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Gulf regulators must clarify their cross-border responsibilities

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In the past three years, some of the Gulf’s leading companies, including Abraaj, Drake & Scull, Arabtec, Al Mojel, and most recently NMC Healthcare, have been stung by problems that highlighted unaddressed governance risks.

These occurred after an increase in corporate governance regulations, introduced after a domestic equity-market crisis in 2005. Market manipulation had been prevalent and capital market regulators were brought in to repair confidence.

Foreign investors are surprised that, in some respects, corporate governance regulations now are tougher here than in emerging-market peers. In some countries, regulators have unusual powers that include attending board meetings of listed companies. Combining the roles of chair and CEO is allowed in listed companies in the US, but not the Gulf.

But following these bold corporate governance reforms, the spirit of these regulations and corporate practice differ. The resulting gap has implications for economic stability and even the delivery of essential services. NMC, the largest private healthcare provider in the UAE, became embroiled in a governance scandal just as the coronavirus pandemic was taking off.

As regulators examine the lessons of these events, they must clarify and enforce the rules for companies operating across jurisdictions. They must also agree on their respective oversight and enforcement obligations. This is critical for companies such as NMC, which is listed in London but regulated in the UAE, as well for those offering cross-border financial services, as Abraaj did before the private equity firm’s collapse in 2018.

While the finger of blame has been pointed at local regulators for some of these failings, foreign securities authorities must assume greater responsibility for overseeing companies in their jurisdiction, such as London-listed NMC.

At the same time local regulators should enhance their credibility with investors. Gulf regulators have tools, but few are making full use of them. The Saudi Capital Market Authority is active, investigating more than 2,500 governance-related investor complaints a year regarding some 200 listed companies. The recent class action suit against Al Mojel, the manufacturing group, the first such action in the region, shows change is afoot.

Local investors also need to play a more prominent role. In the Abraaj and NMC cases, investigations began at the prompt of foreign investors.

Regulatory enforcement started in the US and the UK, respectively. With NMC, the alarm was raised by Muddy Waters, a US-based short seller, not the company’s largest local investors and creditors.

Investors’ and regulators’ interventions must be risk-based and focus on critical issues such as related-party transactions. For example, in 2015 one NMC subsidiary authorised payments to a company controlled by the founder’s daughter. Recent scandals have also underlined problems with gatekeepers including Big Four auditors.

KPMG, which gave Abraaj a clean bill of health before its collapse, appears to have had conflicts of interest. Further separation between audit and consulting activities such as that currently being pushed through in the UK, is needed in the Gulf.

Banks also have a role to play. The regulator’s investigation into Abraaj concluded that “funds were systematically moved in and out of bank accounts around reporting dates” to give the appearance of solvency. The continuing fallout from the pandemic on businesses makes better due diligence by lenders even more important.

Finally, given that foreign investors tend to take a single view of Gulf markets that are in reality diverse, building market credibility will require co-ordinated action by Gulf regulators to enforce the rules and encourage active stewardship by institutional shareholders in the region. There is no better place to start than focusing on domestic sovereign investors that are the largest in local equity markets.

The writer is founder and director of Govern Center



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European markets recover after tech stock fall

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European equities rebounded from falls in the previous session, when fears of a US interest rate rise sent shares tumbling in a broad decline led by technology stocks.

The Stoxx 600 index gained 1.3 per cent in early dealings, almost erasing losses incurred on Tuesday. The UK’s FTSE 100 gained 1 per cent.

Treasury secretary Janet Yellen said at an event on Tuesday that rock-bottom US interest rates might have to rise to stop the rapidly recovering economy overheating, causing markets to fall.

Yellen then clarified her remarks later in the day, saying she did not think there was “going to be an inflationary problem” and that she appreciated the independence of the US central bank.

Investors had also banked gains from technology shares on Tuesday, after a strong run of quarterly results from the sector underscored how it had benefited from coronavirus lockdowns. Apple fell by 3.5 per cent, the most since January, losing another 0.2 per cent in after-hours trading.

Didier Rabattu, head of equities at Lombard Odier, said that while investors were cooling on the tech sector, a rebound in global growth at the same time as the cost of capital remained ultra-low would continue to support stock markets in general.

“I’m seeing a healthy correction [in tech] and people taking their profits,” he said. “Investors want to be much more exposed to reflation and the reopening trades, so they are getting out of lockdown stocks and into companies that benefit from normal life resuming.”

Basic materials and energy businesses were the best performers on the Stoxx on Tuesday morning, while investors continued to sell out of pandemic winners such as online food providers Delivery Hero and HelloFresh.

Futures markets signalled technology shares were unlikely to recover when New York trading begins on Wednesday. Contracts that bet on the direction of the top 100 stocks on the technology and growth-focused Nasdaq Composite added 0.2 per cent.

Those on the broader S&P 500 index, which also has a large concentration of tech shares, gained 0.3 per cent.

Franziska Palmas, of Capital Economics, argued that European stock markets would probably do better than the US counterparts this year as eurozone governments expand their vaccination drives.

“While a lot of good news on the economy appears to be already discounted in the US, we suspect this may not be the case in the eurozone,” she said.

