What are Exchange Traded Funds, how and when they started?
ETFs are investment funds divided into equal units that are traded on the exchange during trading time. ETFs enjoy advantages of both mutual funds and stocks at the same time without any major disadvantages.
ETFs entered global markets for the first time in 1989 through the Canadian market followed by the U.S. in 1993. Since then ETF have enjoyed rapid growth, the ETF asset under management (AUM) have increased from $72 billion in 2001 to $700 billion by the end of 2009 in the U.S. market alone.
How can investors buy the Exchange Traded Funds (ETFs)?
Investors can buy and sell ETF units throughout the exchange trading time. The units can also be created / redeemed through the market maker or any other authorized party.
Are there any upper or lower limits on the number of the Exchange Traded Funds (ETFs) units that an investor can buy or sell?
Minimum ETF units that an investor can purchase over the exchange is one unit, whereas creation of ETF units (minimum and maximum) would be as per ETF terms and conditions. Maximum limits of buy orders are regulated by Exchange. .
What are the differences between Exchange Traded Funds (ETFs) and Mutual Funds?
What are the benefits of investing in the Exchange Traded Funds (ETFs)?
In general, the investors could gain from the increase in the value of the underlying assets of the ETF in addition to any dividends paid.
Do the Exchange Traded Funds (ETFs) investors get dividends in-kind or in cash?
This is decided according to the policy of ETF as disclosed in the prospectus.
Does the unit price of the Exchange Traded Funds (ETFs) equal the stock prices of the underlying constituent of the ETF?
One must clearly distinguish between the trading price of the ETF units which is subject to supply and demand and the value of net assets (NAV) of the unit which represents the market value of assets consisting of the ETF unit. Often buying and selling of ETF units happen at a price very close to the value of net assets.
Would the Exchange Traded Funds (ETFs) prospectus be available before the ETF starts trading on the primary and secondary markets?
Yes, it will be available, The Fund Manager, as per Capital Market Authority regulations particularly ETF regulations, is obliged to provide the ETF prospectus and the terms and conditions an adequate period ahead of the ETF trading.
What are the risks that investors may face by investing in the Exchange Traded Funds (ETFs)?
The risks that investors may face by investing in ETF are the same as that of investing in securities. However, due to benefits of diversification, risks of investing in ETF may be less.
Are the Exchange Traded Funds (ETFs) limited to stocks only?
No, ETFs are not limited to the stocks only they may also include other instruments or commodities such as gold and silver.
Who will be the provider of the Exchange Traded Funds (ETFs)?
Authorized participants having Asset Management license issued by the Capital Market Authority.
Are there any limits to the ownership of the Exchange Traded Funds (ETFs)?
No, it is subject to ETF available volume in the stock market.
Would all categories and nationalities be allowed to invest in the Exchange Traded Funds (ETFs)?
Yes, ETFs will be available to all categories of investors who are registered to trade in the exchange.
Would the Exchange Traded Funds (ETFs) owners have the right to attend assemblies and vote?
ETFs are managed completely and directly by the fund manager and subject to the Investment Fund Regulations issued by the Capital Market Authority (CMA), therefore no general assembly is arranged for these funds.
Would the transfer process be available between the customer's portfolios?
Yes, with the same terms and conditions of the transfer of shares.
When does the Exchange Traded Funds (ETFs) expire and be delisted from the market?
Upon redemption of all ETF units by the Fund Manager.
Can an authorized participant issue more than one the Exchange Traded Funds (ETFs) at a time or at different times?
Yes, an authorized participant can issue more than one ETF, at the same time, based on different styles or strategies.
Can an authorized participant issue ETFs consisting of local and international shares?
Yes, after the approval of Capital Market Authority (CMA).
What are the most popular International Markets for the Exchange Traded Funds( ETFs)?
ETFs are generally traded in the international markets however ETFs are traded more actively in the United States, Canada and Germany.
