1. As we start a new decade, please can you look into the future and share your predictions on what the global market infrastructure industry might look and feel like by 2025?
I believe that our industry, in the middle of this decade, will be largely engaged in a renovation/modernisation process to take full advantage of the new technologies available as well as to satisfy needs arising from new customers.
Funding companies - large, medium and small - willing to grow their businesses, will remain the key purpose of our market infrastructure industry. We will continue to deliver along the current value chain: listing, trading, clearing and settlement services including market data with its growing importance.
The new technologies replicating our business models are readily available and commoditising at high speed, so, the business models of market infrastructures will change over time, and competition will make its inroads; that is a 'fact of life' but new opportunities will also be available. The differentiating factors will be the proven robustness of our processes, the reliability, the brand, and the thrust. I am certain that the ecosystem will better understand and value more appropriately our unique positioning as an unbiased trusted third party.
We understand that our customer base will not be limited to the traditional sell side. Indeed, new services – including ones not related to the securities industry - may well be offered to a whole range of new customers. Product standardisation/certification, price formation/discovering, matching, informing, settling are key features of any exchange of goods and services amongst economic actors. It is up to us as an industry group to make the best use of our assets in the coming decade.
2. And how is your firm getting ready for the changes you’ve outlined above?
First of all, we have heavily invested to upgrade our technology and trading as well as post trade: these changes are not simply technology changes, they are a unique opportunity to understand and adopt new business standards as well as the best agreed industry practices. By moving to these standards, we make sure that we are and remain attractive to the largest possible customer base of intermediaries and end investors.
These investments are a 'must' to stay relevant as a market infrastructure for our users as well as for companies looking to raise capital in the kingdom and in the region.
To face the changing nature of our business we are closely monitoring and analysing the new technologies, and the evolution/revolution they may or may not bring to our business models. We have set up a multidisciplinary innovation team in charge of reviewing and understanding these new business and technology trends and their impact. We do also participate in different Fintech industry groups and think tanks, to see where our unique assets and value propositions could be exploited.
Not all innovations or business proposals are worth investing in. Due to that, we have set up a filtering process to qualify each initiative, assessing if it is the right initiative, and more importantly, if it is the right timing for us to get involved.
3. Entering a new decade isn't just about looking ahead; it is also a good time for reflecting on the past. What’s the top lesson you’ve personally learned from the past ten years?
The previous decade has been one of tremendous changes; there have been more changes taking place in the last five years of this decade than over the previous two decades!
We started the decade as an exchange accessible only for domestic investors, with retail representing most of the volumes on the market with high volatility as a negative corollary of such market structure.
Limited assets classes (equities mainly) were available; buy and sell activity had to be pre-funded and settled in real time, not giving room for financial innovation. Borrowing and lending as well as short selling were not allowed, further distorting price formation.
The asset management industry was nascent and not diversified.
And IPOs were not based on book building, and Saudi listed companies didn’t appear on any major international indices.
In less than five years…
- The market opened to foreign investors through swaps initially, and the QFI framework later, to represent now around 12.5% ownership of the free float of listed companies.
- Over 1800 QFIs have registered and are authorised to trade securities in the Saudi Stock Exchange.
- Institutional investors do not need to pre-fund their business when they intervene on the market, and the settlement cycle has been extended to T+2 to align with international markets.
- Borrowing and lending of securities as well as covered short selling has been defined and implemented.
- New asset classes have been introduced – REITS, Sukuks, ETFs – and a secondary market with less strict requirements for issuers has been launched, immediately attracting a significant number of small and mid-sized companies.
- In the last year of the decade, thanks to market infrastructure and regulatory changes, Saudi companies have been included in major Emerging Market indices – MSCI, FTSE & SPDJ – in a record time never observed before!
- New indices – including tradable ones, based on the most liquid listed companies – have been launched to allow appropriate benchmarking and the development of the asset management industry.
- New mechanisms - closing auctions, reduced tick sizes - have been introduced to manage and control market volatility.
- An independent CSD and CCP have been set up as fully owned subsidiaries to have dedicated entities focused on their businesses and to better mitigate risks. A derivatives market has been developed over the last two years and will be launched in Q1 2020.
- Finally, the largest IPO in history, in terms of capital raising, took place at the end of last year on our exchange, demonstrating the capabilities and professionalism of the Saudi Capital Markets and Tadawul teams.
The Saudi Stock Exchange is now part of the top 10 Exchanges in the world in terms of market capitalisation.
The lesson I personally learnt over the last decade is very simple:
“Where there is a will, there is a way.”