Brokerages may have to bolster reserves

The financial market regulator is looking at raising the minimum level of capital brokerages are required to hold, fearing their reserves are too low. Such a move by the Emirates Securities and Commodities Authority (SCA) would trigger further mergers and closures in the sector, which has suffered from weak volumes after the global financial crisis. "Brokerages are aware of this as they [SCA officials] have been meeting with the heads of brokerages since the beginning of the year to discuss capital requirements among other regulations set to be put in place," said Saad al Chalabi, an institutional trader at AlRamz Securities in Abu Dhabi.

The deputy chief executive of the SCA, Ibrahim al Zaabi, said no concrete plans were in place but the regulator had concerns about the capital adequacy of the brokerages. "Capital adequacy of these companies is an issue. It is very important and yes, if the minimum capital is increased, it will be good for them," Mr al Zaabi said. There are more than 80 brokerage firms operating in the country and the SCA requires them to hold a minimum capital of Dh30 million (US$8.1m).

This limit varies with the type of company, as brokerage arms of banks are required to hold a minimum of Dh100m in capital. Traders expect the SCA to raise the baseline limit to Dh50m but Mr al Zaabi did not specify a figure. "I don't know how the market got this figure. So far, nothing is approved and there is no clear direction if we will do it," he said. But if the SCA goes ahead with raising minimum capital requirements, it will significantly reduce the number of brokerages.

Many of them have struggled to stay viable as trade volumes fell drastically over the past 18 months. "Higher capital requirement is a way of forcing closure or mergers," said Nour al Zoubi, the general manager at MacSharaf Securities in Dubai. "I think the brokerage sector needs consolidation like any other sector of the economy. We will be happy if the number drops down to between 40 to 50." Mr al Chalabi agreed: "This might reduce the number of brokerages in the short term, but in the long term it increases sustainability in the market. It is a good thing as the market will be reducing systemic risk."

Eleven brokerages in the UAE have either shut down this year or are in the process of closing, while many others are seeking to merge with other companies as difficult market conditions persist. Three brokerage houses closed last year. On the Abu Dhabi Securities Exchange (ADX), the average daily trading volume this year has been about 66 million shares, compared with 149 million last year, while on the Dubai Financial Market (DFM) average daily volume has dropped to 173.7 million from 445 million, according to Zawya data.

The two UAE markets have seen the biggest falls this year among exchanges in the Gulf, with the DFM General Index losing 18.6 per cent of its value and the ADX General Index dropping by 8.7 per cent. The situation is unlikely to improve in the near future as the markets head into Ramadan, traditionally a period of low market activity. And questions have been raised over how smoothly the market consolidation can take place if the SCA goes ahead with an increase in capital requirement.

The regulator does not have procedures in place for mergers between struggling companies that want to consolidate. One SCA official told The National in June the agency had prepared a draft procedure on administering mergers between brokerage companies, including protections for investors, which would be presented to the SCA's board of directors imminently. The regulator is also at work on a set of rules aimed at tightening the regulation of financial markets.

The new set of regulations, which is expected to be in place soon, will cover trading on margins, market making and short selling. [e-mail] [e-mail]