Traders say margin rules will likely affect liquidity

Abu Dhabi: The proposed regulations for margin trading in the UAE's financial markets can result in limiting the liquidity in circulation, some traders claim.

Margin trading, in simple terms, is a facility for investors to purchase stocks exceeding their financial capacity, set by the Emirates Securities and Commodities Authority (Esca) at 50 per cent of the invested funds in the new regulations.

"The matter of fact is that brokerages are offering their clients 200 per cent and more, and regulating margin trading by setting a ceiling of 50 per cent will rather limit the available liquidity in the market," said Khalid Abdul Rahman, general manager of Abu Dhabi Financial Services, the brokerage arm of the National Bank of Abu Dhabi.

"If Esca seeks to implement these regulations and assume the role of the watchdog for the strict application, our markets will only suffer more."

Nevertheless, Esca maintains that regulating margin trading will remove excess liquidity as many brokers tend to finance leverage through assets of other clients.

The regulations, already published, are pending implementation subject to the introduction of the executive bill, which is expected within two months. They were introduced to address the practice after the catastrophic consequences that hit investors during the 2006 market meltdown.

"Brokers will start to apply for margin trading activities from the beginning of September. By then reporting accounts will be on a daily basis rather than weekly as is the case at present," Bassam Jamil Al Ramahi, brokerage manager at Emirates Securities, said.

"If margin trading is efficiently regulated, we will only have real liquidity in circulation, and this will strengthen the markets," he added, explaining that enforcing accounts segregation at brokerages on a daily basis will also help in curbing market fluctuations.

"The high volatility of the UAE markets is partly attributed to this fact, where we find brokers violating the account separation rule throughout the week. Hence we find a strong performance for two or three days, to be followed by a contraction towards the end of the week when brokers need to submit the report," Al Ramahi said.