The region’s appetite to constantly evolve is abundantly clear. In early 2019, a mix of excitement and anxiety preceded the inclusion of Saudi Arabia and Kuwait on the MSCI Emerging Markets Indices, with both proving to be highly successful. It was a similar conversation for UAE and Qatar few years before, which, had also done well. Now, as a region, four out of six GCC markets are part of the MSCI Emerging Markets Indices. And that is just the start.

    Other major developments that have been rolled out in recent years, as Middle Eastern nations seek inclusion on the emerging market index, reflect a determination to spur investors’ appetite, bolster liquidity and gain greater credibility on the global financial stage. Such progress includes some countries increasing or abolishing the foreign ownership limits, as well as pursuing important changes to the qualification requirements for account openings, as in Saudi Arabia, the region’s biggest economy or the introduction of Omnibus account structure and same NIN cross trades in Kuwait. Discussions about the abolishment of dual account structures in Qatar and UAE are also underway, along with regional conversations about the evolution of the delivery versus payment. All these steps forward, and many more, are welcomed by market participants at home and abroad.

    Amid the change, it is critical to sustain international best practices and keep upping market accessibility, while abiding by unique local requirements. Above all, inclusion on the emerging market index is just the beginning of a broader journey into ever-improving market infrastructure. It has certainly been an impressive start and nations’ eagerness will keep on increasing as they seek listings on a developed market index.

    Positive disruption

    A tremendous effort preceded Saudi Arabia’s inclusion on the emerging markets index, which has not only diversified the Kingdom’s investor base but also opened a wealth of foreign experience and insights. Leveraging this to support its needs and vision, benefits include better investor relations capabilities in listed companies, enhanced technical infrastructure and refined regulatory capabilities. Some of the significant reforms include changing the settlement cycle to T+2, easing QFI eligibility requirements leading to increased QFI registrations with over 2300 registered (up 20 per cent compared to 2019), introducing closing auctions, followed by trade at last to complement the closing auctions. In late-2020, Tadawul introduced volatility guards for the first time in the Saudi capital markets and enhanced its negotiated deal requirements – in large part, acting on investors’ feedback. And Tadawul continues to see foreign inflow from both passive and active investors due to its inclusion on the index. Passive funds have become more interested in the Saudi market as a result of their inclusion. In terms of retail investor participation, it remains the largest in the region with a market cap of USD2.4 trillion at the end of 2020, with its average daily trade value rising by 137 per cent. The good news is that liquidity is clearly increasingly available – a non-negotiable steppingstone for those seeking developed market status.

    Meanwhile, Kuwait’s successful inclusion on the emerging markets index last year, despite the challenging environment, speaks volumes about how the country’s massive structural changes since 2016 are paying off. Undertaking a degree of change not witnessed in the country for more than three decades has helped Kuwait capture even more international investors’ attention, with Boursa Kuwait reporting the highest rated value in the history of Kuwait’s market of USD3.2 billion on November 30th, 2020. While markedly smaller than some other nations, it was an opportunity for Kuwait to showcase how it already has all the pieces of the puzzle in place to seamlessly accommodate such volume.

    Next steps?

    To set clear parameters for aspiring nations and to bolster transparency, MSCI has a clear framework to determine what markets must do in order to be reclassified as developed markets. It is similar to the process set for emerging markets classifications. The annual announcement in June on the potential reclassification is primarily based on three key pillars: the sustainability of economic development, size and liquidity requirements, and the development of market infrastructure. The latter is especially critical for emerging markets, having a significant impact on the MSCI accessibility requirement. Looking ahead, market players can increasingly look at how to better leverage the technologies that facilitate trade – such as those that lie under the umbrella of the 4th Industrial Revolution – to not only provide operational solutions, but to entirely transform the efficiency and effectiveness of the process. This growing level of sophistication will appeal to international investors and help the region keep pace with global and best practices.

    Strengthened market infrastructure will also be required to support the region’s fast-growing focus on environmental, social and governance (ESG) sensitive capital flows and exchange traded funds (ETFs). Again though, additional products and capital in both spaces will greatly benefit from more sophisticated trading instruments. Above all, ambitious market players must keep their eyes and ears open for feedback so they can respond quickly to changing dynamics, therefore accelerating their journey towards developed indices.

    In the UAE, the DFM looked at the efficiency of the operational framework which leans heavily on post trade infrastructures and went live with a new post trade structure comprising a post trade holding company - Dubai Central Clearing and Depository LLC, the CSD company - Dubai CSD LLC and CCP Clearing House - Dubai Clear that sets out a robust foundation for future market infrastructure developments. The implementation of the CCP Clearing House company enables DFM to ring-fence clearing risks from Stock Exchange and CSD business, ensures more efficient use of collateral thereby reducing cost of doing business and also supports the derivatives market. DFM is also planning to change its CSD technology platform starting Q321, which will allow them to revamp the existing DVP settlement process into a multi-level confirmation model.

    In Qatar, as a result of its inclusion, there is now a broader strategy in terms of how to develop the market. Since Qatar’s inclusion in the market, there have been significant inflows and understanding of foreign institutional investors requirements which has helped improve transparency and disclosure standards. Alongside introducing CCP and improving the risk infrastructure, Qatar is also focusing on a sustainability or ESG model to cater to international investors changing sentiments.

    Saudi Arabia will continue its focused to develop its equity markets with enhancements to Short selling, Stock Borrowing and Lending (SBL), introducing market making, services for high frequency traders while also focusing on developing its debt and ETF markets.

    As Kuwait continues its ambitious market development program, more products are planned for launch in 2021 such as net settlement (since implemented in early May 2021), margin lending and trading, ETFs and regulated bond and sukuk market.

    This article is taken from the HSBC MENAT Markets & Securities Forum 2021’s Index Inclusion panel which featured speakers from: Dubai Central Clearing and Depository, Tadawul, Boursa Kuwait, MSCI, Qatar Stock Exchange and was moderated by Rocio Echague, Head of Securities Services UAE, HSBC


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