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Abu Dhabi Global Markets (ADGM) has recently released new revised financial services regulations and various revised rulebook modules.[1] These wide-ranging measures update ADGM’s rules on environmental matters, virtual assets, commodities, listings, financing and benchmarking, all of which are key growth areas for ADGM. The park is looking to play a leading role in these emerging areas, for example by developing the green economy and attracting start-up and growth companies to go public. It also plans to build on its success as host to the most successful Murban oil market in the Middle East by establishing itself as a broader trading hub for commodities and carbon credits, and introducing new regimes for environmental instruments and spot commodities. Additionally, existing virtual asset rules have been expanded to cover some non-fungible token activities, further driving ADGM regulation of the space. This note outlines the major changes.[2]
Environmental instruments
The rules introduce the concept of “environmental instruments,” a new type of financial instrument that will cause carbon credits to be traded like other financial instruments for regulatory purposes. Such instruments, when processed, will trigger licensing requirements, financial promotion rules and other general regulatory rules. The changes reflect ADGM’s desire to expand its role in the global carbon market. As discussed in our client note, Abu Dhabi Global Market to launch world’s first voluntary carbon credit swap, there have been calls for stronger regulation of the carbon credit market to ensure a more robust verification process. There is uncertainty as to whether voluntary carbon units constitute only contractual rights or assets and, if the latter, whether they are regulated or negotiable. In March 2022, ADGM announced its intention to be the first jurisdiction in the world to develop a framework to support carbon as a commodity. ADGM also plans to support the establishment of a regulated carbon exchange and carbon clearing house in Abu Dhabi onshore later in 2022. Carbon offsets will also be “acceptable spot commodities” for the purposes of the new spot commodity regime.
sustainable finance
ADGM introduces new reporting and disclosure requirements for issuers covering environmental, social and governance issues. New mining and oil company rules will require disclosure of these companies’ environmental and social policies and risks.
Spot Commodities
ADGM is introducing a new system for the “spot” commodity market, namely buy and sell contracts for immediate delivery (as opposed to futures, which have a later delivery date). To date, other leading global markets have not adopted financial regulations for spot commodity trading, implementing a liberal exposure regime,[3] But ADGM sees market sentiment in favor of regulation.
Under the new rules, certain activities in spot commodities, including the custody of such products and the operation of trading venues, will be regulated in ADGM.[4] Unless there are exceptions, such as proprietary trading as the primary activity, licensing requirements for regulated activities in spot commodities will be triggered.[5] However, regulated activity can only be carried out for “accepted spot commodities”. The FSRA will determine which commodities are “accepted” based on factors such as criteria imposed by authorised entities when sourcing commodities and the market in which commodities are traded, including their liquidity, transparency and orderly functioning.
Authorized entities will be required to adhere to responsible and sustainable sourcing standards for their products and activities, as well as the activities and acceptable off-the-shelf commodities of their users. They may only use delivery and storage facilities within the ADGM or with the same rules set out in the ADGM, and in each case operating within the relevant jurisdiction and international standards. Arrangements must be in place to deal with delivery disputes or interruptions and title to in-stock merchandise.
Authorized entities will have the right to operate spot commodity auction platforms, subject to system, control and safeguard requirements.
Commodity Derivatives
ADGM has introduced new measures to curb the potential for excessive speculation and price volatility in commodity derivatives. Recognized Investment Exchanges (RIEs) are now expected to mitigate the risk of orderly trading that may arise from price volatility. They will be able to set price limits on derivatives and must introduce position limits on commodity derivatives and any other physically settled related derivatives to reduce the risk of market abuse. They are required to demonstrate to the FSRA annually how their position limits are effective in mitigating market abuse. The RIE is expected to publish weekly position reports showing the total positions of each derivative held by each category of participants, including the number of long and short positions.
Mining and Petroleum (MAP) Companies
Some changes to the ADGM rules are aimed at encouraging MAP issuers to list in the region, such as the introduction of a new offering disclosure regime for these companies. The rule specifies when, where and how MAP activities should be disclosed with reference to industry reporting standards and ADGM-specific obligations. If MAP companies seek to go public under the new asset eligibility test (discussed in the Listing and Fundraising section below), they will be able to submit audited accounts for less than the standard three-year period.
