• The monthly trades of the secondary market for fixed income instruments exceed 2.6 billion riyals



    The secondary market for fixed income instruments in Saudi Arabia - listed debt instruments listed by the government and companies - was registered last January with the highest monthly trades since the market's inception in 2009.
    The market, which is dedicated to trading "bonds and Deeds" on the Saudi Stock Exchange, witnessed transactions amounting to 2.6 billion riyals.
    A monitoring unit for the reports in the newspaper "Al-Iqtisadiya" showed that the growth rate recorded in January jumped 598% compared to the same month last year.
    Trading volumes also increased by 1034% compared to the month before December 2019.
    And the percentage of trading in January of the new year 26.20% of the total trading in 2019, which amounted to 10.1 billion riyals.
    Last month saw a remarkable activity from brokerage firms "not officially appointed to play the role of market makers", when they clearly acquired 81.24 percent of trading volumes that passed through them, which is the highest historically the highest percentage in terms of the difference between them and the five appointed market makers who dominated 18.76% of total trading.
    While the five market makers play a pivotal role since 2018 in the activation of secondary liquidity, this is the second time in three months that the brokerage firms outperform the designated market makers.
    Monitoring shows that the last time was in November 2019, when other brokerage firms captured 55.2 percent of the trading share for that month​.
    In addition, traders specializing in fixed income markets attributed the developments that took place last month as taking profit for the month of December "after the positions taken in late 2019 and their closure was postponed until January of the new year."
    This explains the jump in trading, that is, from 234.8 million riyals in December to 2.6 billion riyals in January 2020, where the accounting evaluation of brokerage firms' exposure to their assets from Sukuk takes place at the end of December, as brokerage firms reserve reservations Intensive trading.
    This is a natural thing that coincides with the end of the accounting period or the calendar year for the financial statements that are closed at the end of December, in order to initiate the preparation of financial statements for the investing entities, as institutional investors "whether in Saudi Arabia or in the emerging markets" close their books and also close the accounts at the end of Fiscal year​.

    Daily trades
    The monitoring of "Al-Iqtisadiah" showed an increase in the average rate of total daily trades to reach 121.1 million riyals during the first month of this year, with a growth of 199 percent compared to the total average trading for the whole of 2019, which amounted to 40.4 million riyals "after excluding the weekends and official holidays."
    The analysis was based on the latest official data issued by Tadawul, which revealed the total trading of sovereign and corporate debt instruments.​
    In addition to other factors such as investors seeking higher returns "in the midst of a low domestic interest environment" as well as low trading fees, the increase in total trading volumes from their traditional levels comes at a time when the Kingdom is witnessing a series of economic reforms that have touched local fixed income markets, where The first of these was legislation on zakat on government instruments.
    It is noteworthy that the General Authority of Zakat and Income announced in March 2019 that the state bears zakat and income tax on investment in government bonds and bonds issued by the Ministry of Finance locally "denominated in Saudi riyals."
    Zakat and income tax "to be borne by the state" will be limited to the annual returns of debt instruments "that investors receive" and not to the value of the entire issue​.
    Effective participation of market makers
    Saudi Arabia has undertaken several reform initiatives to advance secondary market trading in fixed income instruments, such as bonds and deeds.
    Prior to 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 issued its sovereign issues for the first time during 2018.
    This decision was followed by the use of market makers, "who are authorized to stimulate secondary trading for government issues," and both events occurred in July 2018.

    Trading fees
    Previously, trading fees were described by observers as exaggerated, reaching ten basis points, "eight basis points that go to licensed companies, that are brokerage firms," ​​and two basis points that are divided equally between the Capital Market Authority and "Tadawul".
    One of the reasons for the licensed companies obtaining eight basis points is due to the lack of liquidity, which leads to limited deals per month, but the level of monthly trades has taken a high track since the inclusion of government debts, which has led to the maximization of the numbers and values ​​of executed deals.
    In April 2019, a long-awaited package of reforms was announced by workers in the fixed income markets in Saudi Arabia, as the financial compensation for services provided to issuers and traders was restructured.
    The restructuring of fees is directed to two tranches. The first is the issuers and these amendments will contribute to reducing the fees related to listing on the stock exchange by touching 25%. This number may increase and decrease, according to factors related to the issuing party.
    On the other side, trading fees have been reduced for the benefit of investors, as the share of a trading company is between half a basis point to half a point, "except in cases where either the seller or the buyer is a specific initial customer."
    It is expected that the decision to raise the controls on the commission of brokerage companies, by removing the lower and upper limits for executing purchase and sale deals, will lead to creating competition between these companies by offering low fees to attract clients.
    In case of executing any deeds deal, Tadawul will deduct its stake from the financial consideration, as well as the brokerage company through which the purchase or sale order was made​.

    Brokerage firms
    With the rise in the value of the unit of a single instrument "which is equivalent to an alpha" compared to share prices, this means that the average rate of government deeds deals "per deal" for each individual investor will be higher when compared to equity deals, and therefore it is natural that the fees for executing the purchase and sale deals of the instruments obtained Brokerage firms.
    At a time when the number of financial brokerage firms in the Saudi stock market reaches 31 companies, this number varies with the market of bonds and bonds. After referring to all the brokerage companies that have implemented buying and selling deals in the secondary market for "Saudi debt markets" within three years, it is clear that the numbers of companies The monitored brokerage are 12 companies, "including five market makers"​.

    New Gulf exporters
    The total issuance of Gulf entities that issued in hard currencies for the first time in 2019 reached up to $ 17 billion, "including the issuance of Aramco bonds of $ 12 billion," according to the research study "On Fixed Income Management" of First Abu Dhabi Bank, which indicated that the number of issuers El Jadida reached 11 destinations.
    Issuers in the Gulf and emerging markets are still taking advantage of favorable conditions for borrowing in light of the low cost of financing globally.
    The "commercial war fears" in 2019 contributed to making the benchmarks "that we use with the pricing of bonds and bonds" trading at low levels, which contributed to reducing the "cost of financing" for the Gulf.
    It is known that the "NASDAQ Dubai" has become the preferred platform for listing the Chinese issuers, which hosts more than nine dollar issues from the Asian country.
    The “profitable returns” of deeds and bonds are located in the acceptable region of “the two sides of the equation, which are the investors” who see that the returns of the new issues are still attractive and among issuers that “see that the returns are still low”.

    * Economic Reports Unit​

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