October 19, 2022
ジャンプリンクテキスト
The Abu Dhabi Global Market (ADGM) has recently published new financial services amending regulations and various amended rulebook modules.[1] These wide-ranging measures update ADGM’s rules on environmental matters, virtual assets, commodities, listings, capital raising and benchmarks, all of which are key growth areas for ADGM. The zone is seeking to play a leading role in these emerging sectors, for example by developing its green economy and attracting listings of start-up and growth companies. It also plans to build on its success as the host of the Middle East’s most successful marketplace for Murban oil by establishing itself as a broader commodities and carbon credits trading hub and introducing new regimes for environmental instruments and spot commodities. In addition, the existing virtual assets rules have been extended to cover some non-fungible token activities, furthering ADGM’s efforts to regulate this area. This note provides an overview of the key changes.[2]
The rules introduce the concept of an “environmental instrument,” which is a new type of financial instrument that will result in carbon credits being traded like other financial instruments for regulatory purposes. Such instruments will, when dealt with, 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 emissions market. As discussed in our client note, Abu Dhabi Global Market to Launch World’s First Voluntary Carbon Credit Exchange, there have been calls for enhanced regulation of the carbon credit market to ensure a more robust verification process. Uncertainties exist as to whether voluntary carbon units constitute mere contractual rights or assets and, if the latter, if they are regulated or negotiable. In March 2022, ADGM announced its intention to become the first jurisdiction globally to develop a framework to support carbon as a commodity. ADGM also plans to support the launch of a regulated carbon trading exchange and carbon clearing house in onshore Abu Dhabi later in 2022. Environmental instruments that (in the view of the Financial Services Regulatory Authority (FSRA), the financial services regulator in ADGM) amount to carbon offsets will also be “accepted spot commodities” for the purposes of the new spot commodities regime.
ADGM has introduced new reporting and disclosure requirements for issuers covering environmental, social and governance issues. New mining and petroleum company rules will mandate the disclosure of those companies’ environmental and social policies and risks.
ADGM is introducing a new regime for “spot” commodities markets, i.e., buy/sell contracts for immediate delivery (as opposed to futures, which are for a later delivery date). Other leading global marketplaces have not, to date, adopted financial regulations for spot commodities trading, imposing a lighter touch regime,[3] but ADGM views market sentiment as favoring regulation.
Under the new rules, certain activities in respect of spot commodities, including the provision of custody and the operation of trading venues for such products, will be regulated in ADGM.[4] A licensing requirement for conducting regulated activities in relation to spot commodities will be triggered unless an exception applies, e.g., for proprietary trading purposes as a main activity.[5] Regulated activities can however only be carried on in respect of “accepted spot commodities.” The FSRA will determine which commodities are “accepted” according to factors such as the standards that an authorized entity imposes when sourcing the commodity and the market that the commodity trades in, including its liquidity, transparency and orderly operation.
Authorized entities will need to comply with responsible and sustainable sourcing standards for their products and activities, as well as for the activities of their users and for accepted spot commodities. They may only use delivery and storage facilities that are either within ADGM or that have rules equivalent to those imposed in ADGM, and in each case operate within relevant jurisdictional and international standards. Arrangements to deal with delivery disputes or disruption and spot commodity title must be in place.
Authorized entities will be entitled to run auction platforms for spot commodities but will need to comply with systems and controls and safeguarding requirements.
ADGM has introduced new measures to curb the potential for excessive speculation and fluctuations in commodity derivatives prices. Recognized investment exchanges (RIEs) are now expected to mitigate risks to orderly trading that might arise from volatile prices. They will be able to set price limits for derivatives and will have to introduce position limits for commodity derivatives and any other relevant derivatives that are physically settled to reduce the risk of market abuse. They will need to show the FSRA, on a yearly basis and as and when the FSRA requests, how their position limits effectively mitigate market abuse. RIEs will be expected to publish position reports on a weekly basis that show the aggregate positions held by each category of participant for each derivative, including the number of long and short positions.
Some changes to ADGM rules have been designed to encourage MAP issuers to list in the zone, for example the introduction of a new offering disclosure regime for these companies. The rules mandate when, where and how disclosures on MAP activities should be made, by reference to industry reporting standards as well as ADGM-specific obligations. MAP companies will be able to submit audited accounts covering less than the standard three-year period if they are seeking admission to listing under the new assets eligibility test (discussed in the Listings and Capital Raising section below).
ADGM was an early mover in introducing a bespoke regulatory regime for virtual assets in 2018. The latest papers make some amendments to those rules.
An authorized person carrying out a regulated activity with respect to a virtual asset is already required to have certain systems and controls in place for creating and managing private keys. These systems and controls now also cover public key sharing and re-use.
