• Market & Regulatory Insights
    • Accessing emerging markets

Future-proofing MENAT market infrastructure

  • Article

The MENAT region remains a highly dynamic collection of markets, driving investment opportunities both regionally and across the globe.

In order to boost attractiveness and ensure a healthy flow of future inward investment, a number of MENAT states are progressing with transformative developments in trading and post trading infrastructure. Recently, HSBC hosted a panel of experts at its Markets and Securities Services MENAT Forum 2022, who discussed the different enhancements currently taking place across the region's markets.

Across the MENAT countries, significant steps are being taken in the trading and markets envi-ronment to raise the game in investment in the region. And one common thread in the drive to modernise and create a fit-for-purpose capital markets ecosystem that provides flexibility, speed and efficiency, is the regional drive to adopt technology initiatives that aim to future-proof the pro-cess for brokers, investors and end customers alike.

Like elsewhere, the MENAT region is hungry to develop capital markets to ensure ease of ac-cess to the opportunities there. At our recent Markets and Securities Services MENAT Forum 2022, an expert panel representing Saudi Arabia, Kuwait, Qatar and UAE, broke down the vari-ous elements that are shaping the markets infrastructure.

Post-trade developmental opportunities

Hanan Alshehri is Chief of Business Development for Saudi Arabia’s Securities Depository Cen-ter Company (Edaa). She explains how we are witnessing a dramatic change in her country’s markets landscape thanks to the government’s Post-Trade Technology Programme (PTTP).

“We’re upgrading services mainly related to trade, and one of the milestone developments for us in Saudi Arabia, which form part of PTTP, is the introduction of clearing on all securities types,” she explains. “This is a core activity of our counter-party clearing house (CCP), and it will help us reduce systemic risk in the markets, as well as being able to introduce products, mainly in the derivatives space.”

Another enhancement that is in progress, explains Hanan, is the Central Securities Depository (CSD), which is being completely modernised. This will boost operational efficiencies, both in de-positories and settlement. Also changing under new regulations, is a new category of custody numbers for banks, which will allow them to extend and complement the range of services avail-able to their clients.

“On settlements, we are planning to have flexible settlement cycles, mainly for negotiated and over-the-counter (OTC) trades. We’re hoping that this feature will be especially well received by those investors who typically need shorter investment cycles for their trades.”

As far as PTTP is concerned, it is activating Saudi Arabia’s link with one of the major international CSDs, which is Euroclear. Hanan says: “This is a big step for us in the market. A new channel is now open for foreign investors to access the Saudi market, particularly the fixed income market.”

In Qatar, too, there is much cause for enthusiasm around systems modernisation. Mohsin Mu-jtaba, who leads Product and Market Development at the Qatar Stock Exchange, says, “We are also looking at upgrading our post-trade technology, ultimately to bring in more processing effi-ciencies for the benefit of our members, brokers, custodians – and the end customer as well.

“Firstly there is going to be a very strong focus on digital onboarding for our end customers. That is the need of this post-pandemic world, and you can’t have a depository or a client facing func-tion where you don't offer digital onboarding.

“Secondly, we’re bringing significant enhancement to the trading lifecycle. A degree of automa-tion is already available for custodians and customers. But going forward, our intention is to have straight-through processing (STP) through a further technology upgrade, because we are getting increased numbers of time zones linked to our market.”

Thirdly, Mohsin explains that Qatar is looking to introduce a counter-party clearing house as well – primarily for derivatives, which will help them understand how the market systems would inter-act with a centralised clearing institution. Further down the road, there will be an opportunity to provide capital efficiencies to the members in the cash equity market, too, he adds: “We are choosing to launch our CCP in an international jurisdiction environment based in Qatar’s financial centre, which is where the netting regime is already recognised.”

Patrick Kong, Senior Vice President at Dubai Central Clearing and Depository Holdings LLC, says that the Emirate is no different in its desire to renew systems and provide end-to-end con-nectivity.

“We will be reforming our CSD system just like others in the region,” he says. “But more im-portantly, in line with the re-platforming itself, certain operational changes will be made, including the current dual account structure itself that is tied down to the current legacy system.

“One major change will involve us moving collateral away from the CSD system to the CCP. We have a CCP clearing system in place with margining for both the equities and the derivatives market.”

Patrick adds that their intention is also to examine better connectivity as part of the new technol-ogy, creating remote connection with members here who are not necessarily onshore.

