Regulation of the Stock Market in the United Arab Emirates Using Volckers Rule - Research Paper Example

Regulation of the stock market in UAE using Volcker’s rule Contents Contents 2 Introduction 3 Research question, objectives and goals 4 Literature Review 5 Research Methodology 7 Analysis and Findings 8 Conclusion 11 Recommendations 12 References 14 Introduction It is a section of “Dodd- Frank Wall Street Reform and Consumer Protection Act”. Volcker Rule was publicly endorsed by US president on 21 January 2010 on the backdrop of great American financial crisis which rocked the American financial sector from 2007-2010. It is a regulation maintained by the US Federal Reserve. This came into fray to prevent banks from speculative investments for their own profit. The rule was approved by five federal financial pillars of USA. Those agencies are 1)The Board of Governor Of Federal Reserve System 2)The Federal Deposit Insurance Corporation 3) The office of the controller of the currency 4)The commodity futures trading commission 5) Exchange Commission. This rule was named after the Chairman of President’s economic recovery advisory board (USA) Paul Volcker. This rule brought stability in the US financial sector by limiting the size of financial institutions by market size. This rule is applicable for deposit taking banks, federally insured, institution owning deposit taking banks. The most important point of this rule is that nation largest bank can’t trade or invest in any property on their whims. According an estimation done by American bankers association it will take 6.6 million hours of work, more 3000 employees and 1.8 million hour per year for implementing this rule. This rule is largely meant for the large banks. All financial experts around the world are not convinced with this model. By virtue of this rule banks can continue underwriting, market making, hedging, insurance company’s activities, trading of Government securities, offering private equity funds and hedge funds. The most important reason for choosing this topic is modern world is facing a huge threat from uncertain financial atmosphere around the world. Most of the countries are facing problems to keep their growth rate up. Implications of Volcker rules in the UAE market is the matter of the subject. It will create a system in such a way that, it will prevent unnecessary property trading. This rule would have great implications on the UAE banks which are related with US companies. It would help financial institutions of UAE to avoid taking too many risks in their investments. In this way Volcker rules can be proved to be very helpful in case of insulating the UAE stock market from any financial disasters. It will be an effective proactive step taken by the SCA to control the UAE stock market properly. Research question, objectives and goals In this ever changing world, each and every country is related with the other countries around the world. If any changes happen in any part of the world then the cascading effect takes place in the other parts of the world. United Arab Emirate is looking to make its stock market more at-per with the other countries around the world. Country’s stock regulating authority “Securities and Commodities Authority” (SCA) is considering different techniques. The research paper will try to analyse how SCA should go for the change they are wanting. The main aim of this research will be how SCA can use the concept of Volcker’s rules for the regulating the stock market of UAE. By taking this rule into consideration SCA can make their market more in line with the world. The most important objective of this research is how UAE can control its stock market by implementing “Volcker Rules” (Heflin, Subramanyam, and Zhanhg, 2003). The main goal of this research is to give a picture to the (SCA) that how UAE’s stock market can be controlled by keeping close eye on the investment those are taking place in the market. It will work as a road map for the organization to avoid different financial crises nation is facing in case of stock market. With the research (SCA) can cop up with different financial uncertainties of the modern day world. This rule will go to prevent different banks from speculative investments which can lead disaster in the stock markets. With the help of this research (SCA) will be able to secure the interests of different stake holders related or connected with the market. Profitability of stakeholders and legitimacy of investment is very important for any stock market. The objective of this research is to how SCA can keep their market stable by using “Volcker Rules”. The main focus of this research will be to keep authority more vigilant and proactive towards the market. As the authority will be more proactive and vigilant then it will be easy to keep an eye on the all ongoing proceedings and it will help them to take required action according to the situation demands (SIFMA, 2013). On the whole it will help the company to maintain stability of the stock market. This research can act as a light house, showing direction to the ship sailing through rough water. This research will help to avoid the need of any bailout package because with the help of this research Regulators will be able to take proper steps needed to keep the things under their control. Literature Review According to Peter .J Willison on 2013It is perceived by Americans that this rule can stop banks from taking unnecessary risks with insured deposit. But it actually bars banks from valuable activities which don’t