Overview: SCA: Abu Dhabi Stock Exchange- Rules, Regulations, and Procedures

SCA: Abu Dhabi Stock Exchange- Rules, Regulations, and Procedures

Introduction

The Abu Dhabi Securities Exchange (ADX) as of now, lists 73 companies. The listed companies include those from the banking, insurance, services, industry & hotels sectors. They include First Abu Dhabi Bank and Etisalat.

The following article will cover the Abu Dhabi Security Exchange’s latest regulations including those regarding crypto-assets and the composition of board of directors, market maker regulations, and derivative trading.

Latest regulations

Amendment of JSC Governance Guide:

The Chairman of the Authority’s Board of Directors’ Decision No. (08 / Chairman) of 2021 Concerning Amending the Joint Stock Companies Governance Guide

This Decision, issued on 28^th March 2021, highlights that Clause (3) of Article (9) of the Joint Stock Companies Governance Manual attached to the Chairman of the Authority’s Board of Directors’ Decision No. (3/Chairman) of 2020 would be amended.

The amendment requires that a company’s articles of association document must define the method in which their board of directors is formed, the number of its members and type of membership, provided that the representation of women shall not be less than one member in the board of directors. Additionally, the company is obligated to disclose this representation in their annual guidance report.

Therefore, as per this Decision, it is now mandatory for UAE Public Joint Stock Companies (PJSCs) listed on either the Abu Dhabi Securities Exchange (ADX) or the Dubai Financial Market (DFM) to have at least one female board member. 

Earlier, it was required that females shall represented in at least 20% of the Board membership and compliance with Article 9(3) of the Governance Code was on a ‘comply or explain’ basis. Thus, as long as it was reasonably explained in the company’s annual report and governance report, non-compliance was acceptable. This ‘comply or explain’ feature and the requirement for 20% female representation is now done away with.

The second article also outlines, “The companies must fulfill the requirement for women representation in boards of directors in appointment, election, vacancy, or increasing membership therein.”

Crypto Asset Regulations:

The Administrative Decision no. (11) of 2021 concerning Guidance for Crypto Asset Regulations

This Decision was issued on 17^th March 2021 and provided an explanatory guide for The Chairman of the Authority’s Board of Directors' Decision No. (23/ Chairman) of 2020 Concerning Crypto Assets Activities Regulation.

Crypto assets are cryptographically protected virtual, digital assets or tokens that operate on a blockchain platform. The regulations apply to crypto asset promotion, offering, and trading in the UAE, as well as crypto asset exchange and custody services.

Scope of Regulations

The regulations cover anyone who, among other things:

• Promotes, offers, or issues cryptocurrency to UAE residents, or engages in any of these activities in the UAE. Thus, cross-border promotions and special offers are caught.
• Those providing custody services, operating a crypto asset exchange, or runs a platform for fundraising crypto asset issuances in the UAE.
• In regard to crypto assets, engages in any other financial activities in the UAE. Financial activity refers to a group of 26 SCA-regulated activities.

Exemptions

Certain crypto assets are not covered by this Regulation. These are:

• Those that are owned by the federal and local governments, government institutions, and authorities. Additionally, the crypto assets owned by any companies that the mentioned government entities own.
• Currencies, virtual currencies, units of stored value or any other instruments issued through a system licensed, approved or required to be approved by the Central Bank.
• Securities held in dematerialized form by a custodian or depository in a clearing or settlement system, and Securities not issued as Crypto Assets but managed by the offering person or its approved Registrar using an electronic record keeping technique, unless otherwise qualifying as a Crypto Asset.

Activities carried out within the UAE Financial Free Zones would also be excluded.

• Promotion and Offer of Security Tokens & Recognition of Crypto Currencies

Security tokens may be promoted in the UAE in accordance with the SCA Promotions and Introductions Regulations (PIRs). Additionally, security tokens may only be issued or offered in the UAE by an offeror incorporated in the UAE, or in an FFZ, or with an establishment in the UAE.

Offers to ‘qualified investors’ i.e., individuals who meet a certain asset test or who are represented by an SCA-licensed investment manager, in addition to the offer documentation only require the submission of a notification to the SCA. However, to all other types of investors, the SCA's approval would be required.

The SCA will maintain a register of recognized crypto currencies to which Commodity Tokens can be admitted upon request. Commodity tokens are crypto assets that are not security tokens.

• Crypto Asset Exchanges

Before a crypto exchange which is accessible to investors who do not meet the criteria to be Qualified Investors can be operated, for example, if the exchange is open to the public, the regulations requires the SCA’s approval.

Additionally, crypto asset exchanges are subject to the same market abuse laws and regulations that are generally applicable to trading on exchanges.

• Crypto Fundraising Platforms

These regulations which allow investors to subscribe to crypto assets, for example, using an initial token offering. The subscription limit is of AED 50,000 per issuance. A crypto fundraising platform must be licensed by the SCA as a crypto asset exchange to be able to offer trading services to investors.

