The kingdom of tradition and innovation
01 April 2025
Following the recent introduction of short selling and securities lending facilities, Daniel Tison explores the rapidly growing capital market of Saudi Arabia
Image: stock.adobe.com/Amir
The securities finance market of Saudi Arabia is experiencing exponential growth, with increasing participation from both domestic and international investors, says Andrew Dyson, CEO of the International 麻豆传媒 Lending Association (ISLA).
He adds: 鈥淭his growth is fuelled by initiatives such as the introduction of short selling and the development of the derivatives markets, which requires securities lending to facilitate it.鈥�
Dominated by vast deserts, with mountain ranges stretching along the Red Sea and coastal plains accompanying the Persian Gulf, the Kingdom of Saudi Arabia (KSA) is the largest country in the Middle East region, covering the bulk of the Arabian Peninsula. As the birthplace of Islam and the location of its two holiest sites, Mecca and Medina, the KSA鈥檚 identity and daily life are deeply intertwined with religious principles, influencing both its culture and legal framework.
With Islam being the official religion of Saudi Arabia, the Quran and Sunna form the foundation of its legal and governance system. Sharia law, derived from these sacred texts, applies to all individuals within the kingdom, regardless of their faith. This includes the securities finance sector, which must avoid interest payments and excessive uncertainty to align with religious values.
Nevertheless, market participants agree that Saudi Arabia stands out as an emerging market, with the recent introduction of securities finance playing a key role in increasing liquidity and attracting foreign investment.
Based in Riyadh, Jalal Taji Faruki, head of custody and securities services at SNB Capital, observes some unique dynamics in the local securities finance market. This includes its historical drive by retail and high-net-worth (HNW) investors acting on a self-directed basis, a large flow of foreign investment since the Kingdom鈥檚 inclusion in major emerging markets indices in 2019, as well as a notable shift towards institutional managers in the local investor population.
鈥淐ombined, these dynamics lead to a very compelling opportunity for SBL to grow quickly,鈥� says Faruki.
He adds that Saudi Arabia鈥檚 securities lending market is characterised by technological advancements, including the adoption of agency lending and pooled principal models, along with ISO/SWIFT messaging, introducing operational efficiency.
Gaining exposure
With Saudi Arabia strengthening its position in global financial markets, foreign investor interest is increasing.
鈥淎s this exposure grows, institutional investors look to deploy hedged and long/short strategies,鈥� says Faruki. 鈥淭hese types of mandates drive demand and the requirement for capacity in the securities lending area.鈥�
He adds that custodians, asset managers, and brokers are developing capabilities to offer securities borrowing and lending (SBL), while elements like collateral management and investment accounting are being upgraded to support these types of transactions.
Based on data from S&P Global Market Intelligence, the Saudi equity market demonstrated robust growth in 2024, with total securities lending revenue surpassing US$12 million. As of 28 February 2025, the value on loan increased by 15 per cent year-on-year (YoY) to US$5.7 million, while the lendable inventory in Saudi Arabia has seen a remarkable increase of 190 per cent YoY, surging from US$3.1 billion to US$8.9 billion.
Shaan Jivan, product specialist for securities finance at S&P Global Market Intelligence, comments: 鈥淭his substantial growth in lendable inventory indicates growing market participation as more agent lenders and custodians are able to offer securities lending services in the region and local asset owners start to participate in the market.鈥�
Dyson notes that recent regulatory reforms have aimed to align the Saudi market with international best practices, thereby bolstering transparency and investor confidence.
鈥淐onsequently, the market has witnessed a significant increase in liquidity and efficiency, alongside an expanding investor base, marking a substantial step towards global financial integration,鈥� he states.
The Middle East, and Saudi Arabia in particular, has been a focus for ISLA for several years, with the association鈥檚 growing presence and membership in the region. In September 2023, ISLA entered into a partnership with Latham & Watkins to promote the advancement of securities lending activities in the Middle East.
Five months later, in February 2024, the association released the first of a number of SBL guides covering the region, with the first one dedicated to Saudi Arabia. In this guide, ISLA provides members with insights into the Saudi SBL market, as well as an annex setting out various scenarios in accordance with the specific regulatory framework.
