Business News Details

The bond and sukuk market trading in Saudi Arabia rose 17% in January, amounting to 3.1 billion riyals
21/02/2021
The market dedicated to trading debt instruments, including bonds and Sukuk, recorded double-digit growth in trading volumes during the trading of the first month of this year. According to the monitoring unit of the reports in Al-Eqtisadiah newspaper, the Saudi debt stock exchange ended the month of January with 3.1 billion riyals, achieving growth of 17 percent on an annual basis, and 26 percent monthly. December's trading was the lowest in 12 months, according to the newspaper's data for the largest Middle East stock exchange incubating Islamic bond listings.
On the other hand, informed government sources revealed to Al-Eqtisadiah that the infrastructure for electronic trading of debt markets had been successfully developed, which would allow the automation of prices listed on the Tadawul platform for primary dealers.
The outline document for the annual borrowing plan issued by the National Debt Management Center highlighted this step as one of the initiatives to develop local debt markets. The official document also touched on the initiative to enhance local primary market settlement by permitting delivery-for-payment settlements for primary dealers, which would reduce settlement risks for primary dealers.
Returning to the first initiative, Saudi Arabia has thus succeeded in deepening the secondary market for debt instruments so that it is similar to the stock market in terms of ease of trading.
As for the technical details of this initiative, the trading system enables the automation of market maker pricing for listed debt instruments by permitting continuous and automated sending of a pair of orders (buy and sell), to maintain the price spread obligations of the security.
The aim of developing this service, according to the sources, is to protect market makers from human errors and to activate the pricing engines responsible for monitoring the price of the security.
The trading activity on local debt instruments in Bond eValue, a financial instrument that tracks fixed income instruments, showed that the majority of government bonds moved in January, according to medium price ranges, in an indication of the return of market deals activity.
It is noteworthy that the "Bond eValue" data provides investors with the advantage of disclosing the offers to buy and sell the bonds, which are in their portfolios, to control the investment decision of the security.

In the same context, the IBOX Tadawul indicators for government bonds, both main and subsidiary, showed an improvement in their performance, as they ended last month with a rise in their indices, according to the IHS Markit analysis and financial data platform.
On the other hand, Saudi debt instruments posted gains of 10.78 percent at the end of last year, according to the ICE Bank of America Merrill Lynch bond index.
The weight of Saudi debt instruments in this index is 12.8%, and thus Saudi Arabia ranks seventh in terms of the highest dollar gains obtained by international investors as a result of investing in those securities listed on the London Stock Exchange in the emerging markets category (for high investment-grade countries) by the end of 2020.
The newspaper’s economic reporting unit analysis was based on data from the CreditSights Research Platform, which publishes the performance of Merrill Lynch countries weekly.

New arrivals

The remarkable activity of the brokerage firms "not formally appointed to play the role of market makers" continued when they collectively acquired 77.3 percent of the trading volumes that passed through them in 2021, compared to the five market makers appointed, whose share reached 22.7 percent of total trades. Knowing that the five market makers appointed began 2020, they accounted for 18.7% of total January trading.
These figures show that the five market makers continued to lose their dominance in secondary debt trading, after losing it for the first time last year, and it is reported that in 2019 the total trades that passed through them reached 80.85 percent.
With the entry of strong brokerage firms, observers do not rule out that these companies will continue to control total trading, especially since three of those companies are on the list of the top five brokerage firms in terms of total trading volumes on listed fixed income instruments.
According to the monitoring of the economic reports unit, some market makers have executed the largest number of deals, compared to others, which is a clear indication of their efforts to stimulate trading.

