Dubai Financial Market to Permit Short Selling to Boost Liquidity

The DFM’s announcement comes shortly after the Abu Dhabi's ADX announced plans to launch short selling early this year.

Dubai Financial Market (DFM), the Arab Gulf’s only listed stock exchange, said that it will allow short-selling on the UAE’s bourse within the “coming month”, a move that may attract further interest in local equities from foreign institutions.

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“DFM is planning implementation of regulated short-selling on a selected list of eligible securities in accordance with international recommendations under local market conditions in the coming months, subject to regulatory approvals of its rules,” the exchange said in a statement.

Short-selling is currently not permitted in the UAE’s two markets and analysts have speculated that this is one of the reasons for falling trading volumes in recent years. In 2012, the UAE’s financial regulator followed the lead of Kuwait, the oldest established stock exchange in the region, by authorising stock lending and short selling, but restricted their adoption by limiting them to licensed market makers.

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The DFM’s announcement comes shortly after the Abu Dhabi Securities Exchange (ADX) announced plans to launch limited short selling early this year.

The UAE’s market regulator, the Securities and Commodities Authority (SCA), has been liberalising securities rules in recent years, partly to secure an upgrade in its status to ‘advanced’ from ’emerging’ market by equity benchmark provider MSCI.

Abdullah Al-Blooshi, CEO of ADX, said that the initial tests would be conducted in a restricted and gradual manner to boost liquidity and attract more foreign investors. Some brokerages in the UAE have been forced to shut down as turnover on the DFM and the Abu Dhabi bourse slumped to several year lows, while Nasdaq Dubai was trading less than $3 million daily.

Short selling – which allows investors to make gains in a falling market by borrowing a security they don’t own, selling it and agreeing to buy it back at a lower price – plays an important role in developed capital markets since it makes price discovery more efficient and smooths volatility whilst providing investors with a host of risk-management tools.

Meanwhile, the exchange explained that due to the characteristics of such instruments, the price of a sold stock will be above the price of last deal price, at least one unit higher. In addition, the short selling mechanism will be ceased on any given day, and until the next session, should the stock price falls 5 percent during this day.

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