In collaboration with the International Capital Market Association (ICMA) and the International Swaps and Derivatives Association (ISDA), ISLA hosted its first conference in Riyadh in February, with almost 200 market participants attending.
ISLA members can also join its Developing Markets Working Group, which brings together members and relevant stakeholders in the region to help drive the development of SBL and formulate ideas around industry best practice, legal frameworks, and post-trade procedures. SNB Capital, EFG Holding, Riyad Capital, as well as the Saudi Central Bank (SAMA) and the the 麻豆传媒 Depository Center Company (Edaa), are all members of the association now.
Regulatory overhauls
As conventional SBL activities, which often involve interest payments and speculative practices, do not align with Shariah principles, Islamic financial institutions have developed alternative mechanisms to ensure compliance.
According to Faruki, one of the most prominent alternatives is Murabaha with double wa鈥檃d structure, offering a Shariah-compliant framework for both securities lending and short selling. This structure begins with an actual Murabaha transaction that is executed immediately, allowing the borrower to acquire the securities through a Shariah-compliant sale. Alongside this, both parties make separate unilateral promises (wa鈥檃d) to potentially enter into a future transaction under pre-agreed terms. These promises are not binding until one party requests the other to fulfill the wa鈥檃d. If both parties choose to proceed, the borrower sells the securities back to the original seller, completing the cycle in a Shariah-compliant manner. Additionally, it is essential that the underlying securities in these transactions exclude instruments related to prohibited sectors, such as alcohol, gambling, or conventional financial services.
Faruki comments: 鈥淪hariah compliance is a very important aspect for local investors, and enabling compliant securities lending is one of the key priorities for us to access the large local retail and HNW lenders.鈥�
Dyson emphasises that the introduction of short selling has enhanced market efficiency and provided investors with greater trading flexibility, fostering increased liquidity and improved price discovery.
鈥淭his development, coupled with the establishment of robust securities lending infrastructure, has been crucial in supporting the growth of sophisticated trading strategies, and attracting both domestic and international investors,鈥� he states.
The Saudi capital market first opened up to foreign investors in 2016, with the introduction of 鈥楻ules of Qualified Foreign Financial Institutions Investment in Listed 麻豆传媒鈥�. These rules were amended with the formation of Edaa, acting as the central securities depository (CSD) for Saudi Arabia.
Providing an infrastructure and regulatory framework for SBL activities in the kingdom, Edaa has soon become a key player in this sector, along with the Capital Market Authority (CMA), Saudi Stock Exchange (Tadawul), and SAMA.
SAMA primarily regulates the banking sector, insurance companies, and payment systems, with a focus on maintaining monetary stability and ensuring the soundness of the financial system, while the CMA is responsible for setting and policing financial rules and regulations, which includes Tadawul.
The KSA issued its initial SBL and short selling regulations in 2017, but these underwent significant changes in subsequent years to enhance market efficiency and align with international standards.
The CMA鈥檚 approval of the 麻豆传媒 Central Counterparties Regulation in 2020 paved the way for the introduction of a central counterparty (CCP) in the kingdom. Since its establishment in 2018, the 麻豆传媒 Clearing Center Company (Muqassa) has completed its full coverage of all exchange-traded products in Tadawul.
In 2021, Tadawul approved amendments, which allowed all types of investors to engage in short selling and SBL activities under specific conditions, aiming to boost market liquidity and provide diversified investment opportunities. ?In 2022, Edaa updated the SBL regulations to reflect ongoing enhancements in the capital market infrastructure as part of the Kingdom鈥檚 comprehensive post-trade transformation programme (PTTP).
For instance, the dual portfolio was discontinued, which removed the requirement to link client securities accounts to broker-managed portfolios and allowed for faster market access. The PTTP has also brought greater flexibility in trading and settlement cycles, enabling buyers and sellers in negotiated deals to agree on a settlement period ranging from T+0 to T+5.
Additionally, the introduction of average pricing and post-execution trade allocation to investor accounts has helped investors to capitalise on market opportunities, according to HSBC. Last but not least, recent enhancements to the fails mechanism have also resulted in a substantial reduction in failing trades.
