Middle East Links – January 2025

New regulatory framework for fiat-referenced tokens

The Financial Services Regulatory Authority (FSRA) of the ADGM introduced a new regulatory framework applicable to the issuance of Fiat-Referenced Tokens ("FRTs") in December 2024. The framework creates a new separate Regulated Activity of Issuing FRTs, reducing the regulatory burden on FRT issuers, while increasing financial stability and investor protection. This expands the suite of digital assets that can be offered in a regulated environment, enabling “Accepted” FRTs to be issued in accordance with the framework. Virtual assets issuers should review their internal processes to align with the new requirements for FRTs set out in the FSRA Rulebook.

Consultation on further changes to the virtual assets regime

The FSRA is proposing to amend the virtual asset regulatory framework in the ADGM, reflecting the growing focus of regulators in the region on the virtual assets sector (Consultation Paper No.11 of 2024). New proposals would see the current FSRA-led approval process for Virtual Assets replaced with a self-assessment and notification process. Firms would be subject to continuous monitoring requirements and enhanced reporting requirements. The paper also seeks feedback on matters such as capital requirements, enhanced supervisory powers and the criteria to be applied in determining whether non-ADGM issued Fiat-Referenced Tokens should be accepted within ADGM.

Consultation on regulatory framework changes to address Basel III Core Principles

Authorised Firms in the ADGM should be aware of proposed changes to the FSRA’s regulatory framework to further align with aspects of international best practice set out in The Core Principles for effective banking supervision published by the Basel Committee on Banking Supervision (“BCBS Principles”), which were revised in April 2024. This may result in enhanced corporate governance requirements, higher standards for domestic systemically important banks, higher regulatory expectations as to policies for country risk and transfer risk, more detailed rules on large exposures to connected/closely related counterparties and adjusted credit classification criteria and guidance for managing problem exposures, as detailed in Consultation Paper No.9 of 2024.

The FSRA intends to consult further on proposals to align with the Objectives and Principles of Securities Regulation issued by the International Organization of Securities Commissions and  Insurance Core Principles issued by International Association of Insurance Supervisors. Authorised Firms should expect a range of changes to the regulatory framework in the coming months and ensure their policies and procedures are updated, if required.

DIFC reinforces its international common law legal system

The DIFC’s legal framework now expressly provides that the DIFC Courts may consider case law from England and Wales and other common law jurisdictions in interpreting DIFC laws and in developing or modifying the common law applicable in the DIFC. The Law on the Application of Civil and Commercial Laws in the DIFC (DIFC Law No.3 of 2004) was amended in November 2024, to address uncertainties raised at the consultation stage as to whether the common law can be used as an interpretative aid in respect of DIFC legislation that is of a non-common law origin. DIFC law is to be determined first by reference to DIFC laws and DIFC Court judgments, and is supplemented by common law.

This interpretative approach applies whether the DIFC law is based on international model law or another non-common law source. This amendment to DIFC law reaffirms the international common law component of DIFC law, as distinct from civil law, code-based systems, as applicable onshore in the Emirates.

Rules for resolving conflicts between the Dubai courts and DIFC courts

New procedural rules clarify the processes of the Judicial Authority for Resolving Jurisdictional Conflicts Between DIFC Courts and Judicial Bodies in the Emirate of Dubai (the “Judicial Authority”), which has jurisdiction to determine conflicts of jurisdiction or judgments as between the judicial bodies in the Emirate of Dubai (including the Dubai courts) and the DIFC Courts. The Judicial Authority has the power to stay proceedings in the Dubai court or the DIFC court and to transfer proceedings to the other court, where the Judicial Authority determines the competent court to hear the dispute.

Streamlined processes allow a party to apply online, in Arabic and English, to refer a conflict of jurisdiction or judgment in a relevant dispute to the Judicial Authority, the defendant must file a response within seven working days from the date of being notified of the application, and the Judicial Authority will issue its decision with 30 days (which may be extended) and notify the parties within two working days.

