Dubai Financial Market (DFM) Rules and Regulations PDF

Chapter Eight Dubai Financial Market (DFM) 1. Brokerage Firms 203 2. Rules of Securities Trading in the DFM 207 3. The Professional Code of Conduct (DFM) 211 4. Online...

Chapter Eight Dubai Financial Market (DFM) 1. Brokerage Firms 203 2. Rules of Securities Trading in the DFM 207 3. The Professional Code of Conduct (DFM) 211 4. Online Trading Regulations (DFM) 216 5. Order Types (DFM) 219 6. Order Handling (DFM) 221 This syllabus area will provide approximately 11 of the 100 examination questions 202  Dubai Financial Market (DFM) This chapter covers the rules and regulations associated with the Dubai Financial Market (DFM). DFM operates as a secondary market for the trading of securities issued by public shareholding companies, bonds issued by federal or local governments, local public institutions and mutual funds as well as other local or foreign DFM approved financial instruments. After launching as a public institution in March 2000, the Executive Council of Dubai decided to transform the DFM into a public shareholding company with a capital of AED 8 billion divided into 8 billion shares, and 20% of the capital was offered through an IPO. DFM operates according to Shariah principles and is regulated by the UAE Securities and Commodities Authority (SCA or The Authority). 1. Brokerage Firms 8 1.1 Obligations of Brokerage Firms to the DFM and the SCA Learning Objective 8.1.1 Know the obligations of brokerage firms towards DFM and SCA (Article 7) Brokerage firms operating on the DFM must meet certain obligations, including the following: 1. Financial solvency – brokerage firms must maintain the level of financial solvency necessary for carrying out their activities and meeting their obligations, in accordance with the criteria issued by the Authority. 2. Market notifications – each brokerage firm is required to notify the market of the following: any material changes or developments that occur in the company, or any deficit that may affect its financial position any adjustment made to the information and data contained in its licence application any change or adjustment made to the orders system used by the company 203  any change in the members of its board of directors or management board any attachment or pledging of the company’s assets, or any lawsuits in which the company or any of its Authority-approved employees take part, and any court rulings issued in said lawsuits which may affect the company’s financial position, and any acts committed by its employees in violation of laws, regulations or circulars applied by the Authority or DFM. 3. Segregating departments – if licensed to carry out more than one activity, brokerage firms must have autonomous, dedicated departments for each activity and segregate between the departments and activities to avoid conflict of interests. 4. Not publishing incorrect information – brokerage firms must refrain from publishing or promoting any incorrect information related to parties whose securities are listed on the market. 5. Verifying eligibility – brokerage firms must verify the eligibility of their clients, and the soundness of transactions executed. 6. Not executing outside trading sessions – brokerages must refrain from executing any buying or selling orders outside trading sessions, unless allowed by applicable laws. 7. Meeting trading obligations – brokerage firms must meet all obligations arising from trading brokered within the specified timelines. 8. Evidencing consent – brokerages must be able to prove client consent for all executed orders, by acquiring client signature on written order forms, or by recording and archiving orders received by phone or online, in accordance with the rules and technical requirements set by the Authority. The brokerage firm must also verify the orders received by fax or email, or any other electronic means, and keep copies of such orders, while also issuing a confirmation for the client regarding all executed orders on the same day of the execution. 9. Maintaining records – brokerages must maintain commercial books and records or use computers and other modern technologies in accordance with the International Financial Reporting Standards (IFRS), as well as rules issued by the Authority, and retain client orders whether written, recorded through phone or received by any other electronic means approved by the Authority, for a period of ten years. Back-up copies of such data and documents must be retained for the same period in order to preserve the client’s data and transactions and to avoid any damage to them. 10. Enabling SCA access – the Authority must be provided with access and must be able to review the records, documents, accounts and financial statements that show the brokerage’s financial position and its clients’ financial positions, transactions, and agreements to open accounts for each of them. All information must be made available immediately upon request. 11. Minimum employee numbers – brokerages must have the necessary number of employees in its offices within the DFM trading floor, in accordance with the Authority and the DFM requirements. 12. Compliance – brokerages must comply with all regulatory rules, procedures and requirements determined by the Authority with respect to internal controls and the functions of the compliance officer. 204  Dubai Financial Market (DFM) 1.2 Obligations of Brokerage Firms to Clients 8 Learning Objective 8.1.2 Know the obligations of brokerage firms towards their clients (Article 8) Brokerage firms and their employees are required to comply with the Professional Code of Conduct, and refrain from any act that may harm the reputation of the market, its members or traders. In particular, brokerage firms and their employees must adhere to the following: 1. Brokers must not trade in securities in favour of a client until an agreement is in place, dated and signed by persons legally authorised by the parties. The agreement sets out the rights and obligations of both parties, the method of terminating the agreement, the client’s investment goals, the means of receiving orders and notifications, and where the securities will be held. Such data must be updated periodically. 