The brokerage business in the United Arab Emirates is collapsing. Those brokers that survived 2011 know the cull will continue in the year ahead, and that their numbers will be even fewer come 2013. Both investors and brokers are crying out for crucial and well overdue reforms to address the parched equity markets. Regulators are now beginning to respond, implementing a new settlement process for financial instruments, required by the MSCI for the UAE to join the ranks of its Emerging Markets Index, and introducing draft laws to help raise liquidity. And while these reforms are steps in the right direction, much more will be needed to avert a total disintegration of the brokerage market. This month Executive examines the crisis battering brokers in the UAE, as well as the solutions that could save the industry.
The desperate needs
Structural reforms are critical and long overdue. First and foremost, the UAE exchange misrepresents the UAE economy. The ailing real estate and banking sectors will not buoy the exchanges, and without listings from thriving retail, tourism and airline sectors, the bourse will starve. For a more diversified exchange, the government needs to show its support for the equity markets by listing its own companies on a UAE exchange. The listing of large state-owned and successful corporates by the government would raise liquidity and it could encourage private companies to follow suit, leading to a more developed capital market — which should be a high priority government target.
Increasing the participation of institutional investors in the UAE exchanges would also improve liquidity. While the draft laws introduced in 2011 could help raise this interest, brokers suggest other means to attract institutional investors, such as mandating local pension funds to invest in UAE markets as opposed to allowing them to invest all their funds in their market of choice. Companies in the UAE also need to go on more road shows to promote their businesses, their projects and the UAE to the international community.
As brokers choke financially, it is also critical that regulators revisit the lofty costs of running a brokerage. Regulators demand huge bank guarantees from brokers to provide them with access to the exchanges, further straining brokers’ ability to survive; lowering these bank guarantees would give brokers more fiscal leeway. Regulators also limit brokers to only charging commissions on volumes traded, putting them at a disadvantage relative to international brokers who can charge for different services. Regulators set a maximum limit on the commission charged, of which the exchange takes a hefty portion. This limit and the percentage paid to the exchange should be revisited.
Merging the UAE’s two exchanges, the Dubai Financial Market and the Abu Dhabi Securities Exchange, would reduce costs for the brokers, provide scale for the exchanges and potentially increase profits. While unsuccessful merger talks have been held in the past, this issue remains mainly political and on the bottom of the ‘to-do’ list for now. It should move up the UAE’s priorities, as it would provide a more efficient UAE exchange with a more cost effective brokerage industry.
UAE exchanges are still nascent, as they have existed for only 10 years. They have a lot to learn before they reach the level of sophistication attained in markets of the developed world. The bourses should also take advantage of their infancy to avoid the mistakes that brought the markets in the Western world to their knees, which they are still struggling to get off of.
The UAE markets are in the same downward spin as much of the rest of the global industry, and are in need of guidance to steer the wheel in the right direction. Battening down the hatches and riding out the storm will leave the brokerage
industry out in the rain. However, if reforms are implemented and leadership shown, developed capital markets may rise from the turmoil and offer a path to a more prosperous future.