New Netting Law

The UAE’s updated netting regime broadly maintains the same position as under the previous regime and introduces some refinements to the regime, with effect from 2 January 2025. Federal Decree-Law No.31 of 2024 aligns with aspects of the International Swaps and Derivatives Association (ISDA) Model Netting Act 2018 and repeals the previous netting law, Federal Law No.10 of 2018.

As under the previous regime, the netting and set-off provisions in eligible agreements between parties where at least one of which is a UAE company or a foreign company with a branch in the UAE (onshore) are confirmed as legal, valid, binding and enforceable as a matter of UAE law both, prior to insolvency and where one party to the transaction is subject to insolvency proceedings in the UAE.

The previous law clarified that these types of provisions are not unenforceable on the basis that such arrangements could be characterised as illegal gambling or speculative contracts, contrary to provisions of the UAE Civil Code which prohibit such contracts. The new law affirms that these types of provisions are not contrary to provisions of any UAE law enshrining these Shariah principles into law. This is a welcome clarification that problematic legislative provisions, such as in the UAE Civil Code or the UAE Penal Code, should not operate to restrict the enforceability of eligible netting arrangements.

Other key changes include that there is now a more detailed list of types of “Qualified Financial Contracts” that are eligible for netting, which includes conventional and Shariah-compliant contracts. No party may subsequently challenge the validity of Shariah-compliant Qualified Financial Contracts based on a change in interpretation of Shariah principles. The UAE Central Bank is now authorised to designate new types of financial products as Qualified Financial Contracts, rather than the Committee for Designation of Qualified Financial Contracts within the Ministry of Finance. 

Repeal of anti-concealment law regarding nominee arrangements

The Commercial Concealment Law (Federal Law No.17 of 2004) which prohibited local shareholder nominee arrangements designed to structure around foreign investment restrictions on the ownership of UAE companies has been repealed by Federal Decree-Law No.26 of 2024 with effect from October 2024.

The status of the Concealment Law has been under review following the relaxation of foreign investment restrictions in UAE companies since 2021. Now, foreign investors can own shares in UAE companies with no limit on the percentage of the company’s share capital that they may hold (subject to Federal restrictions protecting strategic sectors and applicable Emirate-level requirements). Parties to bespoke private contractual arrangements designed to mitigate the impact of foreign investment rules and structured to comply with the requirements of the Commercial Concealment Law may wish to seek advice as to whether these arrangements remain necessary, or if they can be adjusted, in light of these changes in law.

Regulatory approval for UAE Dirham pegged stablecoin

The first UAE Dirham pegged stablecoin, the AE Coin, received final regulatory approval from the UAE Central Bank in December 2024. AE Coin will be a new form of digital money pegged to, and backed by, the national currency and available to individuals and companies for domestic and cross-border payments as an alternative to cash. The introduction of digital currency forms a key part of the UAE Central Bank’s 2023-2026 strategy and follows the enactment of the new payment token services framework earlier in 2024 (Circular No. 2/2024) (read more…).

Once available, AE Coin looks set to transform the UAE’s financial services landscape and place the UAE as a regional leader in the adoption of stablecoins. Firms who intend to integrate the AE Coin into their offerings will need to review the UAE Central Bank’s digital payment token services framework and consider the regulatory requirements and compliance obligations associated with AE Coin.

New climate change law

In the latest step in the UAE’s sustainability journey since hosting COP28 in 2024 (read more…), national climate change objectives, mitigation strategies and sustainability initiatives now have a statutory footing pursuant to the new Federal Decree-Law No.11 of 2024 on the Reduction Climate Change Effects.

There will be a sector-based, national pathway to climate neutrality, under which the Ministry of Climate Change and Environment, the Cabinet and the relevant local authorities will determine annual targets for emission reduction. The UAE aims to achieve climate neutrality by 2050. Sector-based climate change adaptation plans will assess climate-related risks and propose responses and adaptation measures. A range of strategies will be used to reduce emissions, such as using clean energy and carbon capture, use and storage. Further resolutions and standards are expected to be issued to provide more granular detail on these strategies. There will be strict measurement and reporting requirements (via new electronic systems) around emissions reductions and measures. A new National Register for Carbon Credits (established pursuant to Cabinet Decision No. 67 of 2024) will facilitate carbon offsetting activities and emissions trading.

