Spotlight on Saudi Arabia
13 September 2016
Sunil Daswani speaks to members of Northern Trust’s global securities lending team to discuss the emerging Saudi Arabian market and
the opportunities, and uncertainties, it could bring
Image: Shutterstock
Saudi Arabia’s Capital Market Authority (CMA) approved the introduction of securities lending and covered short selling in May and has also amended the settlement cycle of listed shares from T+0 to T+2, bringing the Saudi Arabian settlement system in line with those of international markets. Both are significant developments for the region’s securities marketplace, according to Northern Trust.
“These enhancements are key milestones by the Saudi Arabian stock market in further developing the largest and most established regional financial market in the Middle East,” explains Michael Slater, CEO of Northern Trust Saudi Arabia.
Long-term ambitions
Slater describes these moves by the Saudi stock market, known as the Tadawul, as part of a broader push by the government as it seeks to encourage greater foreign investment into the country.
“These reforms form part of the government’s wider ambitions to help diversify the economy away from hydrocarbons,” he adds. “The implementation of securities lending and covered short-selling programmes are expected to be important steps in attracting inward investment to Saudi Arabia.”
Northern Trust has served clients across the Middle East since 1987. In 2013, it took the step of expanding its global footprint by opening an office in Riyadh, Saudi Arabia’s capital city, to service an expanding client base.
Since then, the global custodian and asset servicer has since doubled its number of staff there to support Saudi clients, for whom it provides a mixture of custodial and other services, including the delivery of investment accounting and performance from Sunday to Friday for both domestic and global assets.
“The measures announced will allow us to expand our support for our clients on opportunities in the region,” according to Justin Miller, head of Middle East relationship management and capital markets. “We are looking forward with interest to the Tadawul’s introduction of these programmes from the first half of 2017.”
Expectations and timelines
While specific details of the securities lending and covered short selling programmes are yet to be disclosed, initial indications suggest there is reason to be optimistic. According to Northern Trust’s head of equity lending trading for Europe, the Middle East and Africa, Jon Lacey, these are encouraging announcements for the industry.
“Feedback from both the prime brokerage community following the CMA’s announcement has been positive. Prime brokers have reported significant client interest in the Saudi market, and are very encouraged by the regulator’s action,” he says.
“Short selling plays an important role in capital markets by helping provide more efficient price discovery and increasing market liquidity. It also facilitates hedging and other risk management activities – all are important considerations commonly assessed by asset owners, hedge funds and asset managers before deploying capital.”
Despite the optimism the news has created, some reservations exist around the cited timeline. The Northern Trust team is also monitoring this with interest.
“General consensus is that the first half of 2017 is quite an aggressive timeline to pursue, given that there are a number of uncertainties around exactly how the market will introduce securities lending and how it will function on a day-to-day basis,” says Lacey. “We feel that the market will remain in a ‘discovery phase’ well into next year as the uncertainties are resolved.”
Discovering opportunities
According to Northern Trust, the Saudi Arabian market potentially represents an exciting opportunity for beneficial owners active in securities lending, including sovereign wealth funds, central banks, asset management companies and corporate clients with long-
term holdings.
“Beneficial owners have often enjoyed strong earnings when entering new lending markets at an early stage,” says Miller. “As ever, we will be closely following the introduction of these programmes over forthcoming months to ascertain where the best opportunities exist for our clients and borrowers.”
“These enhancements are key milestones by the Saudi Arabian stock market in further developing the largest and most established regional financial market in the Middle East,” explains Michael Slater, CEO of Northern Trust Saudi Arabia.
Long-term ambitions
Slater describes these moves by the Saudi stock market, known as the Tadawul, as part of a broader push by the government as it seeks to encourage greater foreign investment into the country.
“These reforms form part of the government’s wider ambitions to help diversify the economy away from hydrocarbons,” he adds. “The implementation of securities lending and covered short-selling programmes are expected to be important steps in attracting inward investment to Saudi Arabia.”
Northern Trust has served clients across the Middle East since 1987. In 2013, it took the step of expanding its global footprint by opening an office in Riyadh, Saudi Arabia’s capital city, to service an expanding client base.
Since then, the global custodian and asset servicer has since doubled its number of staff there to support Saudi clients, for whom it provides a mixture of custodial and other services, including the delivery of investment accounting and performance from Sunday to Friday for both domestic and global assets.
“The measures announced will allow us to expand our support for our clients on opportunities in the region,” according to Justin Miller, head of Middle East relationship management and capital markets. “We are looking forward with interest to the Tadawul’s introduction of these programmes from the first half of 2017.”
Expectations and timelines
While specific details of the securities lending and covered short selling programmes are yet to be disclosed, initial indications suggest there is reason to be optimistic. According to Northern Trust’s head of equity lending trading for Europe, the Middle East and Africa, Jon Lacey, these are encouraging announcements for the industry.
“Feedback from both the prime brokerage community following the CMA’s announcement has been positive. Prime brokers have reported significant client interest in the Saudi market, and are very encouraged by the regulator’s action,” he says.
“Short selling plays an important role in capital markets by helping provide more efficient price discovery and increasing market liquidity. It also facilitates hedging and other risk management activities – all are important considerations commonly assessed by asset owners, hedge funds and asset managers before deploying capital.”
Despite the optimism the news has created, some reservations exist around the cited timeline. The Northern Trust team is also monitoring this with interest.
“General consensus is that the first half of 2017 is quite an aggressive timeline to pursue, given that there are a number of uncertainties around exactly how the market will introduce securities lending and how it will function on a day-to-day basis,” says Lacey. “We feel that the market will remain in a ‘discovery phase’ well into next year as the uncertainties are resolved.”
Discovering opportunities
According to Northern Trust, the Saudi Arabian market potentially represents an exciting opportunity for beneficial owners active in securities lending, including sovereign wealth funds, central banks, asset management companies and corporate clients with long-
term holdings.
“Beneficial owners have often enjoyed strong earnings when entering new lending markets at an early stage,” says Miller. “As ever, we will be closely following the introduction of these programmes over forthcoming months to ascertain where the best opportunities exist for our clients and borrowers.”
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