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Then There Were Bonds

Dubai’s financial markets look to both encourage activity within the local economy and position the Emirate to be the premiere finance destination between Singapore and London. The Emirate has shown its ability to not only find and refine niche financial products, but also compete to be an international commodities trading entrepí´t.


Established by the government in 2000, the Dubai Financial Market (DFM) remains the key local exchange in the Emirate of Dubai, though since 2007 the exchange has been a publicly listed company. At the end of 2015, the DFM recorded a market capitalization of AED308 billion ($83.92 billion) with some 60 companies listed on the boards, while another 64 conventional bonds and sukuks were shared between the DFM and its “free zone” sister, Nasdaq Dubai, according to data released by the exchange. Average daily trading value during 2015 was some AED603 million ($164.31 million), with the total value of share trading on the DFM’s equities market coming in at AED151 billion ($41.14 billion) for the year, indicating a market velocity rate of some 49.1%. While this was a significant slowdown from the 118.2% seen at the most recent height of the market in 2014, 1Q16 has recorded a slight nudge up on the end-2015 figure, rising to 51.2%.

While there were 60 equities featured on the DFM at the start of 2016, it also trades all of the companies listed on the Nasdaq Dubai, bringing up the total to nearly 70 companies. However, with the Nasdaq Dubai seemingly shifting its focus toward sharia-compliant capital activities, especially sukuks, and other bond-related activities, the DFM is getting on with the business of acting as a capital magnet for locally listed companies.
Over the first five months of 2016, the DFM General Index managed to show a year-to-date return of some 5.22%, or 3,315.6 points, as investors begin to renew interest in the local economy as the price crude oil begins to trend toward the $50 per barrel level. While nicely up in YTD terms, it should be recalled that the most recent high point for the DFM General Index was 5,302.09 points, recorded back in May 2014 amidst a wave of initial public offerings (IPOs) held that year. Over 2014, four important IPOs that pulled in some AED6 billion ($1.63 billion) of investor funding were held, while total traded volumes topped out at AED382 billion ($104.09 billion), more than double the same metric in 2015. The companies involved — Marka, Emaar Malls, Amanat Holding, and Dubai Parks and Resorts — were the first to be listed on the DFM since 2010, breaking a significant drought. However, as broader market worries over global liquidity levels and the effect of crude oil prices on the local economy rose, the IPO drought returned. Despite the lack of IPOs, early 2015 saw the listing of DAMAC Properties shares, with Al Safwa Islamic Financial Services joining the DFM’s secondary market. In February 2016, the CEO of the DFM, Essa Kazim, told Mubasher, a financial services provider, that there, “are a minimum of 10 companies that are prepared to go public on DFM,” and that one or two of them may muscle up to the bar over the course of the year. To help make IPOs juicier for potential entrants, a new raft of regulations was introduced in late 2015 And it will be only through IPOs that the DFM will be able to better reflect actual GDP generation within the broader economy. At end-2015, the two largest categories, finance and real estate and construction, accounted for some 45% and 37% of the DFM’s market capitalization, though in the real economy they only accounted for 12% and 22%, respectively, over the same time period.

The DFM has also been seeking to deepen the market through attracting more quality institutional investors, while at the same time encouraging an increasingly higher level of foreign investment. By 1Q2016, institutional investors represented 76.6% of the market capitalization on the DFM, up on the 69.9% seen in 2013. On the foreign investment front, some traction was gained in terms of trading volumes, with overseas investors behind 47.3% of all trading activity in 2015, up on the previous year’s figure of 43.8%. Still, the level of foreign ownership in the DFM was at just 17% in 1Q2016, this is little up on the 16% seen in 2013, though admittedly is higher than the nadir of 11.2% recorded for 2011, just five years ago. Overall, foreign investors bought a net AED900 million ($245.23 million) in stock over 2015. Different levels of maximum foreign share ownership exist for stocks on the DFM, with foreigners and GCC residents in separate categories alongside UAE nationals. However, most of these foreign ownership limits have not been topped out as of yet, showing increased room for foreign investment activity is possible, if only the original local owners of the scrip were willing to sell down their holdings.


