There remain a lot of practical challenges for Saudi Arabia in growing securities borrowing and lending (SBL) activities, according to panellists. Speakers at this year’s International Securities Lending Association (ISLA) conference discussed the association’s expansion into the Middle East, as well as the key milestones and various phases the entity has put in place. The association’s affiliation with the region began when it partnered with law f irm Latham & Watkins in September to promote the advancement of securities lending activities in the Middle East. In the first phase of the partnership, ISLA and Latham & Watkins said it would focus on steps to advance the sector and to boost market liquidity in Saudi Arabia, Abu Dhabi and Dubai — including the Abu Dhabi Global Market and the Dubai International Financial Centre. In February, ISLA released its SBL guide on Saudi Arabia — the first of a number of additional country-specific guides to be produced in 2024. The guide argued that Saudi Arabia and the Middle East offer ripe opportunities for new businesses, particularly in the financial services and capital markets sector. As discussed in the panel, SBL regulations have existed in Saudi Arabia since 2017. However, enablement from an operational and business perspective is relatively new, according to one panellist, only becoming feasible after the Post Trade Technology Program was implemented in April 2022. The panel said that Saudi Arabia is considered to be one of the high-potential growth areas in the market supporting other new products and activities, including market making, short selling, and derivatives. According to the Saudi Exchange “Tadawul” rules, entering into an SBL transaction is available for ‘qualified investors’, such as local custodians and brokers which can act as a lending agent for an SBL transaction. There are three types of SBL models currently active in the Saudi Arabia market, which are pooled principal, bilateral trades, and agency lending. Speakers on the breakout session indicated that there have been a lot of practical challenges facing the Saudi Arabia market over the past 12 months, in terms of growing both the borrowing and lending sides. On the borrowing side, from an international investor perspective, one panellist pinpointed market charges as a barrier — especially one that applies to market makers who are frequently borrowing, or high frequency funds that are frequently borrowing. There is a ticket charge that can be prohibitive, the panellist indicated, on these kinds of investors. In addition, the number of counterparties that are enabled under the Global Master Securities Lending Agreement (GMSLA) is still very limited, participants noted. In regards to lending activity, there are a number of global custodians offering the ability to lend assets to other foreign investors, and so lending to local Saudis is not something market participants have seen. The reason for this is twofold: because there is no documentation, and it is not a natural source of demand right now, the panel heard. As players in this space continue to watch this emerging market, ISLA members can expect to discover SBL guides on Abu Dhabi, Dubai, Qatar and Kuwait in the near future.
