In its decision, MSCI cited the further market enhancements introduced by Tadawul and the Kingdom’s Capital Market Authority (CMA) during the past year since being added to MSCI’s Emerging Market Index Watch List last June. Many of those developments have fulfilled criteria set by the MSCI Market Classification Framework that must be met in order for a market to be classified as Emerging Market in its indices. The Saudi Arabia Index, with 32 securities is expected to have a potential weighting of 2.6 % within the MSCI Emerging Markets Index.
His Excellency Mohammed El-Kuwaiz, Chairman of the Capital Market Authority (CMA) commented:
“The inclusion decision shall enhance the diversity of the investors’ base as well as the liquidity of the Saudi Capital Market. We, at the CMA, will continue to further develop the Saudi Capital Market to ensure that the market facilitates investments, promotes confidence and protects investor and market participants.”
“Today’s announcement from MSCI, so close on the heels of KSA’s reclassification in the FTSE Russell Global Equity Index Series, marks the further integration of the Kingdom into global capital markets,” said Sarah Al Suhaimi, Chairperson of Tadawul. “It is the culmination of Tadawul’s ongoing efforts to work closely with Saudi regulatory authorities and leading emerging market investors to implement far-ranging reforms and market enhancements to strengthen the effectiveness of the Saudi capital market and foster an attractive investment climate for local and international investors. We are proud that these efforts have gained Saudi Arabia inclusion in the leading global indexes and benchmarks.”
“Inclusion in the MSCI Emerging Market Index is an important milestone and further affirmation of the tremendous progress Tadawul has made in the past year in broadening investor access to the Saudi capital market, enhancing market efficiency and further aligning market practices with global best practices,” said Khalid Al Hussan, Chief Executive Officer of Tadawul. “Our work is never done, and additional market enhancements are in the pipeline as we continue to strengthen and grow investor confidence in the Saudi market.”
The Road to MSCI Emerging Market Index Inclusion
Saudi Arabia was added to the MSCI Emerging Market Index Watch List in June 2017. In its February 2018 Consultation on the proposed reclassification of Saudi Arabia to Emerging Markets, MSCI highlighted the Kingdom’s progress in implementing positive market reforms across a range of market accessibility criteria, including foreign ownership limits, easing of registration requirements for Qualified Foreign Investors (QFIs), enhancements to the clearing and settlement process and introduction of securities lending and short selling. Since then, Tadawul and the CMA have continued to move ahead with implementation of significant market reforms and enhancements as part of the Kingdom of Saudi Arabia’s Vision 2030 economic transformation program, which in part seeks to bring the Saudi market into alignment with its emerging and developed market peers. Measures announced to be implemented since the beginning of 2018 include:
• Establishing a Central Counterparty Company (CCP) in May 2018 to develop future clearing services and pave the way for derivatives trading and other new asset classes, to be fully operate by the second half of 2019.
• Listing and trading Government debt instruments accessible to all eligible investors as of April 2018, to further strengthen the Sukuk and Bond market by creating a yield curve.
• Implementing changes to the opening and closing price mechanism to introduce greater price efficiency, increased liquidity, reduced market volatility and enhanced security and a more attractive investment climate for domestic and international investors. The enhancements, which took effect on May 27, 2018, include:
o 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;
o Enhancing the opening price auction in line with practices adopted by most other major markets.
• 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.
• 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.
Key reforms previously implemented 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 the Securities Depositary Center (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.
• Selection of NASDAQ as the solution provider to implement a new post-trade technology which will replace Tadawul’s current registry, depository, clearing and settlement solution with a state of the art solution.
• Spin-off of the Securities Depository Center (Edaa), which has been operational since January 2017 and is fully owned by Tadawul.
• 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.
• QFI Program
Saudi Arabia’s QFI Program was introduced in June 2015 to facilitate participation by international investors 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 $522 billion, and average daily trading value of nearly $972.6 million as of May 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 150 international financial institutions have joined with more than 200 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 in aggressively moving forward with several initiatives to reform the exchange and attract foreign capital.