Do regulators feel the urge to merge?

Rumours of a merger between the emirates financial watchdogs appear to be premature.
Do regulators feel the urge to merge?
By Daniel Stanton
Sun 18 May 2008 11:50 AM

Dubai International Financial Centre (DIFC) has been abuzz with rumours that the Dubai Financial Services Authority (DFSA), which regulates companies in the centre, and the UAE Central Bank are to merge.

At first, the suggestion does not make much sense: institutions in the DIFC are not involved in the retail business.

However, some institutions based there may be becoming a little frustrated that they are barred from doing any business in dirhams. The constant speculation, in the media and in conversation with other bankers, over the future of the dollar peg has seen more large organisations issuing bonds or sukuk denominated in dirhams to hedge against revaluation. HSBC last month issued a five-year AED2.25 billion (US$6.12m) sukuk - imagine how costly it would have been to the bank if it had issued it in dollars, only for a 10% or higher revaluation to occur before 2013.

Financial institutions in the DIFC are also keen to take a larger slice of direct UAE business. Takaful and insurance firms, in particular, are not allowed to offer direct coverage in the UAE, which limits their market significantly.

The DFSA quickly denied rumour of a merger when contacted by this magazine, calling it "speculation." That is probably right.

One possibility is for the Emirates Securities and Commodities Authority (ESCA), which regulates business on the Dubai Financial Market and Abu Dhabi Securities Exchange, to become part of the UAE Central Bank. If such a move means that international institutions looking at entering the UAE need to have only one meeting with regulators, instead of two, it should be popular.

Whether or not any of the UAE's financial regulators are to join forces, the regulatory environment would benefit from more centralisation. This year, the biggest banking crisis in the UK for decades occurred because the different regulatory bodies were unsure which of them had the power to act when Northern Rock began going south.

The outlook for the financial sector here will not always be as good as it is today. It makes sense to ensure that any changes to the regulatory system are made before a crisis strikes.

Daniel Stanton is the editor of Arabian Banking & Finance.

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