Dubai International Financial Exchange seems wired to stir things up and that’s exactly what happened in August this year when it launched the first listed structured product platform in the Middle East. The DIFX clearly has its eyes on the rapid growth of the structured products market, and wants to leverage the region’s fabled liquidity to build a platform encompassing all types of instruments. But just how far can the platform grow? Will there be enough liquidity to drive this market?
There is still a huge amount of skepticism about the initiative, but this is not stopping Armen V. Papazian, the managing director of innovation and development at the DIFX, from trumpeting gains achieved so far. TraX currently lists 23 structured products issued by Deutsche Bank, Merrill Lynch and Morgan Stanley. Papazian says all TraX securities can be easily traded, just like shares, through local and international brokers linked to the DIFX. The products, he says, allow better risk management for regional investors, providing them with valuable portfolio diversification tools.
This November the DIFX announced a new initiative. It has invited several banks to list Shariah-compliant structured products in the market. DIFX officials say Citigroup, Deutsche Bank, Merrill Lynch and Morgan Stanley are just some of the banks planning to list Islamic products in the near future. DIFX president Per Larsson has told reporters that they are looking forward to listing Islamic products that track regional and international equity indices and other well known benchmarks.
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Like conventional structured products, Islamic products can be tailored to suit a range of investment styles. Some are capital-protected while others offer greater risks or rewards. Papazian rejects suggestions it is premature for the bourse to focus on structured products when its market has yet to attain a required depth in equities and bond trading.
The launch of the structured product platform in late August also coincided with heightened volatility in the markets as a result of sub prime crisis and there was considerable apprehension among investors on the unintended effects of highly-leveraged and synthetic structures to underlying markets. Papazian, however, argues there will always be skeptics when one is trying new things and insist that the right perspective is taken on these initiatives. “We go beyond the skeptics since we recognize our role to play in the bigger picture.”
The bourse, he says, has started to attract liquidity. Two days after the start of trading, the structured product platform saw US$2 million worth of trades. Awareness for the platform, he says, has steadily built up after a sizeable number of local brokers attended their structured products workshop.
Given the significant pool of available liquidity in this region, Papazian says there is a dire need to establish venues where those cash can be invested in a constructive way. DIFX is already the largest exchange in the world for sukuk by listed value, at US$13.78 billion, and the plan is to remain at the forefront of innovation in the Islamic finance sector.
Papazian says DIFX’s mandate has both a commercial and evolutionary elements to it. “The deepening of markets and capital market growth are very much part of its mission and vision,” he says, even as he hastened to add that the DIFX’s work is just not all about getting new structures or product platforms up and running. “It is all about building the future of capital markets in this region, not just in Dubai but also in the UAE,” he says. In building the first structured products platform in the region, DIFX has taken the region’s capital markets into a new area of growth, he added.
Online trading on the structured product platform was immediately made available during the 28th of August launch, with members providing DMA platforms to local brokers who are non-DIFX members. Mubasher, the biggest brokerage in the region, provided online access to retail investors and other brokers were also contemplating providing the same access to their retail customers. Mubasher connects to the DIFX through a DMA platform provided by Deutsche Bank, and it turn provides online trading to retail clients using the Reuters order routing systems. Papazian says the other brokers are still fine-tuning their systems. Papazian explains that while DIFX was originally modeled as a wholesale market, its structure has changed so that it also now caters to the retail market with brokers able to connect affiliate institutions outside the UAE to trade in the DIFX.
Best practices
Papazian says DIFX’s key attraction as an exchange is the high level of regulation in place, mimicking the well-developed regime of London and the New York Stock Exchange. Many local institutions, he says, he says, were quite surprised at the amount of regulations involved to become a member in the DIFX.
The regulation, he says, is necessary since international investors are interested to invest in local products if they are confident of the level of transparency, reliability and accountability. DIFX, he adds, plays a key role in boosting the confidence of investors given its role as a central counterparty to all trades. It has set aside US$25 million to guarantee trades. When The Asset visited the DIFX in the first week of trading there were already 14 new products launched valued at almost US$460 million. The products included index trackers providing exposure to SP500, Nikkei 225, Abu Dhabi, Qatar, etc.
Papazian says they had no problem at all stoking the interest of local institutions in the platform. In fact, the local brokers and investing institutions were quite eager and requested the holding of training workshops on schedules way earlier than the product launch, he adds. DIFX’s relationship with local brokers had not exactly been smooth at the start, as the latter saw DIFX as mainly targeting offshore service providers and investors. Papazian admitted there were concerns that the structured products platform was nothing more than a vehicle to provide a distribution platform for international banks in the region.
The DIFX had a change of heart this year when it decided to also attract a retail component of the business. The local brokers in turn saw opportunities to be able to service international investors. Papazian explains that while foreign international banks can issue or list a structured product such as an index tracker on the Dubai market, they still need to abide with foreign ownership rules and so are restricted from some activities in the market. “These foreign banks do not want to issue products that they cannot hedge,” Papazian says. “The local institutions, which usually do not have such limitations, could end up offering exposures to the market that the international bank are not be able to. They can do this because they will have more access to the local asset base, and through structured products can provide international investors exposure to the market that would otherwise not be possible.”
Index tracker products focusing on the Dubai Financial Market, Dubai’s domestic bourse, have been launched by Deutsche Bank and Merrill Lynch. While some of these products are already available in London, Frankfurt or Singapore, Papazian says he is not quite sure whether those markets go out of their way to support their investor base for products of this type. “We are determined to push the envelope when it comes to helping Dubai’s capital markets grow and so we go out of our way to provide educational support and have done so in an enthusiastic manner,” he says.