2. Brokers must verify the client’s ability to make the payment for purchased securities before the settlement date. 3. Brokers must not deal with third parties on behalf of clients unless authorised by an authenticated power of attorney. The power of attorney will define the limits and authorities of the agent regarding the account and the handling of shares. 4. Brokers must capture and include certain basic information within client orders, including the date and time of the order, the type of security, number of securities, and price of securities and expiry of the order. If the order is written, it should include the signature of the client or the representative of the client. 5. Brokers must not receive or keep any blank and signed orders from the clients. 205 6. Brokers should not dispose of clients’ monies in any manner contrary to their instructions or in violation of the activity for which the brokerage firm is authorised to practise. 7. Executed transactions must be notified to the client and custodian in writing or by the agreed means of communications upon execution. The client or custodian may object to any transaction in accordance with the procedures of delivery versus payment. 8. Firms must not combine the role of brokerage with the role of an agent in a contract brokered. 9. The client must be provided with a detailed quarterly statement of account – in the event of executing trading orders during that period – without prejudice to the right of the client to request a detailed statement of account or a statement of securities balance at any time. 10. Brokerage firms must maintain the confidentiality of client data, transactions and orders, and not utilise them to achieve benefits or gains for the brokerage firm, or any of its employees, or others. 11. Observe the principles of honesty and integrity and avoid conflict of interest situations. The brokerage firm must not favour personal interests or third-party interests over the interests of clients and must refrain from prejudice among clients, executing their orders on a first received, first served basis. 12. Practise the licensed activity with care and prudence in accordance with the provisions of the law and the regulations and the conditions and controls on which the licence was issued. Additionally, business norms and the principles of trust, fairness, equality and care should be observed. 13. Obtain from each client a statement of the bank account number to which the client’s cash dividends will be transferred. The statement must be signed by the client. 14. Brokerage firms must open a trading account on the market for any investor seeking trading, without requiring a minimum advance deposit. 15. The brokerage firm is not allowed to open more than one account for the same investor. 16. Trading in the broker’s portfolio or in the shares of a parent, subsidiary, sister or affiliate company is not allowed unless it is carried in accordance with the applicable Authority regulations and DFM rules. 1.3 Trading Members and Clearing Members Learning Objective 8.1.3 Know regulations that apply to: trading members (Article 10); trading and clearing members (Article 11); failed settlement (Article 9) Brokerage firms that are just trading members of the DFM must enter into a contract with a clearing member to settle clients’ accounts, or accounts of the company. The contract will detail the relationship between both parties, the rights and obligations of each, work procedures and means of distributing commission among the parties. Once signed, a copy of the contract must be submitted to both the Authority and DFM. Furthermore, the trading member must not receive any cash from its clients, with the clients paying the clearing member. Brokerage firms that are both trading and clearing members must settle their obligations to the DFM according to the DFM’s regulations. They must not pay any cash to clients with debit balances, and not pay any amounts that exceed a client’s credit balance, while observing margin trading regulations. Credit must not be added to clients’ accounts via post-dated cheques, except after these cheques have been cashed. 206  Dubai Financial Market (DFM) Trading and clearing members are not permitted to sell shares of debtor clients without DFM approval, and must not commit any actions that lead to the freezing of clients’ securities or prevent the clients from utilising their securities, except in accordance with a court ruling, procedures applicable in the DFM, or the Authority resolutions. Any broker cannot receive commission from investors that exceeds the limits set by the Authority, and commissions are distributed in accordance with the regulations and resolutions issued by the Authority. The value of securities deals is settled between the broker and its clients in accordance with the trading regulations and brokers regulations. If the client fails to pay the price of securities related to the executed deal within the two settlement days, the brokerage firm is obliged to sell the securities no later than one working day from the settlement date, upon approval from the DFM. The selling must be at the market price, with the client incurring any losses arising. Any profits arising from the selling of securities must be deposited in the Investor Protection Fund’s account. 