Index inclusion affirms positive impact of market reforms Tadawul and Saudi government have introduced as part of Vision 2030
The Saudi Stock Exchange (Tadawul) is pleased that FTSE Russell announced today that Tadawul will be classified as a “Secondary Emerging” market in the FTSE Global Equity Index Series from its previous status as “Unclassified”.
This decision was issued following a series of market enhancements introduced by Tadawul and the Capital Market Authority (CMA) over the past two years. Many of those developments have fulfilled market quality criteria set by FTSE Russell that must be met in order for a market to be classified as Emerging in its indices.
His Excellency Mohammed El-Kuwaiz, Chairman of the Capital Market Authority (CMA) commented: “The CMA continues to develop the Saudi capital market and to facilitate investments in order to enhance the Capital Market’s efficiency, as well as promote its regional and international competitiveness." Mr. El-Kuwaiz added: “This achievement is in line with the Financial Sector Development Program which is part of the Saudi Vision 2030 and reflects the efforts of both the CMA and Tadawul.”
“Over the past year, Tadawul has continued to work closely with Saudi government bodies and leading emerging market investors to introduce capital market reforms to bolster the effectiveness of the market and foster an attractive investment climate for local and international investors,” said Sarah Al Suhaimi, Chairperson of Tadawul. “We are proud that all these efforts have gained Tadawul inclusion in one of the most preeminent global indices to be benchmarked.”
“FTSE’s announcement today is significant for Tadawul in that it indicates growing investor confidence in the Saudi capital market and recognition that we are among the largest and most liquid emerging markets in the world,” said Khalid Al Hussan, Chief Executive Officer of Tadawul. “Guided by Vision 2030, we remain steadfast in our commitment to the reforms already introduced and in the pipeline so that we may continue to grow investor confidence worldwide and further strengthen the Saudi market.”
The Road to FTSE Russell Index Inclusion
Saudi Arabia was added to the FTSE Russell Watch List in September 2015 following the introduction of the Kingdom’s Qualified Foreign Investor (QFI) program, and was maintained at Watch List status in the organization’s 2016 country classification.
In October 2017, FTSE Russell launched the FTSE Saudi Arabia Inclusion Index Series, a comprehensive series of global, regional and country-level indexes which can be used as a transitional tool to assist domestic and international investors who wish to seek early index-based exposure to the market.
Key reforms undertaken that had an impact on the Kingdom’s FTSE inclusion include:
Amending the settlement cycle to T+2 for all listed securities to increase the level of asset safety for investors and to unify the settlement duration for all types of listed securities. The amendment of the settlement cycle brings the Saudi Market in alignment with the standards set by other international exchanges. In addition, securities borrowing and lending and short selling were introduced for all listed stocks. These changes went live in April 2017.
Dropping the cash prefunding requirement for specific investors, leaving the timing of cash availability to the contractual terms between the Authorized Person and the investor. This will align trading practice with good international standards, and standardize institutional investors’ trading processes especially investment funds.
Introduction of Fails Management Controls that is offered by SDC for executing brokers to cover securities shortage by transferring securities from the principle account, borrowing securities via SBL function, buying securities on open market, or preforming optional Buy-in. Also, mandatory Buy-in can be conducted by SDC.
Introduction of a Delivery versus Payment Model (DvP) to comply with the principle of DvP, wherein the delivery of securities occurs only if the corresponding payment occurs.
Enhancements to the Independent Custody Model which enable custodians to reject the settlement of unconfirmed trades executed by the executing brokers in April 2017.
Introduction of Securities Borrowing & Lending and short selling: Tadawul is the first market in the region to offer Securities Borrowing and Lending and covered short selling for all listed stocks.
Adoption of new corporate governance rules issued by the Saudi Capital Market Authority (CMA) in February 2017. The rules enhance the rights of shareholders and board members and provide greater clarity and more transparency around determining commercial strategic planning, roles, responsibilities and oversight of corporate entities and third parties.
Permitting QFIs to participate in IPOs, a change that was instituted in January 2017.
Introduction of Nomu, a parallel equity market for Qualified Investors that offers lighter listing requirements and serves as an alternative platform for companies to go public. The Nomu-parallel market was launched in February 2017.
The introduction of Real Estate Investment Traded Funds (REITs) to further diversify the availability of investment opportunities and promote investment in real estate for all market participants.
Recent Market Developments
Within the country’s ambitious 2030 Vision, Tadawul continues to work with the CMA to implement a set of extensive capital market reforms not only to enhance access, efficiency, corporate governance, and transparency, but also to position the Exchange as a regional leader in size, liquidity, and presence. Within this context, significant recent market enhancements include:
Updating the Independent Custody Model (ICM) as of January 2018, to enhance Qualified Foreign Investor access to the market by providing more flexibility in trading limits for ICM clients. Along with this change, new procedures were introduced to mitigate credit risk associated with the settlement process for all participants
Introducing a new optional model for structure of accounts (segregated accounts) to allow asset managers to aggregate the orders of managed assets (discretionary portfolios - “DPs” - and investment funds) in January 2018. This development assures best execution and fair allocation for asset managers and their clients.
Moving from a Volume Weighted Average Price (VWAP) to an auction method for determining closing prices for both the Main Market and Nomu parallel market, and enhancing the opening price auction in line with practices adopted by most other major markets; expected to take place in the second quarter of 2018.
Implementing a Market Making (MM) Program based on global best practices to enhance liquidity, facilitate orderly price formation, reduce price volatility, fortify the sukuk, bond and ETF markets and pave the way for Exchange Traded Products (ETP) and derivatives. MM program is also expected to be implemented during the second quarter of 2018.
Conducting Investor relations workshops and partnerships to develop and facilitate communication between listed companies, financial market stakeholders, financial analysts and legislative and regulatory bodies in the Kingdom. Tadawul also is keen on implementing investor relations global best practices and enhancing transparency across all listed companies.
The cumulative impact of these measures will be a more efficient, liquid and secure market for investors and intermediaries that is further aligned to international best practices.
QFI Program
Saudi Arabia’s Qualified Foreign Investor (QFI) Program was introduced in June 2015 to facilitate participation by international investor in the Saudi capital market. The QFI Program was enhanced in 2016 and again in January 2018 to further ease the qualification requirements for qualified foreign investors and expand the range of institutional investors eligible for the program. Through the QFI program, international investors now have direct and full access to Tadawul, the largest equity market in the GCC and MENA regions with a market capitalization of $466 billion , and average daily trading value of nearly $1 billion as of February 2018 . QFI qualifying criteria and foreign ownership limits were recently eased and the Saudi IPO market is now open to QFIs.
Since inception of the QFI program, over 120 international financial institutions have joined with more than 180 others at various stages in the qualifying process. As of January 2017, QFIs can participate in all Saudi domestic IPO offerings. This accelerated growth in the QFI program reflects the progress that Tadawul has made this year in aggressively moving forward with several initiatives to reform the exchange and attract foreign capital.
For more information on today's announcement from FTSE, [click here].
