Dubai Financial Market (DFM) , the emirate's main stock exchange, has issued rules allowing the lending and borrowing of securities, part of efforts to make the market more flexible ahead of an influx of foreign funds.

Lending and borrowing of securities is expected to begin in the first quarter of this year, if investors are ready, DFM said in a statement seen on Friday.

Securities lending and borrowing will help the development of other products on DFM such as exchange-traded funds, said Maryam Fekri, an executive vice-president of DFM.

The UAE market regulator, the Securities and Commodities Authority (SCA), approved regulations for securities lending and borrowing in October 2012 but exchanges have taken considerable time to introduce the practice, partly because of concern about causing instability.

DFM's rules say approved agents must be involved in the practice and appear to stop short of allowing full-fledged short-shelling of stocks.

In the "initial phase", securities lending and borrowing will only be for market-making and settling securities deliveries that have failed, DFM said without elaborating.

Dubai was one of the best-performing stock markets in the world last year, with its main index rocketing more than 100 per cent, and is expected to attract hundreds of millions of dollars of fresh foreign money after May, when index compiler MSCI is due to upgrade it to emerging market status.

Earlier this month the SCA issued rules allowing the issuance and trading of covered warrants, which are listed, tradable instruments giving investors the right to buy or sell stocks or other securities at specified prices.

It also increased the amount of margin lending which brokerages can legally conduct while vowing to crack down on unlicensed lending.-Reuters