2. Rules of Securities Trading in the DFM 2.1 Order Handling 8 Learning Objective 8.2.1 Know the rules governing order handling (Articles 2 & 3) When handling client orders, it is important to appreciate that these orders are binding on the brokerage firm. The client order to the broker for the buying or selling of a security can arrive via fax, email or any other electronic means. The broker must be able to prove to the DFM that it has obtained an order that states the name of the client, the issuer, type of transaction (buying or selling), the number of securities, price, date and validity of the order. The broker must handle the orders received from its clients fairly and justly, based on the time these orders were received. Clients’ orders and transactions executed on their behalf have priority over orders executed for the broker or any other account in which the broker holds an interest. Only persons registered in the brokerage firm’s representatives register are allowed to enter buying and selling orders into the trading system. However, this requirement does not prevent a client entering orders into the trading systems online or via any other electronic platform provided by the broker. The brokerage is expected to exert its utmost efforts to ensure its clients get the best selling and buying prices at the time of execution according to the priority of their orders, and with no prejudice to the conditions set by their orders. Unsurprisingly, the broker is not permitted to share any undisclosed information that came to its knowledge, nor may the broker invest based on such information. It is the broker that is responsible for the orders entered by the broker into the trading system. 207 2.2 Broker Reporting Requirements Learning Objective 8.2.2 Know brokers reporting requirements (Article 5) Upon execution, the broker must notify the client of the executed transactions on that client’s account. Unless a shorter period is stipulated in the client agreement, the broker must submit to the client a statement of account that outlines the client’s balance of securities and cash, and all transactions executed on behalf of the client, every three months. 2.3 Other Broker Rules and Requirements Learning Objective 8.2.3 Know the rules relating to: conflicts of interest (Article 6); insider trading (Article 7); board members (Article 7); misleading information (Article 8); articles of association of an issuer (Article 9); mistakes (Article 11); cancellations (Article 12); brokers representatives (Article 15) 2.3.1 Conflicts of Interest Where the broker has an interest in the transaction to be executed in the client’s account, or that relates to the transaction that may lead to a conflict of interests, then the broker may not execute the said transaction unless appropriate measures are taken to ensure the client’s interests are met and that the client was treated fairly. 2.3.2 Internal/Insider Information A broker must not execute any transaction related to a security for its benefit or the benefit of any of its clients based on internal/insider information related to that security or any other related security. Information related to any person’s intention to buy or sell any specific security in large volumes, or to the person having executed said transactions is considered internal/insider information. Furthermore, prior to publication, financial consultations prepared by the broker are considered internal/insider information. A broker should not execute any order on behalf of a client if the broker knows the order is based on internal/insider information. 208  Dubai Financial Market (DFM) 2.3.3 Dealing for Board Members When executing trades for a member of the listed company’s board of directors, its general manager or any of its insider employees, the broker must take care that the client is not dealing within the closed period (the ten days leading up to the announcement of material information, or the 15 days leading up to the disclosure of financial statements) and abides by the requirements to clear trades with, and disclose trades to, the market. 2.3.4 Misleading Information A broker must not commit any act that aims to give an incorrect and misleading idea about the price of any security, or its trading volume, in a manner that significantly affects the supply/demand of the particular security, and may not exploit information related to investors’ orders for its own benefit or the benefit of others. 2.3.5 Violations of the Articles of Association A broker must not execute any order related to a security if the order violates the articles of association of the issuer of this security or violates any effective laws in the country. If this happens, the DFM has the right to compel the broker to re-sell or re-buy the particular security so that the situation is as it was before executing the order. If the amount that results from the re-selling or re-buying exceeds the 8 amounts paid by the client, the broker must transfer the resulting amount to the DFM. If the resulting amount is less than what the client paid, the broker suffers the loss. However, unravelling the violating transaction does not prevent the DFM taking disciplinary action against the offending broker. 209 2.3.6 Mistakes If trading was conducted on a particular account by mistake, the broker can request the DFM to adjust the trading account number for the transaction. The adjustment request must normally be submitted within 30 minutes after conclusion of the trading session. In exceptional cases, the CEO of the market may accept adjustment requests submitted after this time, on approval from the Authority. The DFM has the right to request all necessary documents and take necessary measures to verify the mistake. 