UAE brokers reject regulator’s claim they are to blame for market meltdown

The SCA has requested reports from brokerages that detailed margin calls accompanying the 50 per cent decline in Arabtec stock between May and June.

Analysts complain that Arabtec management has done little to restore confidence in the stock, with many key questions about the crisis unanswered. Christopher Pike / The National

Stockbrokers yesterday complained about being made scapegoats by market regulators for the Arabtec-led market meltdown last month.

The Securities and Commodities Authority (SCA) carried out inspections of brokerages last month, it has emerged, where it requested reports that detailed margin calls accompanying the 50 per cent decline in Arabtec stock between May and June.

“They tried to put the blame on us,” said Fathi Ben Grira, the chief executive at Mena Corp, an Abu Dhabi investment company. “You can’t blame margin calls for what happened in the market. What happened in the market was Arabtec.”

Dubai stocks are in bear market territory, having lost more than 20 per cent of their value in recent weeks, after Arabtec’s chief executive Hasan Ismaik resigned, and hundreds of staff were made redundant, provoking concerns by investors over the prospects of the Dubai-listed contractor.

“I heard the regulator went to brokerage houses and did inspections, checked margins to check if they are doing legal or illegal things,” said Khaldoun Jaradat, a stockbroker at Brokerage House Securities in Abu Dhabi. “The problem is bigger than that. Investors bought shares and sold shares. The brokerages didn’t trick people or try to create news.”

Last week Arabtec sought to reassure investors by holding a press conference in which the chairman Khadem Al Qubaisi told reporters that the company planned to concentrate on core business and repeated the commitment of the shareholder Abu Dhabi fund Aabar to retain its stake in Arabtec.

However, analysts complain that Arabtec management has done little to restore confidence in the stock, with many key questions about the crisis unanswered. These include what prompted the sudden departure of Mr Ismaik last month and what will happen to the 28.8 per cent stake he holds in the company.

Amid a panicky sell-off, questions also remain about how much of the liquidity was “inflated”, in other words how much of the trading was driven by margin accounts and other forms of financing.

“The regulator asked us a set of questions to know how we exercised the margin calls. They tried to find something, to check if we gave more leverage ,” said Mr Ben Grira.

But other brokers defended the right of the regulator to investigate.“They did blame the brokers but they had the right to, because the collapse was not normal,” said Sherif Elkhadem, the general manager of Al Jazeera Financial Services in Dubai.

“It was a fact that the brokerage companies were exercising margin calls a lot. They were forcing clients to sell before the due dates. They didn’t give the client an opportunity to enhance their position,” Mr Elkhadem said.

According to the SCA regulation, if a stock loses a maximum of 25 per cent, the brokers should grant the client 48 hours to improve their position, either by selling shares or adding more money. “But some brokerages didn’t wait,” Mr Elkhadem added.

The market regulator earlier this week set up a permanent technical committee consisting of the Abu Dhabi Securities Exchange, Dubai Financial Market and the Central Bank to observe remarks made by chief executives of public companies to ensure they are truthful and accurate and follow their impact on the company's stock price. Separately, the SCA said it would review regulations on bank lending of shares and recommend changes if needed.

“There were big fish – we’re talking Dh50 million to Dh100m in the market – who went to local and international banks and put their shares as collateral in return for margin,” said a Dubai broker who spoke on conditions of anonymity. “Some of the banks went beyond the 1-1 rule. Brokerages can’t offer these guys margin. The maximum capital at local brokerage houses is about Dh150m, so you can give a maximum of Dh60m in leverage. The banks could obviously exceed and were out of the SCA legal framework.”

SCA did not return calls.

Follow us on Twitter @Ind_Insights