With the next phase of development upon it, the Dubai International Financial Centre (DIFC) is stepping up its game toward moulding Dubai as a "new financial time zone".

"In the coming two years, I believe the DIFC will be what people think about when they think about finance in this part of the world. It's well on its path to becoming a centre for the entire region," observed Nasser Al Shaali, Chief Operating Officer of the Dubai International Financial Exchange (DIFX), the centre's international stock market.

The DIFC is already counting a greater number of global headlines this year. In April, its newly created investment subsidiary, DIFC Investments, acquired a stake in pan-European stock market operator Euronext.

In May, it increased that stake to 3.48 per cent, fuelling speculation that it could be considering takeover bids as the world's top exchanges make headway towards consolidation.

If obtaining global credibility is a key parameter of success, then the DIFC has unlocked the door with some recent high-profile executive appointments such as David Eldon.

The former HSBC Chairman this month became the DIFC Authority's senior figurehead.

Bringing big names in regional and international finance to its ranks is another check mark on the DIFC's report card.

More than 170 finance companies are licensed by the DIFC, including heavyweights such as Morgan Stanley.

Many of these companies are also committed to ramping up liquidity on the DIFX. Morgan Stanley managed the exchange's first initial public offering (IPO) this year, Kingdom Hotel Investments, the hospitality arm of Saudi billionaire Prince Al Waleed bin Talal's mammoth Kingdom Holding. Its next big IPO is ShowtimeShowtime Arabia another major listing anticipated in the DIFX offing.

"I think what people look for is critical mass of activity and the DIFC is really on its way. A testimony to that is its stake in Euronext.They are perceived as favorable partners which means that the DIFC is seen as credible and is taken seriously," said Nicholas Hegarty, managing director of Barclays Capital, one of the first investment banks to set up shop at the DIFC.

Centre of gravity
It is hard to fathom that the DIFC was on "shaky ground" just two years ago, according to Simon Williams, senior editor and economist with the Economist Intelligence Unit, who referred to the DIFC's progress as nothing less than "impressive".

"I do not expect a repeat of what happened in the beginning," Williams said from London, referring to the move by the Dubai Financial Services Authority (DFSA), the DIFC's independent regulator, in June 2004, to fire Chief Executive Phillip Thorpe and Chairman Ian Hay Davison.

Davison claimed that he and Thorpe were dismissed because the DFSA board had complained about conflicts of interest and suspect land deals.

"I think they have learned their lesson since then. They've been having a good 18 months and their momentum has really picked up speed," said Williams, who sees the DIFC at the front of the line among the GCC's three financial centres.

"It's pulling ahead of the other two centres in Doha and Manama and establishing a centre of gravity under them. That's very attractive," Williams said.

The gravitational pull has not only lured HSBC's Eldon; the DIFX's incoming CEO is Per Larsson, who headed Sweden based trading technology firm OMX, which owns several Nordic exchanges.

"I'm a believer in voting with your feet," said Dr Nasser Al Saidi, DIFC chief economist.

Regulatory regime
Smart regulations and good timing have been the key drivers of the DIFC's success so far, observers said.

The DFSA, under the chairmanship of Dr Habib Al Mulla, has pioneered a host of progressive legislation that set it apart from other global regulators, like the Securities and Exchange Commission (SEC) in the United States and the UK's Financial Services Authority.

Both of these authorities have tailored their regulatory regimes with an emphasis on protecting entry-level investors - the socalled "widows and orphans".

The DFSA laws, by contrast, are moulded to attract high-networth investors.

The regulator's imposing legal collection includes the recently passed collective investments law, which enables hedge funds to domicile their funds in the centre, a world first for the untilnow unregulated industry.

Laws, meanwhile, are backed by a DIFC Court.

"We now have an international regulator based at the DIFC," Al Saidi said, pointing to the DFSA's recent agreements with the FSA and the SEC.

