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December 2005 On September 26, 2005, Dubai opened the Dubai International Financial Exchange (DIFX)—and opened a world of opportunity for offshore investors. The DIFX offers benefits such as…  • A zero tax rate on income and profits  • 100% foreign ownership  • No restrictions on foreign exchange or capital/profit repatriation  • World-class operational support and business continuity facilities  Sure, other offshore centers offer these things. However, Dubai has some extraordinary qualities that set it apart. It is a strong economic state and part of the United Arab Emirates. As such it cannot be pushed around by the Organization for Economic Cooperation and Development (OECD) and the European Union (EU) in the way that smaller offshore financial centers have been in the last few years.  Dubai offers a stable regime that is not subject to the EU savings tax directive, the OECD’s tax harmonization pressures or the increasing intrusions on financial privacy from the U.S. and others. Dubai - The Jewel Of The Middle East When you think of the Middle East, the first words that come to your mind might not be “business friendly” or “moderate” or “peaceful.” But all those words describe Dubai.  Dubai is part of the United Arab Emirates, a political union that was formed in 1971 when Abu Zaby, Ajman, Al Fujayrah, Ash Shariqah, Dubayy (Dubai), and Umm al Qaywayn merged. They were joined a year later by Ra’s al Khaymah. The UAE is a small nation nestled between Saudi Arabia and Oman, but oil wealth helped put its per capita GDP on par with Western Europe.  The far-sighted leaders of the UAE are not content to live and die on oil wealth—the country’s oil and gas are due to run out in about 10 years. So the government has been busy investing its current wealth in new wealth creation initiatives, with a goal of creating an environment for growth, progress and economic development. It’s already a success—oil and gas now contribute just 6% of economic output. Having achieved one goal, the government is moving the goalposts. Now, the aim is for Dubai to become a successful onshore capital market that is designated as a sort of “offshore zone” in the hope of dominating financial services in the world’s biggest oil producing region.

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In the sea, they are building three enormous man-made islands, designed in the shape of palm trees, with new homes for some of the world’s wealthiest individuals. In the desert, they have built Dubailand, a US$19 billion theme park twice the size of Disney World. Dubai has the world’s tallest building and the world’s most expensive hotel—the Burj Al Arab—designed to resemble a billowing sail. So when Dubai says it will build an international financial center and stock exchange, the chances are that they will succeed. 

A Bull Market In New Markets

The opening of the DIFX is just the start. The Dubai Gold & Commodities Exchange (DGCX) launched on November 22. The DIFX is already listing international securities and both the DIFX and DGCX have several trading members. 

The DIFX forms the centerpiece of the Dubai International Financial Center (DIFC), a state-run financial free zone, with its own laws and regulations, designed to create a unique financial services cluster economy for wealth creation initiatives. The DIFC itself was launched in September 2004 and has already licensed over 70 companies including Merrill Lynch, Credit Suisse, Barclays Capital, Standard Chartered, Deutsche Bank, and AIG. 
The DIFC Authority is charged with developing the overall strategy and providing direction and supervision to the DIFC, including attracting licensees to operate in the DIFC and the creation of laws and regulations that govern non-financial services activities. 

All financial services activity conducted in or from the DIFC is regulated by the Dubai Financial Services Authority (DFSA). The DFSA is an independent body responsible for licensing, authorizing and registering businesses to conduct those services. The DFSA’s regulatory framework has been developed by a team of experienced regulators and legal experts drawn from internationally recognized regulatory bodies and major financial institutions around the world, and is based on the best practices and the laws of the world’s leading financial jurisdictions. 

DIFX - A Regional Stock Market With Global Appeal

As a wholly owned subsidiary of the DIFC Authority, the DIFX has been created to provide investors and issuers with a larger and more liquid securities market than currently exists in the region. Based on the Euronext technology, this fully integrated electronic market place is capable of trading a wide range of financial instruments, including equities, bonds, funds, and derivatives. 

The DIFX market opened with the listing of five Deutsche Bank securities. These are index tracking certificates, which will cover the U.S. S&P 500, the German DAX 30, the Japanese Nikkei 225, the EuroStoxx 50, and the Stoxx 50. 

The international mobile telecommunications company, Investcom, this month became the first company to list on the DIFX. The company, which has operations in the Middle East, Europe and Africa, raised US$740.94 million in an IPO of 59.99 million Global Depository Shares (GDSs). These are listed and traded on the DIFX and also on the London Stock Exchange. The company intends at a later stage to issue ordinary shares on the DIFX as its primary listing. 

Investcom’s IPO is the first of some 10 to 15 offerings that the DIFX believes will be brought to its market in 2006, by companies based in countries across the region and beyond. 

The DIFX aims to become the leading exchange in its region for equities, bonds, funds, Islamic products, and other securities. It will be a gateway for international and regional investment. It is the first exchange in its region that has been created to list securities from many different countries. It also aims to be the first to attract large numbers of international brokers, including some of the world’s biggest investment banks. 

The DIFX already has five trading members, including Deutsche Bank and Citigroup Global Markets Ltd., which has joined as an individual clearing member and a trading member. 

The Gold Exchange At The Heart Of The India Trade

The Middle Eastern culture places a high value on physical gold. No wonder, then, that Dubai is the self-styled “City of Gold.” In fact, you can find gold linked on the Dubai city guide on the web at http://www.dubaicityguide.com/theguides/gold.asp. 

Gold in the United Arab Emirates is sold in gold “souqs” or gold centers dedicated to the precious metal (there are also individual stores in upmarket malls). At the souq, you will find row upon row of shops displaying gold in kilo bars, 10-tola bars (the tola is an Indian unit of weight, and 10 tola is equivalent to 3.75 ounces or 116.64 grams), and more. The basic cost of the gold is set by weight daily. But the real star of the souq is gold jewelry in incredibly intricate designs. You can buy gold jewelry in 18- and 22-carat, even 24-carat, though be aware that high-carat gold is a deep yellow, and may not be what you’re used to. 

Looking at the individual pieces, you might think you’d be able to buy them at cheaper prices in other global markets. But pick them up—most gold jewelry made in Dubai is solid. Figure in the world-class craftsmanship and you’re getting gold at a good price. 

Dubai is already a trading hub for 10% of the world’s gold. That is set to increase with the launch of the DGCX. The DGCX is a joint venture between the Dubai Metals and Commodities Centre, Financial Technologies (India) Limited and the Multi Commodity Exchange of India. The DGCX will be located in the Gold Tower, built just for that purpose. 

DGCX opened its membership last June and received an overwhelming response. Some 200 applications have now been approved in principle by the DGCX Board, and about 50 have been formally admitted to membership. 
The exchange expects to be trading several thousand gold futures contracts a day by the end of next year, with four to six products on the market, according to chairman David Rutledge. “This is a very natural market for gold. Dubai is the conduit in many cases for the physical flow of gold to India,” he said. 

Will the global commodities boom continue, ensuring the success of the world’s newest commodities exchange? Global commodities guru Jim Rogers, author of the best-seller Hot Commodities notes that the shortest commodity bull market lasted 14 years and that the current one is only five years old. So the DGCX looks set to succeed on the back of the combined waves of a commodities bull market and the overall growth of Dubai as a new offshore center. 
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W. William Woods is the CEO of WWWoods & Co. Limited and a member of The Sovereign Society’s Council of Experts. He serves as an independent director on a number of offshore hedge funds. Having lived and worked in Hong Kong and Bermuda, he specializes in advising on offshore financial centers and is the author of the blog www.bizoffshore.com. Email: www@wwwoods.com; Tel: (416) 644-4939.

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