View background article on Kuwait MSCI inclusion

    What is the status of using DMA to trade in Kuwait and specifically for the MSCI trade?

    Electronic trading has a long history in Kuwaiti markets. DSA activity has however raised some concerns locally that some entities trading directly through local broker memberships have not been fully vetted. HSBC has raised the issue of DMA and DSA with both Boursa Kuwait and the Capital Markets Authority. Equally, we have engaged both a regional and a local broker in Kuwait City to seek clarification on electronic trading strategies. We are confident that local regulation is being followed with regard to the use of HSBC algorithmic strategies through our local execution relationships regulated by the Kuwaiti authorities. Provisions for DMA are set out in Articles 4-42 to 4-48 in the Boursa Kuwait Rulebook.

    Is continuous trading and/or the closing auction going to be extended for the MSCI Inclusion Trade on 30 November?

    Trading will remain unchanged during the inclusion trade, but all phases of the auction will be extended. Price Discovery time during the auction will be extended to a total of 40 minutes. There will then be a 30 minute break to check that all orders are queued successfully for unwind. Finally, there will then be a 40 minute trade-at-last-session. Additionally, crossing will be allowed during the Auction and Trade-at-Last. Not being able to cancel orders once in the auction will be suspended. You will be able to change or cancel tickets at any point during the auction before the auction unwind. All of the above is subject to revision by Boursa Kuwait.

    What can and cannot be done in terms of Trade Crossing on Boursa Kuwait?

    Market crosses, as a concept, were long considered to be inconsistent with trading best practice for most of the exchange’s history. However, with a highly engaged regulator and very progressive management at the new Boursa Kuwait, issues related to crossing—on and off exchange—have largely been resolved. Crossing from one Investor ID (NIN) to a different Investor ID is now an accepted trading mechanism on and off exchange. For on-exchange crossing, the transaction must occur in the middle of the spread or on the bid/offer, where the best bid or offer must be filled as well. At present, crosses cannot be aggregated across IDs, and must be executed individually. Off-market crosses are also allowed, subject to certain conditions, and are entered through an on-line portal dedicated to this kind of operation. Crossed done away from the order book must have a notional value of at least KWD150,000 (USD491,000) and cannot be more than 20 per cent away from the last closing price of the security. Off-market crosses are limited to two parties only. Crossing stock exposures on the same Investor ID has recently been approved by Boursa Kuwait and the CMA. The ability to do so requires a broker or investor to attest to various statements about the nature of their funds and their ownership. HSBC is currently in negotiations with Boursa Kuwait to receive approval for same-NIN crossing.

    The window for executing the necessary FX trade for the MSCI Inclusion Trade is quite tight and BAU liquidity in USD KWD is sub- USD600 million/day. Is this an issue?*

    November 30th is the Monday following the US Thanksgiving holiday where US dollar liquidity will be tight. However, there is little reason to believe that there is a need to pre-fund the MSCI Kuwaiti rebalance trade and executing the FX on Trade Date or T+1 (Equity settlement in Kuwait is T+3) should be relatively straightforward. The T+2 funding deadline will be extended from 10am to 12pm on MSCI day but even so, because of instruction delays, clients planning on funding their MSCI trades via third-party banks are most at risk of missing the cut-off. HSBC would encourage clients whose sub-custodian in Kuwait is HSBC to put procedures in place now to execute the requisite KWD with HSBC Kuwait directly on T+0. Overdrafts in KWD are not allowed which means that funding failures by close of business on T+2 will result in the executing broker having to own the trade(s) on T+3. The risk of a sell-out and/or cascading credit issue at the local broker is high. That being said, we have verbal assurances from senior management at HSBC Kuwait, the KCC, and Boursa Kuwait that the Central Bank of Kuwait is prepared to meet all demand for currency on all days leading up to settlement of the approximate USD2.7 billion of currency in-flow.

    What happens if I trade on the wrong NIN/ID? Can I change it after the market closes?

    Yes. Article 9-16-1 of the Boursa Kuwait Rulebook states: The Licensed Broker may request the modification of Trades in the event of erroneous entry of the Investment Account (Trader ID) , provided that such request is submitted no later than the lapse of the settlement cycle. Further details are available on the Boursa Kuwait website.

    Can I amend the price, quantity, commission and/or trading and settlement dates?

    Gross Price and Net Price are not variables in the settlement of the client-leg of a trade done on Boursa Kuwait, but they cannot be modified at the exchange. This means that HSBC must honour what it traded in the order book, regardless of the client’s need to change the gross price or fees/ comms on the trade. Trade Date and Settlement Date are not amendable.

    For more information, please contact your HSBC Global Markets representative.

    All the information above is subject to revision by Boursa Kuwait

     

    *Subject to change for MSCI Inclusion; please contact your HSBC GEM representative for updates.

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