What are the procedures to open a Depository Center account for a Qualified Foreign Investor (QFI)?
A QFI can open a Depository Center account through the Custody member after completing the following requirements:
- QFI details form.
- A copy of the certificate of incorporation or commercial register or an equivalent document.
- Disclosure of the QFI’s investments in listed companies.
The identification of QFI and non-resident foreigners shall be through Custody Members.
Where will foreign ownership information be available, and how often will it be updated?
Foreign ownership information will be available on Saudi Exchange website, and it will be updated on daily basis after market close.
How will foreign ownership information be displayed on Saudi Exchange’s website?
Under the QFI page, a foreign ownership limit section will have:
- Maximum ownership percentage per issuer and existing ownership percentage per issuer by all QFI’s.
- Maximum ownership percentage per issuer and existing ownership percentage per issuer by all foreign investors.
- Total ownership of QFI’s and swaps as a percentage of total market value.
Under each issuer’s web page, the “Major shareholders Foreigners” ownership section will contain:
- Maximum ownership percentage for the issuer and existing ownership percentage for the issuer by all QFI’s.
- Maximum ownership percentage per issuer and existing ownership percentage per issuer for all foreign investors.
How will investment limits in listed companies be disclosed?
Investment limitations set forth in the articles of association or by-laws of the listed companies or any instructions issued by the supervisory or regulatory authorities to which these companies are subject, will be available under each issuer’s profile page; under the label “investment limits”.
How can securities in a swap account be transferred to the depository center account of (QFIs)?
To transfer holdings under a swap account to a QFI, the following requirements should be met:
- CMA’s approval.
- Filling out the Securities Depository Center transfer form.
- A certified copy of the certificate of incorporation, and the commercial register or an equivalent document.
What are the transfer fees?
SAR 20 per issuance transferred.
What is Tadawulaty?
Tadawulaty is a service offered by Edaa and includes a bundle of services for investors:
Consolidated Reporting, Electronic Voting, Dividends Entitlement Reports, Expected Dividends Notifications, Shares Certificate Search, and Tender Offers.
You can access Tadawulaty through your member’s website, or click here.
What is the role of the custodian?
The custodian is the investor’s settlement and asset servicing agent in the market. It is used by the investor to support and manage pre and post trading activities in the market. The custodian will be assigned by the investor in the market for the following services:
- Settlement: settlement of all investor’s trades in the market. Responsible for receiving/delivering cash/securities.
- Safekeeping: safeguarding investor’s assets.
- Corporate actions: administers corporate actions on securities held such as securities dividends, tender offer, rights issue, etc.
- Cash Settlement: maintains cash settlement with Settlement Agent (Banks), deposits, withdrawals and other cash transactions.
- Reporting: provides the investor with information and analysis of the positions and performance of his/her portfolios.
Is the independent custody service mandatory for investors?
It is not mandatory, the service is optional and investors may choose to use the current custody model (combined brokerage and custody) instead.
Should the custodian transfer securities/cash to the executing member of the exchange to place an order in the market?
No, the executing member only has “remote” access (without the ability to view the investor’s assets) to enter buy-sell orders on behalf of the investor. All executed trades will be reflected in the investors account held by the custodian. The executing member acts as an execution agent only and retains no investor balance on its own account as a result of any trade.Custodians can hold the transaction and prevent settlement if trade is not confirmed by investor.
Who is responsible of collecting trading commissions?
Trading commissions will be collected by the executing broker.
Securities Borrowing and Lending
Does the Securities Depository Center (Edaa) review the bilateral agreement between the lender & the borrower and their agents?
The Securities Depository Center (Edaa) does not review the bilateral agreement between the lender and the borrower and their agents. It will be the responsibility of the Lenders & Borrowers and their agents to ensure their adherence with the Center's rules, procedures and market regulations.
Is a specific agreement required for securities lending and borrowing?