• Financial Crime

The regulations also introduced specific requirements to curb the risk of financial crime. For example, SCA-licensed crypto asset firms should assign a high-risk rating to clients who deal in crypto assets.

Furthermore, to help establish legitimate transaction history for any given crypto asset, tracing measures would be required for all transactions that involve crypto assets. Those crypto assets that do not allow tracing would be illegal.

Market Maker Regulations

As per the Market Maker Regulations, market making is defined as, “The activity which mainly depends on providing continuous prices for the purchase and sale of a certain security with the aim to increase the liquidity on such security.” The market in question is the Abu Dhabi Securities Exchange.

• Conditions for practicing the activity (Article 3)

As per Article 3, to practice Market Making a license or approval of the Abu Dhabi Securities Exchange has to be obtained under certain conditions.

1. The applicant must be either:
   1. A company established in the state with one of its purposes as practicing Market Making. Alternatively, it may be licensed by the Authority (Securities and Commodities Authority) given that conflicts between activities regulations issued by the Authority are prevented.
   2. A commercial bank/investment company licensed by the UAE Central Bank. Alternatively, the applicant may be branch of a foreign bank given that its parent bank is licensed to practice Market Making. These companies are subject to obtaining the approval of the UAE Central Bank.
2. Over AED 30 million or its equivalent in another currency must be the paid up or the allocated capital for practicing Market Making.
3. There must be available financial solvency and qualified administrative and technical staff to practice Market Making in accordance with the Market’s set conditions and regulations, and the Authority’s issued regulatory controls of the financial activities and services.
4. There also must be available electronic programs and technical systems that are required to conduct the activity in accordance with the requirements, conditions and regulations set by the Market.
5. The professional code of conduct manual, company internal procedures manual and risk management regulation must be available as well.
6. The license fee prescribed by the Market must be paid.
7. The applicant must always meet the conditions of the license.

Additionally, the Foreign Market Maker may obtain the Market’s approval to conduct the activity in accordance certain conditions:

1. The applicant for approval must be a foreign company similarly regulated in its home country i.e., licensed to conduct Market Maker activity in the country incorporation (the country in which the company is legally registered) by
   • a regulator similar to the Authority,
   • member of the International Organization for Securities Committees (IOSCO),
   • and one that applies rules and procedures similar to that applied in the State with regard to Know Your Customer (KYC), Customer Due Diligence (CDD) and Anti-Money Laundry/Combating the Finance of Terrorism (AML/CFT),

or the company licensed may be one licensed to conduct Market Making activity in a financial free zone within the State.

2. The Foreign Market Maker shall
   • If it is a foreign company, obtain the approval of the competent authority to conduct the Market Making activity within the state.
   • If it is a company established in a financial free zone within the state in accordance with the Companies' Law, it must meet the conditions of the Cabinet of Ministers in relation to registration.
3. The similar regulator in the country where the company is legally registered must deal similarly with the Market Maker licensed within the state.
4. More importantly, the Foreign Market Maker shall have at least five-years-experience in the same field.
5. The applicant must also pay the approval fee determined by the Market
6. Additionally, the applicant must have a contract with a brokerage company licensed in the State i.e., a member of the Market to execute the orders through it.

• Market Maker Obligations (Article 8)

Unless in violation of any other obligations prescribed by law, regulations decisions, or circulars issued by the Authority, the Market Maker must commit to doing the following:

1. Sign an agreement with the Market before beginning the activity. This agreement must include the conditions, requirement and regulations of its business and trading in the Market. Additionally, it must state the eligible securities under its responsibilities.
2. Notify the Market about unusual trading in the securities under its responsibility.
3. Refrain from using their facilities to trade on behalf of the clients.
4. Maintain financial solvency as per the solvency standards issued by the Authority or the regulator for the Foreign Market Maker.
5. Provide the following reports to the Market:
   1. A monthly report of profit and loss, and the size of the portfolio of the Marking Making activities.
   2. If the Market Maker is a company practicing Market Making activities only, they must provide their quarterly financial statements audited by the accounts auditor.
   3. If the Market Maker is a company practicing Market Making activities only, they must also provide their audited financial statements.
   4. A half-yearly report on the internal control function covering at least: the procedures with which internal control is organized, a list of the implemented internal control processes and their outcomes, and a list of issues discovered and their corrective action plan. The issues related to market risk, settlement and liquidity must be mentioned especially.
6. Retain commercial records, registers, statements, data and information relating to trading and the activity for at least 10 years, and retain an electronic back-up copies this data.
7. While practicing the activity, the market maker must exert the care of a prudent person in accordance with the law, regulations, decisions, rules and circulars issued and, taking into account commercial norms in this regard. Additionally, the principles of honesty, justice and equality must be followed.