It is noteworthy that the Board of the Capital Market Authority permitted, in early September 2020, resident and non-resident foreigners to directly invest in listed and unlisted debt instruments. Government securities are granted annual distributions that are "closer to the guaranteed" to the investors who hold these securities.
The reason for the investors' appetite for the specialized stock exchange for trading in bonds and Sukuk is due to several factors, the most important of which is the search for the highest return in times of low interest

Daily trades
Al-Eqtisadiah monitoring showed a decrease in the average rate of total daily transactions to reach 148 million riyals during 2021, and this is equivalent to a decrease in daily trading volumes by 202 percent, compared to the total average of trades for the whole year of 2020, which amounted to 300 million riyals, excluding weekends and holidays Official. The monitoring was based on the latest official data issued by Tadawul, which revealed total trading of sovereign debt instruments, as well as those of companies.

The relationship of interest with debt instruments

The market value of Sukuk and other fixed-return securities changes according to the changes that occur in interest rates and other factors, as the prices of fixed-return debt instruments rise, the lower the interest rates, and the prices of those securities decrease the higher the interest rate.
The securities issued by the Saudi government are guaranteed only to pay the declared interest and face value upon maturity, and just as with other fixed-return securities, government-guaranteed securities will fluctuate their value when interest rates change.

Secondary liquidity

Some Sukuk listed on the Saudi market may become less liquid than others, which means that they cannot be sold quickly and easily, and some Sukuk may be difficult to liquidate into cash because there is no secondary market due to regulatory restrictions or restrictions on the nature of the investment or the absence of interested buyers. This type of asset may negatively affect the performance of the asset companies' funds and the unit price.
For example, the Sukuk market may go through periods of significantly low liquidity, which may lead to difficulty in maintaining stable and/or fair prices in purchase transactions (and vice versa in the case of high liquidity in the event of a need to sell), and this may lead to recording certain losses for funds of asset companies.

Market makers

Saudi Arabia has undertaken several reform initiatives to promote secondary trading in fixed income instruments such as bonds and Sukuk. Before the decision to restructure the financial compensation for issuers and traders and the accompanying reduction in trading fees during April 2019, Saudi Arabia listed and traded its sovereign issuances for the first time in 2018.
This decision was followed by the help of market makers, who were authorized to activate secondary trading of government issuances, and both events came in July 2018.

Trading fees

In the past, the trading fees were described by observers as being exaggerated, reaching ten basis points, eight basis points going to the licensed companies (brokerage firms), and two basis points divided equally between the Capital Market Authority and “Tadawul”.
One of the reasons that licensed firms score eight basis points is due to the lack of liquidity, which leads to limited deals every month. However, the level of monthly trading has taken a high path since the government debt was listed, which led to the increase in the numbers and values of executed deals.
In April 2019, a package of reforms, which are long-awaited by dealers in fixed income markets in Saudi Arabia, was announced, as the financial compensation for services provided to issuers and traders was restructured.
The restructuring of fees is intended for two tranches, the first being the issuers, and these amendments will contribute to reducing the fees related to listing on the stock exchange, by a percentage of 25%, and this figure may increase or decrease, according to various factors related to the issuer.
The other segment is in the interest of investors, where the trading fees have been reduced, as the share of a trading company reaches between a basis point to half a point (except in cases where either the seller or the buyer is a specific primary dealer).
It is expected that the decision to lift controls on commission for brokerage firms, by removing the minimum and maximum limits for executing buy and sell deals, is expected to lead to the creation of competition between these companies by introducing low fees to attract clients. If any Sukuk deal is executed, Tadawul will deduct its share from the financial consideration, as well as the brokerage firm, through which the purchase or sale order was made.
The Board of the Capital Market Authority issued its decision in July 2020 to continue exempting exporters wishing to offer debt instruments in a public offering from paying the fees collected to the Authority upon applying for registration of debt instruments, when studying the application for registering debt instruments, and upon registering debt instruments. Until the end of 2025.
The Capital Market Authority stated that this initiative comes within the framework of its endeavor to enhance the regulatory environment and stability in the financial market and to achieve the role of the financial market in facilitating financing, stimulating investment, and providing the necessary support to maintain the safety and stability of the financial sector and all its participants.