2.3.7 Cancellations There are various situations that might result in the cancellation of orders, including the following: 1. By a resolution from the CEO of the market or the person acting on the CEO’s behalf, the buying or selling orders of a certain security may be cancelled where: the orders were in violation of the law or the regulations and procedures applicable in the market the transactions executed during the trading session were as a result of a technical glitch in the market’s systems upon receiving a written request from both brokers of the transaction, at the market’s discretion, provided that there are valid and serious reasons that justify the cancelation or adjustment of the transaction. Both parties involved in the transaction will return to their status before execution of the transaction. 2. The Authority can cancel trading transactions that are in violation of the law or the regulations, resolutions or circulars. The Authority may instruct that the situation is restored to what it was before executing the trading in accordance with DFM’s procedure, and without harming others. 2.3.8 Brokers Representatives All representatives and employees of the broker are not allowed to trade securities listed on the DFM except through the brokerage firm and with the approval of the DFM. Trading through other brokerage firms requires the approval of the CEO of the DFM. 2.4 Settlement Requirements Learning Objective 8.2.4 Know settlement requirements (Article 10) Brokers must pay the value of securities sold on behalf of their clients, after deducting commissions and fees, before the end of two days or the end of the settlement period set by the DFM. Payments are made through cheques in the name of the broker and in favour of the registered client, or through financial transfers to the client’s account. 210  Dubai Financial Market (DFM) If the client does not request to receive the value of sold securities, the broker must add this value to the client’s balance before the end of the settlement period for the sold securities. The buying client must pay for the securities bought on its behalf before the settlement date, and the broker must verify its client’s ability to make the required payment. In cases where securities are bought and sold during the same trading session, the client must have in its cash account enough credit to cover the value of purchase. If the buying client fails to pay the price of the securities bought on its behalf, and the commissions due on the transaction within the settlement period, then the broker may sell the securities, at market price, upon market approval. Any profits resulting from the selling are deposited in the Investor Protection Fund’s account. Any losses resulting from the selling are incurred by the client or the brokerage firm. When dealing in cash with its clients, the broker must always comply with the applicable anti-money laundering regulations. 3. The Professional Code of Conduct (DFM) The DFM’s Professional Code of Conduct is required of all its brokerage firms and their employees. 8 Broadly, it expects firms and their employees to abide by the ethics of the profession, and refrain from any acts that would be detrimental to the reputation of another brokerage firm or the reputation of the market, its members or traders. 3.1 Obligations to Employees and Representatives Learning Objective 8.3.1 Know brokerage firms’ obligations in relation to their employees and representatives (Article 2) Brokerage firms must, at all times, ensure that any persons employed to deal with clients, or on their behalf, have the necessary qualifications for their role, including professional experience and training to perform the tasks expected. At all times, brokerage firms must have the necessary resources to enable effective and constant supervision of its employees or other persons appointed to deal with clients, on their behalf, with other brokerage firms, or with the market. In all cases, the brokerage firm is held responsible for any acts, mistakes or negligence committed by its employees while performing their jobs. It must not allow any person who is not licensed or registered to use the electronic trading system or the electronic clearing system. It must not allow the use of its username by unauthorised persons. 211 Representatives of the broker must not execute buying or selling orders for their own benefit or the benefit of their employers or members of the board of directors of their companies, or the employees of their companies or their spouses, ascendants or descendants to the second degree, except upon approval of the market. Representatives of the broker and the other employees of brokerage firms may not trade for their own accounts except through their own firms and upon a written approval of the brokerage firm manager and the DFM. 3.2 Obligations in Relation to Client Due Diligence (CDD) Learning Objective 8.3.2 Know brokerage firms’ obligations in relation to client due diligence (Article 3) The DFM’s Professional Code of Conduct requires brokerage firms to take reasonable steps to determine the identity, contact details, financial solvency and investment goals of their clients, including at least: a. For natural persons: full name as in the passport, passport number, date of issuance and place of issuance nationality and place of residence profession, exact address, PO Box and phone number. b. For the corporate persons: name of company/entity and its nationality commercial register number, commercial licence, place and date of issuance for both copy of the memorandum of association for the founding company as per the laws of the native country address, PO Box, zip code and other contact details of main headquarters name of person authorised to manage accounts, that person’s nationality, passport number, date and place of passport issuance, profession and an authorisation letter. c. For securities portfolios managed by a licensed investment manager: full name of portfolio manager as in the passport, passport number, date and place of issuance, and nationality of portfolio manager place of residence, exact address, PO Box and other contact details of the portfolio manager. d. For investment funds: nature of the entity, its legal form, type and capital copy of the memorandum of association full name of the investment/fund manager, as applicable, as in the passport, passport number, date and place of issuance, and nationality of the manage address, PO Box, zip code and other contact details. 