pose any threats to deposit. As theory given by Milton Ezrati 2014 According to author this rule has the power and capability to fight any change in the monetary policy, Federal Reserve should consider its effectiveness. According to Onnig Dombalagian (2013), it is a very controversial provision of Dodd-Frank Wall Street Reform and consumer protection Act of 2010. It is a comparison between the Steagall Act of 1933 and Gramm-leach-Biley Act of 1999. Priyank Gandhi & Patrick Keifer said that the intention of this rule is to reduce the unwanted risk taking ability of US banks. According to them it can fix an upper limit for banks which are edging for risky investments. Lexis Nexis is sharing that Volcker’s Rule is tougher than expected by the people. According to him rule could have been worse than the present one. According to author this rule has brought about a sense of relief among the stake holders related with it. Although the author lauded this law but also told that this law is not an unmixed blessing. There are certain loop holes which can be treated as a point of leakage. But According to author it is more of a satisfactory rule. Author also said that lawyers are trying to work on those loop holes and designing strategy to counter this law. Volcker rule is named after the Federal Reserve chairman that is Mr. Paul Volcker and this rule abandons any kind of short term trading of derivatives, security, or any commodity futures that do not benefit the customers of the bank (Saleh, 2008). The main aim behind this rule is that the banks have no rights to utilize their funds so as to increase their own profit levels. In December 2013 the Volcker’s rule was approve by the five agencies that is Federal Deposit Insurance Corporation, Federal Reserve System, Commodity Futures Trading Commission, Comptroller of Currency, and Exchange and Securities Commission. Banks no matter can continue to provide private equity funds, hedge funds, custodians unless it do not give rise to any kind of conflicts of interest of the banks and the customers (Azzam, 2002). This rule even states that the banks depending upon their sizes must develop strategies to disclose the trading activities with the government (Silber, 2012). On the contrary larger organizations must develop new rules so as to ensure compliance with the newly formed rules and the developed program should be subjected to regular analysis and testing. The Volcker rule do not prohibit any kind of activities for the non bank financial companies that are headed by the board (Anand, 2011). On the contrary the rule demands the board to put some restriction and additional charges on these kinds of companies so as to highlight the risk and uncertainties that the Volcker’s rule was designed to highlight (Skeel, 2010). The stock market is a very integral part of the economy so the institutions needs certain rules as that of the Volcker’s so as to ensure that they are not taking any huge risks just to meet higher profit levels (Carpenter, 2011). Research Methodology Secondary research methodology is the process which will be followed in this case of SCA. Secondary research will be cost effective. With the help of secondary research it is very easy to reach up to the intended documents and data. It also helps researcher to focus on its research .In any research primary research are done before the secondary research (if needed). Secondary research is more time saving than the primary research, and in this modern busy world saving time is a very important aspect for any good research report. Data used in secondary research are more flexible to use. Another advantage of secondary research is that it can easily filter out unwanted data (Stewart And Kammins, 1963). In this research previous data, reports related to the stock market of UAE will be collected from different journals, articles written by different experts and Governmental websites, data from the US Federal Reserve are going to be the main sources of secondary data. Then all those data has to be examined, after examination of all those data this report will be able to chalk out the proper areas where the stock market of UAE is having threat or in which areas SCA has to address the issue. After finding the issue with the market Then SCA should implement the “Volcker Rules”. It has to be implemented according to the need of the market. As the Stock Market of USA will be different than the one of UAE, it has to keep in the mind. Application of “Volcker Rule” should be done properly according to the need of the market, according to Risk taking ability of the market. After the application of the “Volcker Rule” then comparative study between the previous result before using the rule and after using the rule. This study will be helpful. In this way SCA will be able to understand the effect of the rule they used. This rule will make the organization more proactive and vigilant. It will help the organization in both ways one is the identification of the problem and another is the solution of the problem (Kiecolt And Nathan, 1985). As the research is totally based on secondary data so as much as data can be collected, it will be good for the research. As the research is totally based upon secondary data, so it is highly dependent on those sources. In some cases data can be incomplete which is very much counterproductive for any research. Sometimes secondary research fails to meet the demand of the researchers. In case of secondary research many times data which are collected for the sake of research, are