CAPITAL FLOWS: SAUDI ARABIA
Figure 1: Growth in institutional trading in Saudi Arabia
80% 100%
60% 40% 20%
0%
• The introduction of a more efficient handling of order flow by market participants through an enhanced mechanism for short-selling
82% 70%
• Same-day settlements (T+0) for buy- in trades which are executed on the Exchange
30% 18%
• A more flexible settlement cycle for negotiated deals, enabling buyers and sellers to agree on a settlement cycle from T+0 to T+5 depending on their requirements. This will benefit clients with liquidity as it is now possible to repatriate sales proceeds on the same day
2015 2022
Institutional Non-institutional
Source: Weekly stock market ownership and trading activity report – Tadawul
Each of these positive reforms ultimately resulted in significant foreign investment into the country.
While Saudi Arabia’s market remains overwhelmingly retail-dominated from a trading perspective, the Tadawul Periodic Report reveals a notable increase in institutional trading. In December 2015, institutional trading accounted for around 18% of overall trading volumes, a figure that had risen to 30% by April 2022. Regarding ownership, as of April 2022 QFIs held around US$87bn of Saudi Arabian securities, marking a notable shift. The figure exceeds forecasts – experts had initially anticipated that between US$40bn and US$45bn of capital would flow into Saudi Arabia following its Morgan Stanley Capital International (MSCI) upgrade in 2018. Despite these impressive inflows, the brakes have not been applied to the Saudi liberalisation agenda.
Post-trade reform gains momentum In March 2022, the Saudi Tadawul Group announced several modifications to its post- trade infrastructure to help attract further international investment into the country. The changes will be felt across the Saudi Exchange, Muqassa and Edaa. Reforms to the Saudi Exchange include:
Visit us at
flow.db.com
For Muqassa, there will be an extension of clearing services to cover all securities traded on the Saudi Exchange, including equities, sukuks and bonds, together with the adoption of a comprehensive risk management framework. Additional post- trade services, including the ability to rectify trades before settlement and average or split price trades, have also been unveiled. Several changes being implemented at Edaa are quite transformational. These include the introduction of straight-through- processing (STP) via ISO 15022 messaging – something which will bolster post-trade settlement and market-wide efficiencies. In addition, providing daily position reporting will aid the reconciliation mechanism and provide flexibility for CSD users, while enriched ad-hoc reporting will be vital when sharing downstream information to end- institutional investors. Some other notable benefits for the custody process include:
• Corporate action reporting from Edaa, which is now received via STP in ISO 15022 messages
• Status updates of trade are carried out in real time, enabling swift matching and reporting
• Elimination of rejection procedures and access to the system’s user interface
The impetus to further strengthen the domestic market shows no sign of decelerating, and it does seem that many of the challenges which faced the Saudi Arabian market have been left behind. In addition, structural reforms to Saudi Arabia’s asset management industry are still required, and in-house fund administration continues to be ubiquitous despite having been phased out in most other major markets. For this reason, there is a real need for specialist, third-party fund administrators to drive costs down and provide independence and transparency to investors.
The brakes have not been applied to the Saudi liberalisation agenda
An eye on the future Over the months ahead, digitalisation of financial services looks set to sweep through Saudi Arabia and across the GCC region, which is not far behind the world’s pacesetters in terms of Web 3.0 progress. The bank is watching distributed ledger technology (DLT) and the crypto space with interest. Saudi Arabia has announced investments in digital technologies which will aid the growth of projects using DLT and artificial intelligence (AI). Asset tokenisation is likely to start developing in the region too, especially as it relates to illiquid instruments such as real estate. Overall, the GCC region is now examining the merits of digital asset custody as investor appetite for digital assets, such as cryptocurrencies and security tokens, continues to grow. The pace of change in Saudi Arabia since 2015 has been phenomenal and the country’s ambitions are being rewarded with ample capital inflows. Having implemented a series of wide-ranging liberalising measures aimed at promoting inward investment, the country is making further reforms to bolster its already robust post-trade infrastructure. The bank anticipates listings of government- owned assets and by private companies in the technology, healthcare, finance and infrastructure sectors, which will create more liquidity in the market. By doing so, further inflows can be expected.
Manoj Aidasani is Head of Securities Services for GCC (Gulf Co-operation Council) at Deutsche Bank
Deutsche Bank flow app For more insights on securities services
in GCC countries, download the flow app. Available on iOS and Android.
65
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64 |
Page 65 |
Page 66 |
Page 67 |
Page 68 |
Page 69 |
Page 70 |
Page 71 |
Page 72 |
Page 73 |
Page 74 |
Page 75 |
Page 76 |
Page 77 |
Page 78 |
Page 79 |
Page 80 |
Page 81 |
Page 82 |
Page 83 |
Page 84 |
Page 85 |
Page 86 |
Page 87 |
Page 88 |
Page 89 |
Page 90 |
Page 91 |
Page 92
