Inclusion in global indices reflects continued progress of capital market reform under Vision 2030
RIYADH– The Saudi Stock Exchange (Tadawul) is pleased to announce today that MSCI, a leading provider of global equity indices, upgraded the Kingdom of Saudi Arabia to “Emerging Market” from its previous “Standalone Market” status in its Annual Market Classification Review.
The Kingdom, which was also recently added to the FTSE Russell as a “Secondary Emerging” market in March 2018, will be included in MSCI’s Emerging Market Index in two phases concurring with the May 2019 Semi Annual Index Review and the August 2019 Quarterly Index Review.
In its decision, MSCI cited the further market enhancements introduced by Tadawul and the Kingdom’s Capital Market Authority (CMA) during the past year since being added to MSCI’s Emerging Market Index Watch List last June. Many of those developments have fulfilled criteria set by the MSCI Market Classification Framework that must be met in order for a market to be classified as Emerging Market in its indices. The Saudi Arabia Index, with 32 securities, is expected to have a weighting of 2.6 % within the MSCI Emerging Markets Index.
His Excellency Mohammed El-Kuwaiz, Chairman of the Capital Market Authority (CMA) commented:
“The inclusion decision shall enhance the diversity of the investors’ base as well as the liquidity of the Saudi Capital Market. We, at the CMA, will continue to further develop the Saudi Capital Market to ensure that the market facilitates investments, promotes confidence and protects investor and market participants.”
“Today’s announcement from MSCI, so close on the heels of KSA’s reclassification in the FTSE Russell Global Equity Index Series, marks the further integration of the Kingdom into global capital markets,” said Sarah Al Suhaimi, Chairperson of Tadawul. “It is the culmination of Tadawul’s ongoing efforts to work closely with Saudi regulatory authorities and leading emerging market investors to implement far-ranging reforms and market enhancements to strengthen the effectiveness of the Saudi capital market and foster an attractive investment climate for local and international investors. We are proud that these efforts have gained Saudi Arabia inclusion in the leading global indexes and benchmarks.”
“Inclusion in the MSCI Emerging Market Index is an important milestone and further affirmation of the tremendous progress Tadawul has made in the past year in broadening investor access to the Saudi capital market, enhancing market efficiency and further aligning market practices with global best practices,” said Khalid Al Hussan, Chief Executive Officer of Tadawul. “Our work is never done, and additional market enhancements are in the pipeline as we continue to strengthen and grow investor confidence in the Saudi market.”
The Road to MSCI Emerging Market Index Inclusion
Saudi Arabia was added to the MSCI Emerging Market Index Watch List in June 2017. In its February 2018 Consultation on the proposed reclassification of Saudi Arabia to Emerging Market, MSCI highlighted the Kingdom’s progress in implementing positive market reforms across a range of market accessibility criteria, including foreign ownership limits, easing of registration requirements for Qualified Foreign Investors (QFIs), enhancements to the clearing and settlement process and introduction of securities lending and short selling. Since then, Tadawul and the CMA have continued to move ahead with implementation of significant market reforms and enhancements as part of the Kingdom of Saudi Arabia’s Vision 2030 economic transformation program, which in part seeks to bring the Saudi market into alignment with its emerging and developed market peers. Measures announced to be implemented since the beginning of 2018 include:
- Establishing a Central Counterparty Company (CCP) in May 2018 to develop future clearing services and pave the way for derivatives trading and other new asset classes, to be fully operational by the second half of 2019.
- Listing and trading Government debt instruments accessible to all eligible investors as of April 2018, to further strengthen the Sukuk and Bond market by creating a yield curve.
- Implementing changes to the opening and closing price mechanism to introduce greater price efficiency, increased liquidity, reduced market volatility and enhanced security and a more attractive investment climate for domestic and international investors. The enhancements, which took effect on May 27, 2018, include:
- Moving from a Volume Weighted Average Price (VWAP) to an auction method for determining closing prices for both the Main Market and Nomu parallel market;
- Enhancing the opening price auction in line with practices adopted by most other major markets.
