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The regulation of covered warrants in the UAE

The above regulations in respect of covered warrants have come into effect in the UAE, enabling licensed issuers to issue and trade covered warrants on exchanges outside the free zones in the UAE. The regulations demonstrate an increasing commitment to developing the UAE onshore capital markets, with some speculating that this is a precursor to the introduction of regulations for other, more complicated instruments such as options and futures.

Covered warrants are a form of listed security issued by financial institutions that are traded on stock markets. Depending on how the warrant is structured, it gives the holder the right, but not the obligation, to buy or sell an underlying asset (such as shares, commodities or currencies) at an agreed price on or before a set date. The price paid for this right is often referred to as the ‘premium’ payable for the covered warrant and the holder cannot lose more than any such premium he has paid. Covered warrants are generally seen as a flexible investment option for private investors who are looking for instruments that can offer the leverage benefits of a derivative but with a lower-risk profile.

When an issuer sells a warrant to an investor, it typically limits its risk by buying the underlying instrument in the market. Under the regulations, the Securities and Commodities Authority (SCA) may approve the issue of warrants without requiring the issuer to purchase the underlying asset, provided the issuer evidences sufficient solvency to cover the value of the issue or proof that the issue is guaranteed by another body, bank or financial institution that itself meets the SCA’s solvency requirements…

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