Saudi stock exchange adjusts rules to attract foreign funds

Saudi Arabia’s stock exchange is adjusting its rules to make it easier for foreign investors to trade – steps that may help the bourse absorb a huge IPO by oil giant Saudi Aramco this year, the exchange’s chief executive said on Wednesday.

“These changes are required by the growth of the market and what international institutions tell us,” Khalid al-Hussan said in a telephone interview from Riyadh.

Trading limits will be made more flexible for the exchange’s independent custody system, Hussan said. The system allows foreign investors to use a global custodian bank rather than a local broker to hold their assets.

Meanwhile, foreign asset managers will be allowed to aggregate the orders of their portfolios and funds, helping them obtain better prices. Both changes are to take place by January 21.

Read: Saudi to ease requirements for foreign investors in bourse

Saudi Arabia opened its market to direct investment by foreign institutions in mid-2015 and is keen to boost capital inflows, partly to facilitate the initial public offer of shares in Aramco and other privatisation plans.

Riyadh aims to sell about 5 per cent of Aramco in the second half of 2018, potentially raising $100bn if it achieves the $2 trillion valuation for the company that it has projected. Many private analysts think that target is too optimistic but that the IPO will still be the world’s largest.

Authorities have said they will list Aramco’s shares in Riyadh and also aim for a listing in at least one foreign market; options include New York, London and Hong Kong, but officials say a choice has not been made.

With a capitalisation of about $450bn, Riyadh’s market could struggle to absorb Aramco shares, plus tens of billions of dollars in other privatisations envisioned in coming years, without the participation of foreign funds.

Hussan said in October that his exchange hoped to be the only venue for listing Aramco and could handle all of the IPO. He repeated this on Wednesday, but stressed he had received no word of any decision by authorities on foreign listing venues.

“As an exchange, it is natural for us to aspire to be the only place for listing and we are taking all necessary measures to be ready for that, if that is the decision. We are waiting for the decision.”

This month’s reforms may encourage global equity index providers to upgrade Saudi Arabia, which would attract more foreign money. MSCI will announce this June whether it will add Saudi Arabia to its emerging markets index, while FTSE has said it will probably decide in March to do so.

Other planned reforms, which the exchange intends to introduce by mid-2018, include using an auction method to determine closing stock prices instead of the current volume-weighted average price method, Hussan said.

A system for market makers – firms that improve liquidity by holding inventories of stocks, ensuring they can offer buying and selling prices continuously – will be introduced by mid-year, he said.

The development of market makers would pave the way for the exchange to introduce equity derivatives, which could help to attract foreign investors by giving them ways to hedge.

Hussan said stock futures and options were expected to be introduced in 2020, after reforms to the clearing system.

At the end of 2017, 118 foreign institutions had registered to invest on the Saudi stock market.

All types of foreign investor, including those owning stocks indirectly through swaps, now hold about 4.2 percent of the market.

The exchange has been working with the Saudi securities regulator in its drive to attract foreign funds. On Tuesday, the Capital Market Authority said it was easing requirements for foreign institutions to qualify as investors.

Saudi authorities are also keen to develop the exchange as a place for trading debt, in order to deepen the country’s capital markets.

Trading of government bonds on the exchange is expected to begin this year, Hussan said.