Abu Dhabi Securities Exchange (ADX) today announced the launch of its latest investment service “Covered Short Selling”, to support the exchange’s strategy of diversifying investment and providing investors with a broader range of hedging mechanisms. By doing so, it will attract a new segment of specialized and experienced investors, driving both liquidity and trading volumes.

The launch of CSS comes after the Securities and Commodities Authority (SCA) approved ADX’s covered short selling guidelines, which enable investors to sell borrowed securities or financial securities pledged for return to lenders.

Covered short selling involves investors selling shares in a specific company that they do not own at the time, but which they believe to be over-valued, which creates an obligation to buy them in the future. This can be done by borrowing the shares they wish to sell from a brokerage company and then selling them directly in the market in anticipation of a decrease in the share price. If the share price subsequently falls, the investor can buy back the shares at a price lower than the selling price and then return the shares to the lender (a process known as short selling coverage), thereby making a capital profit from the process.

Short selling will enhance the presence of long-term investment and limit speculation. One of the most important benefits is enhancing liquidity through increasing trading values, since the lender of shares is usually a long-term investor who does not regularly trade. The process also increases investment awareness and transparency on the Exchange.

It is also possible to deploy short selling as a hedging tool by going short on shares in a similar type of company, either at an amount equal in value to shares already owned in a portfolio (direct hedging), or at a lower amount (partial hedging). The objective is to mitigate against losses arising from a future decline in the value of the stock originally held in the portfolio.

H.E. Mohamed Ali Al Shorafa Al Hammadi, Chairman of ADX, said: “ADX is founded on an integrated legislative structure, to ensure that all relevant parties comply with covered short selling guidelines. This ensures a fair and secure trading environment in accordance with international best practice, making it more attractive to a broader range of investors. It is very important for us to have in place clear laws, rights and obligations to govern transactions both for brokers and investors, in order to give investors the opportunity to invest their savings in an advanced legal environment that is underpinned by fair and transparent disclosure regulations.”

In a related development, ADX has also amended its securities lending and borrowing guidelines, whereby the ownership of shares can easily be transferred from one party (the lender) to another (the borrower) on a temporary basis. The new guidelines place a commitment on the borrower to return the shares at the request of the lender at any time during the period, unless otherwise agreed.

These amendments were made after consultation with all of ADX’s market members. They are also consistent with other related guidelines and procedures that support the exchange’s efforts to continuously review and improve its systems and controls to comply with best practice. By issuing updated guidelines for lending and borrowing securities, ADX is enhancing the efficiency of Abu Dhabi’s capital markets and enabling investors to adopt different investment strategies.