Clearing Demand
By Ahmed Bin Sulayem
Since its establishment in 2005, the Dubai Commodities Clearing Corporation (DCCC) has been the central counterparty for clearing and settlement services to the Dubai Gold & Commodities Exchange (DGCX). Emerging as the largest clearing house in the MENA region by volume, DCCC is now poised to play a far more multinational role in line with the transition of economic power from west to east, while providing a broader range of products and services.
Why the DCCC?
As a wholly owned subsidiary of DGCX, which in turn is a wholly owned subsidiary of Dubai Multi Commodities Centre, DCCC’s success may have started out of functionality, but has since expanded to provide a streamlined mechanism for its members with numerous competitive advantages. Outside of providing guaranteed settlement and reduced counterparty risk, DCCC also offers the advantages of transacting and clearing business within the UAE, thus benefiting from a strong and safe business and regulatory environment. For greater transparency and predictability, DCCC also operates a simplified fee structure that applies to all clearing members, including identical margins regardless of commercial or non-commercial status. Overlapping across Asian, European and U.S. trading hours, DCCC’s robust regulation, under the Securities & Commodities Authority (SCA), recognition by the Monetary Authority of Singapore (MAS), the Bank of England, and Abu Dhabi Global Market (ADGM) and membership of CCP Global have further minimised systemic risk, while enhancing efficiency for its clients. Providing clearing and settlement services for derivative contracts across four asset classes, namely base and precious metals, hydrocarbons, currencies, and equities, DCCC’s consistent investment in state-of-the-art risk management systems, such as ActiveRisk, have enhanced its regulatory compliance in line with the Principles for Financial Markets Infrastructure (PFMI) and technical standards under European Market Infrastructure Regulation (EMIR). As a result, DCCC has achieved several notable milestones since its launch, including clearing 175,690,385 contracts between 2005 – 2023, while becoming one of the most prominent offshore exchanges for INR Futures and the first Shari’ah-compliant spot gold contract exchange. By working with a list of approved clearing banks, DCCC trades an extensive list of currency pairs that require physical delivery on all open positions, with most currencies being settled in USDs. As an additional transparency measure, delivery of the Shari’ah Spot Gold contract takes place through DMCC’s Tradeflow, a dedicated online platform for registering ownership of commodities and their subsequent transfers.
A Change In Economic Supply and Demand
As the world’s reserve currency for almost eighty years, DCCC’s historic default for settling contracts in U.S. dollars has always made sense. As a functional currency in most economies, even heavily sanctioned ones such as Russia, the U.S. dollar remains a stalwart for trade and commerce, however, in recent years its influence has waned through a culmination of geopolitical and geostrategic shifts, particularly in the currency and oil & gas markets.
According to Meera Chandan, Co-Head of the Global FX Strategy research team at J.P. Morgan, “Overall dollar usage has declined, but it remains within long-run ranges and its share remains elevated compared to other currencies. The dollar’s transactional dominance remains top-of-class despite secular declines in U.S. trade shares. On the other hand, de-dollarization is evident in FX reserves, where the dollar’s share has declined to a record low of 58%.”
Twilight of the Petrodollar
Where oil & gas is concerned, J.P. Morgan’s Head of Global Commodities Strategy, Natasha Kaneva commented, “The U.S. dollar, one of the key drivers of global oil prices, appears to be losing its once powerful influence.” Highlighting how oil & gas has continued to follow the path of least resistance, Kaneva went on to say, “Crucially, Russian oil is now either sold in the local currencies of the buyers or in the currencies of countries that Russia perceives as friendly.” Supporting Kaneva’s position, a J.P Morgan de-dollarisation report went on to say, “Major Russian commodity producers have started issuing bonds in yuan. In September 2022, state-owned oil company Rosneft made a public offering of 10 billion yuan in bonds, followed by a second tranche of 15 billion yuan in March 2023.”
As a movement that is by no means limited to Russia, other countries appear to be following suit. As illustrated in the same report: “Some Indian refiners have begun paying for Russian oil purchased via Dubai-based traders in dirhams, while others are considering doing so in yuan. Saudi Arabia is reportedly exploring the acceptance of payments in other currencies.”
While some may identify de-dollarisation as a recurrent, post-war theme, there is growing sentiment that the carrot of seizing some measure of inflationary control and the stick of sanctions means a complete incentivisation for nations to follow through for an alternative. Not only are there widespread concerns about the United States’ reckless domestic policies on printing money, but its treatment of Russia as a cautionary tale of the sort of disruption less resource-rich, dollar dependent nations could face. As highlighted by Thomas Fazi, the freezing of Russia’s foreign exchange reserves, “violated an almost sacred principle: the neutrality of international reserves”. Even more indicatively, many countries didn’t follow suit in applying sanctions, but instead “quietly started strengthening their ties with Russia and China in an effort to reduce their dependence on the dollar-centric system”. Good examples include Bolivia, Brazil, and Argentina, which since July 2023, have been paying for imports and exports using Chinese renminbi, or Indian Oil’s rupee payment for a million barrels from Abu Dhabi National Oil Company in the same month.
