Saudis seek control amid easier foreign stock rules

RIYADH - Saudi Arabia imposed no limits on access for foreign investors to its stock exchange under complex regulations unveiled last week but has set out tight guidelines on how those investments are made, details of the new rules showed on Tuesday.

By (Reuters)

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Published: Tue 26 Aug 2008, 10:01 PM

Last updated: Sun 5 Apr 2015, 11:58 AM

The detail, published in a local newspaper in lieu of an official announcement, leave unanswered many questions but reveal an attempt by authorities to lower barriers to foreigners without encouraging speculation.

"With these regulations, CMA has struck a balance ... We are not too stringent, nor not too flexible. We have a balanced set of regulations for these swap agreements," said Fahad al-Mubarak, Chairman of Morgan Stanley Saudi Arabia.

CMA last week allowed non-resident foreign investors to sign swap agreements with Saudi intermediaries, permitting a form of indirect ownership of the shares, in one of the boldest moves the kingdom has yet taken to open its exchange to foreigners.

But the CMA, which took the step to diversify the investor base of the Gulf region's worst-performing benchmark this year, did not publish detailed rules to govern these agreements, leaving many investors guessing how they might be implemented.

The regulator has now sent a memo to Saudi brokerage and asset management firms outlining 11 guidelines for these agreements, senior brokerage and asset management executives said.

CMA's website did not carry these regulations and its chief Abdulrahman al-Tuwaijri declined to comment.

Morgan Stanley was the first firm to have signed up a foreign investor under a swap agreement which he said will be for one single unidentified stock.

The regulations capped at four years the duration of swap agreements but did not set a minimum maturity duration.

"These agreements can be renewed once the four years come to maturity. They did not set a minimum because they wanted to offer flexibility," Mubarak said.

CMA did not set limits on the number of shares foreign investors can access through these agreements.

But investment bank EFG-Hermes said CMA's information requirements suggest specific amendments that may impose some limits on some stocks may be planned.

"If issued, we believe such restrictions are likely to be in the form of sector specific ownership limits ... most probably focused on the financials sector," EFG-Hermes wrote in a note.

Excitement down

The Saudi index recorded its strongest rise in 28 months on the first day of trading that followed last week's announcement but the excitement has since subsided as investors began to wonder how these swap agreements will work.

"Since the various swap agreements are currently being reviewed by the CMA, we believe that the green light for authorised persons is around the corner and should be delivered in the coming days," EFG-Hermes said.

"Any delays would only create uncertainty and would lead to a worsening in investor sentiment," it added.

Speculators beware

The CMA memo said licensed intermediaries must avoid credit risks that may arise from swap agreements which must be paid for in full.

"CMA wants these swap agreements to be fully covered to prevent intermediaries from taking financial risk by either buying more or less shares than what a foreign investor can actually pay for," said Ibrahim al-Alwan, deputy chief executive of KSB Capital investment bank.

Long dominated by day traders and dogged with a reputation for being opaque, the Saudi stock market has been trying to improve transparency and gain more institutional investors since a market crash in 2006, when the index tumbled 64 percent from peak to trough that year.

"Global investors are seeking growing exposure to emerging markets amid the current downturn and Saudi stands as a very attractive and relatively-well regulated emerging place," a senior fund manager at an Abu-Dhabi based investment bank said.

"By not showing all its (regulation) cards at once, CMA is trying to first test global appetite and then regulate whenever the need arises," he added.

The kingdom's market has been the least open to foreign investors among Gulf Arab bourses, allowing non-resident foreigners access to stocks only through select funds.

The new foreign ownership rule came one week after Saudi Arabia's market operator Tadawul implemented a transparency rule whereby the exchange names investors with stakes of 5 percent or more in listed firms.

"Swap agreements are usually less attractive than direct ownership since foreign investors have no control. But these agreements have opened a window: We had a near-zero percent entry of foreign investors now we are 20 percent open," Alwan said.

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