What now for the DFM?

After the financial drama of August 28, speculation is rife over what further action needs to be taken. David Robinson reports.

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By  David Robinson Published  September 11, 2005

|~|200--trader.jpg|~|Dubai Financial Market |~|After the financial drama of August 28, speculation is rife over what further action needs to be taken. David Robinson reports. THE DUST has begun to settle on the biggest stock market scandal the region has ever seen. Dubai’s robust financial markets have been shaken by the wipeout of US$2 billion of trading in Dubai Islamic Bank (DIB) shares at the end of August, but observers say the swift and aggressive response by regulators to punish the culprits and ensure transparency has reassured jittery investors. The Emirates Securities & Commodities Authority (ESCA) began naming and shaming the culprits involved in the manipulation last week and promises that tough penalties would be imposed. But as the government looks to consign the incident to history, rumours have been circulating that the motivation behind the clampdown might not be whiter than white. The investors involved — Rashid Bin Zayed Bin Ouaidha Al Qubaisi, Khalid Ahmed Mejrin Al Kindi and Yahia Awadhallah Salama — borrowed more than US$1 billion from local banks to finance the move, which they pumped into DIB’s stock throughout the day on August 28. The deals were conducted through brokerage firm Al Sharhan Stock Centre. Under Dubai Financial Market (DFM) Authority rules, when a trade of more than 10 million dirhams (US$2.7 million) goes through the exchange, it is obliged to make a call to the brokerage involved, therefore the DFM would have been in touch with Al Sharhan throughout the day, yet it took no action until after the day’s trading was over. Observers are speculating that lenders backing investors in the stock market might have got severely burnt, had regulators not stepped in to ensure a total rollback of the entire day’s trading in DIB. It has been speculated that prominent connections may have been used to make sure prompt action was taken. “Many people were surprised it became such a big deal because in the past this sort of thing didn’t become an issue,” says a broker at a leading firm. “Many people initially assumed that [the manipulation] became an issue because the general investment climate in Dubai is becoming more open and more transparent. However, people are now wondering if there wasn’t a specific catalyst behind why the ESCA chose to take such a tough stance.” The broker speculates that a prominent bank might have been ruined had the regulator not stepped in. “The ruling elite is well connected in this town. The banks’ chairmen would have known top people at the DFM and ESCA and demanded action be taken to protect their businesses. Hence, you’ve got a complete rollback of the entire day’s trades.” The investors traded in a large quantity of shares to prompt upward and downward trends in DIB share sales, in order to rake in swift gains. The move inflicted severe damage on other traders. Many institutional and retail investors duly followed suit and by the end of August 28, the amount of money ploughed into DIB’s stock had topped US$2.6 billion. The ESCA looks set to take the unprecedented step of publishing a report detailing transactions involving DIB on that day. “One can’t help wondering if powerful people at the top of the tree are pulling strings to make this unravel in the way they want it to, to protect their interests,” the broker said. Such a large amount of money was involved in the manipulation that if it had been left unaccounted for, the losses could have crippled prominent local banks or financers. Had the debt been allowed to gather momentum and brought down a big financial institution, it could have severely damaged the reputation of the region — putting not just the balance sheets of local lenders on the line, but also potentially hindering Dubai’s strenuous efforts to turn itself into a regional financial hub. According to an analyst at a regional bank who asked not to be named, the aggressive way in which Dubai authorities dealt with the case suggests a grudge might have been settled along the way. “In this town, friends and enemies change quickly. Somebody could have had it in for somebody else — but then, that’s just speculation,” the analyst says. “Someone who has an interest in this sort of thing not happening got wind of it and might have enacted their ire.” Meanwhile, a preliminary probe conducted by a special panel formed by ESCA and DFM last week named and shamed the investors and a brokerage firm involved in the manipulation. “The deals in question involving DIB were struck by two UAE investors — Rashid Bin Zayed Bin Ouaidha Al Qubaisi, who is actually under-age, Khalid Ahmed Mejrin Al Kindi and Yahia Awadhallah Salama, who is Palestinian — he managed the second investor’s accounts without the formal authorisation required,” Dr. Essam Abdelhady, ESCA’s mass communications manager tells Arabian Business. The deals, ESCA confirms, were conducted through a brokerage firm, Al Sharhan Stock Centre, managed by Jubran Abdulrahman Ajaj, alias Zuhair Al Kiswani, who is Jordanian. There was no immediate comment from the brokerage and the investors could not be immediately reached. “The board ... will look into the penalties that should be levied against those involved ... as well as refer a proposal with these penalties to the Justice, Islamic Affairs and Endowments Ministry,” an ESCA statement said. Other analysts have praised the crackdown on the trades, but say bourses in the Gulf must create even tougher regulations to stamp out market abuses. “It is probable that there will be the introduction of new rules to stop this sort of behaviour,” says Abdul Wahid, a partner at Al Tamimi & Co in Dubai. “The authorities might bring in clauses or provisions to the law after this incident that make it easy to incriminate actions like insider trading. It would make investors think twice before doing something like this. “DFM and ESCA can take administrative action as they find suitable in order to find a problem in the market. There could already be incriminating provisions in the law that could make it a criminal offence,” he added. The ESCA board of directors is currently deciding what penalties might be imposed on the perpetrators, but market watchers expect the punishments to be severe. “They will definitely be banned for a period of time,” says a lawyer from a leading local practice. “And if there was some sort of punishment that would make them pay money to compensate twhen it could be implemented … they may even spend time in prison.” ||**||DFSA urges tougher regulations|~|200-box.jpg|~|TOUGH TALKER: DFSA chairman, Al Mulla, thinks finance regulations should be improved across the GCC in light of the DIB scandal. |~|BY RHYS JONES Following the attempted August 28 share sting on the Dubai Financial Market (DFM), Habib Al Mulla, chairman of the Dubai Financial Services Authority (DFSA) and the man implementing the law for Dubai