Dubai is considering major changes to its rules governing money managers to further enhance the city’s reputation as an emerging hub for hedge funds. Officials at the Dubai Financial Services Authority are conducting a comprehensive review of the UAE’s regulations to remove unnecessary regulatory burdens and lower barriers to entry, a spokesman for the agency said, reported by Bloomberg, citing the DFSA.
They have already proposed lowering minimum capital thresholds for some money managers. They have also said they will consider both reducing the amount of cash firms must hold in case of emergencies and scrapping rules requiring the regulator to vet and approve key hires. The moves, which would bring Dubai closer to EU and UK standards, could be the most significant regulatory changes in almost two decades. The potential changes could be implemented sometime next year after a period of ongoing consultation with firms.
Dubai: A new hub for hedge funds
The discussions come amid a steady influx of hedge funds into the city. Dubai currently has more than 70 hedge funds, from Andurand Capital Management to Point72 Asset Management. Most of them manage assets worth more than $1 billion. The proposed changes build on previous settings and will continue to meet international regulatory standards, the DFSA said. The regulator has four levels of licensing and is mainly proposing changes to Category 3, the designation for firms that manage money. It plans to reduce the minimum core cash capital requirements that some managers must hold to $140,000. It has already temporarily lowered that threshold to $230,000 from $500,000 two years ago.
For smaller local funds, the DFSA is proposing to lower the core capital threshold to $40,000 from $70,000, as it sees them as having limited regulatory risk. The changes come as Dubai expects an influx of new start-up hedge funds. The city is already upgrading a building in the financial centre to accommodate the crowd, which is expected to open by the end of April. For money managers that do not hold their clients’ cash, the DFSA is proposing to get rid of a rule that requires them to have enough extra cash to cover the costs of a possible liquidation.
Liquidation capital
But those firms that hold this external cash will still have to maintain so-called liquidation capital. Under the proposal, this minimum could be reduced to 25% of the firm’s annual fixed overhead costs from almost 35%. The agency is also looking to introduce new activity-based capital requirements for Category 3 firms, requiring them to hold cash in proportion to the firm’s assets, client funds and trading order volume. Some firms may no longer need DFSA approval for certain officers, including those responsible for compliance and finance, and senior management. The proposal is aimed at forcing firms to take primary responsibility for vetting key staff rather than relying on regulators.