The Middle East Securities Finance panel
12 November 2024
In the first of a three part series, industry experts discuss the high potential growth of the Middle East, with Saudi Arabia leading the charge for change
Image: stock.adobe.com/boule1301
The high potential growth of the Middle East is key to this discussion. Dimitri, how do you see the market in this respect?
Dimitri Arlando: The exciting thing for me in any new market, is when I see data flowing through the pipes and into our ecosystem. If you look back to a year ago, although there was securities lending activity happening in the regional markets, there wasn’t much data flowing through. But if you look at the dataset today, we actually see quite a lot.
There are still some trades that are happening that aren't flowing through the standard pipes however, this is as expected for a new market. What we are seeing right now, is about US$2.6 billion of lendable assets in Saudi Arabian equities, and US$370 million of assets out on loan (across 103 securities). Of those 103 securities, 101 of those are trading at more than 100 basis points, and half of them are trading over 500bps. So there's quite significant value in lending those securities.
In some of those other markets, although there is securities lending activity, we are not seeing any of that data flow through into our dataset. As a comparison, the lending market globally is about US$37 trillion of lendable assets, and about US$2.6-2.7 trillion out on loan on any given day. Focusing on some of the fixed income markets, regionally, we're also seeing about US$20 billion of lendable corporate bonds, and US$1.6 billion of those out on loan, and US$21 billion of lendable sovereign debt, and US$2 billion of that out on loan. This is across all of the Gulf Cooperation Council (GCC) countries, not just Saudi Arabia.
Jalal Faruki: When we look at the local market data, which comes from the depository, if you go back to the beginning of 2023, that data balance was basically zero. There was very little, or maybe one or two positions out on loan. If we look at September 2023, there were around 30 to 40 different securities on loan for a total value of about US$180 million. Looking at this year, the market has grown significantly. There are approximately 166 positions on loan out of around 280 total listed companies, so more than half of the market has some kind of position on loan. And there is about US$550-600 million outstanding on loan as of the end of August 2024.
Elie Geagea: In terms of growth, we can describe it as exponential. HSBC has identified and believed in this growth since the beginning. From day one, we have been working and collaborating with the regulator to refine the rules.
HSBC closed the first SBL transaction in Saudi Arabia in early 2020. HSBC executed the first international SBL transaction on the Dubai Financial Market (DFM) in July 2023. In the same time, we are trying to implement this growth in a very careful and smooth way, in order not to squeeze the liquidity in the market and to bring comfort to all market participants.
Is this a trend that is being seen across different firms? Are you experiencing this from a London perspective, Andrew?
Andrew Stephen: Definitely. Saudi Arabia has long been a key market for J.P. Morgan, and we went live with securities lending in the region late last year, and since then, we have started to see clients show significant interest.
The Middle East is interesting because it is home to international investors that have been active in securities lending for many years with their international portfolios, but who are now looking to understand how they can enter the domestic markets as they open, and how they can capture the significant revenue potential on offer. Further, clients are grappling with the understanding of how entering the local market could differ from the international models that they have today.
We are also seeing an increasing number of ‘single country’ portfolios, consisting entirely of Saudi assets, and they are coming to market – particularly from clients that we never would have spoken to previously, because lending wasn’t available in Saudi Arabia. Now, a whole new segment of the market is opening, which are typically Saudi-domestic firms with domestic investors, which we are only now able to target.
This dimension of domestic and crossborder is arguably recent and visible. Is this something that you are seeing? What other trends have you noticed?
Sarah Alothman: Edaa, the Saudi Arabian central securities depository (CSD), launched the securities lending and borrowing regulation that was approved by the Capital Market Authority (CMA) back in 2017. The market infrastructure, Edaa, and the exchange, along with the market participants, the brokers, and the custodians, along with the investors, have collaborated for the sake of enhancing SBL in the Kingdom of Saudi Arabia. As a result, updates have been made to allow the expansion of agent services with a third party, so this has added efficiency within the securities lending and borrowing programme in Saudi Arabia.
Andrew Geggus: The trends that we are seeing from our client base in the region and elsewhere, is interest in the markets. What's going on? Is there a potential for securities lending? Can they access it? What does it mean for their local securities? But also, where is the future direction of travel heading? We have seen trends from international investors more broadly, beyond securities lending, of investment into the Middle East. And with that, we are beginning to see dual listings.