Brokerage firms

The increase in liquidity in circulation during the past year contributed to the acceleration of the entry of three new brokerage firms, thus raising the number of brokerage firms from 12 to 15 active companies in the secondary fixed income markets.
The months of June and December 2020 saw the entry of new brokerage firms.
Thus, the number of brokerage firms that were attracted to fixed income market trades during 2020 achieved a growth rate of 25 percent after the entry of three new companies in 2020, compared to 12 companies by the end of 2019.
With the increase in the value of a single Sukuk unit, equivalent to 1000, compared to stock prices, this means that the average value of government Sukuk deals (per deal) per individual investor will be higher when compared to stock deals. Accordingly, it is natural for the fees to increase the execution of the transactions of buying and selling the Sukuk, which the brokerage firms collect.
At a time when the number of financial intermediation companies in the Saudi stock market is 31 companies, this number varies with the Sukuk and bond market. After referring to all the brokerage companies that carried out buying and selling deals in the secondary market (of the Saudi debt markets) within three years, it becomes clear that the numbers The brokerage firms, 14 of which were monitored (including five market makers).

Zakat treatment

Since the launch of Vision 2030, Saudi Arabia is witnessing a series of economic reforms that have affected local fixed income markets, the first of which is the legislation on government Sukuk zakat, which was issued by the General Authority for Zakat and Income in March of 2019.
Unlike what happens with some other countries when individuals are forced to pay taxes on profits earned from periodic payments of government bonds, Saudi Arabia has ensured that zakat is borne on government bonds issued by the Ministry of Finance locally (denominated in Saudi riyals). However, the mechanism for recovering the amounts paid for zakat lies in the investors submitting a refund request from the Ministry of Finance, according to the clarifications of a responsible source.
The state's bearing of the zakat resulting from the Sukuk came to enhance domestic and international investment in them, and this issue is of great importance to investors, as it affects the percentage of what they receive from the periodic profits of the Sukuk. This trend is in line with the Financial Sector Development Program document, whose most important initiatives were the treatment of zakat treatment, the method of calculation, as well as the withholding tax for debt instruments.
The rules for calculating zakat for financing activities indicate that the zakat assets of the taxpayer will be reached by deducting “non-zakat” assets from the total assets. When looking at the non-zakat assets, it will become clear that they are limited to government bonds, whose maturity period remains for more than a year, for which the state will bear zakat. It is also represented in the loans directed by banks towards infrastructure projects, as well as long-term financing loans, which are mostly housing products, which are usually directed to individuals.

Zakat on specialized funds

In the same context, the zakat treatment of the funds specialized in government Sukuk that are presented in the Saudi market varies, for example, a document of one of the fund managers stated that the fund manager has the right to pay zakat on investment units for investors, and it is the unit owner responsibility to pay zakat on what he owns of investment units. If the Zakat assessment is not performed, as stipulated in Ministerial Resolution No. (2218) issued in 2019.
The ministerial decision stipulated that the state would stop bearing any of the government debt instruments, except for the instruments issued within the program of issuing Sukuk in Saudi riyals with the Ministry of Finance, starting from 2020.

Value-added tax

During the first half of 2019, the General Authority for Zakat and Income launched a guideline on Islamic finance, which dealt with how to apply value-added tax to the most important Islamic finance products, such as murabahah, leasing, musharaka, tawarruq, Sukuk, mudarabah, and agency.
These products are the backbone of banks and Islamic banking windows in Saudi Arabia, and how to deal with the tax on corporate bonds has been discussed, given the existence of legislation for zakat government debt instruments.
The guide addressed the most prominent sticking points in the tax field, such as the issue of the temporary transfer of Sukuk assets (it is considered outside the scope of tax because possession by the other party is not permanent), in addition to that, those assets that are in the possession of the special purpose company will be returned to the issuer later, and therefore the issuance assets and periodic installments are not subject For value-added tax.

Economic Reports Unit

The bond and sukuk market trading in Saudi Arabia rose 17% in January, amounting to 3.1 billion riyals