Apr 03 2013
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SCA rules signal new era of growth for Islamic funds
The new set of fund regulations approved in August 2012 by the UAE Securities and Commodities Authority (SCA) is expected to dramatically change the country's investment landscape.
The decision has been regarded as a step in the right direction for all types of funds as the new rules not only address issues of foreign ownership, liquidity and risk management, but also prescribe guidelines on reporting for both conventional and Shariah-compliant funds.
The aim of these long-awaited regulations was to keep standards in line with international best practices and to strengthen investor confidence. But it also reflects the growing sophistication and value of Islamic financial instruments in today's market condition. A timely undertaking considering that Islamic finance has become an important sector within the global asset management industry, and one that more and more firms are looking to develop.
The SCA regulations, with their onus on Islamic finance, mark a radical shift in the development of the UAE regulatory framework and will have important ramifications for those wishing to launch funds in the wider GCC region.
But fund managers in the region need to be aware that they face significant challenges when dealing with the pace and nature of the regulation involved. The SCA's regulations specifically focus on the issues of Islamic finance, corporate governance and risk and liquidity management. As a result, managers need to ensure that the systems and internal processes have the capability to comply with both conventional and Shariah-compliant funds.
Raising the bar
Managers must now meet a higher level of standards than they were previously used to. From now on, a fund's quarterly and annual reports must meet standards set by the International Accounting Standards Board (IASB) and the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) for a Shariah-compliant fund. In addition, regulatory reports may be demanded by the SCA at short notice. A robust accounting and reporting solution should be in place to comply with these demands.
Also, it is recommended that the systems and processes for Shariah-compliant funds are configured via the open architecture model which makes adding, swapping or upgrading components easy.
The increasing trend of setting up these funds alongside conventional funds means that managers should opt for a single system that can support both investment types. The system should be flexible and the reporting technology easily modifiable, without the need to re-write and re-build existing technology infrastructure.
The process will include choosing which types of products to offer - both Islamic and acceptable conventional products - and ensuring the right screening processes, workflows, purification methods and segregations of monies are in place to ensure compliance of the Islamic investments at all times.
As part of the SCA rules, UAE-domiciled fund managers are required to have a 3% ownership stake, therefore managers need to monitor their portfolios constantly to ensure that the composition does not "drift" due to buy and sell decisions or changes in market conditions. Therefore managers need to make sure that they monitor their positions in real time and enact pre-trade compliance checks.
There are also very specific rules on risk and liquidity management, which will require managers to ensure total transparency into portfolio holdings and sector weightings in order to check a fund's composition and define and adjust for risk and liquidity.
But it's not only about keeping the regulators happy. In today's world of intense regulatory scrutiny, as well as the increasing sophistication of clients, asset management firms need to find innovative ways to improve their competitive edge and grow their business.
Managers who are able to operate sophisticated systems with robust reporting, integrated trading compliance and comprehensive portfolio monitoring capabilities, are well positioned to maintain high levels of client satisfaction and provide timely, accurate and transparent portfolio information.
Hazem Elmalla is regional head for client relationship and support at Advent Software, MENA.
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