Kuwait’s own mission to modernise is part of what Duaij Al-Saleh, Deputy CEO for the Strategy & IT Sector at Kuwait Clearing Company, says is a “market development programme.” In their jour-ney to date, they have focused on three pillars: aligning to international best practice; listening to market participants to hear their needs; and building using only the latest technologies available.

For our stage-three market developments,” he explains, “we will be focusing mainly on the post-trade side and, firstly, we will be dividing the operations of post-trade into two separate entities.” Currently, Kuwait Clearing Company is the only entity – whether handling clearing, CSD or col-lateral management.

Kuwait will separate its CSD from the clearing house while evolving that to become a CCP similar to colleagues in other GCC markets. “On top of that,” he adds “we are going to give a wider role to the market intermediaries. So, brokers, custodians and investment companies will be respon-sible for some of the clearing services.”

Kuwait still practices settlement on a gross basis, says Duaij, which spells an opportunity to in-troduce netting and increase market efficiency.

This, along with new trading products, multiple account types, and an AGM voting platform, will be in place by the end of 2022.

Plus 3 or plus 2?

Trade cycle times remain different in the region – though individual markets are weighing up the pros and cons.

Duaij explains how Kuwait is keeping its counsel on whether to switch from T+3 to T+2, citing po-tential obstacles that may still appear while systems infrastructure is being reworked – “until is-sues such as the readiness of the various market participants, including the Central Bank of Ku-wait, the operating banks in Kuwait, and other market players, are resolved.”

Qatar, meanwhile, has already announced the move to T+2. Mohsin believes that this is the re-sult of a combination of several initiatives with accounts and transfers, which together will make the switch convenient for clients. “It will happen sometime during this year, but we are working with colleagues at the Depository to finalise the other initiatives as well before we want to start,” he adds.

Easing the IPO process

The appetite for IPOs in the region is strong – though what role might the redevelopment of infra-structure play in making operational improvements to them?

From the Saudi perspective, Hanan suggests we are living in a remarkable time where, “we have reaped the rewards of the efforts by the regulators in recent years. “Now I would say private companies are motivated and comfortable that it's safe. And for that we are seeing a heavy and active pipeline of IPOs as well as direct listings.”

As part of PTTP, Saudi Arabia is committed to IPO improvements, too — one of which is cross listings, which could see companies from other MENAT countries eventually listed in the Saudi markets.

More specifically, issuer agents will be able to create securities and then distribute them both to and between different subscribers. Issuer agents will also be able to conduct DVP (Delivery vs. Payment) instead of solely through FOP (Free of payment) transfers.

The UAE also has designs on reforming the process. Patrick explains: “We currently have book-built IPO settlement – something that is already paperless. But with the re-platforming of the CSD system itself, we are looking to automate or improve connectivity between ourselves and the JGCs (joint global co-ordinators) when it comes to post-IPO settlement.”

Digitalisation remains the game changer

The panel were unanimous in recognising the imperative to embrace digital tech in the drive to modernise and create efficiencies. Blockchain could bring potential to many projects, from Ku-wait’s AGM voting and OTC platforms, to “other automated connections” that increase STP and eliminate many manual processes for market participants.

From the Qatari standpoint, Mohsin cites how he was vindicated years later after raising the pos-sibilities surrounding DLT technology. But data, too, needs to be used productively.

“There is a lot more data being produced now, especially from the depositories and exchanges functioning across the region,” Mohsin says. “This can be very insightful, and we should also be looking at predictive analytics to provide the service to intermediaries, and to the regulatory and surveillance side to inform customer and investor behaviour.”

Patrick’s conclusion was focused on the regulatory influence, which needs to encourage techno-logical development that would benefit both businesses and society. “What we need is a worka-ble and sensible regulatory framework here, which supports the use of new technologies,” he ar-gues. “In UAE, we are fortunate the regulator has a regulation for digital asset custodian, and be-ing a CSD itself, it can play that role of a digital asset custodian. So, we'll be watching this space closely.”

Accessing Emerging Markets

Explore our latest insights on topics as diverse as macroeconomics, technological innovation, and the future of trade.

MENAT: Shifting dynamics and trends for 2022

This article explores the trends to watch in a year where the Middle East will be in the interna-tional spotlight.

Need help?

For more information, please contact your HSBC representative.