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Consultation Paper No. 39 A New Category of Recognised Members
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Nov 23 2006 onwards

Consultation Paper No. 39 A New Category of Recognised Members



Download this Consultation Paper in PDF format.

Why are we issuing this paper?

1. This Consultation Paper seeks public comments on the DFSA's proposal to change the Recognition Module (REC Module) of the DFSA Rulebook to create a new category of Recognised Members. Under this proposal, a person will be able to deal in Commodity Derivatives as Principal on an Authorised Market Institution (AMI) as a Recognised Member even if that person is not licensed and regulated in respect of that activity by a Financial Services Regulator, provided certain alternative safeguards are in place.
2. Under the current requirements in REC chapter 7 of the REC Module, a person can become a Recognised Member on an AMI only where that person is licensed or authorised to perform the financial services it proposes to conduct in the DIFC in a jurisdiction other than the DIFC and is regulated in respect of those activities by a Financial Services Regulator to a standard satisfactory to the DFSA.
3. The proposed new category of Recognised Members requires an applicant to meet certain alternative conditions that are designed to address the risks associated with Dealing as Principal in Commodity Derivatives by remote members on an AMI. These proposals are consistent with the DFSA's risk based approach to regulation. The required Rule amendments to give effect to this proposal are in Annexure A. Please note that such proposals do not affect the recognition of members under the existing rules.

Who should read this paper?

4. The proposal in this paper would be of primary interest to AMIs and those persons who wish to carry on the Financial Service of Dealing as a Principal in Commodity Derivatives on an AMI which is licensed, (or has applied for a licence) to operate a market in Commodity Derivatives.

How is this paper structured?

5. In this paper, we set out:
(a) Defined terms in paragraph 8;
(b) The scope of and reasons for the current proposal in paragraphs 9–13; and
(c) Proposed rule changes — Annexure A.

How to provide comments?

6. All comments should be forwarded to the person specified below. You may, if relevant, identify the organisation you represent in providing your comments. The DFSA reserves the right to publish, including on its website, any comments you provide, unless you expressly request otherwise at the time of making comments.

What happens next?

7. The deadline for providing comments on these proposals is 16 January 2007. Once we receive your comments, we will consider if any further refinements are required to these proposals. We will then proceed to enact the changes to the DFSA's Rulebook. You should not act on these proposals until the relevant changes to the DFSA Rulebook are made. We will issue a notice on our website telling you when this happens. Until any changes are made to the DFSA Rulebook following consultation on these proposals, there is only one category of Recognised Membership, as provided in REC chapter 7 of the REC Module.

Comments to be addressed to:
Sema Dursun-Carver
Legal Counsel
DFSA
PO Box 75850
Dubai, UAE

or e-mailed to: sdursuncarver@dfsa.ae

Defined Terms

8. The terms used in this paper have the same meaning as in the DFSA legislation including the Glossary (GLO) Module of the DFSA Rulebook, unless otherwise stated. All capitalised terms are generally defined terms in the relevant legislation. For convenience of reference, in this Paper:
(a) "AMI" means an Authorised Market institution;
(b) "Body Corporate" means any body corporate, including a limited liability partnership and a body corporate constituted under the law of a country or territory outside the DIFC;
(c) "Commodity Derivative" is a Derivative over a commodity (see the new definition proposed in Annexure A);
(d) "Dealing as a Principal" means the Financial Service of Dealing in Investments as Principal, as defined in GEN Rule 2.7.1;
(e) "Financial Services Regulator" means a regulator of financial service activities established in a jurisdiction other the DIFC;
(f) "Recognised Member" is a person who holds a Recognition Notice issued to that person under Article 61 of the Regulatory Law 2004 recognising that person as a Recognised Person;
(g) "Regulatory Law" means the Regulatory Law No 1 of 2004; and
(h) "remote member" means a person who does not have a physical presence in the DIFC.

The scope of and reasons for the current proposal

9. The Regulatory Law prohibits the conduct of Financial Services in or from the DIFC unless a person conducting business that amounts to a Financial Service (such as Dealing in Investments as Principal or as Agent) is appropriately licensed or otherwise exempt. Article 41(7) of the Regulatory Law provides such an exemption. It says that a Recognised Member is not subject to the Financial Services Prohibition with respect to any Financial Service it carries on by trading on, or using the facilities of, an AMI as a remote member of that AMI. As a result, persons other than DFSA licensed Authorised Firms can trade on, or use the facilities provided by an AMI by obtaining from the DFSA, the status of a Recognised Member.
10. REC Chapter 7 of the REC Module sets out the DFSA's current criteria that must be met to become a Recognised Member. Under REC Rule 7.2.2, to become a Recognised Member, an applicant must:
(a) not be an Authorised Firm or AMI or, an applicant to be an Authorised Firm or AMI;
(b) be licensed or authorised to perform the financial services it will be carrying on in the DIFC in another jurisdiction outside the DIFC;
(c) be regulated in respect of the above activities by a Financial Services Regulator to a standard satisfactory to the DFSA;
(d) have its head and registered office outside of the DIFC; and
(e) be a Member of, or authorised to use the facilities of, an AMI, subject to being granted Recognised Member status by the DFSA .
11. We propose to add a new category of Recognised Members to the existing category above. Under this category, a person can become a Recognised Member and thereby be able to trade on an AMI as a remote member where:
(a) the trading:
(i) relates to Commodity Derivatives; and
(ii) is limited to Dealing as Principal; and
(b) the person:
(i) is a Body Corporate which is of good standing and repute;
(ii) has adequate and relevant expertise relating to trading in Commodity Derivatives;
(iii) has an agent in the DIFC who is authorised to accept any service of notice and process on behalf of the member;
(iv) has subjected itself to the jurisdiction of the DFSA and DIFC Court; and
(c) the DFSA has no other grounds for objection.
12. We propose to create a new category of Recognised Members subject to the above criteria for the following reasons:
(a) Trading in Commodity Derivatives does not attract the same level of regulation as dealing in securities in some jurisdictions. Therefore, the current criteria that rely on alternative equivalent regulation may unnecessarily hinder the development of markets in Commodity Derivatives in the DIFC. By adding the new category, we provide a greater level of flexibility for remote members to trade in Commodity Derivatives on an appropriately licensed AMI;
(b) Persons trading in Commodity Derivatives as Principal are generally highly experienced in such trading. Therefore, we are of the view that such persons have the necessary expertise, resources and capacity to act in such a market. Our proposed requirements that applicants for Recognised Membership must demonstrate adequate experience in trading in Commodity Derivatives and also, the limitation that they may only deal on their own behalf (i.e. Dealing as Principal) reinforces these positions; and
(c) Our proposed requirements relating to such members having to subject themselves to the jurisdiction of the DIFC, and also, having an agent, on their behalf in the DIFC who is authorised to accept service and process are designed to ensure appropriate liaison and enforcement due to the fact that such members do not have a physical presence in the DIFC and it is likely that there is not a Financial Services Regulator for that activity in the home jurisdiction of the member.
13. In developing these proposals, we have also looked at comparable practices in other jurisdictions such as the United Kingdom, the United States, Europe, Singapore, Australia, the United Arab Emirates and other Gulf Cooperation Council countries.

Download this Consultation Paper in PDF format.

•   Download a copy of Annexure A — Proposed amendments to the Recognition Rules in PDF format.