MSCI, a leading index provider to the ETF industry, has upgraded Saudi Arabia to Emerging Market status, following its latest Annual Market Classification Review.

Sarah Al Suhaimi, chairperson of Tadawul

The move marks a change from the country’s previous status of “Standalone Market” and echos recent changes made by FTSE Russell which designated Saudi Arabia as a Secondary Emerging market in March 2018.

Supporting its decision, MSCI cited further market enhancements introduced by Tadawul (the country’s national stock exchange) 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.

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 Saudi Arabia’s reclassification in the FTSE Russell Global Equity Index Series, marks the further integration of the Kingdom into global capital markets,” added 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.”

The country will be included in the flagship MSCI Emerging Markets Index in two phases, concurring with the May 2019 Semi Annual Index Review and the August 2019 Quarterly Index Review.

The MSCI Saudi Arabia Index, with 32 securities, is expected to have a weighting of approximately 2.6% within the MSCI Emerging Markets Index.

The road to inclusion in the MSCI Emerging Market Index

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 status, 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 (Islamic bonds) 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 27 May 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.