Saudi Arabia opened its doors to foreign investment yesterday, giving investors direct access to the country’s largest stocks.
The regulations on foreign investment, which were published in early May, now permit overseas institutional investors including sovereign wealth funds, pension funds and collective investment schemes to access the Saudi stock market. In addition, definitions of the four categories of qualified foreign investors (QFI) - bank, insurance company, brokerage/securities firm and fund manager - are now included in the rules.
The final version of the regulations excludes Gulf Cooperation Council asset managers with funds domiciled in listed jurisdictions such as Dublin or Luxembourg, which might disappoint some managers, although it is unclear if they would have met the minimum $5 billion AuM eligibility threshold.
Adel Al-Ghamdi, chief executive of Tadawul, the country’s stock exchange, told Reuters in London that the first transaction by a QFI was due to take place on Monday. He did not name the investor.
Previously, foreigners could only buy stocks in the $564 billion market, which is the largest in the Arab world, indirectly through channels such as swaps.
One clarification that may prove more problematic for some large institutional investors, and for their asset managers, relates to the multi-manager structures that are common international practice. The final version of the regulations stipulates that a QFI cannot appoint and seek registration under multiple QFIs. This however does not prevent QFI fund managers from offering PNotes or Swap products.
The QFI process lasts 12 days: five days for the Assessing Authorized Persons (AAP) body to process the application and one day for it to submit the application with a recommendation to the Capital Markets Authority (CMA), followed by five days for the CMA to determine the application and one day in which to issue its decision.
Along with the introduction of the QFI concept, Tadawul also proposed a draft Independent Custody Model (ICM).
This is attractive to foreign institutional investors, in terms of security, workflow and efficiency, and clearly defines the roles and responsibilities of the custodian, broker, clearing bank and CSD.
The model also became available on Monday, subject to participants completing the eligibility requirements and successful testing.
HSBC, which obtained its QFI licence on Monday, and will also act as a licenced custodian, says institutional investors will use multiple brokers in conjunction with a single custodian, thereby achieving centralised control and visibility. “This reduces QFI clients' counterparty risk on brokers: for example, brokers will have no incentive to execute trades fraudulently on client accounts, as they will not have access to any proceeds,” it said in a public note. Furthermore, under the ICM, brokers will have no visibility of the contents of clients' custodian access accounts, so unauthorised orders that exceed the holdings of the access account cannot be executed.”
Arindam Das, regional head of HSBC Securities Services, MENA says: "HSBC is pleased to have registered the first trades on the Tadawul as a qualified foreign investor. These trades were executed through HSBC's local broking entity and settled through its local custodian entity. We expect the region to be firmly on international investors’ radar in the future."
The Saudi market's T+0 settlement cycle effectively requires pre-funding, which may concern some foreign institutional investors. However, because the Saudi currency is pegged to the US dollar, there is (unlike a floating currency) limited currency risk exposure arising from pre-funding, HSBC noted.
A recent additional advance has been the clarification of guidelines on lending relating to custody. It is now officially possible for a Saudi-based bank to offer credit facilities to investors or intermediaries that can be used to obviate the need for pre-funding, and facilitate a longer settlement cycle. The investor's trades could then be settled at T+0 in the market using this funding, but then subsequently be settled outside the market directly with the investor or global custodian, via the sub custodian on (for example) T+2. The operational workflows and terms and conditions around these will need to be worked out between the investor, the custodian and the lending bank.