- Updating the Independent Custody Model (ICM) as of January 2018, to enhance Qualified Foreign Investor access to the market by providing more flexibility in trading limits for ICM clients. Along with this change, new procedures were introduced to mitigate credit risk associated with the settlement process for all participants
- Introducing a new optional model for structure of accounts (segregated accounts) to allow asset managers to aggregate the orders of managed assets (discretionary portfolios – “DPs” – and investment funds) in January 2018. This development assures best execution and fair allocation for asset managers and their clients.
- Implementing a Market Making (MM) Program based on global best practices to enhance liquidity, facilitate orderly price formation, reduce price volatility, fortify the sukuk, bond and ETF markets and pave the way for Exchange Traded Products (ETP) and derivatives. MM program is also expected to be implemented during the second quarter of 2018.
Key reforms previously implemented include:
- Amending the settlement cycle to T+2 for all listed securities to increase the level of asset safety for investors and to unify the settlement duration for all types of listed securities. The amendment of the settlement cycle brings the Saudi Market in alignment with the standards set by other international exchanges. In addition, securities borrowing and lending and short selling were introduced for all listed stocks. These changes went live in April 2017.
- Dropping the cash prefunding requirement for specific investors, leaving the timing of cash availability to the contractual terms between the Authorized Person and the investor. This will align trading practice with good international standards, and standardize institutional investors’ trading processes especially investment funds.
- Introduction of Fails Management Controls that is offered by the Securities Depositary Center (SDC) for executing brokers to cover securities shortage by transferring securities from the principle account, borrowing securities via SBL function, buying securities on open market, or preforming optional Buy-in. Also, mandatory Buy-in can be conducted by SDC.
- Introduction of a Delivery versus Payment Model(DvP) to comply with the principle of DvP, wherein the delivery of securities occurs only if the corresponding payment occurs.
- Enhancements to the Independent Custody Model which enable custodians to reject the settlement of unconfirmed trades executed by the executing brokers in April 2017.
- Introduction of Securities Borrowing & Lending and short selling: Tadawul is the first market in the region to offer Securities Borrowing and Lending and covered short selling for all listed stocks.
- Adoption of new corporate governance rules issued by the Saudi Capital Market Authority (CMA) in February 2017. The rules enhance the rights of shareholders and board members and provide greater clarity and more transparency around determining commercial strategic planning, roles, responsibilities and oversight of corporate entities and third parties.
- Permitting QFIs to participate in IPOs, a change that was instituted in January 2017.
- Introduction of Nomu, a parallel equity market for Qualified Investors that offers lighter listing requirements and serves as an alternative platform for companies to go public. The Nomu-parallel market was launched in February 2017.
- The introduction of Real Estate Investment Traded Funds (REITs) to further diversify the availability of investment opportunities and promote investment in real estate for all market participants.
- Selection of NASDAQ as the solution provider to implement a new post-trade technology which will replace Tadawul’s current registry, depository, clearing and settlement solution with a state of the art solution.
- Spin-off of the Securities Depository Center (Edaa), which has been operational since January 2017 and is fully owned by Tadawul.
- Conducting Investor relations workshops and partnerships to develop and facilitate communication between listed companies, financial market stakeholders, financial analysts and legislative and regulatory bodies in the Kingdom. Tadawul also is keen on implementing investor relations global best practices and enhancing transparency across all listed companies.
Saudi Arabia’s QFI Program was introduced in June 2015 to facilitate participation by international investors in the Saudi capital market. The QFI Program was enhanced in 2016 and again in January 2018 to further ease the qualification requirements for qualified foreign investors and expand the range of institutional investors eligible for the program. Through the QFI program, international investors now have direct and full access to Tadawul, the largest equity market in the GCC and MENA regions with a market capitalization of $522 billion, and average daily trading value of nearly $972.6 million as of May 2018. QFI qualifying criteria and foreign ownership limits were recently eased and the Saudi IPO market is now open to QFIs.