Darren Crowther: We have seen an interest in the last two or three years around technology solutions from the market. The onboarding process has gone positively well, because — and using Saudi as an example — they've used an international standard framework for the way they approach things. So when companies are trying to educate their clients on how the market works, and who the participants are, the systems behind that already meet those standards — there’s always some customisation or specifics per client but we found quite a lot of interest, due to the out of the box support for many aspects.
Jalal’s prior comments on market numbers are quite interesting. The Saudi Market went from zero to 30 or 40 names, to now 160 names. You can no longer really run things manually on this side, you need technology underpinning the operational risk. So that's where the demand is coming from. The number of trades that are out there is now making it operationally challenging for firms to do a manual method. This aligns to the demand for technology.
We have spoken about Saudi Arabia. How is the rest of the region benefiting?
Arlando: There's definitely an opportunity, I think that's why we're all here. And it's not just a Saudi story — Saudi is just the front runner, the early adopter. To Darren's point, Saudi Arabia has embraced the technology solutions that are available in order to help that growth happen. If you speak to the various different regulators in each of the GCC countries, they're all trying to observe how Saudi Arabia is evolving, and also then looking at how their own markets can follow suit.
The opportunity in Saudi Arabia is larger because of the number of securities that are listed on the exchange, which is greater than any of the other markets in the region. The other markets definitely have potential, but in terms of the scale of the Saudi market, it perhaps offers greater potential from a revenue perspective. And we're all here because we're trying to generate revenue in some way, shape or form. Saudi definitely offers the biggest potential for that revenue.
Geagea: Saudi is leading the growth in the market, it is not a surprise, Saudi is the biggest economy in the GCC market. Having said so, Saudi will not be an isolated case. DFM and Qatar have implemented a similar SBL model. We believe and we expect that DFM and Qatar will witness the same successful story in the future. On the Abu Dhabi Securities Exchange (ADX) and Kuwait side, they will be encouraged to implement the same framework as well. As for Oman and Bahrain, we believe they will follow the same route and try to develop their SBL market as well.
The beauty of this region is that each country has its own growth agenda and vision plan, the momentum is done on an individual and collective basis — whatever is a successful story in one market is replicated into another market. Whatever is a failure in one market is avoided in the other markets. All of the GCC countries have promising projects, and they are on the good track. We highly believe that GCC countries, individually and collectively, will take part of the securities lending growth.
Alothman: I couldn't agree more with Dimitri. It's a mutual benefit across the region. For example, if we have a local lender and a qualified foreign investor based in Dubai or in any other area in the region, each jurisdiction within the GCC are enhancing and developing their SBL framework, and eventually growing the economy across the GCC. And I couldn't agree more with Elie mentioning that the Saudi exchange is the largest in the region. In fact, it became the 10th largest exchange globally in market capitalisation. This is a milestone for the Saudi exchange.
Geggus: If you look at Asia as an example, the size of the markets doesn't take away from the opportunity for some of the smaller markets as well. They're all growing at their own speed. There's a bit of fragmentation around rules and implementation, but that's fine. The opportunity in APAC demonstrates what we've done in the world. So some of the markets are very large and liquid, others are a bit smaller and have different rules, but the opportunity for those markets has been excellent, and now we're seeing this mirrored within the Middle East region as well.
Faruki: One key thing from all of these markets in the region is that they all have the infrastructure, they all have the regulations, and they have people willing to lend inventory. The driver in Saudi, for it to really pick up — and it was years after the regulation was there — was people willing to pay. We have to make an investment in technology and capability, the same for any international custodian. They have to invest in building the legal opinions and building the documentation and all of the infrastructure for that market to work. Until you have borrowers willing to pay to borrow those shares, it's not going to get going.
And we have something in common in a lot of the regional markets that's helping with that. There are market making frameworks in the UAE, there are also exchange listed derivatives in the UAE, Saudi, and other markets also. These are all also drivers of demand for stock loans, and they're part of making it an economically viable product. Otherwise, no one is going to really invest in the capability to deliver.
Stephen: A lot of these countries in the GCC are on a journey, evolving from a frontier market to an emerging market. One of the prerequisites under MSCI is to have an established SBL framework. But it’s not just the framework, they also need to be able to demonstrate that it’s a functioning framework, and that you can trade with it. One of the interesting things that we’ve seen is that there’s always this halo effect — when you see something happening in one market, immediately the countries across the GCC will say: okay, we see what’s happening over there, how can we implement it? How can we benefit from it?
