What kind of trends are you seeing in the Middle Eastern markets?
I came into this market fairly recently, and it strikes me that the direction of movement seems similar to that of other developing markets. The thematic movement is there, but the stage of progress for each market is different.
We are seeing a drive towards segregating the roles of the exchanges, central counterparties (CCPs) and depositories with regards to client assets, towards realigning markets to a common settlement standard, and towards trying to get the role of custodian asset protection more embedded in the market. The similarities are beneficial, as generally there are no surprises. You can see how the markets are moving and predict how they might start to shape up.
This would be even better if we could quantify it. Looking back at other markets as they went through the same stages of development, the pace hasn’t been consistent. There are trigger events that increase the pace of change at various points in time, but these are, of course, different in every market.
In the Middle East at the moment, the movement in oil prices has been one such trigger event. There is a sense of urgency now around managing that change, which is interesting to review and track from an investor point of view. These markets have historically been largely oil-dependent, and the way oil prices have moved over the last few years hasn’t helped the larger macro picture, or the fiscal picture. This has led to liquidity challenges, contributing to a greater emphasis on foreign capital.
That is the direction in which the market is evolving. The reforms are all trending towards making markets more stable and more secure for investors—more aligned to their needs.
Previously, you worked in the Indian market, what parallels can you draw there?
When looking at market growth, you have to consider two aspects of it. One is the macro story, which is the one that drives the thought process, draws in investors and encourages foreign capital investment. Then there is the infrastructure story. Here, we have to consider how easy it is for investors to capture the opportunities that arise from the macro story.
The macro environment is not something we can control, however some of the markets in the Middle East have a very strong macro story. For example, Saudi Arabia is arguably the largest market in the Middle East, in terms of population and market capitalisation, and there is a transformation underway there at the moment, with a drive towards greater economic diversification. That is a similar growth path to the one India saw.
With regards to the infrastructure side, in India, the market opened up in 1993 and grew and developed over a good 20 years. The Middle Eastern market is still relatively new, developing over the last 10 years or so. It is at a different stage of its development, but the model is, again, pretty similar to what we saw in India.
I don’t see any material differences. In both the Saudi and Indian markets we have seen a process of registration introduced for investors, guidance on asset segregation, and the requirement for investors to have a certain track record to invest in the markets. In India, however, the role of the custodian is absolutely established for investors—all clearing must happen through a custodian. This is something that the Middle Eastern markets are still working towards.
How does the role of the custodian differ between different Middle Eastern markets?
In the Middle East, the concept of the custodian stepping in to clear the trade is there in some markets, such as Qatar and the UAE, but not in others, including Saudi Arabia, one of the biggest markets.
That is a big change that the market can bring about that will excite investors. At HSBC we are actively working with the authorities in Saudi to move from a pre-funding T+0 clearing cycle structure, which doesn’t lend itself to a very wide variety of investors, to the T+2 model. This change has actually been announced by the Saudi regulators and is scheduled to be rolled out in the first half of next year.
For investors and for our clients this is very exciting and it relaxes the rules for investors coming in.
At HSBC, we have been active in the Middle East ever since the markets have been established and open to foreign investors, and we have seen some of these markets change materially. We are partnering with various markets in the long term, and we are very involved in making some of those changes happen. There is a lot of potential to provide exactly what the investors are asking for.
Are major initiatives aimed at attracting foreign investment?
The aim is to attract institutional partners at a broader level, but that institutional investorship is both domestic and foreign. The Saudi market is currently very retail-driven, so the idea is to improve the infrastructure to attract more institutional partnerships.
Within Saudi, there are also a lot of changes underway on the domestic side of things—a drive towards independent custodian models and towards appointing independent fund accountants, and developing models for domestic asset managers—as well as the changes in the foreign investment space.
Which are the other Middle Eastern markets to watch?
Saudi is really the big story of the moment, but Kuwait is also very much in the picture. Kuwait is one of those markets where the role of the custodian in clearing is not defined at the moment, but it’s moving towards a unified T+3 model, and that’s the kind of change that shows movement towards custodian clearing and confirmation.
The UAE is also moving towards the central bank taking over the clearing of cash from the exchange, a move designed to help make institutions more robust. There is a similar dialogue in Qatar around segregating all the rules for the CCP, the exchange and the depository. As all of these markets continue to evolve, that’s the kind of direction they’re likely to take, making risk management a bit cleaner and easier for institutional investors.
There is always a question around whether markets are developing at the correct pace, but my sense is that the Middle East is heading in the right direction and we should start to see things moving faster.