There is no requirement for any type of agreement, provided the agreement meets the minimum requirements of a securities lending agreement.
What is meant by “transfer of borrowed securities”?
Transfer of borrowed securities is made available to meet re-lending requirements, so that unqualified investors can borrow through a local broker or custody member, and qualified foreign investors can borrow from their foreign brokers, provided the brokers are themselves qualified foreign investors.
How long does it take to settle securities lending deal?
Settlement period for securities lending transactions is defined by participants as intendend settlement date, can beT+0 to T+5.
Is there a duration limit for a securities lending deal?
There is no duration limit for a lending deal, but the period of validity of the agreement must be determined.
Is it mandatory to safekeep the collateral against an SBL transaction in Edaa?
It is not mandatory to safekeep the collateral in Edaa, and the parties to the process can determine these details through the securities lending agreement.
What types of collateral are acceptable?
The collateral agreed upon between the two parties to the process are acceptable, provided:
- It must be evaluable and enforceable
- Domiciled in a country that applies regulatory and supervisory standards similar to those applied by the Capital Market Authority or acceptable to it.
- That the collateral covers at least 100% of the transaction value during the borrowing period.
Is there any additional agreement that needs to be signed between Edaa and the custody members executing the securities lending & borrowing transaction?
There is no additional requirement for executing a securities lending & borrowing transaction through Edaa.
Will a fee be charged on the custodian member executing the transaction?
Yes, an initiation and a termination fee will be levied on the custodian member executing the deal, as according to Edaa’s published fee schedule (here).
Is it possible for an agent to enter into an agreement and execute securities lending deals on behalf of their clients, whether they are multiple or individual instructions from clients' accounts?
An agent who has been authorized by their clients can enter into securities lending agreement in their behalf of them.
If a securities lending deal takes place, is ownership recorded in the borrower’s name in Edaa’s system?
Yes, the ownership of the borrowed securities is transferred temporarily to the borrower, and all corporate action proceeds such as voting rights and dividends distributions will be with the borrower.
What does a lending agent require?
It is required that the lending agent must be a Center Member of Edaa or an Exchange Member of Saudi Exchange.
How can unqualified investors lend or borrow?
Unqualified investors can lend and borrow securities through a local broker or custodian.
Are there requirements for borrowing from a broker?
Unqualified investors can borrow through a local broker or custodian. Foreign qualified investors can borrow from their foreign brokers provided said brokers are qualified foreign investors.
Is it possible to cancel or recall securities during the lending period?
Yes, provided that the securities lending agreement contains the lender's right to terminate or recall securities during the lending period.
Why is it required to complete an agency agreement in the event that a lending agent is appointed?
To give the flexibility to the lending agents to change the names of the parties as needed without changing the entire agreement.
What is the process of transferring borrowed securities?
A process through which the transfer of securities borrowed or owned by the broker or custodian member is made available to their clients, and the transfer process takes place in order to fulfill a lending or re-lending transaction between the broker and the custodian as a "lender" and his client as a "borrower", and the following transfer process is required:
- That it takes place between the broker or the custodian and their client (whether they are qualified or unqualified investors).
- There are no requirement for the type of agreement to be the used, provided the agreement meets the minimum requirements mentioned in the Securities Borrowing & Lending Regulations.
- That the purpose of the transfer is for one of the permitted purposes for securities borrowing & lending deals.
What is the purpose of permitting the re-lending of “borrowed securities”?
Since re-lending of securities is no longer one of the permitted purposes for securities lending transactions due to the risks that may accompany it. Also, there may be a need for some borrowers who borrowed to meet the needs of their clients to conclude a re-lending deal, this will be permitted in a standardized manner through the “re-lending process”.
Is there an example of transferring “borrowed securities”?