Return of the Gold Rush
As a further indicator of global sentiment, the en masse gold rush of the world’s central banks, particularly in the face of a strong dollar and falling inflation expectations, would suggest many macroeconomies believe now is a good time to hedge. Led by China, which has been stockpiling gold for 17 consecutive months, other nations including Singapore and Poland have also been buying in large quantities, propelling the price to USD 2,430 per ounce, with many gold bugs anticipating highs beyond USD 3,000 before the next business cycle shift. Amid the global uncertainty, those buying gold are also cautious about where it should be kept. Again, driven by the U.S.-led sanctions against Russia, “an increasing number of countries are repatriating gold reserves as protection against the sort of sanctions imposed by the West on Russia”, according to an Invesco survey of central bank and sovereign wealth funds published in July last year. As a result, the survey showed a “substantial share” of central banks were concerned by the precedent that had been set with 68 per cent of respondents stating they will be keeping their reserves at home, compared to 50 per cent in 2020.
A Centralised, Trustworthy, Apolitical Ecosystem
With the global economies in a state of transition, the UAE has emerged as a centralised destination for people and businesses. Whether through companies establishing trading hubs, or HNWIs hedging their assets and or liabilities in a transparent jurisdiction, the UAE has achieved a state of global neutrality, while offering considerable advantages for its residents and investors. As illustrated by H.E Abdulla bin Touq, the UAE’s Minister of Economy, "The UAE has established itself as a leading global financial hub that offers all enablers for success for the business sector, investors, and start-ups from around the world. This was made possible by a resilient economic legislative ecosystem, a competitive, attractive, and stable business environment and the further development of infrastructure to be among the best globally." Commenting on the back of the announcement that UAE business licenses linked to creative activities alone had reached 932,000 registrations by the end of H1 2023, similar figures were echoed throughout the UAE’s free zone communities. DMCC achieved record growth with 2,692 new companies joining its community, accounting for 11 per cent of Dubai’s total FDI inflows in 2023, while DCCC cleared a total value of more than USD 115bn.
A Catalyst for Change
As a result, DCCC finds itself in the unique position of being the only regional institution that can transparently handle the clearing and settlement services for bullion, oil & gas, and currency pairs, while retaining the ability to create new products in line with both local and international demand. A great example of this being the recent launch of the GCC’s first Shari’ah compliant Silver Spot Contract. With many different global banks and brokerage houses already listed as clients, DCCC’s highly regulated environment also means significant advantages and or opportunities for its members, specifically across the asset classes mentioned. Most importantly, however, DCCC has no restrictions when it comes to creating any number or types of product for any market, providing the necessary localised permissions are granted. As a result, it offers a significant advantage over its peers when it comes to creating versatile, market-led products that may fall into high demand in the short to mid-term.
For gold, DCCC not only provides the clearing and settlements services, but by extension a secure and accessible destination in which to keep it. Home to the MENA region’s largest vault and several of the world’s largest refiners, DMCC also works closely with logistical operators such as Brinks and Transguard, while Dubai’s two international airports mean fast and direct access either for import or export purposes. Supported by its Tradeflow system, Dubai is already home to 25 per cent of the world’s gold trade, while the volume of gold contracts cleared through DCCC exceeded USD 4.97bn in 2023.
For currencies, as mentioned, DCCC has zero restrictions in creating new currency products, meaning its ability to launch new pairings, with the express permission of each sovereign state and the necessary, regulatory approvals. This could further extend to provide investment opportunities for either gold-backed currencies in the future or even a basket of currencies made of the BRICS+ nations, which could be priced in accordance with GDP.
For oil & gas, as already illustrated through India’s accelerating CEPA-based relationship with the UAE, DCCC is also ready for countries to purchase hydrocarbon products to be settled in their domestic currencies, thereby cutting transaction costs by eliminating dollar conversions.
A Business-First Environment
While much of the world has continued towards greater uncertainty, the UAE has worked on creating greater security through a highly regulated, safe, and secure destination that upholds the traditional requirements of transparent business under the rule of international law. Since departing FATF’s grey list earlier this year, business has continued to surge, while its international ranking for safety and trustworthiness continues to rise. This includes its recognition as one of the most trusted countries in the world according to the 2023 Edelman Trust Barometer Global Report.
With 2024 tipped not just as an election year, but “perhaps the election year” according to Time, the fact that 64 nations, plus the European Union all head to the polls will indisputably lead to greater volatility. This, coupled with the ongoing conflicts in Ukraine and Gaza, has already resulted in more countries and institutional investors seeking not just a place to weather the storm but prepare for what lies ahead. In this capacity, DCCC and its parent companies represent one of the last safe harbours that are prepared for business-as-usual, no matter the outcome.