"DIFC companies are licensed according to international and global standards, which means that a company listed on the DIFX that wants to migrate to another market will have the comfort of knowing that they are already complying with international standards," added Al Saidi, who also heads Hawkama, the DIFC-based institute for corporate governance.

But the main engine behind the DIFC's success is its impeccable timing, according to Williams. Skyrocketing oil prices and declining supplies in recent years have lined the pockets of GCC business personalities, and opened the door for a wave of acquisitions such as P&O.

"What's really given it the momentum is what has been happening with the regional economies. To coincide it with the largest and most-sustained surge in international oil prices is pretty darn good and help to push the process along," Williams said.

As co-arranger for the DIFX's first sukuk listing, a Dh10.28bn Islamic bond for DP World's controversial takeover of Britain's P&O, Barclays is one bank benefiting from its Dubai hub, conceded Hegarty.

"Now we've introduced the full product suite of Barclays in the UAE and GCC and this is unheard of in terms of the historic operation.You can't directly say that it is the DIFC, but it's got a lot to do with it," he said.

International aspirations
With a lean and mean investment arm, the DIFC's next big move will be to aggressively push its weight in the international circles. DIFC officials have alluded that the stake in Euronext is just the beginning of the global acquisition strategy of DIFC Investments, chaired by DIFC Authority director general Dr Omar bin Sulaiman.

"When we think there are investments that strengthen what we do at the DIFC in such areas as markets, payment systems, other types of activities we will do so.They become links in terms of the knowledge and the technology that underlies the financial market,"Al Saidi said.

But even at home, Hegarty said the DIFC has cleverly "played on the region's strengths" through projects like the Dubai Mercantile Exchange, which will introduce trading in Middle East sour crude futures in the fourth quarter.

The commodities exchange joint venture between the Dubai Government and the New York Mercantile Exchange will lure global financial institutions and trading companies to its DIFC base, while also fulfilling a need for price discovery in regional oil.

Other initiatives like the Family Office are also in tune with the region's needs. The office will help manage financial planning and succession issues of large family-owned enterprises in the region, many of which are in dire need of restructuring.

Anchoring success
Al Shaali said building liquidity is the exchange's key objective in the coming period and a pipeline including up to nine more IPOs before the year's close could help.

He said that Larsson would enhance the exchange's "credibility and appeal" in global circles, particularly given his resume of experience in derivatives instruments like options and futures contracts which the DIFX will pioneer in the region.

"Origination will be the key challenge," added Al Saidi, who sees a wealth of potential in Shariah-compliant products, securitisations and fixed-income instruments.

"When we start originating products from the region, I think that is when we will come into maturity." Taking the DIFC as the sum of its parts, then, the centre is well on its way to solidify that "new financial time zone" that Al Shaali envisions will one day align Dubai with global centres London, NewYork and Tokyo.

Nasser Al Saidi appointed Chief Economist of DIFC authority
The DIFC has appointed Dr Nasser Al Saidi as the chief economist of the Dubai International Financial Centre Authority. Dr Saidi is a former Minister of Economy and Trade and Minister of Industry of Lebanon, as well as former first vice-governor of the Central Bank of Lebanon.

He is a Member of the UN Committee for Development Policy and has served as economic adviser and director for various government organisations, central banks and financial institutions in Arab countries, Europe and Central and Latin America.

Dr Saidi is co-chair with the OECD of the Mena Corporate Governance Forum and is the executive director of HawkamahHawkamah, the Institute for Corporate Governance, whose mission is to assist the countries and companies of the region in developing and implementing sound and globally well integrated corporate governance frameworks.

As chief economist, Dr Saidi will advise the DIFC on strategic economic issues facing the region and its financial markets and actively contribute to the creation of the future vision and strategy for the DIFC, the development of its market infrastructure and financial markets, in order to serve the economic and financial development of the region.

By Daliah Merzaban

© Emirates Today 2006

 

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