Since inception of the QFI program, over 150 international financial institutions have joined with more than 200 others at various stages in the qualifying process. As of January 2017, QFIs can participate in all Saudi domestic IPO offerings. This accelerated growth in the QFI program reflects the progress that Tadawul has made in aggressively moving forward with several initiatives to reform the exchange and attract foreign capital.
Taking control of compliance: how FS institutions can keep up with the ever-changing regulatory landscape
By Charles Southwood, Regional VP – Northern Europe and MEA at Denodo
The wide-spread digital transformation that has swept the financial services (FS) sector in recent years has brought with it a world of possibilities. As traditional financial institutions compete with a fresh wave of challenger banks and fintech startups, innovation is increasing at an unprecedented pace.
Emerging technologies – alongside the ever-evolving concept of online banking – have provided a platform in which the majority of customer interactions now take place in a digital format. The result of this is a never-ending stream of data and digital information. If used correctly, this data can help drive customer experience initiatives and shape wider business strategies, giving organisations a competitive edge.
However, before FS organisations can utilise data-driven insights, they need to ensure that they can adequately protect and secure that data, whilst also complying with mandatory regulatory requirements and governance laws.
The regulation minefield
Regulatory compliance in the FS sector is a complex field to navigate. Whether its potential financial fraud or money laundering, risk comes in many different forms. Due to their very nature – and the type of data that they hold – FS businesses are usually placed under the heaviest of scrutiny when it comes to achieving compliance and data governance, arguably held to a higher standard than those operating in any other industry.
In fact, research undertaken last month discovered that the General Data Protection Regulation (GDPR) has had a greater impact on FS organisations than any other sector. Every respondent working in finance reported that the changes made to their organisation’s cyber security strategies in the last three years were, at least to some extent, as a result of the regulation.
To make matters even more confusing, the goalpost for 100% compliance is continually moving. In fact, between 2008 and 2016, there was a 500% increase in regulatory changes in developed markets. So even when organisations think they are on the right track, they cannot afford to become complacent. The Markets in Financial Instruments Directive (MiFID II), the requirements for central clearing and the second Payment Service Directive (PSD2), are just some examples of the regulations that have forced significant changes on the banking environment in recent years.
Keeping a handle on this legal minefield is only made more challenging by the fact that many FS organisations are juggling an unimaginable amount of data. This data is often complex and of poor quality. Structured, semi-structured and unstructured, it is stored in many different places – whether that’s in data lakes, on premise or in multi-cloud environments. FS organisations can find it extremely difficult just to find out exactly what information they are storing, let alone ensure that they are meeting the many requirements laid out by industry regulations.
A secret weapon
Modern technologies, such as data virtualisation, can help FS organisations to get a handle on their data – regardless of where it is stored or what format it is in. Through a single logical view of all data across an organisation, it boosts visibility and real-time availability of data. This means that governance, security and compliance can be centralised, vastly improving control and removing the need for repeatedly moving and copying the data around the enterprise. This can have an immediate impact in terms of enabling FS organisations to avoid data proliferation and ‘shadow’ IT.
In addition to this, when a new regulation is put in place, data virtualisation provides a way to easily find and access that data, so FS organisations can respond – without having to worry about alternative versions of that data – and ensures that they remain compliant from the offset. This level of control can be reflected even down to the finest details. For example, it is possible to set up access to governance rules through which operators can easily select who has access to what information across the organisation. They can alter settings for sharing, removing silos, masking and filtering through defined, role-based data access. In terms of governance, this feature is essential, ensuring that only those who have the correct permissions to access sensitive information are able to do so.
Compliance is a requirement that will be there forever. In fact, its role is only likely to increase as law catches up with technological advancement and the regulatory landscape continues to change. For FS organisations, failure to meet the latest legal requirements could be devastating. The monetary fines – although substantial – come second to the potential reputation damage associated with non-compliance. It could be the difference between an organisation surviving and failing in today’s climate.