212  Dubai Financial Market (DFM) 3.3 Other Obligations Learning Objective 8.3.3 Know brokerage firms’ obligations in relation to: fairness (Article 4); order taking (Article 4); confidentiality (Article 4); segregation (Article 4); call recording (Article 4); complaints (Article 4); suspicious activity (Article 4); market data (Article 4) The DFM’s Professional Code of Conduct includes a number of obligations additional to those considered above. Among these are the following: 3.3.1 Fairness The brokerage firm must observe in dealing with its clients the principles of honesty and integrity and act fairly when the nature of the clients’ dealings with it are similar, avoiding any acts that provide some, and not all, of its clients with advantage or incentive or any special information, whether directly or indirectly. 3.3.2 Order Taking 8 The brokerage firm must ensure that orders received from its clients are written and signed by the client, or received through the call recording system, fax or email. Oral orders are not allowed, should not be approved nor taken into account. 3.3.3 Confidentiality The brokerage firm must maintain the confidentiality of all information related to its client’s transactions and account, and refrain from disclosing such information except with the client’s permission, or in compliance with orders issued by the Authority, the DFM or competent judicial authorities. 3.3.4 Segregation The brokerage firm must segregate its accounts from the accounts of its clients in accordance with the regulations issued by the Authority. 3.3.5 Call Recording The brokerage firm must abide by the Authority regulations in relation to the recording of calls. 213 3.3.6 Complaints The brokerage firm must have an internal system for handling complaints from its clients, ensuring the following at all times: 1. All client complaints related to its business are handled in a proper and timely manner. 2. Steps are taken to verify and respond immediately to these complaints. 3. The client has been informed about the other steps available according to rules and regulations, in case the client’s complaint was not handled immediately. The brokerage firm must adhere to the contents of the complaint, and submit in a timely manner all information to the market management for investigation. 3.3.7 Suspicious Activity If the brokerage firm senses that a person is manipulating or trying to manipulate the market, it shall immediately notify the DFM. 3.3.8 Market Data The brokerage firm must not publish or promote any market data or the status of market listed entities unless such information is verified and made public by the concerned entity. 214  Dubai Financial Market (DFM) 3.4 Prohibited Actions Learning Objective 8.3.4 Know prohibited actions (Article 5) The DFM’s Professional Code of Conduct prohibits certain actions, as follows: Brokerage firms, or any of their employees, must not take advantage of their knowledge of a client’s orders for the execution of trading transactions for their own accounts or other accounts. Brokerage firm, whether acting solely or in complicity with others, must not take any action that manipulates or misleads investors, including: executing trading transaction(s) on a particular security in order to delude investors that it is an active security, or to impact its price (increase, reduce or fix its price) or the volume of its trading, or in order to influence the investor’s decision regarding investment entering, adjusting and/or cancelling the buying or selling order(s) of a particular security, in order to delude investors that it is an active security, or to impact its price or the volume of its trading, or in order to influence the investor’s decision regarding investment the brokerage firm must not trade any securities for its own account or for an account in which it holds an interest, based on previous knowledge held by the firm relating to future trading for, or with its clients 8 the brokerage firm must not, whether acting solely or in complicity or others, exploit information related to investors’ orders for its personal benefit or the benefit of others the brokerage firm must not, fully or partially, refrain from providing any consultation or other services related to its activity, before ensuring the immediate notification of all affected clients, and before taking the necessary measures related to outstanding work or unfinished business related to the accounts of such affected clients, and the brokerage firm must not harm the reputation of another brokerage firm by accusing the latter of professional negligence or shortcomings, or spreading rumours about other brokerage firms. 3.5 Record Keeping Learning Objective 8.3.5 Know record keeping requirements (Article 8) Article 8 of the DFM’s Professional Code of Conduct relates to record keeping. It states that brokerage firms must keep up to date records, physical or electronic. The DFM has the right to access and review these records. As a minimum, the records must include the following: a. all concluded client agreements b. buying and selling orders executed by the brokerage firm, as well as all orders received by phone c. all securities owned by the brokerage firm and its employees 215 d. all securities owned by clients of the brokerage firm, as well as any client assets held by the firm or a third party acting on its behalf e. all accounting entries and transactions. 