federation of Diamond Bourses' affiliate. DDE is known to have a unique platform and market for exchange and trading of precious gems and diamonds. DDE is located in Almas Tower, which serves as a home to several international and regional precious gems organization.
In 2000, Dubai Financial Market was created as a public institution. The institution was established as a Public Joint Stock Company by the Executive Council Decree of 2005. About 20 percent of its share was provided for the public subscription (Ayturk et al., 2017). The amount was the first to be used across the Middle East region. Across the world, DFM was regarded as the primary financial market that abides by Islamic Sharia rules. Besides, the company provided securities lending, debt instruments, equity instruments, borrowing, and exchange-traded funds.
In 2002, DIFC was created as a free zone to offer financial, market, and physical infrastructure needed to operate and create a thriving marketplace (Akhtar & Jahromi, 2017). Different consulting companies, law services, insurance companies, asset management companies, and leading banks have established their offices in DIFC, which is also a global financial hub. In 2002, Dubai Multi Commodities Centre was created one of Jumeirah' Lakes'Towers free zone and acted as the Dubai government strategic initiative to provide financial, market, and physical infrastructure needed to operate and set up a thriving market place. The company trades in terms of four commodities groups, namely tea, pearl, diamond, and gold. DMCC initiated DPE to support global trade for both farmed and natural pearls.
In 2005, Dubai Gold & Commodities Exchange was established as the first region commodity derivative exchange. In the Middle East, DGCX is currently the leading derivatives exchange. DGCX handles equities, hydrocarbons, currencies, and metals. Thus, it acts as DMCC's subsidiary. DGCX is an electronic platform for currency derivatives and trading commodities, with about 267 members across the world.
In June 2007, the Dubai Mercantile Exchange was launched to bring transparent and fair price discovery and offer risk management solutions to the East Suez. DME handles both commodities and energy futures (Akhtar & Jahromi, 2017). Thus, it provides the most transparent and fair transparent crude oil benchmark in the Middle East region. DME is located in DIFC, where the Dubai Financial Services Authority regulates it regularly. NASDAQ Dubai combines international and regional wealth, making it a worldwide unique platform for investors to find opportunities and for organizations to raise money.
Participants Involved, Traded Fixed Income Securities
At UAE, there exist three participants who are directly engaged in fixed income securities, namely dealers, investors, and issuers. The UAE issuers ensure that a syndicate of dealers is mandated to distribute and underwrite the bonds provided to the investors (Crabbe & Fabozzi, 2015). In some instances, other participants may be involved to ensure that the primary participants offer essential services (Akhtar & Jahromi, 2017). UAE issuers raise funds by giving debt instruments and bonds in debt capital to fund new projects or invest in existing companies. UAE issuers are dominated by corporations and the government. In this context, the government entities support most of the public operation by using debt markets. Companies issues debts when it is favorable regardless of issuer-specific financial requirements and market condition compared to other funding approaches. UAE companies issue a less liquid FIS than those issued by foreign companies based on the factors specified in UAE markets
UAE dealers comprise the financial corporation, which is predominated by investment banks. In essence, the bank plays a crucial role in offering assistance to the government entities and corporations to raise capital based on sound financial decisions. UAE dealers offer services, underwriting, and advisory to the UAE issuers when they are willing to provide security to raise money (Baydoun & Anwar, 2018). In this context, they participate in supporting allocation process and price discovery, soliciting funds and interests from UAE investors, and drafting legal documents. In other words, the UAE dealers are involved in appointing syndicate dealers, who, in turn, reduces the deal burden on the lead by spreading the risk exposure among syndicate dealers. Ideally, the UAE dealers offer diversified services to UAE investors and issues like structuring, trading and sales, and research. Underwriting UAE Corporation' FIS is dominated by some bank that strives to purchase and hold different securities for their specific accounts (Aldhaheri, 2017). Ideally, the practice has led to the lowering of FIS floating in the market to curb UAE-issued appeal for international investors. A complete and timely transactional FIS data provided to the DFSA helps in assessing if the customers are receiving reasonable and fair prices.
