Experts at a recent industry forum have identified significant hurdles that Saudi Arabia must overcome to expand its securities borrowing and lending (SBL) activities. The discussions took place at the International Securities Lending Association (ISLA) conference, which highlighted the organization’s growing involvement in the Middle East, including the establishment of major milestones and strategic phases.
The ISLA’s engagement with the region commenced through a collaboration with the law firm Latham & Watkins in September, aimed at fostering the progress of securities lending in the Middle East. The initial phase of this partnership will concentrate on enhancing the sector and increasing market liquidity across Saudi Arabia, Abu Dhabi, and Dubai, notably within the Abu Dhabi Global Market and the Dubai International Financial Centre.
Earlier in February, ISLA unveiled its Saudi Arabia SBL guide, marking the first in a series of country-specific guides planned for release in 2024. The document suggests that Saudi Arabia and the Middle East present lucrative opportunities for new ventures, particularly within financial services and capital markets.
The panel underscored that while SBL regulations have been in place in Saudi Arabia since 2017, operational and business enablement has only recently been realized, post the implementation of the Post Trade Technology Program in April 2022. Saudi Arabia is now deemed a key growth area in the market, underpinning other novel products and initiatives such as market making, short selling, and derivatives.
Per the Saudi Exchange (Tadawul) regulations, SBL transactions are accessible to ‘qualified investors’, including local custodians and brokers authorized to act as lending agents in these dealings. Currently, the Saudi market operates three distinct SBL models: pooled principal, bilateral trades, and agency lending.
Despite the advancements, panelists at the breakout session acknowledged the considerable challenges encountered in the past year when attempting to stimulate both the borrowing and lending aspects of the market. They pointed out that, from an international investor’s viewpoint, market charges have deterred frequent borrowers such as market makers and high-frequency funds due to onerous ticket charges.
Moreover, the number of counterparties operating under the Global Master Securities Lending Agreement (GMSLA) remains sparse. When it comes to lending activities, while global custodians do provide asset lending services to foreign investors, the practice of lending to local Saudis is not prevalent. The reluctance stems from the lack of documentation and the current absence of a natural demand for such transactions.
Market observers and ISLA members anticipate the release of additional SBL guides for Abu Dhabi, Dubai, Qatar, and Kuwait, as they keep a keen eye on the evolution of this emergent market.