4. Online Trading Regulations (DFM) 4.1 Price Limits Learning Objective 8.4.1 Know how price limits are applied (Article 1) Securities listed on the DFM are normally traded within the price limits set by the market. However, price limits do not apply to shares on their very first trading session when the share price is allowed to float between the date of listing and the conclusion of the trading session during which at least one transaction involving the share is executed. The closing price for the share at the end of the trading session is used as the benchmark to calculate change limits at the start of the next trading session. For dual listed companies (foreign companies) on the DFM, which are listed and have securities traded in another financial market, the opening price for the security on the first trading day on the DFM is based on the last closing price of the security in the principal market. The maximum and minimum daily limits of the price margin are applied according to market procedure as of the security’s first day of trading on the DFM. Market management reserve the right to apply different procedures for the trading of foreign shares listed on the market where appropriate and when justified. 4.2 Pre-Opening and Opening Sessions Learning Objective 8.4.2 Know activities carried out during the: pre-opening session (Article 3); opening session (Article 4) The DFM’s pre-opening session aims to determine the opening price for listed securities that will be used in the subsequent trading session. Brokerage firms are not permitted to enter orders at market price during the pre-opening session and the order prices entered during the pre-opening session are considered general knowledge, with the orders displayed in the market to enable the opening price to be based on supply and demand. The indicative opening price is updated every time orders are entered during the pre-opening session. The opening price is then calculated at the conclusion of the pre-opening session based on the following criteria: 216  Dubai Financial Market (DFM) 1. the price that sees the largest executable trading volume. If more than one price meets this condition, then 2. the price that sees the least inexecutable trading volume. If more than one price meets this condition, then 3. the price that sees the least possible change from the closing price for the previous trading day. If more than one price meets this condition, then 4. the highest price. Volumes of all orders entered into the trading system are taken into account when calculating the opening price. Orders may be entered, adjusted or cancelled (subject to below) during the pre-opening session. Unexecuted and valid orders may be transferred from the previous day to the current session. In the final five minutes of the pre-opening session, selling and buying orders cannot be cancelled, the buyer cannot reduce the buying price and the seller cannot increase the selling price, and in all cases, the number of shares offered for buying or selling cannot be reduced. During the pre-opening session no trading is conducted, but the trading system arranges orders as follows: All entered buying orders are shown at an equal or higher price than the indicative opening price. All entered selling orders are shown at an equal or lower price than the indicative opening price. 8 4.2.1 Opening Session At the end of the pre-opening session, the opening session sees all executable volumes executed at the opening price calculated by the trading system. Unexecuted orders, or the remaining partially-executed orders, are carried forward into the trading session. 217 4.3 Trading Session Learning Objective 8.4.3 Know activities carried out during the trading session (Article 5) Selling and buying of securities during the trading session is conducted continuously. Brokerage firms can enter orders and execute trading transactions when prices and any other conditions match. They can also adjust, cancel, suspend or activate any orders that have not been executed or have been partially executed. During the trading session, if a buying order is entered at an equal or higher price than the price on the selling side, or when a selling order is entered at an equal or lower price than the price on the buying side, the transaction is executed at the price set on the other side. If a buying or selling order is entered with an executable volume at more than one price at the other side, these orders shall be executed according to the available price chain in order of priority until all the orders are executed. If the order is not fully executed, then the remaining unexecuted volume stays on the trading system, at the last executed price. 4.4 Pre-Closing and Closing Sessions Learning Objective 8.4.4 Know activities carried out during the: pre-closing session (Article 6); closing session (Article 7) 4.4.1 Pre-Closing Session In a similar way to the pre-opening session, orders are automatically collected within the central orders register without being executed in the pre-closing session. Orders may be adjusted or cancelled. New orders at determined prices can be entered during the pre-closing session, but not at the market price. At the end of this session, orders are matched on the basis of the theoretical auction price, which is calculated according to the criteria outlined below. If a single matching price is not determined after the first step the model progresses to the second step and, if necessary, the third. Step 1 Maximum tradable volume – is the price that generates the greatest volume of trading. Step 2 Establishing the minimum surplus – if there is more than one price at which there is a maximum tradable volume, the price with minimum unexecuted volume will be chosen. Step 3 Mid-point – the mid-point of the prices that have more than one maximum tradable volume and at least two prices with the same minimum surplus. In order to determine the theoretical auction price, the mid-point is rounded up to the nearest price tick. 218  Dubai Financial Market (DFM) 4.4.2 Closing Session During the closing session, data and information are displayed, enquiries can be made and necessary reports are printed. Brokerage firms cannot adjust or cancel orders, nor enter new orders during this session. 