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The Saudi Qualified Foreign Investors Regime: opportunities for European and US asset managers, depositaries and custodians

The Saudi Qualified Foreign Investors Regime: opportunities for European and US asset managers, depositaries and custodians
  • United Kingdom
  • Saudi Arabia
  • Financial services and markets regulation - Briefings and articles
  • Financial services


The Saudi Arabian Capital Market Authority (CMA) issued its Rules for Qualified Foreign Financial Institutions Investment in Listed Shares (Resolution Number 1-42-2015) (the Rules) in May 2015.

As of 15 June 2015, any foreign financial institutions which satisfy the requirements under the Rules (QFI) can invest directly in shares listed on the Saudi Stock Exchange, the Tadawul, (Listed Shares). Before that date, foreign financial institutions were only able to access Listed Shares through an authorised investment firm in Saudi Arabia (an Authorised Person) under an arrangement which complied with CMA Circular 660/RH (as amended) (a Swap Arrangement).

One of the main stated objectives of the Rules is to promote institutional investment in Saudi Capital market to contribute to market stability and reduce the high volatility in prices. The Rules are designed to help this by attracting the expertise of specialised foreign investors with long term investment goals in the local market.

The Rules represent a new opportunity for European, US and other non-Gulf Co-operation Council (GCC) asset managers, which are now able to invest directly in Listed Shares up to the limits prescribed in the Rules. Together with the introduction of a principle of independent custody, the Rules should help asset managers and those, such as depositaries and custodians, who offer them or the funds, which they manage to more easily discharge EU and US requirements such as those under the UCITS Directive and Investment Companies Act, respectively.

We have set out below the most common questions asked by those asset managers. The CMA have also provided a set of Q&A on the Rules.

Do the Rules apply to investments in securities other than Listed Shares?

No. The Rules only apply to investments by QFIs in Listed Shares. The Rules do not apply to investment by foreigners in any other Saudi securities, for example, listed Sukuk.

Can an asset manager be a QFI?

Yes. In addition to banks, brokerage and securities firms, and insurance companies, an asset manager may apply for registration as a QFI (a QFI Manager).

Is there any home state regulation requirement?

Yes. An applicant must be licensed or otherwise subject to regulatory oversight by a regulatory authority in a jurisdiction that applies regulatory and monitoring standards equivalent to those of the CMA or acceptable to it. The CMA will make a list of those jurisdictions available.

What size requirements must an asset manager satisfy to be a QFI?

An applicant for QFI status must have assets under management of SAR18.75 billion (approximately US$5 billion) or more. This includes assets owned for the purpose of investment or managed for another’s account by the applicant or its group, i.e. (its subsidiaries and affiliates). The definition captures both managed accounts and funds.

What investment experience requirements must an asset manager satisfy to be a QFI?

An applicant for QFI status or any of the applicant’s affiliates must have been engaged in securities activities and making investments for a minimum of five years.

May an asset manager established in the GCC register as a QFI?

No. As GCC citizens, they are already permitted to invest directly in Listed Shares. A GCC citizen is a legal person whose majority capital is owned by the citizens or government of a GCC country who holds a GCC citizenship. This means that if a legal entity incorporated in a GCC country is minority owned by a foreign investor and has a majority GCC capital ownership then it will be treated as a GCC citizen.

As a QFI, is an asset manager automatically able to invest in Listed Shares on behalf of a client (a QFI Client)?

No. The CMA must approve the QFI Client under the Rules.

What are the conditions for approving any QFI Client?

The CMA must be satisfied that: (1) the QFI or applicant to be a QFI is responsible for the management of the QFI Client funds when invested in Listed Shares; (2) the QFI Client is neither a QFI nor a QFI Client of another QFI; and (3) the QFI Client is either (a) an investment fund that is incorporated or licensed in a jurisdiction applying regulatory standards equivalent to those of the CMA or acceptable to it; or (b) a financial institution satisfying all of the conditions referred to above for becoming a QFI.

How does an asset manager apply to become a QFI?

An applicant must submit an application to an authorised person licensed by the CMA to carry out the activity of dealing in securities known as the “Assessing Authorised Person” (AAP). The AAP is responsible for assessing the application and submitting its application to the CMA.

Who qualifies as an AAP?

An AAP is a firm authorised by the CMA to conduct securities business, such as a local broker, who has agreed with an applicant to assess the applicant’s to assess its application for registration as a QFI and executed a QFI assessment agreement (QFI Agreement) with the applicant. The AAP does not have to be independent of the applicant so a manager could apply to its Saudi subsidiary (where it has one).

May a QFI have more than one AAP?

