Middle East's First International Exchange Opens

By Maria Trombly | Securities Industry News | October 17, 2005

The Dubai International Financial Exchange (DIFX) opened late last month, and now comes the test of fulfilling its hopes of attracting investor interest in the region, which could eventually encompass much of Africa, Turkey, Central Asia and the Indian subcontinent through telecommunications links.

The market's connectivity will be facilitated by Bloomberg and Reuters Group, which have already signed agreements to distribute DIFX market data as well as provide transactional capabilities.

"People are very closely looking at the area as a potential for new investment," said Barbara Miller, SVP of equities data at Reuters. "Having good expectations that the center would succeed, we thought we would take a shot at it." She noted that the Middle East is booming in terms of equity performance over the past year.

DIFX data is already available on Reuters' premium desktop products, including the 3000 Xtra. Reuters Order Management for Exchange Execution is the accompanying trading tool.

Connectivity options are limited today because the DIFX is building out its technology gradually. "We started with limited connectivity possibilities because we have to build the exchange," explained DIFX CEO Steffen Schubert. "Rome was not built in a day. We wish to allow every company to program into our system and to get to maximum distribution."

Though the market prospects may seem attractive, the fact that the exchange has no track record gives some would-be partners pause.

"It is a bit of a voyage of discovery," said Stephen Wilson, director of equities at Reuters. But being in on the ground floor creates opportunities for innovation. For example, the exchange combines features of both order-driven and quote-driven marketplaces. "In a new market, they can introduce something that is pretty much state of the art," he noted.

What's more, the DIFX is the first exchange in the region to make use of market makers to provide liquidity. And it will not charge for market data for the first year of operation.

The DIFX was launched with four member banks--CSFB, Deutsche Bank, HSBC and UBS. "We started off with a number of European banks," said Schubert, adding that now membership-building is a priority. "We look forward to welcoming American banks and, toward the end of next year, the first Asian banks. We plan by the end of the year to have 10-plus members and by the end of next year between 30 and 40."

Schubert also expects to see 10 to 15 IPOs within 18 months. Companies as far away as China and India have shown interest in listing on the exchange, he added.

What could make the DIFX attractive to issuers and investors is its potential to open doors to markets that have heretofore been tightly controlled. The DIFX will smooth capital flows, in that there are no restrictions on capital or on ownership; the legal framework for the financial center was created from scratch, along with a new regulatory body designed to make the market attractive to foreigners. The official language for the regulator, the Dubai Financial Services Authority, is English, and prices are quoted in U.S. dollars.

"All the hurdles that exist in surrounding economies have been taken out to enable a creation like the DIFX," said Schubert.

For example, other area exchanges require that companies make at least 55 percent of shares publicly available in order to list. At the DIFX, that threshold is 25 percent, which is expected to attract family-owned businesses into the market, said Schubert.

The DIFX plans to offer a range of equities, bonds, funds, Islamic finance products, index securities and derivatives. Trading hours are 2 p.m. to 5 p.m.--or 10 a.m. to 1 p.m. Greenwich Mean Time--to be convenient to European traders.

The Dubai exchange uses the well-tested AtosEuronext electronic trading platform, with clearing and settlement software provided by India's Tata Consultancy Services.

Despite such preparations, the pressure is on DIFX to attract issuers and investors, and to make sure that everything operates smoothly for them once they arrive. The exchange still hasn't signed any custodian banks, though an official said some are in advanced discussions. "Wait a couple of months until a couple of lawyers work on a couple of transactions, and see how the process goes," said Ayman Khaleq, an attorney at Vinson & Elkins.

Betta Plebani contributed to this report.