Exciting changes are afoot for Saudi Arabia’s capital market. The long-hoped for move to allow direct foreign investment for the first time promises to be a real landmark development. But this is just one element of the Capital Market Authority’s (CMA) Strategic Plan for 2015-20191.
The Plan focuses on four themes:
- Foster capital market development.
- Promote investor protection.
- Improve the regulatory environment.
- Enhance the CMA’s organisational excellence.
Together, they aim to enhance fairness, efficiency and transparency, and attract more investment.
To do this, each theme comprises multiple threads. So alongside the move to open the market to qualified foreign financial institutions, a core objective of theme one is to grow the asset management industry. Initiatives will include diversifying the distribution channels available to investment funds (such as by encouraging the development of electronic distribution platforms). The CMA also plans to mandate the use of independent custodians to enhance asset protection and fund governance. Developing the local sukuk and debt instrument markets is another key target.
Then there is investor protection, an integral part of the CMA’s drive to attract more institutional investment. This entails improving investment funds’ information disclosure requirements, including enhancing the transparency of asset valuations, and strengthening regulatory compliance.
These are all welcome developments that I’m sure will help the CMA achieve its vision for the Saudi market. But inevitably the changes will put pressure on firms’ existing operational platforms.
For instance, expanding the available distribution channels may help investment funds reach a wider audience – but only if they can compete effectively against rival funds, (and the opening of the stock market in June means competition will intensify further) as well as satisfy distributors’ operational and performance due diligence requirements. The boards of asset management companies in the region now have greater oversight responsibilities than in the past, and it is those firms that show excellent corporate governance using transparent, open, visible processes and activities that will attract interest from international investors.
Promoting the sukuk and debt markets means funds will need sophisticated trading and portfolio management systems able to support multiple instrument types. Meanwhile, enhancing investor protection – with its heightened focus on regulatory compliance and disclosure – increases the onus on robust data collection, management and reporting capabilities.
In order to comply with regulations such as disclosure, tracking the importance of personally identifiable information, adherence to workflow practices, client protection mandates, market stabilisation and tax, to name a few, asset managers need a framework to consolidate firm information and data across counterparties as well as monitor and manage that information.
One of the ways of enhancing investor protection is to use independent custodians, and increasingly funds now use multiple custodians, but this requires automated interfaces and reconciliation tools to efficiently exchange and reconcile the data flows to spread the risk across more counterparties. However, the aggregation and management of data across multiple custodians for consolidated reporting means that the traditional methods of paper reporting are now not viable. As a result technology providers and account providers are joining forces to establish custodial data interface partnerships. Custodial interfaces allow managers to move to an exception-based reconciliation process which minimises manual errors and operational risk as well as reduces the time spent on client reporting. Banks, custodians and fund companies now operate custodial interfaces as part of an international custodial data consolidation network.
Considering the Saudi market’s existing size and potential growth, there is no doubt that the Strategic Plan offers many opportunities to asset managers. But as the market shapes up in the coming years – the greater and more complex transaction volumes combined with the evolving international regulatory regime – only those asset managers with best-of-breed technology infrastructures that provide sophisticated trading, risk management, portfolio accounting and reporting capabilities will be positioned to really take advantage.
Jad Fares is the Advent Regional Manager for Saudi Arabia. He is responsible for growing and developing Advent within the investment management industry of the Kingdom where Advent added five new asset managers in 2014.