Change attracts more foreign investors to Gulf securities markets

Securities Services

Change attracts more foreign investors to Gulf securities markets

November 2019

The two-day Network Forum Middle East in Oman attracted global custodians, brokers, asset managers and regulators. flow reports on the talking points arising at the event on 21-22 October, concentrating on their reaction to local securities markets changes

Harmonising capital markets in the Gulf Cooperation Council

Local market requirements and account opening processes for institutional investors across the Middle East are not standardised.  Speaking at the Network Forum in Muscat, Manoj Aidasani, Head of Securities Services for the GCC at Deutsche Bank acknowledged that the adoption of common post-trade principles and the rationalisation of account opening processes by GCC countries should attract more institutional capital, leading to improved market liquidity in the region.

Aidasani said GCC countries should focus on meeting short-term goals such as standardising know-your customer (KYC) checks, anti-money laundering (AML) practices and the creation of national investor numbers (NIN). “If GCC markets can harmonise the basics, then there would be nothing to stop these countries from establishing regional market infrastructures such as central counterparties or central securities depositories,” he added.

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Saudi Arabia: Turning a corner

The transformations in Saudi Arabia highlight wider changes right across the Council states. Saudi reforms flow from the country’s Vision 2030 initiative that intensified from early 2016 and eased foreign institutions’ ability to access the market and trade local securities by direct investment rather than through swap deals. Market access has expanded for qualified foreign investors and is now open to institutions with at least US$500 million in assets compared to an original US$1 billion threshold, prompting more foreign investors to participate, including asset managers, banks, brokers and insurers.

Also, the Saudi Capital Market Authority regulator has instigated post-trade reforms, highlighted Charles Cohen, Head of Securities Services for Saudi Arabia at Deutsche Bank. Important changes included shifting to the T+2 settlement cycle norm from a T+0, along with the introduction of the Independent Custody Model and a trade rejection facility that allows custodians deny unconfirmed trades. Amendments to the qualified foreign investor rules and the introduction of the AML laws in late 2018 helped to streamline market access, said Cohen; the new rules now mean the assessing authorised person - usually a local market custodian - can vet applications in lieu of the Capital Market Authority regulator. “This eased the burden for qualified foreign investors coming to market in Saudi Arabia,” said Cohen.

 

Investors deepen exposure to Saudi Arabia

The Saudi changes have prompted international index providers including MSCI, FTSE Russell and S&P Dow Jones, to add it to their emerging market benchmarks, stimulating investment from passive and active fund managers. Cohen has noticed rapid inflow growth this year, with qualified foreign investor ownership rising 7.5-fold to 5.60% today from just 0.74% the start of 2019. “That’s an impressive increase,” he said.

And the IPO of state-owned oil company Saudi Aramco is tipped to entice more foreign institutional investment. The offering will begin on 17 November and close on December 4 with trading on the Saudi stock exchange, the Tadawul, expected to start in mid-December, according to its prospectus.

 

Saudi market embraces more best practice

Saudi Arabia is also poised to introduce a number of structural enhancements to its capital markets, including the launch of a CCP and a new depository system and interface. Elsewhere, Cohen said the country was also expected to roll-out exchange-traded derivatives as well as single stock derivatives; further strengthening the depth of product tools available to investors. “There are still other areas to improve upon in the local market,” he noted. “There is scope to provide proxy voting access at a portfolio account level as opposed to a NIN (National Investor Number) level, a recurrent theme over the course of the conference. Experts have also said they would like to see quasi-commingled account structures for ICSDs as this would provide a massive stimulus to the fixed income market. And finally, it would be a positive development if issuers launched formalised investor relations programmes.”

For more information on investing in the Saudi Arabian market, please download the Marhaba 2019 booklet, the third edition of Deutsche Bank’s popular market guide for Saudi Arabia

 

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Manoj Aidasani and Charles Cohen unveil the Marhaba guide to investing in Saudi Arabia at the Network Forum Middle East

New technology drives adaptation

Technological innovation is reshaping Gulf Co-operation Council securities markets, driving   Stock exchanges, counterparty clearing houses, central security depositaries and sub-custodian providers away from manual operations towards automatic. The way retail markets have adopted the new technologies to support customers has inspired Deutsche Bank to replicate some of the software and technologies they have used in business-to business securities processes, Aidasani said.

For example, Deutsche Bank’s sub-custody arm is integrating open-banking technologies to retail market systems because clients want more connections between their systems and those of their custodians, providing live updates and trades notifications. Application programming interfaces, known as APIs, offer such data-sharing and Aidasani said they were now building institutional client routes to the bank’s extensive database to offer more real-time information. “What was once a very manual, resource intensive process has now been dramatically streamlined,” he said. 

 

Artificial intelligence and robotics enhance information flows

Sub-custodians are also turning to artificial intelligence, machine learning and robotic process automation to interrogate client data stored in data lakes. Deutsche Bank itself uses these technologies to analyse post-trade processes and understand problems clients face during corporate actions and trade settlements. This helps fix operational problems – especially why particular transactions fail. The bank is also exploring whether robotics could help automate Saudi Arabia authorisation for potential qualified foreign investor clients, Aidasani added.

 

Distributed ledger technology injects transparency

“We believe DLT will help inject transparency into complex processes linking numerous touch and reconciliation points”
Manoj Aidasani

Also, service providers are testing ways to apply distributed ledger technology, or DLT, across securities markets. It provides users with a golden record of the truth that cannot be changed, so could dramatically impact intermediaries. Activities that might experience changes could be proxy voting that involves registrars, custodians, issuers, sub-custodians and central security depositaries.

Deutsche Bank Securities Services has successfully piloted a distributed ledger technology –based system to help automate custodial services. Its first application helped custodians and sub-custodians manage disclosure requirements required by the EU’s Shareholder Rights Directive II. The system will next assist the automation of tax processing, and more uses will then emerge. And, once implemented in Europe, the system will function in other regions where Deutsche Bank Securities Services operates, including the Middle East.

 

Can tokens boost liquidity in the Gulf?

Tokenisation is a way to express asset ownership in a digital - or token - form, transacted through smart contracts on distributed ledger technology. Over-the-counter illiquid assets such as real estate and Islamic bonds can transact more easily in this tokenised form, potentially boosting liquidity in their thin markets – although tokens can also help more-liquid assets such as equities and government bonds. Another advantage is that digital assets can split into smaller units – fractionalised - minimum investments can be much lower; this means financial products once denied to small ticket investors now become more accessible. “Tokenisation is a massive opportunity, said Aidasani, adding, “We expect more providers to start building custody and settlement solutions to cater for this growing demand.”

Dramatic change in the Gulf region means large markets like Saudi Arabia are opening to foreign institutional investment. And this is happening as the region bursts with enthusiasm the many opportunities on offer from disruptive technologies.

 

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