In November 2024, the Saudi Tadawul Group announced the implementation of additional post-trade enhancements, introducing new products and services to diversify offerings and investment opportunities for local and foreign investors.
Commenting on these developments, Sarah Al Othman, managing director and head of securities services at Riyad Capital, says: 鈥淭he number of securities on loan and their value have grown significantly over the past year, indicating increased market activity and acceptance.
鈥淒evelopments such as the establishment of Muqassa and flexible settlement cycles have bolstered market stability and efficiency.鈥�
The Kingdom鈥檚 regulatory capital requirements for financial institutions are often based on net exposure rather than gross exposure when netting agreements are in place. Dyson explains that this allows participants to engage in more securities lending activity with the same amount of capital, increasing market efficiency and liquidity.
On the back of the close-out netting draft regulations issued by SAMA in February 2025, Faruki expects the activity and interest from foreign investors to continue growing in this area. Meanwhile, the CMA is working on netting legislation, following a recent consultation on the draft rules.
On that note, Al Othman adds: 鈥淭his regulation provides a robust legal framework for the enforceability of netting agreements and financial collateral arrangements, particularly in the context of bankruptcy proceedings.
鈥淏y ensuring that netting agreements are enforceable even during bankruptcy, the regulation reduces credit risk and promotes financial stability, aligning Saudi Arabia鈥檚 financial infrastructure with international standards. This will contribute to reducing the credit risks of the transactions and protect against negative changes in the market, as well as the risk of the counterparty鈥檚 default on payment.鈥�
To Dyson, close-out netting acts as a crucial risk management tool in securities lending, as it transforms a complex web of interconnected obligations into a manageable net exposure, thereby safeguarding individual participants and the overall stability of the financial system. Otherwise, the potential for significant losses and systemic disruptions in the securities lending market would be considerably higher, he emphasises, hindering its growth and effectiveness.
Edaa is currently working with market participants to propose further amendments to the rules in order to allow greater foreign participation in the market. As a direct clearing member of Muqassa in the derivative market, SNB Capital actively engages with the Saudi Tadawul Group to stay aligned with regulations while providing feedback to regulatory bodies on any practical challenges that may be addressed in future revisions.
Bright future ahead
Saudi Arabia is currently halfway through its transformative journey towards economic diversification as part of its Vision 2030 initiative, which was first announced by the Saudi government in 2016.
鈥淭his ambitious plan aims to reduce the country's dependence on oil revenues, and foster a more sustainable and diversified economic landscape,鈥� explains Jivan. 鈥淏y investing in sectors such as tourism, entertainment, and technology, Saudi Arabia is positioning itself as a regional hub for innovation and economic activity.鈥�
麻豆传媒 finance plays a pivotal role in this development, according to Jivan, as it increases the efficiency of financial markets and promotes greater participation, essential for economic growth.
鈥淓nhanced liquidity through securities lending can lead to narrower bid-ask spreads, lower transaction costs, and improved price discovery, contributing to a more vibrant capital market,鈥� adds Jivan.
Dyson agrees that recent regulatory reforms, together with Vision 2030, are setting the stage for a rapid transformation of Saudi Arabia's securities finance market in the near future.
鈥淭he Kingdom's robust economic performance is attracting substantial international capital, expanding beyond its traditional regional focus,鈥� he states. 鈥淐ouple this with increased investment in infrastructure, increased presence of international firms, and greater collaboration across all market participants 鈥� the future of securities lending looks very bright.鈥�
However, he notes that to allow the Saudi market to reach its full potential, international institutional investors need to see a market structure that is comparable with other G20 economies.
鈥淚t will be important for all the relevant stakeholders to work together to align the market in the kingdom with those other developed markets from a best practice perspective,鈥� says Dyson.
Over the next few years, Faruki expects increased participation and liquidity in the market from both local and international investors, in addition to enhanced market infrastructure that will support a larger market, streamline securities lending processes, and increase access to liquidity.
Al Othman shares this sentiment, adding: 鈥淭he securities lending market in Saudi Arabia is expected to expand steadily, driven by regulatory reforms, increased foreign investor participation, and the implementation of Vision 2030 projects. These factors are expected to enhance market accessibility and liquidity, fostering further development in securities lending.
