SCA warns against short selling

Abu Dhabi: The Securities and Commodities Authority (SCA) on Saturday warned companies or individuals involved in short selling activities in the UAE markets.

Short selling is the selling of a security that the seller does not own, or any sale that is completed by the delivery of a security borrowed by the seller. Short sellers assume that they will be able to buy the stock at a lower amount than the price at which they sold short. It is not yet regulated in the UAE.

"Most parties associated with short selling are international finance companies and are doing it with good intentions. In the absence of a legal framework it is difficult to regulate short-selling in the UAE at present," Abdullah Al Turaifi, SCA's chief executive officer (CEO) said on Saturday.

"Regulating short-selling requires certain elements or prerequisites including the implementation of the margin trading regulations for a sufficient period of time," he added.

The UAE markets have entered a vicious cycle of losses since the beginning of September, wiping more than Dh115.7 billion in market capitalisation, of which Dh50 billion was recorded last week. One of the reasons attributed to such deterioration is the abuse of short-selling that is not regulated.

"We cannot blame any party specifically, and not the brokers indeed, who only execute the orders without necessarily being aware whether it is for redemption of short-selling," Eisa Kazim, chairman of Dubai Financial Market said. "However, this practice needs to be stopped as it inflicts serious damage to our markets," he said.

Short-selling is associated with many problems as the seller can face difficulties in repurchasing the borrowed shares, while distorting price levels beyond real values. "If short selling is common in any given market, there is always a risk that a downtrend goes beyond real values, as well as an uptrend, hence distorting the value of the shares," said Dr Monzer Barakat, an adviser at SCA.

Authorities did not specify any measures, although an official from SCA told Gulf News that SCA is contemplating action against parties involved in short selling.

"International financial institutions are always concerned about the credibility and reputation, and hence we expect them to comply, as this practice deeply hurts our markets," Kazim told Gulf News.