A detailed analysis of risks to clients who buy and sell virtual assets now needs to be undertaken by firms, and appropriate disclosures must be made to clients, before entering into an initial virtual asset transaction. Authorized persons will have to continually update their analysis and disclosures to reflect any updated risks. Such disclosures might include that virtual assets are not legal tender, that they might be susceptible to an increased risk of financial crime or cyber-attack and that technological issues might mean a client cannot use or access their virtual asset.
ADGM has introduced new guidance to accommodate NFTs, which it recognizes as a growing market. NFTs themselves will not, at this stage, be subject to FSRA regulatory oversight. However, regulated multilateral trading facilities (MTFs) that are authorized to provide custody for virtual assets will be allowed to conduct certain activities for NFTs within ADGM. A specific structure has been established to permit this, whereby a regulated MTF/Virtual Asset Custodian should establish within their ADGM group an unregulated NFT entity, which would be the primary entity engaging with NFT issuers and market participants. The unregulated NFT entity would be ring-fenced from the MTF/Virtual Asset Custodian and would outsource its trading, auction and custody activities back to the MTF/Virtual Asset Custodian.
ADGM has successfully established itself as an energy derivatives marketplace but is yet to attract a successful securities listing market. Various changes to the MKT rulebook seek to improve the underlying regime to potentially develop this sector. Access to the ADGM Official List will be made easier for SMEs and early-stage firms, with the introduction of new profits and assets eligibility tests. Previously, shares subject to listing had to have an aggregate market value of $10 million. Issuers will now be able to list shares if they can demonstrate either: (i) aggregate profits of at least $1 million over the preceding three years, $500,000 of which must have been earned in the preceding 12 months (the profits test); or (ii) net tangible assets of at least $3 million, after deducting any costs of capital raising, or a market capitalization of at least $10 million, after any capital raising (the assets test).
ADGM hopes to encourage growth-stage companies by allowing all listed companies to issue new shares worth up to 20% of their existing share capital to new investors without the need for approval from existing shareholders. Preference shares and shares with weighted voting rights will also be admissible.
Firms’ continuous market disclosure obligations have been strengthened as part of the new rules. The FSRA will have new powers to halt trading at a firm’s request to give it more time before disclosing inside information. Listed funds, previously subject to a distinct set of rules, will now be required to report in the same way as other firms with listed securities.
New rules on administering, and providing information relating to, specified benchmarks have been introduced. This area was not previously covered in ADGM law. The FSRA will decide which benchmarks are “specified,” considering the size of the underlying market and the total value of contracts referencing the benchmark.
The rules include organizational and governance requirements for benchmark administrators and specifications on the information that administrators use to determine a specified benchmark. Benchmark administrators will also have to grant non-discriminatory access to pricing and other information on specified benchmarks, as well as to licenses to use the benchmark.
Benchmark information providers will similarly need to have adequate governance arrangements to ensure the independence of the information they provide, and controls for keeping records of communications on the information they rely on.
This measure effectively builds on similar developments in the EU under the EU Benchmark Regulation (Regulation (EU) No 2016/1011), but in a less onerous manner, particularly as regards third-country benchmarks and the scope of the measure.
ADGM forms a key part of a broader strategy in the UAE and Abu Dhabi to diversify the economy. Clearly, there is a potential upside to attracting new businesses and participants in emerging areas of the world economy to ADGM as a financial center. Where ADGM has succeeded, this has often been in areas where it has been nimbler or taken a lead, e.g., on the adoption of the common law, and areas such as fintech. It is now well-positioned for the emerging carbon reduction sector, especially compared to the U.S., U.K. and EU, which have often been slow to act or heavy-handed in some of these emerging sectors.
With growing international pressure to combat climate change and transition away from fossil fuels, and following its successes in becoming the main trading hub for Middle Eastern oil derivatives, ADGM’s move into the growing carbon trading and emissions reduction market would seem a compelling next step. The new regime will likely also help towards meeting commitments made by international governments, including the UAE at COP26.
[1] Namely, the Financial Services and Markets (Amendment No. 1) Regulations 2022, amending the Financial Services and Markets Regulations 2015 (FSMR), together with a series of updates to various rulebooks (GEN, MKT, COBS, MIR, FEES, IFR, AML and GLO) and to the Guidance on Regulation of Virtual Asset Activities in ADGM. The existing Rules of Market Conduct have also been replaced by a new Code of Market Conduct.
[2] Shearman and Sterling advised ADGM on its laws to establish the center, which were effective 2015, and continues to advise the center on new legal developments. However, the firm did not advise on this particular package.
[3] For example, the EU Wholesale Energy Market Integrity and Transparency Regulation (Regulation (EU) No 1227/2011) and Market Abuse Regulation (Regulation (EU) No 596/2014) impose reporting and market abuse regulations for these markets.
[4] See, for example, Sch 1, Part 2, para 43, FSMR and COBS 22.
[5] Sch 1, Part 2, para 75, FSMR.
