Jalal Faruki: When we look at the practical challenges, the biggest one we have faced as a large local custodian and investment bank, is educating the lender community locally. In a fully developed market, you’ll have international lenders and borrowers, and local lenders and borrowers. But we also realise, at this stage, that there is going to be a natural supply and demand.
The natural supply is probably going to be local lenders, and the natural demand is likely to be foreign borrowers. So for us, educating the local lenders has been the biggest challenge, conditioning them to understand that any incremental return you can generate on a stock loan portfolio is good. Many people want to negotiate prices in the beginning, and instead, we’re trying to condition them to believe that we have a fiduciary responsibility to get the best possible price. Therefore, they benefit from having more assets in those lending pools.
On the borrower side, there’s been some challenges from not having a clean netting opinion — a lot of borrowers still see this as an immediate red flag or hurdle that they’re not willing to work around. In the past year, certain counterparties have been willing to take an RWA impact, to be active and to be first in the market and to get the benefit of that business. This is starting to get people to shift and say: okay, let’s try to get this running, even if we have that hurdle.
There’s a lot of work being done with the International Securities Lending Association (ISLA), the Capital Market Authority (CMA), and with different regulatory bodies in Saudi, to clear that challenge, but it’s still there, and it will still be a challenge in the market to become more efficient.
From the lender’s perspective, Sharia compliance is critical. In Saudi, a majority of investors, if not all, would prefer a Sharia-compliant transaction structure. It is something we’ve gotten cleared with our Sharia board. We’re now going through the documentation process and making sure that it flows properly in our systems is the next step — we think that will open up a lot more on the supply side. On the demand side, the other key factor is long, short funds coming to the market. These didn’t exist a year or two ago in Saudi, but now they’re starting to exist, and they need to have physical borrow. The growth in that sector is going to continue driving to that.
Andrew Geggus: When you have a fragmented region and you’re looking to grow, the challenges are the resources that you need to put into the region to develop it. That is a challenge because banks — global banks, domestic banks — are all challenged from a resource perspective, there is not an abundance of resources available.
For example, to understand the Sharia impact on legal documentation that has to be in place for a transaction, as well as making sure that your firm is abiding by the regulations locally, firms need to invest into a legal opinion on this. Most international participants, or foreign participants, won’t have a team locally that are experts in that. So that’s their resource expended on that point, as well as the infrastructure. As an example, in Saudi, firms have to connect to the Securities Depository Center Company (Edaa). That requires more investment as well.
The challenges from a global agent lender perspective, are around how we dedicate our resources to match the opportunity, which is high, as well as what our clients want — but we do it in the right way, so we don’t fall foul of any regulations or upset a market. There is an unforeseen with this. When there is a new market, firms need to explore things that haven’t happened yet.
Andrew Stephen: Andrew G made an interesting point about resource. When you’re going into a new market, as the head of the business, I’m sure your team will come to you asking for resource, but then you need to substantiate what the opportunity is. You’re in a chicken and egg situation. As a salesperson developing relationships,trying to canvas the market, you need the product to distribute. The business however needs the business case to be able to substantiate the investment, it presents a loop.
To a certain degree, you have to take a view. If you feel that the market is, or this particular opportunity is one worth pursuing, then the banks, the agent lenders, or whoever wants to play a part in the infrastructure of the market, needs to invest today to generate gains in the future.
Sarah Alothman: The demand in Saudi is picking up. We receive a number of requests on the securities lending side. The Kingdom of Saudi Arabia is ready, and the SBL framework was launched by Edaa back in 2017.
Elie Geagea: For the securities borrowing/lending market, one challenge is to be able to expand and diversify the supply. Another challenge is that growth needs often to be led locally. In Saudi for example, most of the assets are owned locally. Local asset owners’ participation in the SBL market will drive growth locally and will encourage foreign investors to engage more in the SBL market
Raising awareness and education among local participants is very important and HSBC is well involved in the education/awareness upskilling exercise. On the other hand, given it’s network with local and international participants, mid-size and large financial institutions, HSBC is capable of providing additional diversified and stable supply, not limited to index-linked shares. We believe if growth is implemented in a smooth and responsible way, it will be a sustainable one.
Darren Crowther: Referencing Andrew Stephen’s leap of faith, I always view this as investing today for future revenue and growth in a 18-24 months time period. Within the Gulf Cooperation Council (GCC) countries, we’ve seen a large amount of inbound enquiries, which we believe will turn into forward revenue, so we are fully behind what we now need to do.
The challenge of companies starting in the region for the first time brings opportunities.
This allows Broadridge to leverage its domain knowledge to educate clients in best practice for securities lending and work with them to create a successful onboarding approach.
We see less fragmentation in the GCC countries in relation to market setup and continual improvements and minor changes to this adoption will reduce this further and promote adoption of best practice.
