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Consultation Paper No. 12 The Authorized Market Institution, Recognition and Offered Securities Modules of the DFSA Rulebook
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Consultation Paper No. 12 The Authorized Market Institution, Recognition and Offered Securities Modules of the DFSA Rulebook

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October 2004

A DUBAI INTERNATIONAL FINANCIAL CENTRE Financial Services AUTHORITY ("DFSA") CONSULTATION PAPER ADDRESSED TO PARTIES INTERESTED IN THE DEVELOPMENT OF Financial Services AND MARKETS Regulation WITHIN DUBAI'S FINANCIAL FREE ZONE (THE "DIFC")

1. Introduction

This paper consults on the DFSA's proposed rules for the:

• licensing of Exchanges and Clearing Houses (which includes settlement operators) operating from the DIFC as Authorised Market Institutions (the Authorised Market Institution or AMI module);
• recognition of Exchanges and Clearing Houses providing services in the DIFC as Recognised Bodies (the Recognition or REC module);
• recognition of firms located outside of the DIFC doing Financial Services in the DIFC on or through the facilities of an Authorised Market Institution as Recognised Members (also in the Recognition or REC module);
• offering of Securities in or from the DIFC (the Offered Securities or OSR module);
• listing of Securities by the DFSA (also in the Offered Securities or OSR module); and
• ongoing obligations of persons who have made offers of Securities in or from the DIFC or who have had Securities listed by the DFSA (also in the Offered Securities Rules or OSR module).

The AMI module is attached as Annex A, the REC module as Annex B and the OSR module as Annex C.

This paper also consults on associated changes to other parts of the DFSA Rulebook. These changes are set out in Annexures D, E and F.

The draft rules are published for consultation purposes only. Please note that, although the draft rules are in near final form, the DFSA reserves the right to amend the drafts at its sole discretion. The rules will be made under powers contained in the Regulatory Law 2004 and the Markets Law 2004.

Comments are invited on any aspect of the regimes proposed in this paper, on both the principles and the detailed drafting. The DFSA would be particularly interested to have the views of firms considering using the proposed rules and views on how this regime compares with those in other major centres. In the light of the comments received, the DFSA may determine to adopt in whole, or in part, the proposals outlined in these papers, or may amend the proposals.

Anyone wishing to submit comments should provide details of the organisation he or she represents. The names of commentators and the content of their submissions may be published on the DFSA website and in other documents to be published by the DFSA. If you wish your name to be withheld from publication, please indicate this when you make your submission.

Any comments should be addressed to:
Mr Nicholas Alves
Legal Counsel
DFSA
PO Box 75850
Dubai, UAE

or e-mailed to nalves@dfsa.ae

All comments should be provided in writing, on or before 8 December 2004

2. Background and context

The draft rules forming the AMI, REC and OSR modules and the associated changes to other parts of the DFSA Rulebook need to be considered in the context of the core Financial Services laws - the Regulatory Law 2004, the Markets Law 2004 and the Law Regulating Islamic Financial Business 2004.

3. The DFSA rulebook

The core Financial Services laws provide the DFSA with a wide range of powers, including powers to make rules and to issue Guidance. This Guidance is not binding, nor does it create a "safe harbour" protecting those who comply with it from action for breach of the underlying rule.

The rules together make up a Rulebook containing a number of modules. The DFSA Rulebook may be viewed on the DFSA's website (www.dfsa.ae) along with all the DIFC Laws and Regulations.

The DFSA has power to waive or modify rules, and is prepared to use this to adapt the rules to specific circumstances which may arise.

4. Interpreting the rulebook

Defined terms are identified throughout the Rulebook by the capitalisation of the initial letter of a word or of each word in a phrase and are defined in the Glossary (GLO). Please note that Annex F contains further definitions. Unless the context otherwise requires, where capitalisation of the initial letter is not used, an expression has its natural meaning.

Every provision in the Rulebook must be interpreted in the light of its purpose. The purpose of any provision is to be gathered first and foremost from the text of the provision in question and its context among other relevant provisions. A provision means every type of provision, including Rules and Guidance.

Where reference is made in the Rulebook to another provision of the Rulebook or other DIFC legislation, it is a reference to that provision as amended from time to time. If a provision in the Rulebook refers to a communication, notice, agreement, or other document 'in writing' then, unless the contrary intention appears, it means in legible form and capable of being reproduced on paper, irrespective of the medium used. Expressions Related to writing must be interpreted accordingly. Any reference to 'dollars' or '$' is a reference to United States Dollars unless the contrary intention appears. References to Articles made throughout the Rulebook are references to Articles in the Regulatory Law 2004 unless otherwise stated.

Unless the contrary intention appears:

• words in the Rulebook importing the masculine gender include the feminine gender and words importing the feminine gender include the masculine; and
• words in the Rulebook in the singular include the plural and words in the plural include the singular.

Unless the contrary intention appears, a day or business day refers to:

• in relation to anything done or to be done in (including to be submitted to a place in) the u.a.e. any day which is not a Friday or Saturday or an official u.a.e. Bank holiday; and
• in relation to anything done or to be done by reference to a market outside the u.a.e. any day on which that market is normally open for business.