As the DFM is a local “onshore” market, the UAE’s Securities and Commodities Authority (SCA) acts as the ultimate regulator, much as it does for the other main exchanges in the UAE. This is different from the Nasdaq Dubai, Dubai Gold & Commodities Exchange (DGCX), and Dubai Mercantile Exchange, all of which are located within the Dubai International Finance Centre (DIFC). As the DIFC is in a “free zone” area, both Nasdaq Dubai and the DGCX are regulated by the Dubai Financial Services Authority (DFSA). In April 2016, a new regulatory body set up shop in the Emirate: the Dubai Economic Security Centre (DESC). Issued under Law No. 4 of 2016, the DESC was set up to protect Dubai’s reputation as a global finance destination and actively seek out potential cases of economic irregularity that could damage the economy at large, and the banking and finance sectors in particular. Unlike the other regulators, the DESC has oversight over both “onshore” and free zone activities and is designed to give the existing regulators more investigative and prosecutorial teeth. While the remit of the DESC is potentially extensive, it is still early days to see how it will play a key role in defending Dubai’s dynamic economy.


Hosted within the DIFC free zone, Nasdaq Dubai is fast re-inventing itself away from being a destination for equities under the special rules afforded to them, and more as a leading center for Islamic finance, especially for sharia-compliant bonds, better known as sukuks. As of mid-2016, eight equities and two funds were listed on the exchange. The last to join the boards was Egypt’s Orascom Construction, which entered the market in March 2015 with an initial market value of $1.54 billion. Unlike equities listed on the DFM, companies listed on the Nasdaq Dubai and based within free zone areas are not subjected to foreign ownership limits, making them attractive for players based in countries like Egypt to tap into the growing strength of Dubai’s international reputation.

However, the real game on the Nasdaq Dubai has become sukuks, with some $43.21 billion being listed as of 1Q2016, making the Emirate the number one globally for this increasingly popular financial product. Over 2015, some 14 sukuks worth a total of $13.26 billion were listed on Nasdaq Dubai, with the Indonesian government alone accounting for $6 billion of the total spread over four listings. The Indonesian government returned to Nasdaq Dubai in April 2016, presenting two sukuks for $2.5 billion to investors. By early June 2016, Nasdaq Dubai reported the listing of seven new sukuks worth $4.55 billion. Normal bonds were also not slacking with $2.27 billion offered to the market spread over six listings during 2015. Nasdaq Dubai was trading some 80 listed sukuks and bonds in June 2016, with sukuks representing three-quarters of the total. Additionally, Nasdaq Dubai offers derivatives trading in a limited number of locally listed shares.


DGCX, operating under the Dubai Commodities Clearing Corporation (DCCC), celebrated its 10th anniversary in late 2105, and is starting to show some real promise as more than just an international commodities destination. While precious metals remain at the heart of the DGCX’s activities, it is also beginning to expand into foreign exchange, equity indices, and energy market trading. Over 1Q2016, the DGCX reported a 37% uptick in contract volumes in YoY terms, with over 4.5 million contracts changing hands. When compared to the FY2015 figure of 14.5 million contracts, the growth in the DGCX’s product mix becomes more impressive, especially as that number was some 23% up on the 2014 total. While trading in major currency and commodity groups remains important, DGCX is targeting the South Asian market in particular, launching a wider range of Indian rupee-denominated products. As an indication, the popularity of Indian rupee options contracts rose some 217% to 80,935 contracts over 1Q2016. However, energy-related products have not been slack, with the WTI contract trebling in volumes to 37,640 contracts over the same quarter. The DGCX has been adding numerous emerging markets currencies to its mix, including the Russian ruble and South African rand. As the new CEO of DGCX, Gaurang Desang, told TBY, “Given the mix of participants in the region, which is almost 180 nationalities, together with the companies originating from all these nationalities, the aim is to offer everyone currency exposure.”

Another significant player in the energy commodities market is the Dubai Mercantile Exchange (DME), whose core offering is the Oman Crude Oil Futures Contract (DME Oman). The DME Oman remains the key pricing mechanism for crude emanating from both Oman and Dubai. Over 2015, the DME saw an increase of 30% in volume terms for Omani crude shipped through its offices, representing some 230 million barrels.

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