Businesses engaged in activities that result in greenhouse gas emissions, including Government-owned companies, will need to ensure they are aware of the upcoming changes affecting their sector and plan for compliance. There will be a year-long grace period for affected businesses to comply, once the law comes into force in May 2025. Non-compliance will be punishable by fines.

Read more about global sustainability news in Linklaters ESG newsletter, Sustainable Futures.

Dubai Courts consider asymmetrical dispute resolution clause

Asymmetrical arbitration clauses are a focus for discussion in the UAE market, following the publication of a recent case decided by the Dubai Court of Cassation. In Commercial Appeal No.735 of 2024 (29 October 2024), the court determined that, as a matter of UAE law, a unilateral option for one party to a UAE law governed agreement to decide to refer disputes to either arbitration or litigation was invalid, on the basis that it lacked clarity and the mutuality required under the Federal Arbitration Law (Federal Law No.6 of 2018).  In the clause at issue in Commercial Appeal No.735, there was no mutual agreement to arbitrate, and it provided for domestic arbitration or domestic litigation at the election of one party only. There are some notable differences in the structuring of this clause, as compared with the type of typical arbitration clause comprised of a mutual agreement to arbitrate but with a unilateral option to litigate granted to one party sometimes seen in English law governed agreements.

The decision may raise questions as to the UAE Courts’ approach to asymmetrical dispute resolution clauses more generally. While the English courts have upheld arbitration clauses with an option to litigate when governed by English law, the approach that a UAE court may take to similar clauses in any future proceedings is unclear. This could be problematic; for example, multiple, parallel proceedings could be a risk. A UAE court could refuse to recognise and enforce an arbitral award or court judgment referred to it for enforcement in the UAE, or could accept jurisdiction if a party were to bring proceedings there. For UAE-seated arbitrations, an arbitral tribunal might decline jurisdiction.

The determination of which dispute resolution forum is the most appropriate in any given transaction is a multi-faceted one that will depend on a number of factors, including the likelihood of enforcement in the UAE. Some businesses may favour arbitration only or litigation only clauses, as a more conservative approach to transactions with a UAE nexus. For others, keeping maximum flexibility in the forum in which a dispute is heard may be important.

Securities and Commodities Authority launches consultation on tokenisation framework

The Securities and Commodities Authority (SCA) has launched a public consultation on draft regulations for security and commodity tokens. The proposed framework sets out the requirements and rules governing security and commodity tokens within the UAE. The obligations under the draft regulations will apply to security token and commodity token contracts issued from or within the UAE, and may impose stringent technical, transparency and security requirements on issuers of security tokens and commodity token contracts. Read more in our recent Tech Insights blog post.

Changes to debt issuance rules

Saudi Arabia’s regulatory environment for Sukuk and bond issuance has undergone changes recently, with revised Rules on the Offer of Securities and Continuing Obligations issued by the Capital Market Authority (CMA) introducing streamlined processes to make debt issuances more straightforward and efficient. Issuers should benefit from quicker private placements under expedited processes, simplified prospectus requirements for offers and an expanded range of exempt offerings, now including developmental funds, banks, and sovereign funds. The changes are expected to drive liquidity on the Saudi Exchange (Tadawul), in line with Vision 2030 goals.

Saudi Arabia’s new Investment Law comes into force

Companies in Saudi Arabia and their investors should be aware that the new regime under the Investment Law (Royal Decree No. M19/1446) applies with effect from 13 February 2025, replacing the previous Foreign Investment Law. The updated regime regulates investment in Saudi Arabian companies by both domestic and foreign investors, with enhanced investor protections and a new national register of investors. Investment will only be restricted in Saudi Arabian companies engaged in activities on a list of “excluded activities”; the list has not yet been issued by the Permanent Ministerial Committee for the Examination of Foreign Investments (CEFI). Implementing regulations are expected to be issued shortly. You can read more about the Investment Law in our recent alert.