Liberalisation of Saudi Arabian market

02 Apr, 2015

Saudi Arabia is likely to liberalise its markets over the course of 2015 in what could be an enormous opportunity for emerging markets-focused fund managers, according to HSBC Securities Services.

In August 2014, it was announced that Saudi Arabia would permit investments from non-Gulf Cooperation Council (GCC) foreign institutional investors, defined by the Saudi Arabian Capital Market Authority (CMA), as licensed banks, brokerage and securities firms, insurers and fund managers regulated in an equivalent regulatory regime with at least $5 billion in assets and five years experience in securities activities. The rules will allow investors to transact in listed equities although exposures to debt instruments are likely to remain off-limits.

“We see Saudi Arabia allowing foreign investment in a manner not too dissimilar to the Chinese market liberalisation moves under Stock Connect and the Qualified Foreign Institutional Investor (QFII) schemes, whereby it will be a quota driven system. However, I do believe there will be a lot of interest from emerging market fund managers given the clout of Saudi Arabia and its market in the GCC,” said Cian Burke, head of HSBC Securities Services in London.

Saudi Arabia’s Bourse – the Tadawul – is one of the largest stock exchanges in the Middle East North Africa (MENA) region with a market cap of $500 billion and a daily turnover of $2 billion, a feat which according to Burke, makes it attractive to foreign institutional investment. Saudi Arabia has permitted foreign investors access to its equity markets through mutual funds, although non-GCC foreign investors have been able to gain exposure to equity markets since 2008 through swaps and participating notes. GCC investors have had exposure to the Saudi equity markets since 2007.

However, there are challenges around market infrastructure. A paper by BlackRock in January 2015 acknowledged that Saudi Arabia’s requirement that transactions settle at T+0 thereby requiring the pre-funding of cash and securities, could cause challenges. There are also no trade confirmation or affirmations or Delivery Versus Payment (DVP) systems.

Another inhibitor to mutual funds investing in the region is that there is no independent custody model, but rather local brokers which act on behalf of custodians. This is in breach of the Security and Exchange Commission’s (SEC) 17(f)5 regulations. Furthermore, there is no separate Central Securities Depository (CSD) or Central Counterparty Clearing House (CCP).

However, the regime is making enormous strides in bolstering its market infrastructure. “Saudi Arabia’s market infrastructure is making enormous strides, and it is a market that we are very excited about,” said Burke.

Saudi Arabiaemerging markets