• Market Maker Trading (Article 9)

Article 9 of the Market of the DFM Market Making Regulations talks about Market Maker Trading. It states that -

• The Market should define trading numbers for the Market Maker in order to identify it from other trading numbers and to maintain total separation between both the Market Maker's activity & any activity it performs.
• The Market trading system would explicitly mention the transaction that relates to the Market Maker. It would classify such transactions as being from the Market Maker.
• The Market maker shall enter its orders either through a Brokerage Firm which is a contracting member of the market or directly in the trading system, in case , the Foreign Market Maker is the Market Maker.
• In executing transactions, the Market Maker would have the same priorities as the other investors.
• The trading transactions of the Market Maker would be dependent on the regulations, decisions, rules issued related to the same, provisions of such Regulations and Laws of the concerned authority.
• The Market Maker can enter buy or sell orders which are executable on the appropriate securities under it responsibility provided it does not violate or contradict with the details set in the agreement between the Market & Market Maker which includes-
  1. The   size of minimum order
  2. Buy & Selling orders’ maximum differences
  3. The Marker Maker’s Orders minimum presence in order book in a day’s continuous trading session
  4. Update selling and buying order in a minimum period of time and executing such transaction of orders in full & on cancellation of such orders or expiry of the duration.
  5. The entered sell or buy order must be among the top 3 in the orders register at the moment the Market Maker's order is submitted.

• On the following conditions, the Market Maker can be exempted from its reasonability to enter executable buy& sell orders on eligible securities-

1. During periods of scheduled and unscheduled bidding periods.
2. During suspension periods of trading in the appropriate security that falls under its responsibility
3. During the periods of opening and closing
4. When the permitted ownership limits exceeds
5. The exceeded limited is permitted trading threshold

•  The Market Maker maybe exempted from its obligations by the Market wither partially or wholly depending the request submitted with congruence with the conditions and in such arising cases as mentioned in the agreement or in situations which might be determined at the Market’s discretion.

• The Market Disclosures (Article 12)

Article 12 of the Market of the DFM Market Making Regulations talks about Market Disclosures. It states that the market would publish the array of securities which comes under Market Making and would update the previous list of securities in the preceding year. This would happen at the commencement of each financial year.  This publishing would include –

• The cancellation of any license or approval of any Market Maker  
• Any license or approval to conduct the Market Making activity
• The eligible securities which fall under its responsibility

• Suspension and Cancellation of the license or approval (Article 14)

Furthermore, Article (14) talks about Suspension and Cancellation of License or Approval. It states the Market Maker may be suspended from conducting any activity if the Market finds that the performance of such an activity is not serving the best interests of the Market or when the agreement concludes between them expires, without any prejudices to the obligations arisen previously.  This Article further lists various cases wherein the approval or license of the Market Maker maybe cancelled –

• Failing due to non-compliance of any of the conditions of the approval or the license mentioned in the regulations, control, decision, Law or instructions issued in implementation of the aforementioned.
• In serious violation of any obligation or duties mentioned in the Law, decisions, regulations or issued instructions in implementation of the same.
• Failing to pay the imposed fine and/or the applicable fee
• When the licensed company has been declared bankrupt by the entry of the final judgement.
• During liquidating or winding up the company
• Pursuing the authority’s decision

The decision of such a cancellation of the license / approval would need to be published with at least one being in Arabic, to 2 National daily newspapers, which would be at the expense of the company.

Derivatives

Derivatives are contracts whose value is calculated by the execution of an underlying outcome, event or an asset —hence the name. Financial derivatives are mostly used to hedge and speculate investments. Derivative are securities whose price is determined by or is derived through one or more underlying asset.  A derivative is a contract between 2 or more parties depending on the assets in question. The underlying asset's variations dictate its value. Interest rates, stock market indices, bonds, commodities, stocks and currencies are the most frequent underlying assets seen today. 

Derivatives can be exchanged privately i.e over the counter format or on an exchange. OTC derivatives account for the majority of derivatives in existence and thus are unregulated, while derivatives traded on exchanges are regulated. OTC derivatives are often more risky for the counter party than regulated derivatives.

There are several derivative products, each with substantial peculiarities that traders must grasp. The following are some of the most commonly utilized derivatives by traders:

• Collateralized debt obligations (CDOs)
• Credit default swaps
• Forwards
• Futures
• Mortgage-backed securities (MBS)
• Options
• Swaps

• Later developments in the U.A.E

 The Securities and Commodities Authority makes a reference to the licensing of trading in unregulated derivatives contracts in a press statement dated July 6, 2020, in what seems to be a referral to the licensing of Contracts for Difference and Forex traders in the United Arab Emirates. This was followed by a news statement on July 8 mentioning discussions between the   Securities & Commodities Authority & the United Arab Emirates exchanges over the launch of new financial instruments & products.

Conclusion

Therefore, the recent legal updates in the ADX aim to better regulate crypto assets, gender diversity & representation, market making, and derivative trading. The UAE consistently works on becoming a trading hub that encourages smooth facilitation of financial activities.

Non-compliance with these regulations, decisions, and laws result in heavy fines and severe consequences. This ensures that financial crime is prevented.