The final part of the puzzle is technology and system integration. There are multiple countries within the GCC which have different data residency requirements and integration requirements. We are focussed heavily on repeatable onboarding processes and standard components which meet market practice.
We are taking more inbound enquiries on repo capabilities within the region so this is evolving into an opportunity space which will fuel further growth in the region.
The ball is gradually starting to roll for repo in the Saudi market. If we don’t organise the repo market, then we are closing ourselves off a little bit, no?
Faruki: What’s interesting about the repo side is that those transactions started in Saudi through the local depository in 2020, before the market infrastructure changed, and before even the SBL regulations were really adopted and used. We started seeing a lot of repo activity between local institutions — with maybe one or two regional institutions coming in as part of that. In the past 18 months, we’ve seen a huge influx of internationals come into the local currency debt market and become active in repo with local institutions.
That’s also driven a lot more liquidity, competitiveness, and activity in that market. But in general, it’s still very opaque. There isn’t a centralised place to see repo activity — there are some platforms that are trying to compete for that. Even in terms of how they’re cleared, each one is different. There is the option for bilateral, and then some are cleared by the CCP in Saudi by Muqassa. Not everyone uses one or the other and, to add to the confusion, there are also international central securities depositories (ICSDs), like Euroclear and Clearstream, that also offer a solution for cleared repo. There is not one place where it’s all aggregating and you can see it in one place, that’s one of the challenges.
Crowther: Do you think a local regulator will put that in place, to have a single place of report?
Faruki: There was a draft regulation about an alternative trading system (ATS) coming to the Saudi market for fixed income securities only, and it has been approved. From what we know, that ATS will come into the market maybe in the next 12-18 months. We think that once that ATS comes, it might also drive a related repo platform to allow it to be linked together, and provide that visibility in one place.
Geggus: What’s the size of the fixed income space in comparison to repo in the Saudi market?
Faruki: In terms of the outstanding, there is approximately between SAR 500-600 billion (US$133-159 billion). So it is not a small market at all.
Geagea: There is a pick up observed in the fixed income repo sector. There must be room for financial institutions to consider equity for repo trades
Faruki: There is some talk about this. One of the challenges we have right now with SBL regulations, as they stand in Saudi, is that I can’t use Saudi assets as collateral in triparty or in these kinds of transactions, unless it’s linked with a local Saudi equity trade. For example, I can’t use Saudi Basic Industries Corporation (SABIC) shares as collateral for something that’s outside of a trade booked in the CSD.
That is one of the key factors that we have mentioned to the depository that needs to change, because we don’t want Saudi shares to just be used to lend, we also want them to be used as collateral for global transactions or other transactions.
Dimitri Arlando: From an education perspective, institutions in the region have been doing international repo for a long time, so it’s a transaction that people are comfortable with, and that they know for the most part. That isn’t necessarily the same with securities lending. However, if you look at the international securities lending business that’s done out of the region. Some of those beneficial owners have been lending securities longer than most people in the world, over a quarter of a century.
It’s important to look at those two things separately. We’re discussing a lot of domestic securities lending here. But actually, securities lending isn’t new to the region, there are institutions in the region, as I said, who have been lending for over 25 years. That’s true of repo as well. If you go and speak to any corporate treasury in any of the large companies that have been formed here, they have been doing repo for a long time. From an education perspective, they’re all very familiar with repo. It’s really just getting the plumbing and the mechanics and the regulations in place, as Jalal said, to enable that repo activity to grow from a domestic perspective.
From a technology perspective, what investments need to be made in the pre-trade setup in the region for the wider use of securities finance?
Crowther: Whether it’s repo or securities lending trades, there’s upfront work that everyone needs to do. Firstly it’s the integration work into the bank and market infrastructure. This is just the pipes and plumbing and something which is becoming easier and more standard over time.. Secondly there is focus on how AI and Date can be used to help with decision making, improving workflow processing and providing more efficient processes.
The advantage of where the GCC countries are now is that they’re going to benefit from the pipes and plumbing that’s already in place from the different vendors, which will allow them to take advantage of some of the new modern technologies.
For firms like Broadridge, which have historically offered data centres in the US, Europe, and Asia, we are now having to ask ourselves: how are we going to do this? How do we service the client’s data residency demands of keeping the data in the country? The easy answer is, Amazon Web Services (AWS). Broadridge is an Amazon partner, we deploy our platform on AWS. We can do that here in the UAE. But, in Saudi Arabia, we can’t do this yet, because AWS services needed are not fully available until 2026.
There’s an interim period where we’re servicing clients with physical kit at the bank, and then in a couple of years’ time, we’ll be able to take that ownership back and provide it on a mutualised basis. ‘Mutualised’ bring efficiencies of scale and cost. We should be able to run things more efficiently across multiple clients, than banks can do on their own. As we go into each country, we’re doing an assessment of what we can do in that country and what we can offer. By the time we get to 2026, or maybe at the end of 2025, we’ll be able to offer something pretty standard into each place, which will allow us to roll out much quicker.
