DIFX takes measures to protect retail investors

The Dubai International Financial Exchange (DIFX) has increased the capital adequacy of members, has introduced dirham trading and revised the margin requirements for derivative products to attract and protect retail investors in the market.

Hardly a month after the DIFX urged all market participants to adopt a new capital adequacy requirement by December 15, the body has now expanded the trading safeguard margin on derivatives and structured products listed on TraX, the region's first derivatives platform.

Traders of derivative products will have to maintain 25 per cent, calculated on the basis of the closing price. Earlier the limit was only 15 per cent.

With effect from November 3, the reference trading safeguard for all securities listed on the TraX Market for structured products will be permanently expanded to 25 per cent. DIFX TraX provides regional and international investors access to derivative products issued by Deutsche Bank, Merrill Lynch and Morgan Stanley.

Jagadish Jaiswal, Assistant Vice-President of a leading brokerage firm in Dubai, said: "The new safeguard limit of 25 per cent on structured products will prevent orders from entering the DIFX trading system if the limit price of that order is 25 per cent greater than the opening price.

"A sale order will be prevented if the limit price of that order is 25 per cent less than the opening price. This will help investors in volatile markets, especially when price sensitive news spread in the market," said Jaiswal.

"Sometime back when the Emirates Securities Authority advised brokers to increase capital, it was not welcomed by the small brokerage firms. When the DIFX introduces a capital enhancement plan, companies have to follow suit because it is a basic requirement for registering a company with the DIFX," he said.

Jaiswal added that big market players have sufficient capital to comply with the new rules of the stock exchange.

The DIFX has informed all brokerage firms recently that in order to be admitted, the applicant must have a capital of $20 million (Dh73.4m) for a new General Clearing Member (GCM) and $10m (Dh36.7m) for an Individual Clearing Member (ICM). Brokerage firms have to bring in additional capital by December 15.

The earlier capital requirements for a GCM were net current assets in excess of $5m and fully paid-up share capital or other non-distributable reserves of not less than $1m. For an ICM, the requirement was to have net current assets in excess of $2m and fully paid up share capital or other non-distributable reserves of not less than $500,000. A trading member, who depends on a CGM for the clearing and settlement of its DIFX transactions, was not subjected to any specific financial criteria.

DIFX Chief Executive Jeff Singer told Emirates Business in a separate interview: "My goal is to establish this exchange as an exchange that consistently executes on the things it says it is going to do. When it makes a commitment to the market, it will deliver on those commitments."

Hamood Al Yasi, General Manager, Emirates International Securities, a share-broking subsidiary of the Emirates Bank Group, said these moves are welcome steps to improve retail investor businesses in the stock exchanges and will improve the daily volume on the DIFX and the Dubai Financial Market (DFM). He said currently the daily trading volume is not as high as initially expected and the market authorities have been talking to various brokers about how to improve the situation.

"The DIFX spoke to brokers including Emirates International Securities and realised that there is room for improvement in the clearing mechanism. The new rule will help more brokerage firms start clearing operations and attract more retail investors." According to him, some big banks are currently in the clearing business and there are some hitches in the daily transactions for retail investors. "When the time comes we will increase capital according to the market requirements. Most of the listed brokerage firms are subsidiaries of big banking groups. They will not have any problem in bringing additional capital, but not all the brokerage firms in the market are listed," he said.

The move will smoothen daily trading in dirham and the trading, settlement and operation of the Central Securities Depository. He said his company has enough capital to comply with the new CAR rules of DIFX.

Krishna Moorthy, Chief Executive Officer, Dubai International Securities, a leading brokerage firm, said: "Improving capital adequacy is essential in view of the current turmoil in the global financial market. The DIFX move will protect both investors and brokers. Brokerage firms are investing on behalf of their clients and in case of a crisis, a high capital base will help investors. Emirates Securities and Exchange Authority had increased the minimum capital requirement for brokerages in September 2007."

For a general trading member the minimum capital requirement was Dh10m and for a general clearing members it was Dh20m. The new capital requirement is about 1.6 times the original capital and companies can use their reserves and surpluses to increase capital base. Brokerage firms and clearing members that do not have sufficient reserves and surplus have to bring in additional capital through rights issues.

Singer said: "We are not happy where we are. The progress has been good, but we're not satisfied that it's enough."

Moorthy said, ideally, the prudent leverage for brokers is 1:4 and in case they borrow more, investors may face difficulties during a crisis. However, the additional fund has to be brought in by the company owner or shareholders, but the tight credit market and stock market conditions are not conducive for raising additional capital through rights issues. The company owners or shareholders will have to arrange it. For a trading member that clears through a GCM, the capital requirement is $200,000.

According to the DIFX notice: "Examples of liable equity capital can be, depending on applicable accounting practice, fully paid up share capital and other non-distributable reserves or after tax shareholders restricted equity. Upon evaluating the capital requirement, DIFX may recognise financial support commitment from its owner or equivalent."

In addition, a clearing member should be subject, either directly or through its owner, to a capital adequacy regime by a supervisory authority recognised by DIFX that will at least cover the Basel Committee on Banking Supervision framework regarding credit risk and market risk and the 1996 amendment to the capital accord to incorporate market risks, as amended. (Inputs by Matt Smith)

DIFX PLATFORM

The DIFX TraX is a structured products platform of DIFX, launched on August 28, 2007. DIFX TraX currently lists capital protected notes and index trackers (certificates). The products are based on specially created indices relating to the DFM, the ADX and other GCC stock markets. Other DIFX TraX products are based on the United States, European and East Asian share indices and certain others are based on commodities such as oil, soy, corn, wheat, sugar and cotton.

DIFX MEMBERS

A General Clearing Member (GCM) of the DIFX is a member that can execute his own and his customers' orders. Besides having the capacity to clear their own and their customers' trades, GCMs can also clear business on behalf of other trading members.

An Individual Clearing Member (ICM) is a member that can execute his own and his customers' orders and clear his business, but cannot clear business for others.

A Trading Member can only execute his own orders or orders on behalf of his customers. A TM is usually required to establish a relationship with a GCM.