No one knows what is around the corner. Whilst some companies may think they are ahead of the compliance game today, that could all change with the introduction of a new regulation tomorrow. The best way to ensure future compliance is to get a handle on your data. By providing total visibility, data virtualisation is helping organisations to gain back control and win the war for compliance.
TCI: A time of critical importance
By Fabrice Desnos, head of Northern Europe Region, Euler Hermes, the world’s leading trade credit insurer, outlines the importance of less publicised measures for the journey ahead.
After months of lockdown, Europe is shifting towards rebuilding economies and resuming trade. Amongst the multibillion-euro stimulus packages provided by governments to businesses to help them resume their engines of growth, the cooperation between the state and private sector trade credit insurance underwriters has perhaps missed the headlines. However, this cooperation will be vital when navigating the uncertain road ahead.
Covid-19 has created a global economic crisis of unprecedented scale and speed. Consequently, we’re experiencing unprecedented levels of support from national governments. Far-reaching fiscal intervention, job retention and business interruption loan schemes are providing a lifeline for businesses that have suffered reductions in turnovers to support national lockdowns.
However, it’s becoming clear the worst is still to come. The unintended consequence of government support measures is delaying the inevitable fallout in trade and commerce. Euler Hermes is already seeing increase in claims for late payments and expects this trend to accelerate as government support measures are progressively removed.
The Covid-19 crisis will have long lasting and sometimes irreversible effects on a number of sectors. It has accelerated transformations that were already underway and had radically changed the landscape for a number of businesses. This means we are seeing a growing number of “zombie” companies, currently under life support, but whose business models are no longer adapted for the post-crisis world. All factors which add up to what is best described as a corporate insolvency “time bomb”.
The effects of the crisis are already visible. In the second quarter of 2020, 147 large companies (those with a turnover above €50 million) failed; up from 77 in the first quarter, and compared to 163 for the whole of the first half of 2019. Retail, services, energy and automotive were the most impacted sectors this year, with the hotspots in retail and services in Western Europe and North America, energy in North America, and automotive in Western Europe
We expect this trend to accelerate and predict a +35% rise in corporate insolvencies globally by the end of 2021. European economies will be among the hardest hit. For example, Spain (+41%) and Italy (+27%) will see the most significant increases – alongside the UK (+43%), which will also feel the impact of Brexit – compared to France (+25%) or Germany (+12%).
Companies are restarting trade, often providing open credit to their clients. However, there can be no credit if there is no confidence. It is increasingly difficult for companies to identify which of their clients will emerge from the crisis from those that won’t, and whether or when they will be paid. In the immediate post-lockdown period, without visibility and confidence, the risk was that inter-company credit could evaporate, placing an additional liquidity strain on the companies that depend on it. This, in turn, would significantly put at risk the speed and extent of the economic recovery.
In recent months, Euler Hermes has co-operated with government agencies, trade associations and private sector trade credit insurance underwriters to create state support for intercompany trade, notably in France, Germany, Belgium, Denmark, the Netherlands and the UK. All with the same goal: to allow companies to trade with each other in confidence.
By providing additional reinsurance capacity to the trade credit insurers, governments help them continue to provide cover to their clients at pre-crisis levels.
The beneficiaries are the thousands of businesses – clients of credit insurers and their buyers – that depend upon intercompany trade as a source of financing. Over 70% of Euler Hermes policyholders are SMEs, which are the lifeblood of our economies and major providers of jobs. These agreements are not without costs or constraints for the insurers, but the industry has chosen to place the interests of its clients and of the economy ahead of other considerations, mindful of the important role credit insurance and inter-company trade will play in the recovery.
Taking the UK as an example, trade credit insurers provide cover for more than £171billion of intercompany transactions, covering 13,000 suppliers and 650,000 buyers. The government has put in place a temporary scheme of £10billion to enable trade credit insurers, including Euler Hermes, to continue supporting businesses at risk due to the impact of coronavirus. This landmark agreement represents an important alliance between the public and private sectors to support trade and prevent the domino effect that payment defaults can create within critical supply chains.