ADGM was a pioneer in introducing a customized regulatory system for virtual assets in 2018. The latest document makes some changes to these rules.
Authorized persons conducting regulated activities on virtual assets are already required to have certain systems and controls in place to create and manage private keys. These systems and controls now also include public key sharing and reuse.
Companies are now required to conduct a detailed analysis of the risks for customers buying and selling virtual assets, and must make appropriate disclosures to customers prior to making initial virtual asset transactions. Authorized personnel must continually update their analysis and disclosures to reflect the risks of any updates. Such disclosures may include that virtual assets are not legal tender, they may be vulnerable to an increased risk of financial crime or cyber-attack, and technical issues may mean that customers cannot use or access their virtual assets.
Non-Fungible Tokens (NFTs)
ADGM has introduced new guidance to accommodate NFTs, which it sees as a growing market. At this stage, the NFT itself will not be regulated by the FSRA. However, regulated Multilateral Trading Facility (MTF) authorized to provide custody for virtual assets will be allowed to conduct certain activities for NFTs within ADGM. A specific structure has been put in place to achieve this, regulated MTF/virtual asset custodians should establish an unregulated NFT entity within their ADGM group which will be the interface with NFT issuers and market participants main entity. Unregulated NFT entities will be segregated from MTF/virtual asset custodians and outsource their trading, auction and custody activities to MTF/virtual asset custodians.
Listing requirements
ADGM has successfully positioned itself as an energy derivatives market, but has yet to attract a successful securities listing.various changes MKT The rulebook aims to improve the potential system to develop the sector. With the introduction of new profit and asset eligibility tests, SMEs and early stage companies will have easier access to the ADGM official list. Previously, the total market capitalization of listed shares had to be $10 million. Issuers can now list shares if they can demonstrate: (i) a total profit of at least $1 million over the past three years, of which $500,000 must have been earned in the past 12 months (profit test); (ii) at least Net tangible assets of $3 million, after any financing costs, or a market capitalization of at least $10 million, after any financing (asset test).
ADGM hopes to encourage growth-stage companies by allowing all public companies to issue new shares worth up to 20% of their existing share capital to new investors without the approval of existing shareholders. Preferred stock and shares with weighted voting rights will also be accepted.
Continuous Disclosure Obligations
As part of the new rules, companies’ continuing market disclosure obligations have been strengthened. The FSRA will have new powers to halt trading at the company’s request to give it more time before inside information is disclosed. Listed funds that were previously subject to a unique set of rules will now be required to report in the same way as other companies with listed securities.
New rules have been introduced for managing and providing information related to specific benchmarks. ADGM laws have not previously covered this area. The FSRA will decide which benchmarks to “designate” based on the size of the underlying market and the total contract value of the reference benchmark.
These rules include organizational and governance requirements for benchmark administrators, as well as specifications about the information administrators use to determine specified benchmarks. Benchmark administrators must also grant non-discriminatory access to pricing and other information for a particular benchmark and permission to use the benchmark.
Benchmark information providers also need to have adequate governance arrangements in place to ensure the independence of the information they provide and to control the communication records of the information they rely on.
The measure effectively builds on similar developments in the EU under the EU Benchmark Regulation (Regulation (EU) No 2016/1011), but in a less onerous way, especially with regard to third country benchmarks and the scope of the measure.
ADGM is an important part of the UAE and Abu Dhabi’s economic diversification strategy. Clearly, attracting new businesses and players from emerging areas of the world economy to ADGM as a financial center has potential advantages. Where ADGM has been successful is usually in areas where it is more flexible or leading, such as in areas such as common law adoption and fintech. It is now well-positioned in emerging areas of carbon reduction, especially compared to the US, UK and EU, some of which tend to be slow or draconian.
ADGM’s foray into the growing carbon trading and emissions reduction market appears to be a compelling next step as international pressure to tackle climate change and move away from fossil fuels mounts, as well as successfully becoming a major trading hub for oil derivatives in the Middle East. The new regime may also help meet commitments made at COP26 by international governments, including the UAE.
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