Dubai Financial Market (DFM), the Gulf’s only listed stock exchange, today decided to introduce central counterparty (CCP) clearing for trades in equities. The service will be provided by a specialized clearing entity, which will also create a settlement default fund consistent with market best practice.
DFM currently offers a CCP service for clearing derivatives trading on its subsidiary Nasdaq Dubai. The bourse will begin consultations after two months, whilst planning to launch the new service in early 2019.
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As a central counterparty in the equities market, DFM’s CCP entity, which will be part of a new wholly owned post-trade subsidiary, will take on the role of legal counterparty for both the original purchaser and the original seller from the time an order is matched on the exchange.
The introduction of a central counterparty reduces the risk exposure between participants in the central securities settlement process, whilst increasing confidence in the local market infrastructure. The DFM said that while market participants are currently required to maintain 100% collateral value for purchase trades, a central counterparty structure will reduce transaction costs for brokers. This is due to the number of settlement transactions carried out being reduced by means of transaction netting – in other words, only net positions are submitted for settlement.
Essa Kazim, Chairman of DFM, commented: “Financial markets globally recognize the need for a CCP to better manage risks associated with clearing and settlement especially more so for DFM being a listed entity. Accordingly, we are delighted to announce this significant market enhancement as part of DFM growth strategy, in order to well- position the market for sustained growth, as the introduction of a CCP reduces risk, and improves liquidity.”
“With the support of the new CCP regulations, DFM is ready to embark on the next phase of improving its legal and operational market infrastructure to ensure that DFM remains at the forefront of the regional exchanges and further strengthened Dubai’s leading position as international capital markets hub,” he added.