鈥淓xpansion into derivatives and other financial instruments will likely provide more opportunities for market participants.鈥�
He adds: 鈥淭his growth is fuelled by initiatives such as the introduction of short selling and the development of the derivatives markets, which requires securities lending to facilitate it.鈥�
Dominated by vast deserts, with mountain ranges stretching along the Red Sea and coastal plains accompanying the Persian Gulf, the Kingdom of Saudi Arabia (KSA) is the largest country in the Middle East region, covering the bulk of the Arabian Peninsula. As the birthplace of Islam and the location of its two holiest sites, Mecca and Medina, the KSA鈥檚 identity and daily life are deeply intertwined with religious principles, influencing both its culture and legal framework.
With Islam being the official religion of Saudi Arabia, the Quran and Sunna form the foundation of its legal and governance system. Sharia law, derived from these sacred texts, applies to all individuals within the kingdom, regardless of their faith. This includes the securities finance sector, which must avoid interest payments and excessive uncertainty to align with religious values.
Nevertheless, market participants agree that Saudi Arabia stands out as an emerging market, with the recent introduction of securities finance playing a key role in increasing liquidity and attracting foreign investment.
Based in Riyadh, Jalal Taji Faruki, head of custody and securities services at SNB Capital, observes some unique dynamics in the local securities finance market. This includes its historical drive by retail and high-net-worth (HNW) investors acting on a self-directed basis, a large flow of foreign investment since the Kingdom鈥檚 inclusion in major emerging markets indices in 2019, as well as a notable shift towards institutional managers in the local investor population.
鈥淐ombined, these dynamics lead to a very compelling opportunity for SBL to grow quickly,鈥� says Faruki.
He adds that Saudi Arabia鈥檚 securities lending market is characterised by technological advancements, including the adoption of agency lending and pooled principal models, along with ISO/SWIFT messaging, introducing operational efficiency.
Gaining exposure
With Saudi Arabia strengthening its position in global financial markets, foreign investor interest is increasing.
鈥淎s this exposure grows, institutional investors look to deploy hedged and long/short strategies,鈥� says Faruki. 鈥淭hese types of mandates drive demand and the requirement for capacity in the securities lending area.鈥�
He adds that custodians, asset managers, and brokers are developing capabilities to offer securities borrowing and lending (SBL), while elements like collateral management and investment accounting are being upgraded to support these types of transactions.
Based on data from S&P Global Market Intelligence, the Saudi equity market demonstrated robust growth in 2024, with total securities lending revenue surpassing US$12 million. As of 28 February 2025, the value on loan increased by 15 per cent year-on-year (YoY) to US$5.7 million, while the lendable inventory in Saudi Arabia has seen a remarkable increase of 190 per cent YoY, surging from US$3.1 billion to US$8.9 billion.
Shaan Jivan, product specialist for securities finance at S&P Global Market Intelligence, comments: 鈥淭his substantial growth in lendable inventory indicates growing market participation as more agent lenders and custodians are able to offer securities lending services in the region and local asset owners start to participate in the market.鈥�
Dyson notes that recent regulatory reforms have aimed to align the Saudi market with international best practices, thereby bolstering transparency and investor confidence.
鈥淐onsequently, the market has witnessed a significant increase in liquidity and efficiency, alongside an expanding investor base, marking a substantial step towards global financial integration,鈥� he states.
The Middle East, and Saudi Arabia in particular, has been a focus for ISLA for several years, with the association鈥檚 growing presence and membership in the region. In September 2023, ISLA entered into a partnership with Latham & Watkins to promote the advancement of securities lending activities in the Middle East.
Five months later, in February 2024, the association released the first of a number of SBL guides covering the region, with the first one dedicated to Saudi Arabia. In this guide, ISLA provides members with insights into the Saudi SBL market, as well as an annex setting out various scenarios in accordance with the specific regulatory framework.
In collaboration with the International Capital Market Association (ICMA) and the International Swaps and Derivatives Association (ISDA), ISLA hosted its first conference in Riyadh in February, with almost 200 market participants attending.
