By Andrew Torchia
New rules issued by the United Arab Emirates' securities market regulator aim to develop local currency bond and sukuk markets in the Arab world's second-biggest economy.
In meetings with potential issuers and financial firms in Abu Dhabi and Dubai this week, the Securities and Commodities Authority (SCA) outlined rules designed to make it faster and cheaper for companies to issue conventional and Islamic bonds, and easier for investors to trade them.
"We would like to see more active bond and sukuk markets - we would like to see more listing, more trading," Mounther Barakat, senior research adviser at the SCA, said in Dubai on Tuesday.
If successful, the project could help to reshape corporate financing in the UAE. At present, firms rely heavily on bank loans and to a lesser extent retained earnings; local currency bond issuance is minimal, and usually only the biggest companies can afford to issue bonds in the international market.
This slows the UAE's efforts to diversify its economy beyond oil and could increase risks in the banking system by making banks, rather than a broad pool of investors, bear the bulk of exposure to corporate debt.
The new rules, which do not apply to issues by government bodies or state-owned companies, set a minimum issue size of just 10 million dirhams ($2.7 million), down from a previous floor of 50 million dirhams.
The SCA said it would shorten the time it took to review and approve issuance applications to five days, while private placements of bonds not listed on the UAE's securities exchanges would not need SCA approval.
Issuers of bonds and sukuk now only need to make financial statements annually, instead of quarterly, and issuers no longer need to obtain credit ratings from rating agencies - potentially removing a major expense for them.
The rules do not attempt to drive trading onto exchanges as they allow off-market dealings in listed bonds and sukuk, as long as the trades are registered. Foreign investors may be encouraged by a provision allowing clearing and settlement abroad, through institutions such as Euroclear.
Dubai wants to become a top sukuk trading centre, and the SCA rules appear to facilitate that by taking a hands-off approach to religious permissibility; they do not specify which sukuk types can be used or distinguish between "asset-backed" and "asset-based" sukuk, a focus of debate in the industry.
"Our policy is to stay away from issuing fatwas," Barakat said. Issuers' own sharia advisers will rule on whether sukuk are permissible, while issuers can also seek guidance from the Dubai Financial Market's sharia board.
In another move to stimulate activity, the new rules introduce the possibility of companies making competitively bid issues without engaging an arranging bank, though it is not clear how many companies will want to try this.
Michael Grifferty, president of the Gulf Bond and Sukuk Association, an industry body which discussed the rules with the SCA, said a sudden surge of issuance in response to the reforms was unlikely, as it would take time for firms to become familiar with them and for a support network of advisers and arrangers to grow.
But he said the new rules were a step towards developing an active corporate bond market in the Gulf; other countries in the region may also introduce reforms.
"As we have seen, the international bond market can come under stress or be closed, for reasons which have nothing to do with the UAE or its issuers, so it would be nice to have a spare tyre, so to speak," he said.
