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A new international stock exchange in a changing region

Date 07/07/2005

Steffen Schubert, Chief Executive, Dubai International Financial Exchange (DIFX)

It is a mere three years since the government of Dubai announced plans to create a new international financial centre, to bridge the gap between Western Europe and East Asia. A key element of this ambition was a new stock exchange that would attract investors from around the world and issuers from across the Middle East and nearby areas, such as India. This exchange would be unique, for there was nothing like it in the region.

In September 2005, that stock exchange plans to open. The Dubai International Financial Exchange (DIFX) has been carefully designed to fulfil the role assigned to it, through the quality of its regulation, its ability to attract potential issuers and members and its excellent regulatory structure.

The DIFX aims to launch with shares, bonds, depository receipts and Islamic products. Funds and derivatives will follow. The elements are in place for the DIFX to grow steadily over months and years into a major international exchange with diverse products and deep and liquid markets.

To be successful, any exchange must adapt to its environment. Stock exchanges around the world have been doing exactly that in recent years in response to commercial and political pressures; some have merged, others have demutualised, while others have adopted new products. The DIFX is fortunate that its own environment is changing in ways that will help it succeed.

The capital markets in the Middle East are expanding and maturing. Regional companies that once automatically borrowed money from banks if they needed new capital are now more inclined to issue shares or bonds instead. They have been doing so on local stock exchanges around the region, which played host to a spate of initial public offerings last year.

At the same time many of these stock exchanges have been opening up to the outside world. Some have relaxed restrictions preventing foreigners from investing. Indian companies meanwhile are listing depositary receipts on international markets in order to access new sources of capital.

The DIFX will benefit from this changing environment by providing a new type of market for which the region is now clearly ready, and which it has lacked to date. This will be a market on which companies from a wide variety of regional countries list their products, and which will attract investment from around the world. For all the advances they have made, existing regional stock markets still mostly list companies only from their own country, and have attracted little investment from outside their own region.

A key feature of the DIFX is the quality of regulation inside the Dubai International Financial Centre (DIFC), the free zone in which the DIFX is based. That regulation is provided by the Dubai Financial Services Authority (DFSA), an independent body that has taken the best practices of regulators in Western jurisdictions and adapted them to its own circumstances. Moreover, the DIFC has its own legal system.

These features, unique in the region, are proving attractive to many leading international and regional investment banks which are in talks with the DIFX about becoming members of the exchange. Such a membership base would in turn be unprecedented in the region. Potential issuers are attracted by this prospect as it offers them the chance of high liquidity, high visibility and excellent valuation for their shares and other products. In addition they are aware that a listing on the DIFX will confer a high status on their company, as to achieve one they will have to demonstrate such features as accounts prepared to international standards and a high calibre board of directors.

Issuers are also attracted by having an international exchange in their own time zone and by other aspects of the DIFX which they know will appeal to  investors. These include its use of the US dollar and the total absence of restrictions on foreign investment. The relatively low minimum 'free float' requirement of typically 25% of share capital is also an advantage, as is the ability of companies to set their own initial public offering share price.

As well as attracting regional issuers, the DIFX is also being approached by European companies that are keen to issue products on an exchange in one of the world's wealthiest regions. High oil prices are not essential for the success of the DIFX, but they are contributing to the growing economic profile of the region.

The technology used by the DIFX is highly attractive. The trading platform will be supplied by AtosEuronext and software for clearing and settlement will be provided by Tata Consultancy Services. Both are leading international suppliers in their fields. The DIFX's clearing house will be the first in its region to provide central counterparty clearing services, thus eliminating default risk.

The core DIFX region from which it is most actively seeking issuers stretches from Morocco in the west to India in the east. It also includes South Africa and Turkey. Rather than be a rival to exchanges in those countries, the DIFX will complement them. Many companies will be content to remain on their local exchange or seek a listing there in future; they will not necessarily want access to international capital, or wish to make structural changes necessary to meet the DIFX's listing rules. Other companies will list products on both the DIFX and local exchanges, while others will opt for the DIFX as an alternative to a listing on an international exchange outside the region, where the time zone is very different and where their company may be less well understood by investors.

The DIFX will also benefit from its location inside the DIFC free zone. The DFSA has given permission to 38 banks and other companies to set up offices in the DIFC, since the zone opened for business in September 2004. They include Credit Suisse, Merrill Lynch, Standard Chartered and other international organisations. The development of capital markets activity in the Middle East looks set to continue, with Dubai at its forefront.   

The DIFX is applying to the DFSA for a licence to operate an exchange inside the DIFC.