A recent judgment of the Federal Supreme Court in Abu Dhabi has emphasized and expanded the Court's hostility to margin trading. This is the third in a series of cases dating back to 1990 relating to trading in currencies or commodities.
In 1990, in a departure from previous judgments, the Supreme Court upheld a lower court judgment that required a broker to reimburse its client for commodity futures trading losses. In 1995, the Court similarly upheld a lower court judgment that required a bank to reimburse to its client currency futures trading losses. The 1995 judgment represented a significant extension of the rationale first articulated in 1990, in as much as banks in the UAE are specifically authorized by Central Bank regulation to engage in currency trading. Furthermore, the Court expressly rejected a claimed distinction between hedging and speculation, and went so far as to opine obiter dicta that such trading constituted a violation of the Penal Code.
Like the 1995 judgment, the recent judgment of the Federal Supreme Court involved a customer of a bank in Abu Dhabi. The customer had a foreign currency trading account with the bank, allowing the customer to assume significant positions in foreign currencies on the basis of a 10% cash margin held by the bank. The customer brought suit against the bank for recovery of trading losses. The Court asserted that the parties' sole intent in such trading currencies is to take advantage of differences in prices between currencies and not to take delivery of the underlying currencies. It concluded that margin trading in currencies was equivalent to gambling, rendering void the underlying contract between the bank and its customer.
This judgment stands in marked contrast with the reasoning followed by the Court of Cassation in Dubai, which has consistently viewed both commodity and currency futures trading as inherently enforceable, focusing instead on whether the customer authorized the disputed trades.
However, under the approach taken by the Federal Supreme Court, the only factual inquiry required is to determine the intent of the parties. The sophisticated trader who understands and willingly encounters the risks of currency and futures trading can recover losses, even in respect of trades that he specifically instructed and even if such trades were executed in regulated exchanges by licensed intermediaries, and were therefore unquestionably lawful where performed. Under the current reasoning of the Federal Supreme Court, a hedge trader would be able to sue its broker and recover trading losses, even though a hedge trader assumes a position in the currency or commodity markets in order to reduce risk, not increase risk.
The Court reasoned that because the contract between the bank and the customer is void, the status quo must be restored by allowing the customer to recover all of the funds he forwarded to the bank. This remedy, of course, does not restore the status quo. However, this argument was raised before the Court in this case and was specifically rejected by the Court.