If “A” is an unqualified investor and wants to borrow 100 shares of “C” to fulfill an obligation, make a short sale, or for any other permitted purposes. Then Investor A must deal with a local Exchange or Custody member.
|If the local Exchange or custody members agrees to lend 100 shares of Company C either from their own shares or by entering into a securities lending deal, then a brokerage agreement or any other type of agreement will be signed with Investor A.|
In the event that 100 shares of Company "C" are available, a transfer of borrowed securities will be executed, and the shares will be transferred from the local Exchange or Custody member to Investor A's account.*
In the event that 100 shares of Company "C" are not available, the local Exchange or Custody member will enter into a securities lending deal with another party to fulfill the request of Investor "A". The lending process with the other party has no direct relationship with Investor A.
|After executing a securities lending transaction, and transferring the borrowed shares to the local Exchange or Custody member’s account. The 100 shares of Company “C” will be transferred to Investor A’s account through executing the transfer process.|
Is there a specific agreement that is required between brokers and their clients to re-lend “borrowed securities”?
No specific agreement is required, provided this agreement meet the minimum requirements set out in the Securities Borrowing & Lending Regulations.
Settlement Cycle (T+2)
How is a transaction executed?
A transaction is executed by matching the sell order with the buy order.
What is the Settlement of Securities?
It is the process of transferring securities of executed transactions from the seller’s investment portfolio to the buyer’s investment portfolio.
What is The Settlement of Cash?
It is the process of transferring the value of securities for executed transactions from the buyer’s investment account to the seller’s investment account.
When is a Settlement of securities completed?
A settlement is complete when securities and cash settlements are complete.
What is meant by the duration of Securities Settlement Cycle?
It is the period that starts when the sell and buy orders are matched, and ends when securities and cash settlements are completed.
What is the duration for Settlement Cycle of securities’ transactions?
Normal exchange trade securities’ transactions are completed after two business days following the transaction execution date (T+2). For negotiated deals and buy-in trades different settlement cycles are applicable: negotiated deals T+0 to T+5 – buy-in T+0.
What does the letter (T) stand for? And what does the added number refer to?
The letter (T) stands for the term (Trade); i.e. transaction.
As for the added number, it refers to the duration required for completing the settlement of a transaction.
Does the transition from (T + 0) to (T + 2) settlement have an impact on traders in the Saudi Capital Market?
No, there is no impact on traders. Buyers can sell securities directly upon executing transactions with no need to wait for completing the settlement of securities.
Also, sellers gain purchasing power that enables them to buy new securities directly upon executing transactions with no need to wait for completing the settlement of securities.
Which types of securities will the new Settlement Cycle apply to?
The new settlement cycle will apply to transactions of securities listed in the market of all types (stocks, SUKUK, bonds, Exchange-Traded Funds (ETFs), tradable rights), in addition to over-the-counter transactions (OTC).
What is borrowing securities?
Borrowing securities is the temporary transfer of securities from its owner (lender) to an investor (borrower) with an obligation to return them back to their owner at a future agreed upon date. A borrower shall provide and maintain financial collateral as agreed with the lender and shall at all times be not less than 100% of the current market value of the borrowed securities. The value of the collateral provided may be amended at the discretion of The Capital Market Authority.
What is Short Selling?
Short selling is the action of selling borrowed securities; provided that the investor returns them to the lender within an agreed upon period.
What is the purpose of Short Selling?
Short Selling aims to increase liquidity in the market and activate the role of the market maker. It also helps investors in short selling transactions to gain profits.
What are the advantages of applying the new (T+2) Settlement Cycle?
- Increasing levels of asset safety for investors, and providing enough time to verify transactions and deal with errors should they occur.
- Activating the role of market makers in the stock market.
- Aligning the Saudi Stock Market with leading global settlement practices, which will open up new listing opportunities for the Saudi market among other global market indexes.
- Developing an investment environment that promotes institutional-level investments and meets necessary requirements for coping with any future changes.
Allowing short selling on condition of borrowing equities.
What is Paying Agent service?