out dated. So there are different limitations of secondary research. Still if data are collected and examined properly then a picture of concept certainly comes into the mind. Those ideas can be very much effective for the Organization (CSA) to regulate their stock market in satisfactory way (Wallison, 2013). It will help them to be at-per with the other stock markets around the globe. Analysis and Findings The research was based on secondary data analysis. Firstly significant data from journals, magazines, online articles were collected to analyse the stock market at UAE. There is significant turmoil observed in the stock market of UAE. In the year 2005 there was a significant increase in the share prices of many companies and even in the share volumes that was being traded. However in the next financial year there were significant drop in shares to about 60% in the stock market of UAE. The net profit of the stock market of UAE like that of the revenue dropped significantly from the year 2007 to 2011. The stock market of UAE is not in a very stable position to attract the foreign companies anymore to its stock list. In 2011 the UAE market recorded a huge fall in its stock market and encountered a loss of AED 6.45 million. The situation of the stock market in UAE has not seen growth in the recent years as it has observed in the past few years. There is no sign of any kind of improvement for the UAE stock market and the condition is deteriorating even more with the passing years. The board members, executives and managers are trying their level best to get the stock market out of the worse dilemma. In such a scenario the Volcker’s rule can be applied but under constant regulation so that the rule should not abandon the stock market from any future growth. The rule would help in keeping the essential activities and eliminating some of the risky situation that would hamper the stock market more. The secondary analysis determines that the rule is very much essential in the current situation the UAE stock market as it would regenerate the revenue and growth of the stock market and even give the shareholders confidence to invest in the stock market as there would not be any risky situations involved by the management to increase profit margins. Hedging funds, proprietary trading desks, and speculate in currencies would turn into more of financial crisis for the stock market and would result into more of declining share value. The Volcker’s rule alters the procedure in which the financial institutions in the US economy operate. It plays a major role in regulating the bank practices that is considered to be risky by the federal agencies. The rule restricts the financial institutions from proprietary trading and aligns them more as a lending body that would lend money to individuals and organizations. The US financial institutions have implemented compliance programs so as to be at par with the Volcker’s rule. There are written policies and procedures designed by the US financial institutions along with limits on market making and underwriting. The banks have internal control systems, audits and testing, additional documentation related to covered funds, and proper record maintenance. Certain institutions have taken pre-emptive actions towards the new rule put across by the Federal agencies. On the contrary many financial institutions consider the rule to be very costly to be implemented in the system and requires billions of dollars of investment. It has both the positive and negative implication on the US economy. On one hand it has helped many financial institutions to control its operating processes and not to be engaged in any kind of risky situations, on the other hand it has even limit the cash in hand with the bank due to excessive lending to the borrowers. The rule has helped in the US economic growth by facilitating more of transactions and eliminating the functions of proprietary trading and hedging that makes the banks undertake risky situation. The rule have been adopted by certain financial institutions but the majority of the US economy believes that the rule limits the bank from certain activities which is risky as it is lending the money to individuals or companies. The implementation of the rule totally depends on the economic conditions of the country in which it’s going to be incorporated. The analysis states that the Volcker’s rule would safeguard the UAE stock market from any kind of future problems and would even give it a chance to establish its position in front of the shareholder’s and the foreign company as a booming segment of the UAE market. The Volcker’s rule would facilitate the securities market to just serve the customers effectively and gain market share and not bet into some risky proposal so as to obtain its own profit margin. The rule would initiate the stock market to set in regulations so that there is more of transparency and the customers investing are sure that they are not being misguided. The financial systems as that of the stock markets play a very big role to disrupt an economy. The Volcker’s rule would help the UAE stock markets to eliminate the casino part that is involved in the financial system. However on comparison of the condition before and after the rule encompasses that the elimination of the rule would make the UAE stock market gain profits by investing into various risky situations but the gain for the stock market will be in the initial stage it would not be sustaining for a longer period of time and would even decrease the confidence