One of the benefits of the Saudi story is that there’s lessons to be learned. Saudi went in first, they worked with market participants, international banks came and worked with the regulators. To implement, jurisdictions need to get buy-in from the international community. Other regions can learn from the wrong terms that were taken in Saudi, and they can now implement with less friction.
Dimitri Arlando: The exciting thing for me in any new market, is when I see data flowing through the pipes and into our ecosystem. If you look back to a year ago, although there was securities lending activity happening in the regional markets, there wasn’t much data flowing through. But if you look at the dataset today, we actually see quite a lot.
There are still some trades that are happening that aren't flowing through the standard pipes however, this is as expected for a new market. What we are seeing right now, is about US$2.6 billion of lendable assets in Saudi Arabian equities, and US$370 million of assets out on loan (across 103 securities). Of those 103 securities, 101 of those are trading at more than 100 basis points, and half of them are trading over 500bps. So there's quite significant value in lending those securities.
In some of those other markets, although there is securities lending activity, we are not seeing any of that data flow through into our dataset. As a comparison, the lending market globally is about US$37 trillion of lendable assets, and about US$2.6-2.7 trillion out on loan on any given day. Focusing on some of the fixed income markets, regionally, we're also seeing about US$20 billion of lendable corporate bonds, and US$1.6 billion of those out on loan, and US$21 billion of lendable sovereign debt, and US$2 billion of that out on loan. This is across all of the Gulf Cooperation Council (GCC) countries, not just Saudi Arabia.
Jalal Faruki: When we look at the local market data, which comes from the depository, if you go back to the beginning of 2023, that data balance was basically zero. There was very little, or maybe one or two positions out on loan. If we look at September 2023, there were around 30 to 40 different securities on loan for a total value of about US$180 million. Looking at this year, the market has grown significantly. There are approximately 166 positions on loan out of around 280 total listed companies, so more than half of the market has some kind of position on loan. And there is about US$550-600 million outstanding on loan as of the end of August 2024.
Elie Geagea: In terms of growth, we can describe it as exponential. HSBC has identified and believed in this growth since the beginning. From day one, we have been working and collaborating with the regulator to refine the rules.
HSBC closed the first SBL transaction in Saudi Arabia in early 2020. HSBC executed the first international SBL transaction on the Dubai Financial Market (DFM) in July 2023. In the same time, we are trying to implement this growth in a very careful and smooth way, in order not to squeeze the liquidity in the market and to bring comfort to all market participants.
Is this a trend that is being seen across different firms? Are you experiencing this from a London perspective, Andrew?
Andrew Stephen: Definitely. Saudi Arabia has long been a key market for J.P. Morgan, and we went live with securities lending in the region late last year, and since then, we have started to see clients show significant interest.
The Middle East is interesting because it is home to international investors that have been active in securities lending for many years with their international portfolios, but who are now looking to understand how they can enter the domestic markets as they open, and how they can capture the significant revenue potential on offer. Further, clients are grappling with the understanding of how entering the local market could differ from the international models that they have today.
We are also seeing an increasing number of ‘single country’ portfolios, consisting entirely of Saudi assets, and they are coming to market – particularly from clients that we never would have spoken to previously, because lending wasn’t available in Saudi Arabia. Now, a whole new segment of the market is opening, which are typically Saudi-domestic firms with domestic investors, which we are only now able to target.
This dimension of domestic and crossborder is arguably recent and visible. Is this something that you are seeing? What other trends have you noticed?
Sarah Alothman: Edaa, the Saudi Arabian central securities depository (CSD), launched the securities lending and borrowing regulation that was approved by the Capital Market Authority (CMA) back in 2017. The market infrastructure, Edaa, and the exchange, along with the market participants, the brokers, and the custodians, along with the investors, have collaborated for the sake of enhancing SBL in the Kingdom of Saudi Arabia. As a result, updates have been made to allow the expansion of agent services with a third party, so this has added efficiency within the securities lending and borrowing programme in Saudi Arabia.
Andrew Geggus: The trends that we are seeing from our client base in the region and elsewhere, is interest in the markets. What's going on? Is there a potential for securities lending? Can they access it? What does it mean for their local securities? But also, where is the future direction of travel heading? We have seen trends from international investors more broadly, beyond securities lending, of investment into the Middle East. And with that, we are beginning to see dual listings.
Darren Crowther: We have seen an interest in the last two or three years around technology solutions from the market. The onboarding process has gone positively well, because — and using Saudi as an example — they've used an international standard framework for the way they approach things. So when companies are trying to educate their clients on how the market works, and who the participants are, the systems behind that already meet those standards — there’s always some customisation or specifics per client but we found quite a lot of interest, due to the out of the box support for many aspects.
