The momentum of trading in the fixed income market in Saudi...

An observation of Al-Eqtisadiah showed that the huge trading momentum continued in the Saudi market for debt instruments, which is the largest market in the Middle East incubating Islamic bond listings during last October.
The secondary trading volumes of fixed income instruments recorded a growth rate that is about to touch the seven-fold, during the first ten months of 2020, compared to the total trading of the whole 2019, which amounted to 10.16 billion riyals.
The monitoring of the reports unit in Al-Eqtisadiah newspaper showed that the total value of transactions for the past ten months reached 68.1 billion riyals, a record high for the first time since the inception of the market.
The market, which is designated for trading “bonds and sukuk” on the Saudi Stock Exchange, witnessed 8.7 billion riyals in circulation during the past month alone. 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.

For the third month in a row

The Debt Instruments Exchange maintained its high trades during the past three months, registering the longest time series of continuous high trades for more than ten years.
This came after an improvement in the sentiment of traders in light of the emergence of local and international developments, all of which are encouraging attracting foreign liquidity towards the private fixed income exchange in Saudi Arabia.

New arrivals

The remarkable activity of the brokerage firms not formally appointed to play the role of market makers continued when they collectively acquired 54.09 percent of the trading volumes that passed through them in the first ten months of this year, compared to the five appointed market makers, whose share reached 45.91. Percent of total trades. Knowing that the five market makers began the year 2020, with their possession of 18.7% of total January trading.
These figures show how the five appointed market makers are on the verge of losing their dominance in the secondary debt trading, for the first time in two years. And it became unlikely for them to end this year by repeating the same scenario of 2019 when the total trades that passed through them reached 80.85%.
With the entry of strong brokerage firms this year, observers do not rule out that those companies will continue to control total trading, especially since three of those companies are among 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. In the newspaper.
The monitoring indicated that some market makers in general have prevailed over most of them executing the largest number of deals, compared to others, in a clear reference to their efforts to stimulate trading.
One of the reasons for the superiority of brokerage firms over specific market makers is that some institutional clients deal with a specific brokerage firm, and therefore deals are executed only through it, which gives them preference in terms of the sheer volume of transactions that they have completed during secondary trades in the past months.

3-digit growth in trading volumes

According to financial data, the trading of the secondary markets of the fixed income market in Saudi Arabia – under which the government and corporate listed debt instruments are included – in the first ten months of 2020 is equivalent to more than six times the total of what was traded in the last three years, amounting to 11 billion riyals.
Government securities give annual dividends (closer to secured) to the investors who hold these securities. The reason for 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 at a time of low interest.

Daily trades

Al-Eqtisadiah’s analysis showed that the average rate of total daily transactions increased to 332 million riyals during the first ten months of this year, registering a growth of 721 percent, compared to the total average of 40.4 million riyals for the whole of 2019, after excluding weekends and public holidays.
The analytical study was based on the latest official data issued by “Tadawul”, which revealed the total trading of sovereign debt instruments, as well as those of companies.

The relationship of interest with debt instruments

It is known that the market value of sukuk and other fixed-income 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.
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 in 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. In this type of asset, it may adversely affect the performance of the assets 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 the need to sell), and this may lead to recording certain losses for funds of asset companies. .

Active participation of market makers

Saudi Arabia has undertaken several reform initiatives to promote secondary trading in fixed income instruments, such as bonds and sukuk. Prior to the decision to restructure the financial compensation for issuers and dealers, and the accompanying reduction in trading fees during April of 2019, Saudi Arabia listed and traded its sovereign issuances for the first time in 2018. This decision was followed by the use of market makers (those authorized to activate secondary trading of government issuances) Both events occurred 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 remuneration 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 variable 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 one 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 raise the controls related to the commission of brokerage firms, by removing the minimum and maximum limits for the execution of buy and sell deals, is expected to lead to the creation of competition between these companies by introducing low fees to attract clients. In the event that any sukuk transaction 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 submitting an application for registration of debt instruments, when studying the application for registering debt instruments, and upon registering debt instruments until 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 first half accelerated the entry of two new brokerage firms. Thus, the number of brokerage firms rises from 12 to 14 active in the secondary fixed-income markets, as last June witnessed a remarkable entry of an experienced brokerage firm in stock market trading.
The number of brokerage firms that were attracted to the fixed income market trades achieved a growth rate of 16.6 percent after entering two new companies during the first half of this year after ending 2019 at 12 companies.
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 deals 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).

Total value of listed debt instruments

The value of listed sukuk and bonds (including government and corporate issuances) in Saudi Arabia increased to 372.7 billion riyals by the end of the first quarter of 2020, recording a growth of 24.3 percent, equivalent to 72.96 billion riyals, compared to its value at the end of the first quarter of 2019 amounting to about 299.74 billion riyals.
On a quarterly basis, its value increased by 5.1 percent, equivalent to 18.2 billion riyals, compared to its value at the end of the previous year 2019 of about 354.5 billion riyals.
According to the monitoring unit of the reports in the “Al-Eqtisadiah” and based on the data of the Capital Market Company “Tadawul” and the data of the Capital Market Authority, the value of listed sukuk and bonds is due to 104 owners by the end of the first quarter of 2020, compared to 99 owners at the end of 2019 and compared to 69 owners at the end of the first quarter of 2019 .
The ownership of the listed sukuk and bonds is divided into four categories: individuals, companies, government and semi-government entities, and funds including Gulf investment funds.
As the value of individual ownership of sukuk and listed bonds amounted to 72.0 million riyals, owned by 26 individuals at the end of the first quarter of 2020, compared to 74.5 million riyals owned by 24 individuals at the end of 2019.

Economic Reports Unit