Jalal, can you tell me about your role and core focuses at SNB Capital? How have your responsibilities developed during your five-year term with the company?
Over the past five years, SNB Capital has evolved in-line with the growth and development of capital markets in the Kingdom of Saudi Arabia, and has established solutions to continue positioning the company as a leading capital market institution in the region.
As with all other local institutions, the securities and brokerage businesses of SNB Capital have historically served the primary investor base in the local capital markets, which included retail, individual and high-net-worth clients. Since 2019, as Saudi Arabia was included in emerging market indices of MSCI and FTSE, we have witnessed a significant growth in the institutional segment of investors, both locally and internationally, as well as a shift in local investors towards appointing asset managers.
Within the securities division of SNB Capital, we have made significant investments into growing our teams, infrastructure and capabilities to support this shift. Some of these changes included the establishment of a dedicated sales trading function, connectivity with trading networks and post-trade confirmation systems, the implementation of institutional trading capabilities including co-location and low latency systems, as well as the provision of reporting and data exchange solutions to serve institutional investors and asset managers. These changes were of course accompanied by growth in our teams and capabilities across institutional trading, sell-side research and securities services.
In 2021, SNB Capital partnered with BNY Mellon to launch its global securities services in Saudi Arabia, offering SBL and clearing services. How have these services developed since its inception, and how was this driven by client demand?
In 2020, SNB Capital took a decision to grow its securities division to include custody and securities services, to provide a global solution to local asset owners and managers. To provide a solution, while maintaining compliance with the strict data residence requirements of local asset owners and entities, we have decided to work with BNY. The Bank of New York Mellon Corporation has the experience and capabilities that allowed SNB Capital to implement data solutions in the Kingdom at our own data centres, which provides clients with the benefit of BNY鈥檚 technology and reporting capabilities, while retaining client asset data in our own data centres.
Global custody services provided by SNB Capital, through BNY as a sub-custodian, forms the base for this project. The value-add to clients has been the additional securities services, which is enabled by having a single global custody platform and account for the client.
Can you reveal more about what SNB Capital鈥檚 SBL and clearing services have to offer for clients? How does this compare with other services offered in Saudi Arabia?
SNB Capital is a direct clearing member (DCM) of Muqassa, a clearing house in Saudi Arabia, and was awarded best DCM by the Saudi Tadawul Group in 2023. Clearing in Saudi Arabia is generally the responsibility of the executing broker, and as an exchange member for brokerage, we have a high focus on ensuring our clearing activities are consistently optimised and fully support the execution requirements of our clients and collateral requirements of Muqassa.
In terms of securities borrowing and lending (SBL), SNB Capital has taken a phased approach with the initial phase focused on the most natural supply/demand dynamic 鈥� which has been local investors as lenders providing securities for loan to international institutions as borrowers. We have taken a unique approach to enabling this type of activity through a number of areas.
First, SNB Capital faces local lenders as principal, given that local lenders are largely high-net-worth-individuals, this enables us to provide a solution to access this liquidity pool which would otherwise be challenging for international institutions to face.
Second, SNB Capital executes a matched principal onward lending transaction to face international institutions, banks, and prime brokers as borrowers under market standard agreements.
Third, we work with all borrower counterparties to provide collateral on a same day basis, utilising the closing prices of loaned assets on a same day basis to calculate required collateral values and book collateral movements. This enables us to minimise risk and ensure compliance with local regulations which require a minimum 100 per cent collateral for securities on loan.
Fourth, we are largely focused on securities which are off-benchmark and provide lenders a higher potential income/return from lending fees. Given that securities lending is a new activity in the market, investors are not yet conditioned to the long term benefits of small incremental returns from securities loans. Hence why we have focused on securities in the 200-500bps range, with the weighted average return for our lenders in 2024 being over 400bps.
SNB Capital aims to expand its financial market footprint through its collaboration with Broadridge鈥檚 SFCM solution. How have evolving attitudes toward SBL activity in the region, and changing regulation, enabled your firm to expand in this respect?