Brent crude, the international oil benchmark, was on course for its third day of gains, adding 0.7 per cent to $69.34 a barrel.

Despite surging coronavirus infections in India, the world’s third-largest oil importer, “oil prices have moved higher on growing vaccination numbers in developed markets”, said Bank of America commodity strategist Francisco Blanch.

Government debt markets were subdued on Wednesday morning as investors weighed up Yellen’s comments with a pledge last week by Federal Reserve chair Jay Powell that the central bank was a long way from withdrawing its support for financial markets.

The yield on the 10-year US Treasury bond, which moves inversely to its price, added 0.01 of a percentage point to 1.605 per cent.

The dollar, as measured against a basket of trading partners’ currencies, gained 0.2 per cent to its strongest in almost a month.

The euro lost 0.2 per cent against the dollar to purchase $1.199.



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Yellen says rates may have to rise to prevent ‘overheating’

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US Treasury secretary Janet Yellen warned on Tuesday that interest rates may need to rise to keep the US economy from overheating, comments that exacerbated a sell-off in technology stocks.

The former Federal Reserve chair made the remarks in the context of the Biden administration’s plans for $4tn of infrastructure and welfare spending, on top of several rounds of economic stimulus because of the pandemic.

“It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat, even though the additional spending is relatively small relative to the size of the economy,” she said at an event hosted by The Atlantic magazine.

“So it could cause some very modest increases in interest rates to get that reallocation. But these are investments our economy needs to be competitive and to be productive.”

Investors and economists have been hotly debating whether the trillions of dollars of extra federal spending, combined with the rapid vaccination rollout, will cause a jolt of inflation. The debate comes as stimulus cheques sent to consumers contribute to a market rally that has lifted equities to record levels.

Jay Powell, the Fed chair, has said that he believes inflation will only be “transitory”; the central bank has promised to stick firmly to an ultra-loose monetary policy until substantially more progress has been made in the economic recovery.

The possibility of interest rates rising has been a risk flagged by many investors since Joe Biden’s US presidential victory, even as markets have continued to rally.

Yellen’s comments added extra pressure to shares of high-growth companies, whose future earnings look relatively less valuable when rates are higher and which had already fallen sharply early in Tuesday’s trading session. The tech-heavy Nasdaq Composite was down 2.8 per cent at noon in New York, while the benchmark S&P 500 was 1.4 per cent lower.

Market interest rates, however, were little changed after the remarks, with the yield on the 10-year Treasury at 1.59 per cent. Yellen recently insisted that the US stimulus bill and plans for more massive government investment in the economy were unlikely to trigger an unhealthy jump in inflation. The US treasury secretary also expressed confidence that if inflation were to rise more persistently than expected, the Federal Reserve had the “tools” to deal with it.

Treasury secretaries generally do not opine on specific monetary policy actions, which are the purview of the Fed. The Fed chair generally refrains from commenting on US policy towards the dollar, which is considered the prerogative of the Treasury secretary.

Yellen’s comments at the Atlantic event were taped on Monday — and she used the opportunity to make the case that Biden’s spending plans would address structural deficiencies that have afflicted the US economy for a long time.

Biden plans to pump more government investment into infrastructure, child care spending, manufacturing subsidies and green energy, to tackle a swath of issues ranging from climate change to income and racial disparities.

“We’ve gone for way too long letting long-term problems fester in our economy,” she said.



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Senior Fed official in line to lead top US banking regulator

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Michael Hsu, a senior Federal Reserve official responsible for supervising the largest US banks, is poised to become the next acting comptroller of the currency, ending weeks of uncertainty over the US financial regulator’s leadership.

Janet Yellen, the US Treasury secretary, was set to tap Hsu for a senior post at the Office of the Comptroller of the Currency that would pave the way for him to become acting chief, according to people familiar with the matter. The timing of the announcement could not be determined.

Hsu is currently associate director of the Fed’s bank supervision and regulation division.

He has emerged as a more technocratic choice to lead the OCC compared with other possible choices with higher political profiles, such as Michael Barr, a professor at the University of Michigan and former Treasury official under Barack Obama who was a leading contender for the job. Some progressive Democrats have also been pushing for Mehrsa Baradaran, a professor at the University of California at Irvine, to be selected for the job.

President Joe Biden has not yet chosen anyone to permanently fill the post, which requires Senate confirmation. The White House declined to comment. Yellen’s decision to choose Hsu to lead the agency on an interim basis was first reported by The Wall Street Journal.

Through his role at the Fed, Hsu has great familiarity with the health of the largest banks. The mission of the OCC, which is housed within the Treasury department, is to ensure that national banks “operate in a safe and sound manner, provide fair access to financial services, treat customers fairly, and comply with applicable laws and regulations”, according to its website.

The Biden administration is expected to take a tougher approach to financial regulation than Donald Trump’s officials, amid concerns that hefty doses of fiscal and monetary stimulus flowing through the US economy as it rebounds from the pandemic is fuelling greater risk-taking on Wall Street.

Blake Paulson, the current acting chief of the OCC, was installed by Steven Mnuchin, the former US Treasury secretary, on January 14, less than a week before he left office.



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