Paying Agent is a service provided by Edaa to the issuers of the securities. Through the service, the issuer authorizes Edaa for the distribution of dividends.
What is the mechanism for Paying Agent service?
Edaa calculates entitlement amount on the record date. After the calculation, the issuer transfers the total amount to an assigned bank account belonging to Edaa. Edaa will then distribute investors’ portions of the entitlement by the members.
Is this service mandatory for issuers?
No, this service is optional for the issuers.
Will this service include all the payment distribution for securities listed in the Saudi market?
Yes, this service includes all payment distribution for all listed securities in the Saudi Capital Market
How will the investor be notified of the dividends distributions?
The investor will be notified through SMS, if the investor is registered in Tadawulaty service.
Who is responsible for the dividends distribution to the clients’ bank accounts?
It is the responsibility of the authorized person to distribute dividends to the clients’ bank accounts.
Is the settlement cycle and depository services for foreign securities listed on Saudi Exchange are the same as offered for listed domestic securities?
Yes, the post-trade process for foreign securities listed on Saudi Exchange will be the same as listed domestic securities.
What is the settlement currency for the foreign security traded on Tadawul?
The settlement currency will be in Saudi Riyals (SAR).
How can investors transfer foreign securities from the foreign depository to Edaa?
- To transfer securities from the foreign depository to Edaa, the investor should submit a request to the foreign depository, as per the requirements of the foreign depository.
- The foreign depository will validate the details provided by the investor and initiate the transfer to the custody account of the investor at Edaa.
How can investors transfer securities from Edaa to a foreign depository center?
- To transfer securities from Edaa to a foreign depository center, the investor should submit a “Security Transfer Request” form to Edaa through a custody member.
- Edaa will validate the details provided by a custody member and initiate the transfer to the custody account of the investor at the foreign depository center.
Will the transfer from Edaa to a Foreign Depository Center be effective on the day of submitting the “Security Transfer Request”?
- If the request for a transfer is submitted to Edaa at or before 11:00 am (GMT+3), the transfer will be executed on the same day. If the request is not executed, it will be planned for execution on the next business day.
- For transfer forms submitted after 11:00 am (GMT+3), the transfer will be executed on the next business day in accordance with the work-days stipulated in the Saudi Labor Law.
How are corporate actions key dates determined for foreign securities at Edaa?
Corporate action key dates for foreign securities will be timed in accordance to the market where they are primarily listed.
How are security proceeds from corporate actions provided?
Edaa will deposit the security proceeds from the corporate action event to the investor. Cash compensation for security fractions will comply with the primary market practice of the foreign security.
How are cash proceeds from corporate actions transferred?
The paying agent appointed by the issuer will provide the cash proceeds of the corporate action event to the investors of Edaa in accordance with the given corporate action.
What is repo Collateral Transfer service?
Repo Collateral Transfer is a service provided by Edaa to the holders of securities in which it facilitates transfer of collateral-securities from a seller to a buyer through their respective custodians.
Is this service mandatory?
No, this service is optional.
What are the benefits of using this service?
This service provides buyers and sellers with a channel to facilitate their investment needs. The service provides sellers with needed liquidity whilst ensure reduced credit exposure by buyers as the collateral would be transferred under their name throughout the transaction period.
What are the service fees?
1) repo transaction amount (SAR 100,000,000), tenor (1 day)
How is collateral transfer service activated?
Edaa members can create collateral movements instructing Edaa system.(Center Account Designation Application Form).
Who is eligible to create a repo transfers?
Edaa custodian members with SBL instructions with selectiong “money loan indicator” tag.
Is the repo service available between different members?
Yes, repo transfers can be facilitated between different members.
Who can benefit from the service and how?
Any investor, bank, or corporation can benefit from the repo service by approaching their custodian to facilitate any repo transaction.
Who has the voting rights for the security?
During the lifespan of the repo agreement, all legal rights are transferred from the seller to the buyer.