Jalal’s prior comments on market numbers are quite interesting. The Saudi Market went from zero to 30 or 40 names, to now 160 names. You can no longer really run things manually on this side, you need technology underpinning the operational risk. So that's where the demand is coming from. The number of trades that are out there is now making it operationally challenging for firms to do a manual method. This aligns to the demand for technology.
We have spoken about Saudi Arabia. How is the rest of the region benefiting?
Arlando: There's definitely an opportunity, I think that's why we're all here. And it's not just a Saudi story — Saudi is just the front runner, the early adopter. To Darren's point, Saudi Arabia has embraced the technology solutions that are available in order to help that growth happen. If you speak to the various different regulators in each of the GCC countries, they're all trying to observe how Saudi Arabia is evolving, and also then looking at how their own markets can follow suit.
The opportunity in Saudi Arabia is larger because of the number of securities that are listed on the exchange, which is greater than any of the other markets in the region. The other markets definitely have potential, but in terms of the scale of the Saudi market, it perhaps offers greater potential from a revenue perspective. And we're all here because we're trying to generate revenue in some way, shape or form. Saudi definitely offers the biggest potential for that revenue.
Geagea: Saudi is leading the growth in the market, it is not a surprise, Saudi is the biggest economy in the GCC market. Having said so, Saudi will not be an isolated case. DFM and Qatar have implemented a similar SBL model. We believe and we expect that DFM and Qatar will witness the same successful story in the future. On the Abu Dhabi Securities Exchange (ADX) and Kuwait side, they will be encouraged to implement the same framework as well. As for Oman and Bahrain, we believe they will follow the same route and try to develop their SBL market as well.
The beauty of this region is that each country has its own growth agenda and vision plan, the momentum is done on an individual and collective basis — whatever is a successful story in one market is replicated into another market. Whatever is a failure in one market is avoided in the other markets. All of the GCC countries have promising projects, and they are on the good track. We highly believe that GCC countries, individually and collectively, will take part of the securities lending growth.
Alothman: I couldn't agree more with Dimitri. It's a mutual benefit across the region. For example, if we have a local lender and a qualified foreign investor based in Dubai or in any other area in the region, each jurisdiction within the GCC are enhancing and developing their SBL framework, and eventually growing the economy across the GCC. And I couldn't agree more with Elie mentioning that the Saudi exchange is the largest in the region. In fact, it became the 10th largest exchange globally in market capitalisation. This is a milestone for the Saudi exchange.
Geggus: If you look at Asia as an example, the size of the markets doesn't take away from the opportunity for some of the smaller markets as well. They're all growing at their own speed. There's a bit of fragmentation around rules and implementation, but that's fine. The opportunity in APAC demonstrates what we've done in the world. So some of the markets are very large and liquid, others are a bit smaller and have different rules, but the opportunity for those markets has been excellent, and now we're seeing this mirrored within the Middle East region as well.
Faruki: One key thing from all of these markets in the region is that they all have the infrastructure, they all have the regulations, and they have people willing to lend inventory. The driver in Saudi, for it to really pick up — and it was years after the regulation was there — was people willing to pay. We have to make an investment in technology and capability, the same for any international custodian. They have to invest in building the legal opinions and building the documentation and all of the infrastructure for that market to work. Until you have borrowers willing to pay to borrow those shares, it's not going to get going.
And we have something in common in a lot of the regional markets that's helping with that. There are market making frameworks in the UAE, there are also exchange listed derivatives in the UAE, Saudi, and other markets also. These are all also drivers of demand for stock loans, and they're part of making it an economically viable product. Otherwise, no one is going to really invest in the capability to deliver.
Stephen: A lot of these countries in the GCC are on a journey, evolving from a frontier market to an emerging market. One of the prerequisites under MSCI is to have an established SBL framework. But it’s not just the framework, they also need to be able to demonstrate that it’s a functioning framework, and that you can trade with it. One of the interesting things that we’ve seen is that there’s always this halo effect — when you see something happening in one market, immediately the countries across the GCC will say: okay, we see what’s happening over there, how can we implement it? How can we benefit from it?
One of the benefits of the Saudi story is that there’s lessons to be learned. Saudi went in first, they worked with market participants, international banks came and worked with the regulators. To implement, jurisdictions need to get buy-in from the international community. Other regions can learn from the wrong terms that were taken in Saudi, and they can now implement with less friction.
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