level of the shareholders and even the foreign companies. However the analysis have highlighted that the rule do not consist of any significant lines that needs to be drawn to prevent the uncertainties it depends on the board and the management to take effective measures so as to safeguard their intentions. However the implementation of the rule in the financial markets should have some flexibility so that the core activities are followed along with some additional activities in order to create some profit margins and gain back the market presence as the UAE stock market was in terms of share trading few years back. The rule would help in guiding the stock market to plan out some strategies to consider the interest of the shareholders and even their profit generation. On the contrary the absence of Volcker’s rule would make the UAE stock market to deviate more from the best suitable path and just to be concerned towards revenue generation. Conclusion The above research is showing that, implementation of the “Volcker Rule” can be a good option to go with. It would create stability in the UAE stock market. With the implementation of this law stakeholders will feel more secure although risky investments are going to be stop. This rule will go to make the regulators more proactive and vigilant. This rule will insulate the market from any sudden unwanted attack, by fixing an upper limit of investment. Although this rule cannot be popular with everyone, some of the players may oppose it but nevertheless it can be very productive and helpful (Al Hilal Publishing & Marketing Group ,2009). In any market in the world huge investment is involved so for securing that investment this kind of rules “Volcker Rule” is a good medicine for the ever fluctuating stock market. This rule is very much important for keeping things like investment under control. This is a very strict rule against unwanted risky investments often made by different banks. This kind of rule (Volcker Rule) will help regulatory authority to monitor the market properly. On the basis of this rule CSA can take disciplinary actions against those organizations which are taking unwanted risk and risking the money of investors. This rule acts like a filter which blocks the high risk investment and trading and allows the legitimate one only. It is a great weapon for the regulatory authority like CSA in UAE. This rule ensures that there should not be any situation where Government has to come down with bailout packages. It is not an unmixed blessing but certainly a deadly rule to suppress unwanted risks. If any regulatory authority, in this case (CSA of UAE) is trying to regulate its stock market strictly then they can go with this rule. Recommendations The rule can be applied or implemented by CSA of UAE. CSA should not copy all the things of the rule followed by the US Federal Reserve. CSA should implement the rule according to the ground reality of their stock market. It need not be the same magnitude of situation is there .Only implementation of the Volcker Rule is not enough, strict monitoring of the same is also very essential. People may oppose at first but CSA has to make them aware about the utility of this rule. And constant up gradation of the rule according to the situation is also very important. The rule should be implemented in such a way that it blocks the risky investments only not the normal investments (with lesser risk). CSA has to be very much clear about their objective and according to that they have to ground the rule effectively. A rule is as effective as it can be followed in a right way. Once the rule is implemented then CSA must follow all the rules related with it. In course of that following, the situation may take place when it has to take very unpopular decisions, but there should not be any stoppage. At the end of the day it is better to take some short term harsh decision for the long term benefit. So keeping that in mind CSA should go for it. References Heflin, F., Subramanyam, K. R. and Zhanhg, Y. (2003). Regulation FD and the Financial Information Environment: Early Evidence, the Accounting Review, 78(1),1-37. SIFMA. (2013). Volcker Rule Resource Centre. Retrieved from http://www.sifma.org/issues/regulatory-reform/volcker-rule/overview/. Al Hilal Publishing & Marketing Group. (2009). UAE to fine-tune stock market regulations. Retrieved from http://www.thefreelibrary.com/UAE+to+fine-tune+stock+market+regulations-a0216609079. Wallison, P. J. (2013). Why the Volcker Rule Will Harm the U.S. Economy Online Magazine of American Enterprise Institute. Retrieved from http://american.com/archive/2013/december/why-the-volcker-rule-will-harm-the-u-s-economy. Stewart, D. W. And Kammins, M. A. (1963). Secondary research: information sources and methods. London: Sage Publications. Kiecolt, K. J. And Nathan, E. L. (1985). Secondary Analysis of Survey Data. California: Sage Publication. Saleh, G. (2008). The Dynamic Relation between Stock Prices and Exchange Rates in Egypt, Saudi Arabia and UAE. USA : ProQuest. Azzam, H.T. (2002). The Arab World: Facing the Challenge of the New Millenium. New York : I.B.Tauris. Silber, W. L. (2012). Volcker: The Triumph of Persistence. USA : Bloomsbury Publishing. Anand, S. (2011). Essentials of the Dodd-Frank Act. Canada : John Wiley & Sons. Skeel, D. (2010). The New Financial Deal: Understanding the Dodd-Frank Act and Its (Unintended) Consequences. New Jersey: John Wiley & Sons. Carpenter, D. H. (2011). Volcker Rule: Proposals to Limit, Speculative. USA : DIANE Publishing Read More