International Financial Exchange (DIFX) — which opens for business later this month — has urged investigators to dish out harsh punishments to those involved in the share scam. Over US$2 billion-worth of trading was wiped out because of the manipulation of Dubai Islamic Bank (DIB) shares when an entire month’s worth of share dealing was ploughed into the company in a single day. Financial regulators have since launched a high-level inquiry to investigate the actions of two well-known local investors, who are alleged to be behind the DIB share manipulation and Al Mulla hopes the punishment is a severe one. “The law gives Emirates Securities and Commodities Authority (ESCA) a wide-range of authority. They can impose fines, they can suspend trading and suspend licences, they can even revoke them and in extreme cases they can even impose jail sentences or, in fact, forward these people to the authorities as criminals,” Al Mulla told Arabian Business. “I do hope that there will be some kind of strong action taken, because at the end of the day if we end up with a minor fine it would be seen as a negative message. I am looking for a heavy fine or at least some kind of suspension of trading and licences, even if it’s just for a short period of time. But there should be some kind of suspension of trading and revocation of licences — a minor fine would simply not do,” he adds. DIB shares rose 7.4% on August 28, with the trades accounting for 84% of the day’s total turnover on the DFM. And Al Mulla is keen that the offenders — reportedly from large institutional brokers, and one already named as Al Sharhan Stock Centre (who allegedly placed huge orders, triggering smaller investors to start buying the stock) are made an example of to discourage investors trying similar stunts in the future. “I think that since action has been taken — which may to some extent have come a bit late — is a strong and positive signal and this needs to be built upon,” explains Al Mulla. “I do hope penalties, which the authorities will impose, will be strong enough to deter such kinds of investors and transactions in the future,” he adds. Considering the weaknesses in governance rules that have historically made some multinational banks and insurance providers reluctant to set up in the Gulf, the regulatory policies drawn up for DIFX are expected to be a key attribute for the exchange, which is due to open on September 26. However, Al Mulla believes centralised financial policies in the region need to be improved in the light of what happened. “It’s not just in Dubai — I think the federal regulations need to be improved in the light of what has happened and the experience that the new markets have had over the past four or five years means they need to build up their expertise, which exists in other international financial markets,” he says. “This should come with greater maturity in the financial markets and two things need to be done. One aspect is the regulation and another is the trading systems, which need to be upgraded so the relevant authorities are alerted immediately when such a transaction is taking place,” he adds. Bahrain has essentially served as the region’s financial centre since the 1970s, and is aiming to cement that with the opening of its Financial Harbour development in 2006. Qatar, meanwhile, is looking to use its multi-billion dollar gas industry to lure project financiers to its shores. Al Mulla, who also owns one of the largest law firms in the UAE, points out that if Dubai International Financial Centre (DIFC) wants to keep up with the competition, it needs to respond to the share scandal in a positive manner. “What the authorities need to do now is to learn from this lesson and to upgrade their trading systems to improve the regulations,” he says. “Normally in any sophisticated financial market when there is a purchase of this amount of stocks of a particular company, authorities will be alerted and there will be certain approvals and requirements. These controls do not exist here yet, but they need to,” he adds. The strength of the regulations the DFSA has drawn up, Al Mulla argues, is one of the main reasons behind the growth in interest in Dubai from international firms. He adds that despite the shock caused by the audacious bid, investors should take heart in the way the situation was dealt with — all dealings in DIB stock on August 28 were cancelled. “This scandal is one of the first of its size and nature that has happened here, so I think to some extent people are quite surprised, but overall I think it is a positive action that the authorities of DFM,” Al Mulla states. “It is a positive action that should send a strong message to those who think that the market is still unregulated. At the same time, it should also encourage investors and give them some confidence in the market,” he adds. The DFSA watchdog was modelled closely on the regulatory systems used in the global financial centres of London and New York, but it has also drawn from the European Union for laws governing data protection, and from the Organisation for Economic Cooperation and Development (OECD) for money laundering rules. The recent appointment of Sir Anthony Evans as an independent chief justice to oversee activities in the centre will further reassure potential investors, Al Mulla adds. Thirteen laws in all have been enacted to govern the operations of the centre, but Al Mulla expects a further eight to be finalised shortly. “We expect that another batch of legislation which relates to non-financial activities — employment and property — [will be issued] soon,” explains Al Mulla. “There may also be one or two more legislations required, such as trust law, which we expect to finalise soon. And if there is any business requirement to prepare a piece of legislation then obviously we will meet that need,” he adds. Al Mulla’s commitment to building a robust legal framework to control activities in the centre also includes mandatory adoption by all licensed companies in DIFC of the international financial reporting standards (IFRS). These have caused headaches for firms all around the world, but Al Mulla has opted to stipulate that companies setting up in DIFC must adopt them from day one, rather than allowing them to bring their own accounting standards to the development. Companies in Bahrain, Jordan, Lebanon, Kuwait and Qatar currently follow IFRS by law, but it is mandatory for banks to abide by it only in the UAE. In some European countries, banks have also been granted an additional grace period before they have to comply. But Al Mulla denies that this will affect interest in DIFC. “Strong regulations are an incentive for the financial sector,” he says. “People look for places where there are good regulations, but serious financial institutions look to the places where there are strong regulations, because at the end of the day they’re a guarantee for institutions and shareholders. It may be difficult initially to adopt them, but finally everybody will be pleased to have strong regulations in place.” ||**||

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