SBL regulations have been available in Saudi Arabia since 2017. However, the market structure and operational challenges in enabling this activity in-line with international models was only addressed when the Saudi Exchange completed the implementation of the Post Trade Technology Program in April 2022.
This program changed the market structure to remove pre-validation on orders and established a separate clearing house for collateralisation of trade settlements. This change has enabled SNB Capital and other market participants to execute securities lending and borrowing transactions in a manner similar to international markets.
Given our large client base and aspiration to develop SBL solutions for the broadest base of investors possible, we selected to work with Broadridge to implement its 麻豆传媒 Finance and Collateral Management (SFCM) platform at SNB Capital, since the firm has significant capabilities and experience working in multiple securities lending and borrowing models with various types of end investors.
We expect as we continue to grow our base of lenders, SBL will become a common activity for local individual investors, especially those which are long-term shareholders in local markets.
With regards to the institutional activity of local investors in securities lending, the primary challenges we have seen are not from a willingness or interest to participate, but rather from the investment accounting and valuation side with other local custodians and middle office teams. The market practice of reflecting securities 鈥榦n loan鈥� in custody systems is largely not yet available in Saudi Arabia.
Given that many custodians are also not active in securities lending yet, the challenge of dealing with third-party lending transactions adds to this issue. We expect that as asset owners see the benefits that clients of SNB Capital and others are generating from this activity; they will place more pressure on their custodians and middle office teams to find solutions to support securities lending for them.
For SNB Capital, how do you compare domestic and international participation in your services? Can you explore any trends that you are seeing in this respect?
As a regional financial institution with expertise across five business lines including asset management, wealth management, securities, investment banking, and principal investments, SNB Capital is the largest asset manager in Saudi Arabia with SAR 260 billion (US$69.3 billion) of assets under management as of March 2024.
Within the securities division, we have various services which have a significantly different mix of clients. In areas such as securities trading, where we provide execution services both high-touch and low-touch to institutional clients, we see up to 40 per cent of our activity coming from international clients on some days. Related areas like sell-side equity research also have a high percentage of clients which are international investors.
When it comes to our custody services, around 80 per cent of our clients are locally registered entities, sometimes they may be a foreign asset manager. Other areas of our business such as securities services are almost entirely serving locally registered clients, many of which are listed companies, asset managers regulated by the Capital Market Authority (CMA) and asset owners in the Kingdom.
A key trend we have noticed in terms of local asset owners is the greater involvement of international asset managers, which places requirements on SNB Capital to ensure we can support the capabilities they require. On the other hand, we see a greater activity in custody and securities services from local asset owners in holding custody of or requiring services for international market assets. This is where our relationship with entities like BNY provides significant value, since our coverage and capabilities can support the requirements of any client for global markets.
Looking ahead, what are the core priorities of SNB Capital鈥檚 development strategy over the coming 12 months? Can you share any upcoming projects or collaborations?
Our vision 鈥淕iving everyone financial confidence in a new future鈥� is all about looking ahead, building trust, and creating new opportunities for a better financial future.
In general, the strategic pillars of our strategy and vision cover the following areas: strengthen and future proof existing business; shape the growth of local and regional capital markets; and drive efficiency and productivity of assets and people.
Under these pillars, SNB Capital has been actively partnering with fintech firms and international asset managers, improving securities trading value proposition of qualified foreign investors (QFIs) and institutions, improving productivity through integrating AI and GenAI in our business lines, and, in general, playing an active role as the national champion supporting funding Vision 2030 initiatives.
When we look at how those key pillars apply to our custody and securities services businesses, the opportunities and focus areas become clear:
鈥� Growing the value chain offered to core custody clients, enabled by providing asset servicing and securities services in areas such as investment accounting, administration, SBL, collateral management, and agency services.
鈥� Develop new solutions and products, such as the unique models we have implemented for SBL, services we provide listed companies for Employee Share Plans, as well as other strategic initiatives.
鈥� Capturing a larger asset base of clients and providing more services per client to drive efficiency and productivity of our relationships.
We believe that delivering on our key strategic pillars will ensure SNB Capital maintains a position as the region's leading investment bank with a focus on connecting local and international investors with opportunities across the globe.
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