ISLA members can also join its Developing Markets Working Group, which brings together members and relevant stakeholders in the region to help drive the development of SBL and formulate ideas around industry best practice, legal frameworks, and post-trade procedures. SNB Capital, EFG Holding, Riyad Capital, as well as the Saudi Central Bank (SAMA) and the the 麻豆传媒 Depository Center Company (Edaa), are all members of the association now.
Regulatory overhauls
As conventional SBL activities, which often involve interest payments and speculative practices, do not align with Shariah principles, Islamic financial institutions have developed alternative mechanisms to ensure compliance.
According to Faruki, one of the most prominent alternatives is Murabaha with double wa鈥檃d structure, offering a Shariah-compliant framework for both securities lending and short selling. This structure begins with an actual Murabaha transaction that is executed immediately, allowing the borrower to acquire the securities through a Shariah-compliant sale. Alongside this, both parties make separate unilateral promises (wa鈥檃d) to potentially enter into a future transaction under pre-agreed terms. These promises are not binding until one party requests the other to fulfill the wa鈥檃d. If both parties choose to proceed, the borrower sells the securities back to the original seller, completing the cycle in a Shariah-compliant manner. Additionally, it is essential that the underlying securities in these transactions exclude instruments related to prohibited sectors, such as alcohol, gambling, or conventional financial services.
Faruki comments: 鈥淪hariah compliance is a very important aspect for local investors, and enabling compliant securities lending is one of the key priorities for us to access the large local retail and HNW lenders.鈥�
Dyson emphasises that the introduction of short selling has enhanced market efficiency and provided investors with greater trading flexibility, fostering increased liquidity and improved price discovery.
鈥淭his development, coupled with the establishment of robust securities lending infrastructure, has been crucial in supporting the growth of sophisticated trading strategies, and attracting both domestic and international investors,鈥� he states.
The Saudi capital market first opened up to foreign investors in 2016, with the introduction of 鈥楻ules of Qualified Foreign Financial Institutions Investment in Listed 麻豆传媒鈥�. These rules were amended with the formation of Edaa, acting as the central securities depository (CSD) for Saudi Arabia.
Providing an infrastructure and regulatory framework for SBL activities in the kingdom, Edaa has soon become a key player in this sector, along with the Capital Market Authority (CMA), Saudi Stock Exchange (Tadawul), and SAMA.
SAMA primarily regulates the banking sector, insurance companies, and payment systems, with a focus on maintaining monetary stability and ensuring the soundness of the financial system, while the CMA is responsible for setting and policing financial rules and regulations, which includes Tadawul.
The KSA issued its initial SBL and short selling regulations in 2017, but these underwent significant changes in subsequent years to enhance market efficiency and align with international standards.
The CMA鈥檚 approval of the 麻豆传媒 Central Counterparties Regulation in 2020 paved the way for the introduction of a central counterparty (CCP) in the kingdom. Since its establishment in 2018, the 麻豆传媒 Clearing Center Company (Muqassa) has completed its full coverage of all exchange-traded products in Tadawul.
In 2021, Tadawul approved amendments, which allowed all types of investors to engage in short selling and SBL activities under specific conditions, aiming to boost market liquidity and provide diversified investment opportunities. ?In 2022, Edaa updated the SBL regulations to reflect ongoing enhancements in the capital market infrastructure as part of the Kingdom鈥檚 comprehensive post-trade transformation programme (PTTP).
For instance, the dual portfolio was discontinued, which removed the requirement to link client securities accounts to broker-managed portfolios and allowed for faster market access. The PTTP has also brought greater flexibility in trading and settlement cycles, enabling buyers and sellers in negotiated deals to agree on a settlement period ranging from T+0 to T+5.
Additionally, the introduction of average pricing and post-execution trade allocation to investor accounts has helped investors to capitalise on market opportunities, according to HSBC. Last but not least, recent enhancements to the fails mechanism have also resulted in a substantial reduction in failing trades.
In November 2024, the Saudi Tadawul Group announced the implementation of additional post-trade enhancements, introducing new products and services to diversify offerings and investment opportunities for local and foreign investors.
