Saudi market reform promises deep discounts on trades

Saudi Arabia’s stock market is the most liquid in the region with volumes of more than US$1.3 billion a day. Ahmed Yosri for The National

Foreign institutional investors can expect trading fees to be cut by more than half if they can buy directly into Saudi Arabia’s stock exchange over the current requirement of buying indirectly through swaps, according to National Bank of Abu Dhabi.

Saudi Arabia’s cabinet last month approved the trading of shares by foreign investors starting next year. Data available on the bourse website last week showed that foreign buying increased in July.

International investment banks such as Merrill Lynch, Goldman Sachs, Morgan Stanley, Deutsche Bank and EFG Hermes are licensed by Saudi Arabia’s market regulator to offer swaps to clients at about 30 basis points, which includes custody for the trade. On the other hand, buying stocks directly costs about 12 basis points.

“There are a lot of investment managers who are uncomfortable using swaps over direct exposure so the benefit of opening up the market would far outweigh the benefits the brokers get from using swaps at the moment,” said Saleem Kokhar, NBAD’s head of equities, who uses swaps to buy Saudi stocks for one of the bank’s EU-based funds.

“Buying into the underlying market would be far cheaper because you don’t have the middle man sitting there giving you access. The investment banks would also benefit from fees from bigger volumes and trade going through.”

Saudi Arabia’s stock market, the most liquid in the region with volumes of more than US$1.3 billion a day, has been for years considering whether to open its bourse to wider buying.

“It’s important to note that the cabinet gave the approval to corporate investors not individual investors,” said Wadah Al Taha, the chief investment officer at the Dubai-based Al Zarooni Group. ““They are targeting mature investors and big amounts, not small investors that require a lot of compliance and bring a rise in costs and administration from the regulator’s part.”

Trades in July through swap agreements by foreigners rose to 3.53bn riyals (Dh3.45bn) from 1.66bn riyals in June, according to data published on the Tadawul index website on Sunday.

The surge in contracts comes even as traded value of the broader market declined 31.8 per cent in the same period to 122.75bn riyals.

“People want to get in until the time direct foreign ownership actually happens, because then the prices may not be that attractive any more,” Farooq Waheed, a senior portfolio manager at Saudi-based Riyad Capital told Reuters this week.

“The local reaction is very positive, especially on large-cap stocks that are likely to be interesting for foreign investors,” Mr Waheed said.

Shares listed on the Tadawul have seen their value rise more than 5 per cent since the announcement. This is despite the fact that there were only four trading sessions because of the Eid holidays.

In 2012, the regulator provided a positive signal to the market that it was seriously taking a step towards opening up the exchange when it allowed the cross listing of shares.

“A foreign issuer whose securities are listed in another regulated exchange may apply for its securities to be registered and admitted to listing,” the Capital Markets Authority said then.

“The authority may admit the securities to listing provided that, in the authority’s opinion, the listing rules applicable in the foreign issuer’s jurisdiction of listing are at least equivalent to these rules.”

Follow The National's Business section on Twitter