Trading volumes in the secondary fixed income market in Saudi Arabia increased by four times during the first seven months of 2020, compared to a total of 10.16 billion riyals traded in the full year of 2019.
The monitoring unit of the reports in Al-Eqtisadiah newspaper showed that the total value of transactions since the beginning of the year until the end of last July amounted to 40.1 billion riyals, a record high for the first time since the inception of the market in 2009.
Financial data stated that the secondary markets of the fixed income market in Saudi Arabia, under which the listed debt instruments for the government and companies are included, have achieved three-digit growth rates in the total trading volumes on securities that give annual dividends “closer to the guaranteed to investors” during the first seven months of This year, compared to the end of last year.
According to the monitoring of the Economic Reports Unit, the total of what was traded in the sukuk and bonds market at Tadawul during the first seven months of this year recorded a growth of 294 percent compared to the total of what was traded for the whole of 2019.
Total trading between January and the end of July is equivalent to more than three times what was traded in debt instruments in the Saudi stock market during the past three years, which reached 11 billion riyals.
Thus, the strong growth in monthly trading volumes continues, to record unprecedented transactions in the history of the market for more than ten years. 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 in times of low interest.
The market, which is designated for trading “bonds and sukuk” on the Saudi Stock Exchange, witnessed transactions that amounted to 6.4 billion riyals during the past month alone.
The remarkable activity of the brokerage firms, not formally appointed to play the role of market makers, continued when they collectively acquired 50.45 percent of the trading volumes that passed through them in the first seven months of this year, compared to 49.55 percent of the five market makers appointed from Total trades.
It is noteworthy that the five market makers began the year 2020 by capturing 18.7 per cent of total January trading.
These figures show the progress of the five appointed market makers towards regaining their lost share of total trades, especially during the last three months, as they gradually reduced the difference from the total trades that pass through them after acquiring half of the secondary trading volumes.
Their share of the total trading in 2019 reached 80.85 per cent, but the task of reducing the difference in total trades seems impossible, even after the strong entry of three brokerage firms this year “among the top five brokerage firms in terms of total trading volumes on fixed income instruments. Included “.
According to Al-Eqtisadiah’s monitoring, some market makers in general have dominated the execution of the largest number of deals compared to others, “a clear indication of their efforts to stimulate trading.”
A source close to the newspaper, who is familiar with secondary trading activities, indicated that one of the reasons for the superiority of brokerage firms over specific market makers may be due to the fact that some institutional clients deal with a specific brokerage firm and therefore deals are executed only through it, which gives them the advantage in terms of the sheer volume of deals they have completed. During secondary trades in the past months.
Al-Eqtisadiah monitoring showed that the average rate of total daily transactions increased to 272 million riyals during the first seven months of this year, with a growth equivalent to 573 percent, compared to the total average trading for the full year of 2019, which amounted to 40.4 million riyals, excluding weekends and official holidays.
The analytical study was based on the latest official data issued by “Tadawul”, which revealed the total trading of sovereign debt instruments and companies.
The relationship of interest to debt instruments
It is known that 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.
The securities issued by the Saudi government are guaranteed only to pay the declared interest and face value upon maturity, and just as is the case with other fixed-return securities, the government-guaranteed securities will fluctuate their value when interest rates change.
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. With this type of assets, this 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 event of high liquidity in the event of a need to sell, and this may lead to recording certain losses for companies’ funds. Assets.
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. Before 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 authorized to activate secondary trading of government issuances. Both events occurred in July 2018.
In the past, 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 that are 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 per month. However, the level of monthly trading has taken a high path since the listing of government debt, which led to the increase in the numbers and values of executed deals.
And in April 2019, a long-awaited package of reforms was announced by dealers in fixed income markets in Saudi Arabia, 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 number may increase or decrease, according to variable factors related to the issuer.
The other segment is in the interest of investors, as 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 raise the controls related to the commission of 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. In the event that 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 issuers wishing to offer debt instruments in a public offering from paying the fees collected to the Authority upon submitting the application 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.
The increase in liquidity in circulation during the first half of this year accelerated the entry of two new brokerage firms, bringing the number from 12 to 14 active companies in the secondary fixed income markets.
June saw a remarkable entry for an experienced brokerage firm in stock market trading. Thus, the number of brokerage firms that were attracted to the fixed income market trades recorded a growth rate of 16.6% after entering the two companies, as there were 12 companies at the end of last year.
With the increase in the value of a single sukuk, which is equivalent to alpha compared to stock prices, this means that the average value of government sukuk deals for “one deal” per individual investor will be higher when compared to stock deals. Therefore, it is natural for the brokerage firms to increase the execution fees of buying and selling sukuk deals.
While the number of financial intermediation companies in the Saudi stock market is 31 companies, this number varies with the sukuk and bond market. After going back to all the brokerage companies that executed buy and sell deals in the secondary market of “Saudi debt markets” within three years, it becomes clear that the numbers The brokerage firms that were monitored are 14 companies, “including five market makers.”
Total value of listed debt instruments
The value of sukuk and bonds listed 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 the listed sukuk and bonds returned 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 categories: individuals, companies, government and semi-government entities, and funds, including GCC investment funds.
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