HSBC to act as custodian to Ashmore in Saudi Arabia

HSBC has been appointed to act as custodian to Ashmore Group in Saudi Arabia as the specialist emerging markets investment manager becomes one of the first Qualified Foreign Investors (QFIs) in the Kingdom.

HSBC also acted as the local Accessing Authorised Person, thereby enabling Ashmore’s license application. This comes as Saudi Arabia introduced liberalising measures towards its capital markets in June 2015 prompting foreign institutional investor interest.

The Capital Market Authority (CMA), the Saudi Arabian regulator, is allowing QFIs to obtain limited exposure to its securities markets. The criteria for investing into Saudi Arabia, however, remains rigorous. Only banks, asset managers, securities firms, or insurers with a minimum of $5 billion in assets or a five year track record are eligible to attain QFI status.

Market participants have welcomed the CMA’s initiative. “As an emerging markets asset manager, Saudi Arabia represents a very exciting opportunity for us. Not only is it the largest economy in the Middle East but it has a clear-sighted strategy to diversify its economy away from oil,” said Mark Coombs, chief executive officer at Ashmore Group.

The reforms are limited and do subject investors to investment restrictions around share ownership. Nonetheless, it is hoped that these measures will facilitate an upgrade of Saudi Arabia by MSCI from Frontier Market Index status to Emerging Market Index status by 2017. If such an upgrade materialises, there could be a surge in fund manager investment into Saudi Arabia.

There have been a number of regulatory improvements. The authorities now permit foreign investors to hold Saudi Arabian securities with a global custodian bank instead of relying on a local broker-dealer, which exposed firms to potential counterparty risks.

However, Saudi Arabia still utilises a T+0 settlement cycle meaning trades must be pre-funded. Again, this exposes foreign investors to counterparty risks, particularly if a local broker-dealer holding securities defaults prior to delivering the securities to the investors. There appears to be little indication that reforms to the T+0 settlement cycle will occur in the near-term.