DUBAI DEPOSITORY RECEIPTS (DDR) IN DIFC (?)

07.02.2004

Hopefully, the Dubai International Financial Centre (DIFC) will come into reckoning soon, given the recent Federal National Council (FNC)'s approval. Many expectations and expenditure have been raised and invested in its making, and DIFC will need to hit the ground running, once it attains a full fledged operating status. Helpfully, DIFC can and should serve to hone 'financial engineering' in the region. Nothing will nurture this more than good home-grown competition to it from the region and within the UAE. The likes of the Bahrain Financial Harbour and indeed the various leading edge institutions will all jostle to attract customers and innovate / differentiate in the wholesale products and services that they offer. These will eventually benefit the customers, investors and all stakeholders alike. Financial engineering need not necessarily take the form of highly exotic and / or aggressive products that may serve to merely compound and transfer risks rather than add real value. While avoiding per se, the clichéd and the common-placed activities in capital markets, the format of DIFC does lend itself for globally renowned and regulated institutions to 'passport' themselves, in the first phase. On the basis of their credentials, capital adequacy and competencies, they should enrich the market place with their vast experience and repertoire of skills and strengths. Financial engineering is often predicated upon proper processes that are well tested, sound and wherein risk management and compliance are cornerstones. Some of these institutions may even choose to relocate part of their research & development (R&D) to the DIFC. They need not reinvent the wheel, but this is not to say that wheels cannot be rebalanced and realigned to suit regional requirements! It is in this context that during recent discussions with some DIFC officials, I had suggested the introduction of DDRs. Essentially, Dubai Depository Receipts (DDRs) can be tailored along the lines of the American Depository Receipts (ADRs) or the Global Depository Receipts (GDRs) that are regularly issued out of well established wholesale market jurisdictions such as New York, London and Luxembourg. One of the announced major initiatives of the DIFC, will be the establishment of a regional stock exchange to be called the Dubai Regional Exchange (DRX). While the DRX can certainly strive to attract multinational corporations and global companies to list or cross-list on its exchange, that alone may prove to be inadequate. DRX's unique selling propositions (USPs) will have to be well defined and appealing to the global financial community. In the past, cross-listing efforts by Omani, Kuwaiti and Bahraini Exchanges, such as for ARIG or Q-Tel, have not been runaway successes. Part of the problem has been the relatively low liquidity and trading volumes in the regional exchanges. Excepting in their home countries, where the public companies are situated, cross-listings have failed to evince much interest in the host countries, be it in the GCC or even in the Far East on in the Western world. Of course, DRX can be tweaked to target MNCs by operating over the weekends i.e. on Saturday and Sunday. Thereby, DRX can pick up the Friday evening slack, and provide continuity i.e. an almost 24 x 7. However, this needs a regional investor base and a big pool of institutions that are committed to sustaining such a globalisation. That alone will not do, and it will be important for the listed companies to activate the broker community and the market players, who trade with great panache in their markets, to facilitate this additional weekend listing and market-making. Unless such globally active players are able to also have shifts of staff working over their weekends and accessing the DRX from their international offices, on a reasonably well-networked basis, there will be insufficient activity levels to sustain prices and liquidity in these stocks and bonds. Most MNCs will view this with trepidation, and unless this transition is managed properly, there will be adverse mindsets arising from the exaggerated price movements in a shallow market. Their company secretaries and CEOs will not have the stomach for irrational exuberance and distortions in the emerging markets' exchanges. They will find it hard-put to explain such aberrations to their core shareholders at home and therefore, decide to stay away. The Dubai Depository Receipt (DDR) can however, mitigate the downside risks and activity route of the regional markets, if reputable and prestigious companies listed in the home exchanges and currencies of each of the GCC, Arab and Asian markets around Dubai, can be persuaded to avail of the DDR opportunities. Through this mechanism, they can structure a similar tranche of say 10% to 20% of their stock, bundle them together under a common / global depository receipt, and offer the DDRs to a carefully chosen group of their ethnic expatriates who are residing in the GCC currently. For instance, public companies in India or Egypt or Saudi Arabia can use this route to place their paper (either debt or equity) among their compatriots. In a similar manner, DRX can also fashion its own version of a Dubai Medium Term Note (DMTN) Progamme. There are several million Indians, Pakistanis, Sri Lankans, Egyptians, Jordanians, and people of Iranian origin, who live in the GCC and have an active interest in investing in securities. They would constitute the logical market and could easily access and be addressed, than in the first instance, trying to get those in the mature markets to list their companies or trade through the DRX. Such primary market innovations are, in themselves, wholly welcome and timely. DIFC and DRX should also take the lead, along with the Bahrain Financial Harbour, to provide readymade platforms / clusters to gain and cement the first-mover advantages. This can be done by creating together an active secondary market in their respective local exchanges and specifically requiring the licensed institutions to "make a market" i.e. by supporting it with some liquidity and quoting two-way prices for the 'issues' that they bring to the fore. The regional stock exchanges will need to operate commercially and with much greater market savvy; by networking with their cross-country counterparts. They should be akin to orchestras in terms of 'concerted' co-ordination; and not strut around like stuffed peacocks or solo players. For instance, DFX can also work with the domestic DFM, ADSM and with each of the regions' exchanges, to deepen and enlarge the pools of liquidity, both locally and regionally. Their current stand-alone scattered systems should be made to talk to one another, operate domestically and access the borders; so that some healthy arbitraging is encouraged to thus, remove the inherent inefficiencies that can crop up in all administered market places. Happily the authorities and the regulators appointed to be in charge of these exchanges, are experienced and seasoned enough to recognize both the risks and the rewards that their wards will entail. The potential that evolving regional economies offer, is significant and should be holistically exploited; in a positive sense of the word. Ultimately, 'nothing ventured is nothing gained'. This saying need not assume the form of adventures for spurious or speculative gains. What would be more exciting all round, in a professional sense, is the emergence of an informed investor community, on the one hand, that represents a cluster of high quality, world-class institutions, bringing global best practices to DRX, and blending them with the region's economic wherewithal, and on the other hand, creating a mild / healthy explosion of innovation, dynamism, growth and prosperity in this part of the world.

The author is General Manager of Emirates Bank. However, the views expressed in this article are not necessarily shared by the Bank.

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