Qatar’s inability to improve foreign ownership limitations and continuing fears over how the UAE deals with failed trades have stopped index provider MSCI from upgrading the two countries to emerging markets status.
In its review of its MSCI Qatar index and the MSCI UAE index, the agency said it would maintain its frontier market status for both indices and consider them for potential reclassification as part of the 2012 annual market classification review.
MSCI had already extended the review period for the potential reclassification to December 2011 from May 2011, following the implementation of new delivery versus payment (DvP) models on the Qatar Exchange, Dubai Financial Market and Abu Dhabi Securities Exchange. The intention had been to provide market participants with additional time to assess the effectiveness of the models and for national regulators and the exchanges to address concerns raised by international institutional investors.
In Qatar, stringent foreign ownership limits, including on large companies, continued to limit the availability of shares to international investors and was a source of potential volatility.
“No change was implemented or announced on this matter by the Qatari regulators during the review period,” said MSCI. “Any change to the status of the MSCI Qatar Index is conditional upon a meaningful increase of foreign ownership limit levels applied to Qatari companies resulting in increased foreign room.”
While international institutional investors were positive about the introduction and seamless functioning of a new DvP model in the UAE, investors nonetheless voiced significant concerns over the effectiveness of the new framework to fully safeguard their assets under certain conditions – particularly in failed trades where a forced sale of assets, without the owner’s consent, remained a possibility. The situation has led to many international institutional investors and custodians needing to hold dual accounts as a requirement.
“The potential introduction of new regulations allowing for securities borrowing and lending (SBL) agreements and security short selling have been raised by market participants as a possible way of resolving these issues,” MSCI said in a statement.
The same concerns existed in Qatar relating to the persistent requirement for international investors to operate with a dual account structure in order to offset the risk of forced sales in the case of failed trades.
The Qatari authorities said they were making progress on the potential introduction of regulations governing SBL agreements and securities short selling, though MSCI said it was unaware of any official communication from the Qatari regulator on these topics.
MSCI’s next announcement on country classification decisions is scheduled for June 2012. In order for regulatory developments to have a positive impact on a country classification decision, the regulations must be in place long enough for market participants to assess the practical effect of such new or modified regulations.