From one side, we have this will of pushing this market forward and blowing it up to its full potential. On the other side, we also have this availability of learning, from mistakes, but also benefiting from all of the new possibilities and systems that make things cheaper and faster. Are you feeling the benefits from these new tools?
Alothman: Definitely. As an example, in Saudi Arabia, the post-trade technology, the changes that have been made and the introduction of a CCP effectively helps with the management of clearing, as well as mitigating market risk. There was also an introduction of the transaction processing rules, to be inline with the global practices. Such as with the introduction of SWIFT messages, the ISO messages, and the introduction of the Saudi Tadawul Group to have a local alignment with the global standard as well.
Faruki: One of the challenges, in general, that we’ve had in Saudi, is that the market infrastructure has changed a lot across so many parts of our business over the past four years. Not just some of the ISO message implementations that Sarah talked about, but we also have similar changes in the fix, in enabling new types of orders, in enabling new IPO processes. All of these are putting a huge load on our infrastructure and technology teams to try to keep up with those changes. That’s why it might take us longer to come and implement some of these new capabilities, even though the market infrastructure and regulation has been there for a while.
As much as we want to go beyond domestic solutions, how can the international banks go beyond cross-border trades and point out what is good for the market?
Geggus: Circling back on the technology point, Darren mentioned the region benefits from the pipes and plumbing that’s already been created before. They were also then impacted by the challenges that are faced everywhere else. A global challenge that we see with technology is around interoperability. We are seeing more and more fintechs come to market at the moment — this is creating potential silos in the global agency lending market and securities lending market, it is not particularly region based. With this, comes challenges. A demand from the agent lender side is for interoperability, it would be extremely helpful, because without that, the market is not efficient, and that will have a knock on impact onto the region.
Cybersecurity is a huge topic for us as a global bank at the moment. That will impact the region as it grows, and technology solutions they use to build upon, as well as the fact that you have all of this future technology, that Darren mentioned, at their disposal, as the market is in its early stages, and it can probably adopt a little bit easier than something that’s been in place for a long time.
There are a couple of points from a technology perspective, but beyond that, how global businesses can help, education is one that’s been mentioned a few times. We’ve been doing this for a long time, we have successful setups in multiple jurisdictions, so utilising that and our knowledge is something that we’re doing at BNP Paribas. We’re looking to work with local participants to help build these models. That is something where we can help develop the markets further.
Faruki: One point that is important to mention. What global custodians also drive, but local custodians need to participate in, is enabling asset managers to properly reflect assets on loan. If you look at the most frequent lenders, a lot of it is long only index-based and benchmarked asset managers. We have a lot of those in Saudi. SNB Capital, Riyad Capital, other investment managers have huge pools of capital that are allocated to these products, most of those products aren’t able to lend now because the local sub-custodian or local middle office or administrator doesn’t have the ability for them to reflect shares on loan versus not in custody, and that impacts net asset value and valuations. This is a key market development that needs to take place, and it’s something that even global custodians need to drive with their local subs to make sure that they have the same capability that they have in developed markets in reflecting those assets properly.
Arlando: There are technology solutions that exist. There are two people on this panel with books and records platforms that can help do that. The difficulty is perhaps more that the technology in some of the institutions has evolved over time, sometimes it’s in-house developed as well, and that’s where interoperability is really important — the ability from technology providers to make sure that whatever we’re building, is able to connect to the various different platforms out there, not just from a books and records perspective, but from a trading perspective.
It’s important that the technology providers are able to offer that connectivity to whichever platforms and systems that firms have. But it’s also difficult, I’d imagine, to extract those systems and put something new in. It’s much easier to get an internal budget to spend if there’s a regulatory driver, rather than trying to improve or be more efficient, it’s a lot harder to make that business case.
Crowther: The two places that budgets are spent is cyber and regulation, those are the current two key drivers. Within Broadridge we have a heavy current focus on Cyber and then our regular product investment strategy. We are investing in data protection and cyber security and solutions that, in the event that they are compromised, can come back up quickly, and can be run in a mode by clients to support their business. It’s key within our books and records platforms that we can do that, and it’s quite an interesting time for us as well because of the Digital Operational Resilience Act (DORA).
The European regulation is setting the benchmark for what the standard will look like in 12 months time. If you don’t provide the standard in 12 months, you don’t really sell, because people will only buy platforms that meet compliance and regulatory standards. There’s a lot of investment within the banks themselves, so BNP Paribas, HSBC, J.P. Morgan will all be investing a lot of money into cyber resiliency to meet their DORA requirements. That will benefit them for many years forward, because it becomes a tick in the box for them. In 12 months time, you must have these things available to you. As a result, a lot of time, money and budget is invested to ensure firms are setting themselves up for the next five years.