5. Purpose and summary of the material provisions of the AMI rules

The rules in the AMI module are created under powers contained in the Regulatory Law 2004 and the Markets Law 2004. The purpose of the rules set out in the AMI module is to provide the necessary detail in relation to the:

• process by which applicants must apply for a Licence to be an Authorised Market Institution;
• process by which an Authorised Market Institution can change the scope of or withdraw its Licence;
• rules in relation to the Controllers of an Authorised Market Institution;
• Licensing Requirements, or standards, which the applicant must satisfy to be granted a Licence; and
• supervisory regime to which an Authorised Market Institution will be subject on an ongoing basis including requirements in respect of its relationship with Regulators.

An Authorised Market Institution is also subject to other modules of the DFSA Rulebook, including rules contained in the General, Supervision and Enforcement modules. The AMI module contains references to these rules. The changes contained in Annexures D and E are intended to apply appropriate provisions of other modules to Authorised Market Institutions.

The Rules contained in the AMI module do not restrict the operation of an Exchange or a Clearing House in the DIFC to a single entity. Any Person wishing to establish an Exchange or Clearing House in the DIFC will however be subject to a transparent regulatory regime that requires the operating standards to be of a world-class international standard.

Such standards are embodied in a set of Licensing Requirements which form the basis of the AMI module and relate to:

(a) fitness and propriety;
(b) proper markets;
(c) financial resources;
(d) human and technology resources;
(e) systems and controls;
(f) Members' access to facilities;
(g) general safeguards for investors;
(h) identification, deterrence and prevention of Market Misconduct, financial crime and Money laundering
(i) promotion and maintenance of standards;
(j) whistle blowing;
(k) clearing and settlement;
(l) Transaction recording;
(m) safeguarding and administration of assets;
(n) business rules;
(o) compliance with business rules;
(p) complaints; and
(q) default rules

An Authorised Market Institution can permit persons to use its facilities on the basis of criteria approved by the DFSA. This could mean that persons based outside of the DIFC are permitted use of the facilities operated by an Authorised Market Institution; these types of firm are commonly known as remote Members and will need to be recognised by the DFSA under the rules contained in the REC module.

6. Purpose and summary of the material provisions of the REC rules

The rules in the REC module are created under powers contained in the Regulatory Law 2004. The purpose of the rules set out in the REC module is to provide the necessary detail in relation to the:

• processes by which applicants must apply for Recognition by the DFSA and where applicable for changing the scope of their recognition;
• Recognition Requirements for Recognised Bodies;
• information required by the DFSA for Recognition of a firm as a Recognised Member; and
• general provisions that apply to Recognised Bodies and Recognised Members and applicants for Recognition.

The regime places substantial reliance on the supervisory arrangements to which the Recognised Person is subject in another jurisdiction and focuses upon events and activities that may affect the DIFC. The rules require that an applicant for Recognition is regulated in a jurisdiction outside of the DIFC to a standard considered satisfactory by the DFSA and that the DFSA has appropriate arrangements for information sharing with the relevant regulator of the Recognised Body or the Recognised Member.

Recognised Persons are subject only to the rules in the REC module and some other rules in the DFSA Rulebook which are prescribed by this module.

7. Purpose and summary of the material provisions of the OSR rules

The Markets Law of 2004 makes provision for the Regulation of offers of Securities in or from the DIFC, together with the initial and ongoing responsibilities of offerors and Reporting Entities. This module will be of relevance to companies incorporated in the DIFC who wish to raise capital by a public Offer, to companies incorporated elsewhere which wish to raise capital in the DIFC, or from it, and to those advising such persons. It applies whether the Offer made in or from the DIFC is to be by way of an issue of traded Securities on the DIFX or by any other form of issue including a public Offer of unlisted Securities.

This module further defines the concepts of Offer and exempt Offer and also contains rules relating to initial disclosure, continuing disclosure and other obligations that arise at the time of, or as a result of, Offering or Listing Securities.

The structure of the module is organised so that the main provisions are contained in each of the chapters, which are linked to appendices at the back of the module, detailing the requirements relating to the various product-specific Categories including Shares, Debentures, Certificates, Warrants and other financial products.

The purpose of the rules set out in the OSR module is to provide the necessary operational detail in relation to the framework created by Parts 3 and 4 of the Markets Law 2004 in relation to offers of Securities in or from the DIFC (Part 3) and the listing of Securities by the DFSA (Part 4). In addition, the OSR module provides the detailed rules in relation to Parts 5 and 6 of the Markets Law 2004 which apply to persons on an ongoing basis who have utilised either Part 3 or 4 of the Markets Law 2004 (or both). These rules deal with corporate governance and disclosure obligations.

The following paragraphs are a brief explanation of Parts 3 to 6 of the Markets Law 2004 and the OSR rules. The purpose of the explanation is merely to provide an overview of the substance and purpose of the legislation. Consequently, any Person subject to the legislation must refer to the Markets Law 2004 and the OSR module and not refer to this brief overview for the purposes of compliance with the legislation.

