The UAE stock market regulator has introduced new margin lending rules and vowed to crack down on unlicensed lending, it said in a statement on its website.
Margin lending – borrowing with cash or share holdings as security, has been in high demand as investors sought to maximise gains from a UAE market surge, with Dubai and Abu Dhabi’s bourses jumping 108 per cent and 63.1 per cent respectively last year.
Limits on such lending were introduced in 2008, but many brokers ignored these and faced few repercussions. Now, on the request of brokers, the Securities and Commodities Authority (SCA) has made changes to what firms can lend customers.
Previously, firms could lend each client 10 per cent of the capital they set aside for margin lending, but they can now lend three times that amount. The new rules are to take immediate effect.
Firms must abide by the new regulations or face fines of Dhs100,000 ($27,200). Repeat offenders may lose their licences in a promised crackdown on illicit margin lending.
“The SCA is doing something important, which is to lower the risk to smaller companies giving unlimited margin and limit downward volatility,” said Mohammed Ali Yasin, managing director of Abu Dhabi Financial Services.
The new rules may increase margin lending in the long term as brokerage firms boost their base capital to provide more margin lending, but in the short term trading volumes may fall as brokers comply with previously-ignored lending limits.
“Brokers have to adjust positions to bring margin levels down,” said Hisham Khairy, head of trading for institutional desk at MENA Corp brokerage firm, adding trading volumes could drop by 30 per cent initially.