But, as with all of the other government support measures, these schemes will not exist in the long term. It is already time for credit insurers and their clients to plan ahead, and prepare for a new normal in which the level and cost of credit risk will be heightened and where identifying the right counterparts, diversifying and insuring credit risk will be of paramount importance for businesses.
Trade credit insurance plays an understated role in the economy but is critical to its health. In normal circumstances, it tends to go unnoticed because it is doing its job. Government support schemes helped maintain confidence between companies and their customers in the immediate aftermath of the crisis.
However, as government support measures are progressively removed, this crisis will have a lasting impact. Accelerating transformations, leading to an increasing number of company restructurings and, in all likelihood, increasing the level of credit risk. To succeed in the post-crisis environment, bbusinesses have to move fast from resilience to adaptation. They have to adopt bold measures to protect their businesses against future crises (or another wave of this pandemic), minimize risk, and drive future growth. By maintaining trust to trade, with or without government support, credit insurance will have an increasing role to play in this.
What Does the FinCEN File Leak Tell Us?
By Ted Sausen, Subject Matter Expert, NICE Actimize
On September 20, 2020, just four days after the Financial Crimes Enforcement Network (FinCEN) issued a much-anticipated Advance Notice of Proposed Rulemaking, the financial industry was shaken and their stock prices saw significant declines when the markets opened on Monday. So what caused this? Buzzfeed News in cooperation with the International Consortium of Investigative Journalists (ICIJ) released what is now being tagged the FinCEN files. These files and summarized reports describe over 200,000 transactions with a total over $2 trillion USD that has been reported to FinCEN as being suspicious in nature from the time periods 1999 to 2017. Buzzfeed obtained over 2,100 Suspicious Activity Reports (SARs) and over 2,600 confidential documents financial institutions had filed with FinCEN over that span of time.
Similar such leaks have occurred previously, such as the Panama Papers in 2016 where over 11 million documents containing personal financial information on over 200,000 entities that belonged to a Panamanian law firm. This was followed up a year and a half later by the Paradise Papers in 2017. This leak contained even more documents and contained the names of more than 120,000 persons and entities. There are three factors that make the FinCEN Files leak significantly different than those mentioned. First, they are highly confidential documents leaked from a government agency. Secondly, they weren’t leaked from a single source. The leaked documents came from nearly 90 financial institutions facilitating financial transactions in more than 150 countries. Lastly, some high-profile names were released in this leak; however, the focus of this leak centered more around the transactions themselves and the financial institutions involved, not necessarily the names of individuals involved.
FinCEN Files and the Impact
What does this mean for the financial institutions? As mentioned above, many experienced a negative impact to their stocks. The next biggest impact is their reputation. Leaders of the highlighted institutions do not enjoy having potential shortcomings in their operations be exposed, nor do customers of those institutions appreciate seeing the institution managing their funds being published adversely in the media.
Where did the financial institutions go wrong? Based on the information, it is actually hard to say where they went wrong, or even ‘if’ they went wrong. Financial institutions are obligated to monitor transactional activity, both inbound and outbound, for suspicious or unusual behavior, especially those that could appear to be illicit activities related to money laundering. If such behavior is identified, the financial institution is required to complete a Suspicious Activity Report, or a SAR, and file it with FinCEN. The SAR contains all relevant information such as the parties involved, transaction(s), account(s), and details describing why the activity is deemed to be suspicious. In some cases, financial institutions will file a SAR if there is no direct suspicion; however, there also was not a logical explanation found either.
So what deems certain activities to be suspicious and how do financial institutions detect them? Most financial institutions have sophisticated solutions in place that monitor transactions over a period of time, and determine typical behavioral patterns for that client, and that client compared to their peers. If any activity falls disproportionately beyond those norms, the financial institution is notified, and an investigation is conducted. Because of the nature of this detection, incorporating multiple transactions, and comparing it to historical “norms”, it is very difficult to stop a transaction related to money laundering real-time. It is not uncommon for a transaction or series of transactions to occur and later be identified as suspicious, and a SAR is filed after the transaction has been completed.
