On 2 August 2009, the Central Bank of the United Arab Emirates (the Central Bank) issued a notice to all regulated banks regarding the sale of certain “structured products” to retail customers in the United Arab Emirates (UAE). Notice No. 3803/2009 - Structured Products (the Notice) states that:

“The Central Bank has decided that it is not desirable that banks operating in the UAE sell structured products to their customers which include high net worth individuals.By structured products, we mean pre-packaged investment strategy which has embedded options related to a single security/stocks, a basket of securities, indices, commodities, debt, credit and/or foreign currencies. Should a bank wish to sell a structured product to its customers, it will have to submit to the Central Bank a written request with the relevant details and the rationale for asking an exemption to this rule.”  

We have been in discussions with the Central Bank and separately with a large number of banks with operations in the UAE or the Dubai International Financial Centre (DIFC) since the release of the Notice. On 12 August 2009, we attended a meeting with a senior representative of Central Bank to discuss the Notice and its implications. Set out below is an outline of the information we have received from the Central Bank.  

Applicability of the Notice  

The Central Bank has confirmed that the Notice only applies to banks regulated by the Central Bank (the Banks).  

Accordingly banks located and regulated outside the UAE (including banks in the DIFC)wishing to sell structured products to retail customers and high net worth individuals in the UAE would not need to apply for, and obtain, the Central Bank approval required in the Notice. The Central Bank has stated that they expect the primary regulator of a financial institution to monitor and regulate such institution’s respective activities.  

Retail customers  

With respect to the term “retail”, the Central Bank has confirmed that this relates to individuals and high net worth individuals and not to corporates or other legal entities.  

Definition of “structured products”  

Although the Notice refers to “structured products” as products having the following characteristics:

  1.  “pre-packaged”; and
  2.  “embedded options”,  

the Central Bank has indicated that the definition of a “structured product” for the purposes of the Notice should be interpreted by Banks as any product which has two components, of which one is a derivative.  

Accordingly, the Central Bank has expressed that over-the-counter (OTC) traded products, such as swaps, options or forward transactions do not fall within the definition of “structured products” as contemplated by the Notice. Procedure for requesting an exemption Banks (to whom the Notice is applicable) wishing to sell a “structured product” to their retail customers (or high net worth individuals) will be required to submit a written request to the Central Bank.  

Applications should:

  • be addressed to the respective Bank’s allocated supervisory contact at the Central Bank
  • detail particulars of the proposed transaction. A copy of the term sheet describing details of the structured product would be acceptable
  • include details of the market and underlying credit risk involved in the specific structured product.  

We understand that applications may be sent electronically.  

Response times  

The Central Bank has stated that it recognises and appreciates the time sensitivities related to banking transactions and accordingly their aim is to review applications within as short a period of time as possible. Currently, we understand that response times have been 1 to 2 business days.  

Existing products  

The Central Bank has indicated that:  

  1. structured products which have already been issued and are traded on the secondary market will still need to be approved by the Central Bank if a Bank intends to sell such products to retail customers (or high net worth individuals) in the UAE; and  
  2. where a Bank has previously obtained consent from the Central Bank to issue certain structured products, such consent is no longer valid and that Bank will need to request approval from the Central Bank with respect to such product.  

Conclusion  

The Central Bank has made it clear that their intention is to protect retail investors in the UAE from potential mis-selling of sophisticated financial products. We understand that the Central Bank will be issuing guidelines expanding upon the Notice within the next two months.