Since 2014 commodity price volatility has exerted downward pressure on GDP growth across Middle East and North Africa (MENA), governments in the region saw little option but to initiate market reforms, thereby opening up their economies to foreign institutional investors. As part of this change programme, efforts were also made to rationalise post-trade processes by simplifying complex administrative procedures and aligning existing market practices with international standards. The progress made in countries such as Saudi Arabia and Kuwait, for instance, was endorsed by major index providers (FTSE Russell and MSCI), which leads to the reclassification of both markets to Emerging Markets status between 2018 and 2020 in what should lead to an influx of capital from global institutional investors.
Expediting access to the local market
Even though MENA jurisdictions are loosening their historic restrictions on foreign investors accessing local markets, continued operational barriers have impeded flows in some cases. Speaking at The Network Forum (TNF) in Muscat, Oman, Steven Costermans, director, network management for MENAT (MENA and Turkey) at Standard Chartered, says one of the most prominent topics in the Middle East and North Africa region is the absence of harmonisation around NIN (national investor number) generation across markets.
Ideally, TNF participants would prefer it if NINs were fully transferable across the entire region. “The account opening process would be a lot easier if an investor were able to open an account in Oman with a transferable NIN, which would permit them to invest freely into Saudi Arabia, for example,” says Costermans. However, NIN harmonisation is not so straightforward. Some markets such as the UAE require investors to obtain multiple NINs as the country is home to more than one stock exchange. Harmonisation would also require enormous standardisation of technology systems and processes across local infrastructures. There is also the need to streamline local legislation across the region before it can happen. “NIN harmonisation is a long-term project, and it will not materialise overnight,” he adds.
Simplifying documentation requirements
Additionally, MENA markets often require investors to provide detailed - and frequently divergent - documentation covering areas such as KYC (know-your-customer) or AML (anti-money laundering) prior to opening up cash and securities accounts. The level of granularity required and lack of uniformity across different markets can be a deterrent to some clients. Costermans suggests that market entry could be expedited and simplified for institutional investors if custodians played a more active role in the authorisation process. “Reducing market entry documentation will alleviate the process and hasten the time it takes to open up accounts. Moreover, regulators could entrust custodians to perform the KYC,” he says citing the example of removing the requirement in many markets to consularise and/or notarise certain documentation and transferring the responsibility to the custodians
Simplifying the account structure
Most MENA markets continue to favour the beneficial ownership model over omnibus account structures, which also creates more paperwork and cost for end customers. “The continued preference for direct registration versus omnibus accounts is another prominent regional discussion. An omnibus account structure would allow investors to open an account with a global custodian and benefit from having access to all of its markets without the need of opening a new account for each new market they want to invest in. Most markets, however, support direct registration because they feel this set-up is advantageous from an asset safety, tax transparency and geopolitical policing perspective,” concedes Costermans.
While regulators are entirely justifiable in having these concerns, Costermans said the risks can be managed effectively through an omnibus account structure in alternative ways. “Asset safety does not depend on the account structure used but by ensuring that a custodian’s proprietary assets are fully segregated from the assets of its clients. Furthermore, the custodian can provide regular updates to the authorities on the tax status of beneficial owners. And finally, custodians could even disclose several layers of ownership information in the SWIFT messages it sends to the Central Securities Depositories during the transaction settlement process,” he says. “Of course, this depends on the SWIFT capabilities of the CSDs in the region. Otherwise the information could be provided via CSDs’ proprietary platforms” he added.
Safety first: The markets make progress
Even though there are some ongoing obstacles inhibiting wider institutional investment in MENA, significant improvements have been made, most notably in the action taken related to the dual account structure. Dual account structures have long been viewed as risky by international investors, mainly because custodians were often obliged to move shares to brokerage accounts days ahead of the cash being received. Costermans said nearly all local markets now allow custodians to keep control over the assets until settlement. “Custodians can now reject broker instructions if needed. In addition, securities are no longer placed in broker accounts to which the custodian has no access from the moment the instruction is received until settlement.”
Despite this, Costermans firmly believes there is still scope for material improvements across MENA. “Even though most markets have a rejection process in place, International investors often prefer to keep their securities in the custody account until the moment they decide to sell. When the securities need to be moved to the trading account, it is often a manual process for the client to instruct the custodian, and for the custodian to then notify the CSD. The ideal situation would be to have only one custodian account where the custodian has the ability to reject broker trades or even better, affirm the trades. This way, should the custodian take no action, the default process should be a trade rejection,” he states.
“Standard Chartered will continue to advocate best market practices and lobby for its clients’ best interest with market infrastructures and regulators. But in the end, it is the regulator who will decide how they want to proceed. But something that is quite unique in the region is the excellent cooperation between regulators, market infrastructures and market participants. They all have the same goal and are willing to listen to each other, something that definitely creates optimistic prospects for the future of the region” Costermans concludes.