Written by HSBC Saudi Arabia

Saudi Arabia's equity market access, which was earlier restricted to foreigners only through mutual funds, has been open to citizens of the Gulf Cooperation Council (GCC) since 2007 and indirectly to non-GCC foreign investors since 2008 via swaps and participating-notes. The announcements made in August 2014 allowing non-GCC foreign institutional investors access to Saudi equities directly is an important landmark in the evolution of the Saudi capital markets.

Tadawul, the Saudi Bourse, is already the largest stock exchange in the MENA region, with a total market cap of around USD 500 billion and daily turnover of USD 2 billion with a sector diversification that is unrivalled in the region. This profile inevitably makes the market immediately attractive to active FIIs (foreign institutional investors). 

As per the draft rules for investment by Qualified Foreign Investors (QFI), banks, fund managers, brokerage and securities firms, and insurance companies can all apply for QFI status to a local Assessing Authorized Person (AAP) licensed by the Capital Market Authority(CMA). QFI criteria include the need to be regulated by a regulatory authority in a qualifying jurisdiction, having a minimum of 5 year experience in securities activities and also Assets Under Management in excess of USD 5 billion. The AAP vets QFI applications on behalf of the CMA and submits its recommendation to accept or reject the application.

“One of the encouraging aspects of the QFI registration process is the speed and the level of execution performance enshrined in the proposed legislation, which applies to both AAPs and the CMA itself," says Madhur Bhandari, Head of Securities Services in HSBC Saudi Arabia Limited.

"This is progressive compared to the way in which most other markets have opened up. It is far more common for no timeframe to be set and for the process to be protracted.”

Madhur adds, “One of the most striking things about the opportunity inherent in the opening of the Tadawul to overseas investors is not just its size. While markets such as China and India have scale, they do not have much per capita wealth; in the case of markets such as UAE and Qatar, the opposite applies. However, Saudi Arabia is exceptional in that the market has both scale and wealth.”

“While the Tadawul's T+0 settlement cycle is clearly something to be aware of, its consequences can be significantly reduced by using a provider that can deliver an end-to-end proposition across transaction banking, broking and custody. If that provider has long experience in the market, then so much the better.”

With the QFI expected to be launched in 1H15, the year promises to be a year of landmark importance to Saudi Arabia and a year which has potential of transforming the investment landscape in the MENA region for years to come.