Who has right to collect dividends payment for the security?
During the lifespan of the repo agreement, all legal rights are transferred from the seller to the buyer.
Are there limitations on securities ownership?
The Authority or any other Regulatory Body –in accordance with the relevant Laws and Regulations-, from time to time, issue ownership controls with respect to Securities.
Where is foreign ownership limitations published?
Saudi Exchange web site publishes limitations on group limits for “Foreign Ownership” and available headroom “Foreign Headroom” reports.
What are the exceptions of foreign investor’s ownership limitations?
Strategic Investors may not be applicable to foreign ownership limitation based on Authority decisions.
How can an investor prevent ownership limitation breach?
Daily disclosure of ownership limits consumption on securities published daily in the website. Additional disclosure/reporting for securities where available limit is below a certain threshold (5%) or fully consumed (group limits) in website. The custodians receive FTP files for group and individual limits end of day. Individual limitations: Check the limitation of each companies by laws; for foreign investors do not invest more than %10 in a local company. Group limitations: Check Saudi Exchange website available foreign headroom before investment decision. Restrictions: Not invest in companies published at Saudi Exchange website as restricted to foreign investors.
How does Saudi Tadawul Group identify or prevent breaches?
Individual and Group limitations are identified on each day after settlement completes. Last settled instruction for that symbol code is identified as breach security and its custodian is informed by Edaa, Exchange Member by Saudi Exchange. Restrictions, settlement instructions are rejected by settlement system. These instructions should be rectified to correct investor at Muqassa system. If not rectified until T+1 end of day Muqassa system automatically rectifies to related brokers house account.
Can investor vote on breach securities?
No, issuer will be responsible to make sure the investor does not exercise any voting rights as per the information provided in the share book for this purpose.
Which types of limitations applies to foreign investors?
- Individual limitations; an investor cannot own more than a certain percentage of a local company.i.e.QFI regulation 10% ownership limit on company level is allowed.
- Group limitations; foreign investors in total cannot own more than %49 of a local company.
- Are restricted to own some local companies either by company by-laws or by regulator.
What should be done in breach of ownership?
The investor should sell the securities on Exchange or transfer out from its account in 5 days. The responsible parties and actions are:
- a.Breach is identified based on reports generated by Edaa end of day. Edaa sends email to Custodian regarding the breach and investor`s responsibility to sell those within 5 days. • Custodian notifies investor as soon as it has been notified by Edaa. • In cases, which investor did not resolve the breach and breach does not originate from a trade; Edaa requests custodian to name a broker for mandatory sell on day 6 following the breach. Custodian should respond the request within the same day. .
- b.Saudi Exchange notifies the Exchange Member regarding the breach. Broker needs to put the necessary means to prevent investor to take more positions on the security.
- c.Daily monitoring of breaches and informing custodian end of day if the breach not rectified breaches via reports at Edaa system. Decrease in the total utilization of the ownership due to other activities (i.e. other foreign investors are selling the same security) won`t remove the responsibility from the originally identified investors to divest securities.
Exchange trade settlement completes on Day 7; in cases which investor did not settle the securities by Day 7:
- d.Saudi Exchange instructs broker to sell securities which are not divested by the end of 7th business day following the breach on behalf of the investor. Broker needs to do a mandatory sell on behalf of the investor on the 8th business day following the breach.
- e.Saudi Exchange requests broker to nominate a house CSD account at the end of the 7th business day following the breach. Broker needs to respond to the Exchange on the same day. Broker shall also notify the Custodian where the nominated house account is opened. • On 10th business day evening Edaa checks the record if breach continues, then transfer securities to broker house account. Broker shall segregate those securities in its own books. • Broker is obliged to sell securities and transfer the principal amount to the client. All the corporate action entitlements should be passed to the client until the sell is completed by the broker. Broker has the right to pass costs associated with transfer and mandatory sell to the client.