FinCEN Files: Who’s at Fault?
Going back to my original question, was there any wrong doing? In this case, they were doing exactly what they were required to do. When suspicion was identified, SARs were filed. There are two things that are important to note. Suspicion does not equate to guilt, and individual financial institutions have a very limited view as to the overall flow of funds. They have visibility of where funds are coming from, or where they are going to; however, they don’t have an overall picture of the original source, or the final destination. The area where financial institutions may have fault is if multiple suspicions or probable guilt is found, but they fail to take appropriate action. According to Buzzfeed News, instances of transactions to or from sanctioned parties occurred, and known suspicious activity was allowed to continue after it was discovered.
How do we do better? First and foremost, FinCEN needs to identify the source of the leak and fix it immediately. This is very sensitive data. Even within a financial institution, this information is only exposed to individuals with a high-level clearance on a need-to-know basis. This leak may result in relationship strains with some of the banks’ customers. Some people already have a fear of being watched or tracked, and releasing publicly that all these reports are being filed from financial institutions to the federal government won’t make that any better – especially if their financial institution was highlighted as one of those filing the most reports. Next, there has been more discussion around real-time AML. Many experts are still working on defining what that truly means, especially when some activities deal with multiple transactions over a period of time; however, there is definitely a place for certain money laundering transactions to be held in real time.
Lastly, the ability to share information between financial institutions more easily will go a long way in fighting financial crime overall. For those of you who are AML professionals, you may be thinking we already have such a mechanism in place with 314b. However, the feedback I have received is that it does not do an adequate job. It’s voluntary and getting responses to requests can be a challenge. Financial institutions need a consortium to effectively communicate with each other, while being able to exchange critical data needed for financial institutions to see the complete picture of financial transactions and all associated activities. That, combined with some type of feedback loop from law enforcement indicating which SARs are “useful” versus which are either “inadequate” or “unnecessary” will allow institutions to focus on those where criminal activity is really occurring.
We will continue to post updates as we learn more.
Mastercard Delivers Greater Transparency in Digital Banking Applications
Mastercard collaborates with merchants and financial institutions to include logos in digital banking applications Research shows that ~25% of disputes...
Success beyond voice: Contact centres supporting retail shift online
As the nation continues to overcome the challenges presented by COVID-19, customers have shifted their channel preferences, and contact centres have demonstrated...
7 Ways to Grow a Profitable Hospitality Business
Hospitality requires charisma and innovation The hospitality industry is a multibillion-dollar industry with lots of career opportunities in hotels, theme...
AML and the FINCEN files: Do banks have the tools to do enough?
By Gudmundur Kristjansson, CEO of Lucinity and former compliance technology officer Says AML systems are outdated and compliance teams need better...
Finding and following your website’s ‘North Star Metric’
By Andy Woods, Design Director of Rouge Media The ‘North Star Metric’ (NSM) is one of many seemingly confusing terms...
Taking control of compliance: how FS institutions can keep up with the ever-changing regulatory landscape
By Charles Southwood, Regional VP – Northern Europe and MEA at Denodo The wide-spread digital transformation that has swept the financial...
Risk assessment: How to plan and execute a security audit as a small business
By Izzy Schulman, Director at Keys 4 U Despite the current global coronavirus pandemic and the uncertainty it has placed...
Buying enterprise professional services: Five considerations for business leaders in turbulent times
By James Sandoval, Founder and CEO, MeasureMatch The platformization of professional services provides businesses with direct, seamless access to the skills...
Wireless Connectivity Lights the Path to Bank Branch Innovation
By Graham Brooks, Strategic Account Director, Cradlepoint EMEA As consumers cautiously return to the UK high street in the past...
Financial Regulations: How do they impact your cloud strategy?
By Michael Chalmers, MD EMEA at Contino How exactly do financial regulations affect your cloud strategy? It’s a question many of...