Regulation key to new Abu Dhabi free zone

The newly established Abu Dhabi World Financial Market will face challenges in competing with rival financial centres, not least of which is Dubai.

A model of Mubadala's Al Maryah Island project was on display at Cityscape Abu Dhabi. Ravindranath K / The National

The newly established Abu Dhabi World Financial Market will need a regulator and lawyers are now asking what form that is likely to take.

On Wednesday, The National reported that the UAE had signed into law the creation of a financial free zone for Abu Dhabi on Al Maryah Island.

"This carves a free zone out of a whole host of federal regulations," said Kai Schneider, a partner at the law firm Latham & Watkins. "As a result you would need an alternative regulator to be in place."

He said it raises questions over what body would regulate the free zone and whether a separate regulator would create a "parallel universe" to the DIFC.

The Central Bank, the Securities and Commodities Authority and the Dubai Financial Services Authority could now potentially be joined by a fourth body to regulate the new entity.

The Abu Dhabi World Financial Market will also be competing with rival emerging centres throughout the Gulf, including Doha, Riyadh and neighbouring Dubai.

Although large numbers of global banks including Morgan Stanley, Standard Chartered and Goldman Sachs have made the DIFC their first point of entry to the Middle East and the region's biggest finance hub, Doha and Riyadh are attracting increasing numbers of financial services staff.

The development was welcomed by Habib Al Mulla, the Dubai lawyer who drew up the legal infrastructure of the DIFC ahead of its launch in 2004. "This is positive news for the UAE. The development of capital markets and financial institutions is of critical importance to the wider economic development of the country.

"Encouraging more choice and deeper, more liquid markets will ensure that national companies have access to advice, execution and trading platforms within the UAE rather than having to seek them overseas. The new financial free zone in Abu Dhabi would complement the DIFC," he said.

One DIFC executive, who spoke on condition of anonymity, said: "We're fuzzy on detail at the moment. We don't know if they are just going to move the Central Bank and ESCA [Emirates Securities and Commodities Authority] there, or if they intend to set up new laws and a regulator. If they do the latter, it's a bold step, and as much a challenge to DIFC as, for example, Qatar."

Generic banking hubs no longer seem to cut it as the Arabian Gulf's financial economy develops. Dubai has recently sought to position itself as a "capital" of the Islamic economy and an arbitration centre, while Qatar has aimed at reinsurance and asset management. Riyadh has attracted equity traders, but foreigners cannot directly own Saudi equities.

Qatar has attempted to lure financial firms with seed capital for asset managers based there, although it has just 135 firms active, only 70 of which are financial firms. That compares to 900 firms in the DIFC, more than a third of which are finance firms.

Although some big banks such as Barclays and Credit Suisse have established Doha-based ventures, by and large it is banks in which Qatar's investment vehicles own a stake that have sent staff there.

Meanwhile, Morgan Stanley and Credit Suisse have sent equity trading staff to Riyadh, aiming to tap into the deepest equity market in the region and possibly reaping rewards when the doors of the Tadawul stock exchange are opened to foreign investors.

"I hope it will be a complement to Dubai, Bahrain and Doha and find a niche for itself," said Mohammed Ali Yasin, the managing director of National Bank of Abu Dhabi's brokerage arm.

"Perhaps not just equities, but commodities and foreign exchange," he added. "There could be small and medium-sized businesses that would be interested, professionals were part of the industry and left to do consultancy and M&As [mergers and acquisitions]."