Saudi Arabia finalises new SBL and short selling rules
29 March 2021 Saudi Arabia
Image: Anton_Balazh/adobe.stock.com
Saudi Arabia has finalised amendments to its securities lending and short selling rules to better align standards with international best practices and encourage further activity in the budding financing market, which saw its first trading activity earlier this month.
The Saudi Stock Exchange (Tadawul) and the Securities Depository Centre Company (Edaa) have approved changes that were formulated as part of a public consultation in February 2020 to review eligible market participants and tradable assets.
Key proposals to limit on-lending of securities beyond one iteration, a requirement to use the Global Master Securities Lending Agreement as the legal framework for all trades and strict definitions of who can participate and what capital can be pledged as collateral that were laid out in last year’s draft document have all been scrapped or revised.
The now-defunct section titled ‘part 3 re-lending’ in the draft rules included a limitation that securities gained as part of a securities lending transaction could only be re-lent once. Under the proposal, a borrower would have a responsibility to notify a counterparty if a security they were on-lending was already the subject of a lending chain.
Elsewhere, the final rules seek to address the fact that the market has so far primarily geared only towards qualified investors. The new rules will allow a non-qualified investor to engage in the securities lending market either through an agent lender on one side or via a broker or its custodian on the borrower side.
Proposed thresholds of net assets an individual must meet to qualify for an investment account outlined in the draft document were also dropped.
Not all areas of concern were weeded-out of the draft proposals, however. Article 13 entitles Edaa to “disclose any information with regard to securities lending transactions as it deems fit”. The vagueness of this wording and broad scope of what it could imply will likely be a central area of focus for future discussions between market stakeholders and regulators.
In a statement on the rule change, Tadawul and Edaa explain they aim to develop a “consistent regulatory environment with the international best practices” to “provide a motivating and competitive atmosphere with high reliability”.
Saudi Arabia has been a long-term growth target for the global securities financing market and the largest market development comes as part of a multi-year campaign by international stakeholders to cultivate the market.
In February 2020, the International Securities Lending Association’s (ISLA) developing markets working group (previously known as the Middle East working group) responded to the public consultation issued by the Tadawul and the Edaa in which it proposed tightening of trading rules.
Throughout 2020, ISLA engaged directly with the exchange to discuss legal and accounting structures to develop their capital markets.
“We are of course delighted to see the publication of these amended rules for securities borrowing/lending and short selling by the authorities in Saudi Arabia,” says ISLA CEO Andrew Dyson. “This is a further important step to bring full market liquidity to the developing capital markets infrastructure in the region.
“These latest amended rules represent the culmination of extensive discussions between ISLA, our members and the authorities, and we look forward to further dialogue on this important issue.”
Publication of the new rules follows new that HSBC, acting as custodian and agent lender, completed the first securities lending transaction in Saudi Arabia.
The transaction involved an unnamed large regional asset owner, enabling HSBC, in its role of a prime broker, to borrow Saudi Arabian equities from the asset owner and provide access to the kingdom’s burgeoning equities market for an also unnamed global institutional investor.
The Saudi Stock Exchange (Tadawul) and the Securities Depository Centre Company (Edaa) have approved changes that were formulated as part of a public consultation in February 2020 to review eligible market participants and tradable assets.
Key proposals to limit on-lending of securities beyond one iteration, a requirement to use the Global Master Securities Lending Agreement as the legal framework for all trades and strict definitions of who can participate and what capital can be pledged as collateral that were laid out in last year’s draft document have all been scrapped or revised.
The now-defunct section titled ‘part 3 re-lending’ in the draft rules included a limitation that securities gained as part of a securities lending transaction could only be re-lent once. Under the proposal, a borrower would have a responsibility to notify a counterparty if a security they were on-lending was already the subject of a lending chain.
Elsewhere, the final rules seek to address the fact that the market has so far primarily geared only towards qualified investors. The new rules will allow a non-qualified investor to engage in the securities lending market either through an agent lender on one side or via a broker or its custodian on the borrower side.
Proposed thresholds of net assets an individual must meet to qualify for an investment account outlined in the draft document were also dropped.
Not all areas of concern were weeded-out of the draft proposals, however. Article 13 entitles Edaa to “disclose any information with regard to securities lending transactions as it deems fit”. The vagueness of this wording and broad scope of what it could imply will likely be a central area of focus for future discussions between market stakeholders and regulators.
In a statement on the rule change, Tadawul and Edaa explain they aim to develop a “consistent regulatory environment with the international best practices” to “provide a motivating and competitive atmosphere with high reliability”.
Saudi Arabia has been a long-term growth target for the global securities financing market and the largest market development comes as part of a multi-year campaign by international stakeholders to cultivate the market.
In February 2020, the International Securities Lending Association’s (ISLA) developing markets working group (previously known as the Middle East working group) responded to the public consultation issued by the Tadawul and the Edaa in which it proposed tightening of trading rules.
Throughout 2020, ISLA engaged directly with the exchange to discuss legal and accounting structures to develop their capital markets.
“We are of course delighted to see the publication of these amended rules for securities borrowing/lending and short selling by the authorities in Saudi Arabia,” says ISLA CEO Andrew Dyson. “This is a further important step to bring full market liquidity to the developing capital markets infrastructure in the region.
“These latest amended rules represent the culmination of extensive discussions between ISLA, our members and the authorities, and we look forward to further dialogue on this important issue.”
Publication of the new rules follows new that HSBC, acting as custodian and agent lender, completed the first securities lending transaction in Saudi Arabia.
The transaction involved an unnamed large regional asset owner, enabling HSBC, in its role of a prime broker, to borrow Saudi Arabian equities from the asset owner and provide access to the kingdom’s burgeoning equities market for an also unnamed global institutional investor.
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