“It’s not a question of if they’ll do it,” an industry executive told me in Dubai a couple of weeks ago. “It’s a question of when.”
The ‘it’ in question here is changing the rules applicable to holders of a Category 5 license in the United Arab Emirates (UAE).
Currently this is the simplest way to enter the Gulf state as a CFD provider. The license lets you market your products and services in the country but onboard clients with another entity, which could be in the Seychelles or Mauritius.
The capital requirement is only AED 500,000 ($136,000) and so the cost is very low compared to most other markets with similar revenue potential.
Consequently it’s not surprising that there are now almost 150 firms with the license, although that includes non-CFD brokerage firms.
Big name brands have taken up the license, including XM, Pepperstone, and Eightcap, with lots of other small and large firms in the CFD industry also using it.
There is a general rule in this sector that the more firms acquire a specific license, the more likely you are to start having ‘problems’, which in turn leads to changes to the licensing regime.
Over the last 12 months or so, lots of people I have spoken to have said that the UAE is going to ‘break’ at some point but no one could say for sure when that would be or what any resulting changes would look like.
The recent change at the local regulator, which has now ‘rebranded’ as the Capital Markets Authority, also led to people saying a change would happen – although it’s not obvious to me why changing their name would lead to this.
The only ‘real’ sign that something is in the air was news that we reported on last week, namely that Category 1 license holders were sent a questionnaire about their businesses and how they operate.
I get into a cold sweat when I hear about these sorts of things – nightmares of restrictions on IBs and caps on leverage start to wiggle their way through my mind. Nothing good ever comes from a questionnaire sent by a regulator to a CFD broker.
But the bigger problem for most providers would be changes to Category 5. Nothing concrete has happened, but three different industry executives have now told me that the CMA will change the license so that firms using one have to introduce clients to a local Category 1 holder.
In practice, that would kill the license. I doubt there is a single broker, which will start being an IB for another broker and so companies will either ditch the license or be forced to upgrade. As the minimum capital requirement for a Category 1 license is AED 20m ($5.5m), most providers will not be willing to do it. The ‘best’ alternative I can think of here is that you have a setup like South Africa, where providers are forced to work with an ODP license holder. This makes the license more like a matched principal license (or ‘STP license’ as some people like to call it).
We reached out to the CMA and asked about changes. As an aside, I sent the email at about 11 pm UK time and had a reply by 9 am the following morning. Such efficiency from other regulators, you will not get!
Here is what they said…
“We can confirm that the current regulatory framework remains unchanged, and there have been no amendments introducing an obligation for Category 5 licensed firms to introduce clients exclusively to a locally regulated Category 1 firm.
At present, no such requirement exists under the applicable regulations governing introducing license holders. Should there be any official updates or regulatory changes, they will be formally announced through the Authority’s official channels.”
The problem with this is that it’s positive on the surface but then you start to feel like Leo Strauss, distinguishing between the ‘common’ reader and the ‘careful’ reader. And as careful readers, you go, ‘well they said there is no change, but they didn’t say there won’t be one in the future’ or ‘they said there will be no change to make people introduce clients to Cat 1 holders, but they didn’t say they won’t change it in another way.’
Alas, this leaves us back in the rumour mill and unsure of what’s actually going to happen. But let’s say they did kill Category 5. Would it be that big a deal?
The mundane answer to this is ‘it depends’.
The UAE license is not like the ‘good’ CySEC license of old. There is no passporting across a massive group of countries. You are just getting access to one – admittedly good – market. A lot of providers that I see are not doing the majority of their business in the UAE and losing access to the market, at least directly, would be annoying but not a huge deal. For example, Pepperstone and FP Markets both recently got this license. I think they would be fine without it.
On the other hand, there are definitely a lot of companies that make heavy use of the license. It would also probably kill some gray area marketing activity on both the retail and institutional side. It will obviously be very bad for these companies if Cat 5 gets killed.
Would it impact Dubai as a hub? Probably not. Dubai has become popular less because of Category 5 and more because it has low tax and is well positioned geographically to manage business in Asia, Europe, and Africa. Plus you don’t have to worry about a Deliveroo driver snatching your phone as you walk along the pavement.
If I’m wrong about that? Well…guess I’ll see you at iFX Expo Mauritius in a few years’ time.