Part 3 of the Markets Law 2004 defines offers of Securities as offers by a Person as a principal which, if accepted would give rise to a contract for the issue of Securities by him or another. It also allows for certain types of Offer to be subject to provisions contained in the DIFC collective Investment law (currently being drafted) rather than the Markets Law 2004.

A general prohibition on offers of Securities (whether listed or unlisted) is created by the Markets Law 2004 unless the Offer is:

(a) an exempt offer; or
(b) a Prospectus Offer.

The main difference between an exempt Offer and a Prospectus Offer is that a Person making an exempt Offer is not required to file a Prospectus with the DFSA before making the Offer. Certain types of offers are exempt from the Prospectus requirement owing to the nature or the content of the Offer, such as offers to professional investors which is an exemption prescribed by the Markets Law 2004. The Markets Law 2004 also contains exemptions relating to offers by Exempt Offerors or offers already subject to Takeover provisions and allows further types to be prescribed in the OSR module.

The Markets Law 2004 requires that a Prospectus must contain (including but not limited to) all the information an investor would reasonably require for the purpose of making an informed assessment of the assets and liabilities, financial position, profits and losses of the Issuer or Offeror of the Securities and the nature of the Securities, as well as complying with any other requirements. A Prospectus that is filed with the DFSA must comply with the Markets Law 2004 and the OSR rules.

The DFSA has power to issue stop orders in relation to offers where it is satisfied that the law or the rules in the OSR module have or would be contravened. Stop orders effectively prevent an Offer from proceeding and the exercise of this power is subject to appeal procedures.

Part 4 of the Markets Law 2004 creates the framework for listing applications and decisions on application for listing. Admission to the Register of Listed Securities is required to be made in accordance with the requirements of the OSR module and applicants will be informed about decisions on applications in writing. The DFSA may also suspend or delist Securities from the Register of Listed Securities, if it satisfied there are special circumstances which preclude regular dealings in the Securities or it is in the interests of the DIFC. All decisions under Part 4 are subject to appeal procedures.

Part 5 applies corporate governance principles to Reporting Entities (normally those persons who have filed a Prospectus in order to Offer Securities or have Securities listed or both). Part 6 has the same application and imposes reporting requirements on the Reporting Entity in relation to the continuous disclosure of price sensitive and similar information, disclosures of Related financial interests by Connected persons and also financial reporting requirements.

Further to the provisions of the Markets Law 2004 as briefly described above, the rules in the OSR module also:

• specify further activities which constitute an Offer of Securities in relation to sales and financial promotion activities relating to Securities in or from the DIFC;
• specify some other types of Offer that are Exempt Offers, and therefore not subject to the Prospectus filing requirement, which include offers of Commercial Paper, offers where the total consideration does not exceed US$1,000,000 and offers to less than 25 people in a 12 month period;
• create some limited requirements associated with some types of Exempt Offers which include an exempt Offer statement requirement and restrictions to whom some Exempt Offers may be made, which is known as the Qualified Investor restriction;
• create requirements for Prospectus contents and rules for the Recognition of documents produced under the rules of other jurisdictions;
• prescribe listing requirements and the process for Securities to be admitted to the Register of Listed Securities by the DFSA;
• provides a process by which the DFSA will exercise its powers in relation to the suspension and de-listing of listed securities;
• details responsibility and liability for the contents of Prospectus filed with the DFSA as part of either a Prospectus Offer or listings application;
• provides a process by which ongoing continuous disclosure requirements are made and to which limited exceptions are available;
• other disclosure requirements on a Person, (the Reporting Entity) who has made an Offer of Securities in or from the DIFC or who has Securities on the Register of Listed Securities;
• provides details on the appointment of Sponsors and their duties in relation to either offers of Securities, listing applications or compliance with ongoing disclosure obligations as a Reporting Entity;
• sets out provisions in relation to contraventions, enforcement and stop orders; and
• general provisions in relation to Fees.

The requirements of the DIFC may be different to those in other jurisdictions. Persons located outside of the DIFC will need to consider if their Offer is being made in the DIFC and is caught by the application of the OSR module. Such persons will also need to consider any relevant legislation in their home State. Some Guidance on cross-border offers is provided in the OSR module section 2.2.

8. The wholesale nature of the DIFC

The DIFC is fundamentally a wholesale financial centre. Authorised Firms are subject to a restriction which prevents them from carrying on Financial Services with another Person unless that Person is a Client or a Commercial Customer. These expressions are defined in the Glossary, but in both cases refer to a Person who is not a Retail Customer.

The OSR module implements the wholesale concept but only in relation to Exempt Offers. Such offers are subject to restrictions as to whom the relevant Securities may be sold, namely only to Qualified Investors. A Qualified Investor equates to a Client. This restriction in the OSR module applies not only to Authorised Firms but to any Person making an exempt Offer. Prospectus offers on the other hand may be made to any Person so long as the Offeror is not an Authorised Firm.