DUBAI: The sudden fall of Gulf share prices as the price of oil slides has given new impetus to governments in the region to improve financial regulation to reduce the credit-fuelled volatility that has afflicted their nascent stock markets.

The stock markets of the Gulf were among the best performers in the world earlier this year, but panicked selling in recent weeks has wiped out all the year’s gains in Kuwait, Qatar, Saudi Arabia and the United Arab Emirates.

Experts say the volatility is driven in part by weak regulation, which allows too much leverage when prices are going up, and too few brakes when prices start to fall.

The worst-hit has been Dubai’s benchmark, which has lost around a third of its value since Nov 25, the day before Opec began a meeting which held oil production at current levels despite an expected glut of supply in 2015.

The plunge has turned attention to the region’s easy rules on leverage, which allow investors to increase their returns with borrowed cash when prices are rising, but speeds the fall when prices turn south.

Much of this year’s surge on UAE stocks had been funded by lending, either from banks or through brokerage houses, which can force investors to sell shares to cover losses in a falling market, driving prices further down.

“The speed by which we see these daily drops can only be explained by banks liquidating big portfolios that were collateral for margin trading,” said Mohammed Ali Yasin, managing director of NBAD Securities, adding there was no way to tell how much of the market was being traded on margin.

The UAE authorities have noted the negative impact, with a senior central bank official saying on Dec. 9 it was studying proposals for new rules on bank lending against shares.

However, the path to implementing regulation in the Gulf region has traditionally been slow. UAE officials said in July they planned to tighten bourse rules after problems at Dubai contractor Arabtec, whose share price surged on leveraged trading, crashed and dragged the wider market with it.

Gulf stock markets still provide few of the automatic brakes found in other countries, which can slow a sudden slide and give market participants time to respond.

The Abu Dhabi bourse has been the first in the region to experiment with automatic circuit breakers: it announced on Sunday it would temporarily suspend trading in stocks that fell more than 5 per cent. The bourse’s CEO told Reuters that a study period for the implementation had been sped up due to the current slump.

Published in Dawn December 18th , 2014