Emerging markets of the Middle East: A critique of selected issues in Arab securities regulation

Publication Date01 Feb 1999
AuthorLu'ayy Minwer Al‐Rimawi
SubjectAccounting & finance
Journal of Financial Regulation and Compliance Volume 7 Number 2
Emerging markets of the Middle East: A
critique of selected issues in Arab
securities regulation
Lu'ayy Minwer Al-Rimawi
Received: 9th February, 1999
Law Department, London School of Economics, Houghton Street, London WC2A 2AE;
(0)171 955 7683; fax: +44 (0)171 955 7366; e-mail: l.m.rimawi@lse.ac.uk
Lu'ayy Minwer Al-Rimawi researches Arab
financial regulation and teaches public
international law at the LSE. In September
1998 he was a speaker at a workshop on
fraud on Arab capital markets held at the
16th Cambridge International Symposium
on Economic Crime at Cambridge
He has had articles on Arab financial
regulation published in The Company
Lawyer, the European Business Law
Review, the European Financial Services
Law, CCH: Financial Services Reporter,
Journal of Financial Crime, and the Year-
book of Islamic and Middle Eastern Law.
He has also commented on Middle Eastern
affairs on BBC World Service and MBC
and in British national newspapers such
as The Guardian, The Independent, the
Independent on Sunday and The Times.
This paper examines comparative aspects of
regulation. It provides a general
introduction, overviews the aims of securities
regulation and the UK
and outlines the obstacles facing equity financing
under Shari'a and hindrances to effective Arab
securities regulation. It
for the major
reasons which have enhanced
interest in Arab securities markets, examines
lack of Arab rules
insider dealing and
possible contractual remedies. It concludes with
a case study shedding light on the term 'securi-
as understood by Article 3 of the 1997
Jordanian Securities Act.
It is pertinent to mention at the outset that
in addition to the nascent Arab equity mar-
the sovereign bond market has also
been receiving increasing attention from
Arab countries.1 For example, in late Feb-
ruary 1998, domestic banking sources in
Qatar reported that Qatar was preparing to
make its debut in the international sover-
eign bond market to raise US$200m. Sev-
eral banks are competing to lead manage
the issue including France's Société Génér-
ale and JP Morgan.2 For its part, Moody's
has rated Qatar at Baa2 with a short-term
rating of P-2. Standard and Poor's has
given Qatar a sovereign BBB rating with a
stable outlook. Qatari banking sources,
however, attribute Qatar's enthusiasm for
the bonds market to the success of Oman's
$225m bond issued in 1996. Qatar has so
far borrowed more than $2.7bn from syn-
dicated loans and raised over S10bn
through non-recourse loans for various
gas-related projects, as Qatar is keen to
cash in on its sound credit ratings. For
example, a $1.2bn bond issued by one of
Qatar's three gas projects, Ras Laffan LNG
Company (Rasgas) in December 1996 was
Journal of Financial Regulation
and Compliance, Vol. 7, No. 2,
pp. 149-176
Henry Stewart Publications,
Page 149
Emerging markets of the Middle East
well received. Moody's, however, has since
downgraded the Rasgas bonds to BBB +
following the economic meltdown in
South Korea, which has contracted to buy
80 per cent of the project's output. Never-
theless, the bonds are still rated investment
grade because of the project sponsors'
strength mainly Mobil and QGPC.3
Aims of securities regulation
Objectives of securities markets in emer-
ging economies are seen through creating
alternative funding sources, facilitating the
privatisation process, promoting medium-
and small-size business, providing alterna-
tive vehicles for national savings and
attracting foreign investment.4 However,
stable macroeconomic conditions, orderly
exchanges, competent financial/banking
systems, coupled with an effective legal
corporate structure underpinned by effica-
cious legal procedures, are all among the
prerequisites for well-functioning securities
markets. Securities markets are often a
composite of many different components:
broker-dealers; physical or electronic
exchanges; clearance and settlements orga-
nisations; agents for issuing the securities,
institutional underwriters of securities, etc.
Aims of securities regulations include: gov-
erning public and private issues of securi-
listing, disclosure, facilitating the
contributions of investment companies,
pension funds and insurance companies,
supervision, etc.,5 all of which are often
subject to prudential regulation aimed at
maintaining systemic stability while avoid-
ing concomitant moral hazards.6
UK regulatory framework
The structure of securities regulation
depends largely on existing institutional
financial structure, sophistication of the
economy and reactions to egregious finan-
cial scandals.7 In addition, the system of
financial regulation can also depend on the
historical-political relationship between the
central government and the financial
sector, as was evident in the traditionally
self-regulatory system of the City of
London before the Big Bang.8 Here the
unique importance of the City as a finan-
cial centre that has even often helped pro-
vide finance for expensive Crown activities
throughout the centuries, has effectively
meant a balance of power tilting towards
the City and its operators.9 However, after
the Big Bang, the self-regulatory structure
became two-tiered.10 Under that structure,
the Securities and Investment Board (SIB)
delegated its regulatory responsibility to
self-regulatory organisations (SROs). The
SIB (like the British Panel on Mergers and
Acquisitions) was considered a public
body, the decisions of which were amen-
able to judicial review. Originally, five
SROs obtained recognition from the SIB.
These were: The Securities Association
Financial Intermediaries Managers
and Brokers Regulatory Association
(FIMBRA), Life Assurance and Unit Trust
Regulatory Organisation (LAUTRO),
Investment Management Regulatory
Organisation (IMRO) and Association of
Futures Brokers and Dealers (AFBD).
After a shake up in British SROs, largely
resulting from functional overlapping,
there were three SROs in operation: The
Securities and Futures Authority (SFA),
IMRO and Personal Investment Authority
However, in light of new regulatory
changes in the UK, the SROs will remain
in charge until the passage of the regula-
tory reform legislation, though enforce-
ment and authorisation decisions will be
taken up by the staff of the newly estab-
lished Financial Services Authority. It is
also expected that the SROs will continue
their regulatory responsibilities until the
regulation transferring their responsibilities
Page 150

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