DFSA’s and UAE’s regulatory framework receives equivalency to European Union regime

On 16 December 2016, it was announced that the regulatory frameworks for the central counterparties (CCPs) of the Dubai Financial Services Authority (DFSA) in the Dubai International Financial Centre (DIFC) and, with regards to commodities, the "onshore" United Arab Emirates (UAE) were categorised by the European Commission as comparable to that of the European Union under EMIR. This follows previous similar equivalency determinations made with regards to, amongst others, Singapore, Japan, Hong Kong, Canada, Switzerland and the US (with regards to the Commodity Futures Trading Commission) in October 2014, November 2015 and March 2016. Under the General (GEN) Module of the DFSA Rulebook, a person who operates a clearing house becomes a CCP, ie such a person operates a facility where the confirmation, clearance and settlement of transactions in investments are to be carried out according to the non-discretionary rules of such facility.

This development demonstrates the continuing efforts of the DIFC and the DFSA in being more aligned with international standards, as set out in the Principles for Financial Market Infrastructures, issued by the International Organisation of Securities Commission (IOSCO).

IOSCO is an international body comprised of securities regulators from around the world and is recognised as the global standards setter for the securities sector. IOSCO develops, executes and promotes observance to internationally recognised standards for securities regulation. The Principles for Financial Market Infrastructures issued by IOSCO addresses financial market infrastructures which play a significant role in the development and strengthening of financial stability in financial markets, by facilitating the clearing, settlement and recording of monetary and other financial transactions. The Principles for Financial Market Infrastructure is aimed at making consistent and strengthening the existing international standards for payment systems (PS) that are systematically important, central securities depositories (CSDs), securities settlement systems (SSSs), and CCPs. Additionally, the Principles for Financial Market Infrastructure provides support to the Financial Stability Board’s initiatives to strengthen core financial infrastructure and markets.

NASDAQ Dubai is the DFSA-licensed CCP operating in the DIFC relating to equities and derivatives trading, and is an international financial exchange, aiming to increase participation in the market by overseas clearing entities. The international recognition of the DFSA’s regulatory regime in this area has the potential to promote further cross-border investment in NASDAQ Dubai’s listed investment products.

Once a CCP from a non-EU country seeks recognition from the European Securities and Markets Authority (ESMA), the European Commission assesses whether the rules of the authority in the third country achieve an equivalent level of robustness and reduction in systemic risk with regards to its CCP regulatory framework. If a determination of equivalence is made, it is given effect through a legally binding implementing act in accordance with Article 25(6) of the European Market Infrastructure Regulation (EMIR) (Regulation (EU) No 648/2012), supplemented by Commission Delegated Regulation (EU) 2016/2251 (which sets out the technical standards).

The equivalency decision by the European Commission is a clear acknowledgement of the efforts of the DFSA to introduce and promote internationally recognised best practices which are inclusive of a strong framework to promote financial stability by reducing systemic risk. Furthermore, the decision may encourage cross-border activity between clearing members based in the European Union and the CCPs in the DIFC through the reduction of the regulatory burden on market participants. Therefore, the DIFC is enhancing its position as a central gateway for international and regional financial institutions that wish to conduct business across the region. Furthermore, the acknowledgement of the Commission should help to strengthen the confidence of entities when operating in the DIFC.

Similarly, the European Commission has issued the same decision with regards to the CCP regulatory framework relating to commodities for "onshore" UAE (ie the UAE outside the DIFC and Abu Dhabi Global Market financial freezones). In light of the UAE Securities and Commodities Authority (SCA) Chairman of the Board of Directors’ Decision Number (11) of 2015 Regulations of Clearing Operations in Commodities Markets, the European Commission stated that the "onshore" UAE framework for CCPs in relation to commodities is “…considered to be equivalent…” to the framework under EMIR.

Read the full text of the European Council decision for the DIFC.
The decision for the UAE can be found here.