The Abu Dhabi Global Market's (ADGM) Financial Services Regulatory Authority (FSRA) has implemented a series of changes to its capital markets rules and regulations. These follow from the FSRA's Consultation Paper 1 of 2022 dated 1 March 2022 (CP) and have a particular focus on environmental instruments and commodities.
We set out an overview of the key changes below.
The FSRA has introduced the concept of "Environmental Instruments". This is defined as:
(a) Financial Instrument that is recognised by the Regulator
(b) enables its holder to emit greenhouse gases into the atmosphere, in accordance with any emissions trading scheme (i.e. emissions allowances or equivalent);
(c) attests to the reduction or removal of greenhouse gases into the atmosphere (i.e. carbon credits or equivalent); or
(d) attests to the environmental attributes of an underlying unit (i.e. renewable energy or environmental attribute certificates).
This change brings "Voluntary Carbon Credits" (VCCs) within the FSRA's regulatory scope making VCCs a tradeable financial instrument within the ADGM. This marks the first time that a regulator in the Middle East has sought to regulate VCCs and is in line with the ADGM's Sustainable Finance Agenda1.
The market for VCCs is growing rapidly as companies and organisations across the world look to reduce their carbon emissions to meet emission reduction targets set by the United Nations Framework Convention on Climate Change. The region has seen an increase in VCC activity with Saudi Arabia's Public Investment Fund recently hosting one of the world's largest carbon credit auctions.2 With the UAE hosting the COP28 summit in 2023, we expect that there will be further activity in the environmental instrument space in the near future.
The FSRA acknowledged in their CP that most financial services regulators across the world have not started regulating the trading of spot commodities.3 However, the FSRA believes that market participants would welcome regulation.
In regulating spot commodities, the FSRA has decided to permit only "Accepted Spot Commodities". These are spot commodities that, in the FSRA's opinion, meet the requirements to allow a regulated activity to be conducted in relation to it. This mirrors the FSRA's approach with Virtual Assets where it only permits "Accepted Virtual Assets" into the ADGM. In considering whether a spot commodity is acceptable, the FSRA will consider a number of factors including the market practice, the number of market participants and market liquidity.
Additionally, the FSRA has imposed requirements in respect of sustainable sourcing of the commodities, and storage. With regard to sustainable sourcing, the FSRA will require that arrangements are aligned with the OECD's Due Diligence Guidelines for Responsible Mineral Supply Chains. As for storage, the storage facilities must be within either the ADGM or other appropriate jurisdictions that meet requirements imposed by the ADGM.
Offer of Securities
A key change in the FSRA's regime for the offer of securities is that the general prohibition in making an offer of securities to the public in or from the ADGM has been amended. The prohibition now only extends to an offer of securities made "in" the ADGM (i.e. the references to "the Public" and "from" have been deleted).
This amendment, albeit nuanced, creates a fundamental change to the ADGM's regime in respect of offers of securities. Under the previous regime, if an ADGM entity intended to make an offer of securities in a non-ADGM jurisdiction only, such an offer would be caught under the ADGM regulations and, if not exempt, would require an approved prospectus in both the ADGM and the non-ADGM jurisdiction.
However, with the new regime, if an entity in the ADGM intends to make an offer of securities in another jurisdiction, without making the offer to persons in the ADGM, this would not be caught under the general prohibition and an approved prospectus would not be required in the ADGM. This subtle change brings the ADGM regulatory architecture for offerings of securities more in line with other jurisdictions, and also makes the ADGM an attractive jurisdiction for, among other things (a) establishing a holding company or "ListCo" for the purposes of an initial public offering in a jurisdiction outside the ADGM (e.g. an ADGM "ListCo" making a public offer to prospective investors "onshore" in the UAE (outside the ADGM) where the shares are listed on an "onshore" exchange (e.g. ADX), and (b) establishing a special purpose issuing vehicle in the ADGM for a Sukuk or bond issuance which is not offered in the ADGM.
1 See our article published in June 2022: https://www.nortonrosefulbright.com/en-us/knowledge/publications/52d2d2f5/the-uaes-journey-to-becoming-a-sustainable-finance-centre-the-story-so-far
2 See PIF Press Release dated 24 October 2022: https://www.pif.gov.sa/en/Pages/NewsDetails.aspx?NewsId-220/WORLDS-LARGEST-CARBON-CREDIT-AUCTION-TO-BE-HELD-BY-VCM-INITIATIVE
3 Spot Commodities are defined by the FSRA as "any physical or energy good of a fungible nature that is capable of being delivered and which is or can be traded on a secondary market"
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