Commenting on these developments, Sarah Al Othman, managing director and head of securities services at Riyad Capital, says: 鈥淭he number of securities on loan and their value have grown significantly over the past year, indicating increased market activity and acceptance.
鈥淒evelopments such as the establishment of Muqassa and flexible settlement cycles have bolstered market stability and efficiency.鈥�
The Kingdom鈥檚 regulatory capital requirements for financial institutions are often based on net exposure rather than gross exposure when netting agreements are in place. Dyson explains that this allows participants to engage in more securities lending activity with the same amount of capital, increasing market efficiency and liquidity.
On the back of the close-out netting draft regulations issued by SAMA in February 2025, Faruki expects the activity and interest from foreign investors to continue growing in this area. Meanwhile, the CMA is working on netting legislation, following a recent consultation on the draft rules.
On that note, Al Othman adds: 鈥淭his regulation provides a robust legal framework for the enforceability of netting agreements and financial collateral arrangements, particularly in the context of bankruptcy proceedings.
鈥淏y ensuring that netting agreements are enforceable even during bankruptcy, the regulation reduces credit risk and promotes financial stability, aligning Saudi Arabia鈥檚 financial infrastructure with international standards. This will contribute to reducing the credit risks of the transactions and protect against negative changes in the market, as well as the risk of the counterparty鈥檚 default on payment.鈥�
To Dyson, close-out netting acts as a crucial risk management tool in securities lending, as it transforms a complex web of interconnected obligations into a manageable net exposure, thereby safeguarding individual participants and the overall stability of the financial system. Otherwise, the potential for significant losses and systemic disruptions in the securities lending market would be considerably higher, he emphasises, hindering its growth and effectiveness.
Edaa is currently working with market participants to propose further amendments to the rules in order to allow greater foreign participation in the market. As a direct clearing member of Muqassa in the derivative market, SNB Capital actively engages with the Saudi Tadawul Group to stay aligned with regulations while providing feedback to regulatory bodies on any practical challenges that may be addressed in future revisions.
Bright future ahead
Saudi Arabia is currently halfway through its transformative journey towards economic diversification as part of its Vision 2030 initiative, which was first announced by the Saudi government in 2016.
鈥淭his ambitious plan aims to reduce the country's dependence on oil revenues, and foster a more sustainable and diversified economic landscape,鈥� explains Jivan. 鈥淏y investing in sectors such as tourism, entertainment, and technology, Saudi Arabia is positioning itself as a regional hub for innovation and economic activity.鈥�
麻豆传媒 finance plays a pivotal role in this development, according to Jivan, as it increases the efficiency of financial markets and promotes greater participation, essential for economic growth.
鈥淓nhanced liquidity through securities lending can lead to narrower bid-ask spreads, lower transaction costs, and improved price discovery, contributing to a more vibrant capital market,鈥� adds Jivan.
Dyson agrees that recent regulatory reforms, together with Vision 2030, are setting the stage for a rapid transformation of Saudi Arabia's securities finance market in the near future.
鈥淭he Kingdom's robust economic performance is attracting substantial international capital, expanding beyond its traditional regional focus,鈥� he states. 鈥淐ouple this with increased investment in infrastructure, increased presence of international firms, and greater collaboration across all market participants 鈥� the future of securities lending looks very bright.鈥�
However, he notes that to allow the Saudi market to reach its full potential, international institutional investors need to see a market structure that is comparable with other G20 economies.
鈥淚t will be important for all the relevant stakeholders to work together to align the market in the kingdom with those other developed markets from a best practice perspective,鈥� says Dyson.
Over the next few years, Faruki expects increased participation and liquidity in the market from both local and international investors, in addition to enhanced market infrastructure that will support a larger market, streamline securities lending processes, and increase access to liquidity.
Al Othman shares this sentiment, adding: 鈥淭he securities lending market in Saudi Arabia is expected to expand steadily, driven by regulatory reforms, increased foreign investor participation, and the implementation of Vision 2030 projects. These factors are expected to enhance market accessibility and liquidity, fostering further development in securities lending.
鈥淓xpansion into derivatives and other financial instruments will likely provide more opportunities for market participants.鈥�
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