International Finance

Saudi Stock Exchange updates on major capital market reforms

Saudi Stock Exchange (Tadawul) provided an update of its progress across a range of far-reaching capital market reforms to enhance efficiency, corporate governance, and transparency. The reforms are part of the Exchange’s efforts to further align Saudi capital market with international standards and make it more attractive to both domestic and foreign investors.

“It is vitally important that Tadawul’s market participants, both domestic and foreign, have access to a transparent and exceptional trade environment that conforms to the highest international standards,” said Khalid Abdullah Al Hussan, Chief Executive Officer of Tadawul. “We have aggressively moved forward with a number of initiatives to strengthen corporate governance, improve investor relations capabilities of Saudi corporates, and bring Saudi Arabia’s trade settlement cycle into line with standard practice in a number of developed markets.”

Tadawul has implemented a number of significant changes, many of which are set to go into effect by the close of Q2 2017. Recent changes include:

  • Adoption of new corporate governance rules issued by the Saudi Capital Markets Authority (CMA) in February. The rules enhance the rights of shareholders and board members and provide greater clarity and more transparency around determining commercial strategic planning, and roles, responsibilities and oversight of corporate entities and third parties.
  • Adoption of the Global Industry Classification Standard (GICS) which enhances comparability of corporates across markets and enables easier analysis of sector performance. The standard was formally adopted in January.
  • Investor relations training for Tadawul’s 24 corporates with the most international exposure and liquidity, to be conducted from mid-April through mid-May. The program will enhance transparency and disclosure and enhance investor relations capabilities within Saudi listed companies.
  • 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 across most international markets. The changes will go into effect on Sunday, April, 23 2017.
  • Enabling foreign participation in Saudi IPOs. Through the Kingdom of Saudi Arabia’s Qualified Foreign Investor (QFI) program, registered QFIs will be able to participate in domestic IPOs.
  • 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.
  • Enhancements to the Independent Custody Model which enable custodians to reject the settlement of unconfirmed trades executed by the executing brokers.
  • 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.
  • Introduction of securities borrowing and lending and covered short-selling
  • Dropping the Exchange requirement of cash prefunding for specific investors, and leave the timing of cash availability to the contractual terms between Authorized Person and the investor, which will align trading practice with good international standards, and standardize institutional investors’ trading processes especially investment funds.

The reforms undertaken by Tadawul play an important role in the development of the Saudi capital market and reinforce the Exchange’s active role in supporting the Kingdom of Saudi Arabia’s (KSA) Vision 2030 plan, and efforts to diversify the Kingdom’s reliance on oil and make its equity market more attractive to foreign investors. Since opening the markets to QFIs in June 2015 and introducing updates to the program in August of last year, Tadawul has registered a total of 56 international financial institutions.

The reforms and outreach to investors are also helping Tadawul prepare for anticipated inclusion in emerging market indices such as Morgan Stanley Capital International (MSCI). Continued Al Hussan, “As part of the Kingdom’s efforts to achieve Emerging Markets status and demonstrate genuine engagement with institutions, Tadawul has conducted three road shows to date in the U.S., Europe, and Asia with more than 250 participating investors, which together represent at least USD $18.05 Trillion in investable assets. Based on the positive feedback and interest received to date, we hope to see a continued rise in QFI applications and registrations through year end.”

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