UAE investors comprise of individuals or institutions that offer capital to government entities or corporations with the desire to generate a return on their money. In essence, UAE investors buy securities from UAE issuers. UAE investors include financial institutions, corporations, governments, and other groups who are committed to investing in debt capital markets (Ayturk et al., 2017). UAE investors actively participate in the market since international investors must consider UAE investors' trading patterns before they engaged in any investments in the market. In other words, the foreign investors purchase FIS of issuers and companies favored by UAE investors (Zarrouk et al., 2017). Generally, the UAE investors hold FIS to maturity leading to further depression of liquidity.
However, there exist other participates who offer essential services in the entire debt issuance process. In this context, the credit rating agencies monitor the credit rating of the issuers. By doing so, it can assist in determining the issuer's credit health. Also, the legal counsel files and drafts legal documents and offer the issuers with legal advice in the entire issuing process. Besides, the settlement agents play a crucial role in completing the transaction between a seller and a buyer of securities.
Bond Trading Practices in the UAE
In UAE, some restrictions are put in place concerning selling and offering of debt securities. As amended, the Commercial Companies Law no. 2 of 2015, provides the general rule for the provision of debt securities, which entails Sukuk and bonds by a joint public organization. Decree No.16 of 2014 and SCA Decree (Decree No.17 of 2014) are the competent regulator for listing and issuing of the Abu Dhabi Securities Exchange and Dubai Financial Market (Alswaidan, 2017). SCA issues decree No. 2 of 2000 based on the regulation of commodities and securities listings. As amended the Rule Book Markets Rules, Dubai Financial Service Authority and the Dubai International Financial Center Market Law No. 1 of 2012 works in tandem to regulate, issue, and list Sukuk and debt on NASDAQ Dubai (Aldhaheri, 2017). The Federal Law No. 9 of 2018 governing debt securities and public mortgages. Besides, Federal Law No. 14 of 2018 tends to organize and oversee financial activities and institutions such UAE Central Bank to act as the licensing authority for every licensed commercial business performed with the country, including Sukuk and bonds.
Joint companies can issue bonds that remain at nominal value until the amount is paid fully. Bonds' conversion to shares is authorized by preapproving documents and providing them by the SCA. In the context of resolving convertible bond issuance, the issuer is limited to raise profits percentage distributable and reduce capital on the shareholders until the conversion price is paid. Debt securities issuance has to be impacted by special general assembly resolution. In this context, the board of directors delegates and assess the time of publication without exceeding delegation resolution by one year (Baydoun & Anwar, 2018). The capital given to the organization should be paid in full amount by issuing the balance sheers covering loss account and profits for not less one fiscal year. Debts instruments and bonds have to be issued based on the procedures and conditions determined under regulations issued by the SCA and Central bank. The organization cannot delay or advance the bonds payment dates. If a corporation is dissolved for other reasons apart from a merger, the bondholder may request value payment of their bond even before reaching the maturity date (Akhtar & Jahromi, 2017). No organization is allowed to offer financial assistance to shareholders to permit them to possess a bond issued by the organization, like providing assets or loans of the firm to act as a guarantee.
Bond Pricing and Yield Calculation in the UAE Financial Markets
In 2009, a first sovereign bond was issued by the UAE federal government. In the following year, the bond market was slightly in better shape as compared to that of 2009. At the end of the 2010 year, the market accumulated about a $31 billion bond offered by the Mena region. The percentage yield on a bond is calculated by using the formula:
Yield= Interest on bond / bond’ market price x 100 %
Interest Rate Analysis in the UAE Financial Markets
UAE's interest rate average to about 1.47 percent from 2007 to date. The figure accumulated to about 4.75 percent in 2007 and was slightly low, with 1 percent in 2009. In September 2019, the UAE Central Bank reduced its benchmark interest rates by 25bps, which averaged to 2.25 percent, a reduction that was realized after the United States policymakers lowered the interest rates for the second time in 2019 fiscal year. In the October meeting 2019, the UAE Central Bank reduced its benchmark interest rates by 25bps to about 2 percent.
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