5. Order Types (DFM) Orders can be categorised into different types depending on the price, time in force (validity) and other special conditions. 5.1 Limit and Market Orders Learning Objective 8.5.1 Know the following order types: limit (Article 8); market (Article 8) Limit and market orders are the two categories based on price. 8 5.1.1 Limit Order A limit order is an order to buy or sell a specific number of shares at a specific price, eg, purchase 100,000 shares in XYZ Co at AED 3.20. 5.1.2 Market Order A market order is an order to buy or sell a specific number of shares at the best price in the market at the time the order is placed, eg, sell 200,000 shares in ABC Co. Market orders can be entered only during the trading session – they cannot be entered in the pre- opening or pre-closing sessions. Market orders are executed at the best price available on the other side. If the order is partially executed, the remaining part of it is displayed at the last execution price. Market orders are rejected if no orders exist on the other side. 219 5.2 Other Types of Order Learning Objective 8.5.2 Know the following order conditions: day order (Article 9); good-till-cancelled (Article 9); immediate-or-cancel (Article 9); good-till-date (Article 9); at-the close (Article 9); orders without time-limits (Article 9); fill-or-kill (FOK) (Article 10); fill-and-kill (FAK) (Article 10) There are a number of order types that are based on their time in force, alternatively referred to as their validity. 5.2.1 Day Orders A day order expires if it is not executed by the end of the trading session on the day it was entered. 5.2.2 Good-Till-Cancelled A good-till-cancelled order will, if not executed, remain until unless the investor cancels it. 5.2.3 Immediate-Or-Cancel An immediate-or-cancel order is also referred to as an immediate order. It is only valid during the trading session and must be executed immediately. Any remaining unexecuted parts of the order are cancelled. 5.2.4 Good-Till-Date A good-till-date order expires if it is not executed by the end of a specified date. 5.2.5 At-the-Close At-the-close orders expire at the end of the trading session. If no time limit is set for the validity of an order, the order is considered to be a day order. All time-specified orders are automatically removed from the trading system once expired. 5.2.6 Special Orders Special orders that can be entered into the trading system are as follows: Fill-or-Kill (FOK) Orders – must be executed in full and cannot be partially executed. Fill-and-Kill (FAK) Orders – may be executed in full or in part depending on market conditions at the time of entry. Execution will be at the specified price or better (which could be a limit price or at market price). The remaining part of any FAK order that is not executed immediately and in full is cancelled. 220  Dubai Financial Market (DFM) 6. Order Handling (DFM) 8 6.1 Prioritisation of Orders Learning Objective 8.6.1 Know the correct method for order prioritisation (Articles 11, 12, 13 & 14) The arrangement of buying and selling orders and the execution of trading transactions are done separately based on the following priorities: a. Price priority – given to the best price as follows: The buying order at a higher price is given priority over other buying orders. The selling order at a lower price is given priority over other selling orders. b. Timing – if multiple orders are entered at the same price, they are arranged based on timing priority as follows: Priority is given to orders entered earlier over those entered at a later time. Priority is given to orders entered during the previous trading session over those entered during the current trading day. c. If an order is adjusted, in terms of price, volume, investor number, the addition or cancellation of a special condition, this order then loses its priority and is arranged according to the date and time of adjustment. This does not apply to adjustment to the order validity. 221 Certain features of a previous order can be changed with the order remaining valid. The adjusted original order is given a new time stamp and a new line priority if the change affected the price, investor’s account number, an increase in the declared volume or the addition/cancelation of a special condition. The entered order does not lose its priority if the declared volume is decreased or if its validity duration is changed. While being adjusted, the order is not deleted, and therefore can still be traded. Changes cannot be made to the share type, market type or order type. If these need to be changed, the order must be cancelled and re-entered. Order cancellation can be done on the trading system and once it is used, the original order cannot be recovered. If the order has been traded, the cancellation is rejected. As already encountered, existing orders in a company’s orders register are executed based on the following priorities: a. Best price – execution priority is given to the best price. b. Timing of entry – orders are arranged in order of entry, where the order with the earliest time stamp is placed first, on a first received first served basis. 222