No. Where a QFI Agreement lapses or is terminated, the Rules indicate that the CMA will not revoke the QFI’s registration provided that it enters into a QFI Agreement with another AAP within 10 days of the lapse or termination (the Transfer Period). The CMA Q&A indicate that the QFI can continue trading in Listed Shares during the Transfer Period.

How does the application process work?

The application to the AAP must be accompanied with the information and documents specified in Annex 2.1 to the Rules. If the applicant wishes to invest for its clients, which an asset manager would likely want to, the Rules require the submission of similar information and documents to demonstrate the eligibility of the clients. The Rules suggest that an AAP must accept the application if all registration conditions are met.

What is the role of the CMA in the application process?

The AAP must notify the CMA of its acceptance or rejection of the application within one business day of the decision. The decision becomes final five business days after the CMA receives notice of the decision from the AAP. The Rules give the CMA powers to extend the review period or request further information. Once the decision becomes final, the Rules indicate that the CMA will register the applicant as a QFI and notify the AAP without delay.

May a manager commence trading in Listed Shares once it is registered as a QFI

Registration is not in itself sufficient. Before it can begin trading, the QFI must: (a) hold an account with a local bank, which is in the name of the AAP and complies with the CMA Client Money Rules; (b) hold a securities account with the Depositary Centre opened by the AAP; and (c) satisfy any other conditions imposed by the CMA. The Rules do not restrict an authorised person, other than the AAP, from opening additional cash and securities accounts on behalf of the QFI. The CMA Q&A provide guidance on the various account opening procedures.

May a QFI Manager appoint a Saudi manager to manage its investments in Listed Shares?

Although a QFI Manager can appoint a local CMA authorised asset manager to manage the QFI’s own assets (such that there are), only the QFI may manage investments in Listed Shares made for QFI Clients. In other words, a QFI Manager may not delegate the management of QFI Client assets to a Saudi manager.

May a QFI Manager take on new QFI Clients?

Yes, but the prospective QFI Client must comply with conditions for approving a QFI Client and the QFI will have to go through a registration process with its AAP and the CMA. The CMA Q&A indicate that a QFI Client may not have more than one QFI.

May a QFI Manager send orders through a broker that is not registered as a QFI?

Yes, provided that the QFI Manager has given the broker authority to send orders.

What ownership limitations apply to the QFIs' investments in Listed Shares?

In addition to any legislative limits, which apply to foreign ownership in joint stock companies, the Rules set out the following investment limits

Maximum SSE Shareholding Holdings included in calculating Threshold
5% of the Listed Shares of a single issuer Each QFI together with its affiliates or QFI Client together with its affiliates
20% of the Listed Shares of a single issuer All QFIs and QFI Clients
49% of the Listed Shares of a single issuer All categories of foreign investors whether resident or non resident including any interests under a CMA Swap Arrangement
10% of all shares of all issuers whose shares are Listed Shares All QFIs, QFI Clients and investors holding interests under any CMA Swap Arrangements

The Rules require the Tadawul to publish on its website the ownership percentages and limitations above.

What about ongoing obligations for QFI Managers?

The Rules impose an annual reporting requirement on a QFI Manager to report to its AAP the information and documents identified in Annex 3.1 to the Rules and duties to make immediate notifications if any of the immediate notifiable events in Annex 3.1 occurs. There is also a duty to provide information without delay to the CMA.

In addition, a QFI Manager is bound to assist the AAP in its duties to monitor the QFI Manager’s and that of the QFI Clients ongoing satisfaction of the QFI registration conditions and the other requirements set out in the Rules.

What about enforcement?

QFIs are subject to the CMA's general enforcement powers as set out in the Capital Market Law, including the powers to impose financial penalties and suspend or revoke registration.

What about the framework for Swap Arrangements?

The CMA’s Q&A indicate that the framework for Swap Arrangements continues but is only available for investors who are not registered as QFIs or QFI Clients. Investors currently investing via a Swap Arrangement are able to apply to be QFIs, provided that they transfer all of their holdings under any Swap Arrangement to the relevant QFI or QFI Client account. It is unclear whether a QFI will be able to continue as a counterparty to a Swap Arrangement with an Authorised Person under which it provides exposure to Listed Shares for third parties who are not QFIs or QFI Clients.

Can a QFI Manager appoint someone other than the AAP or an authorised person other than the executing broker as its custodian?

Yes. The CMA Q&A establish the principle of independent custody in terms of which a QFI Manager may appoint a custodian different to the broker who executes its trades. The CMA Q&A indicates that the Tadawul will host workshops for authorised persons on the independent custody model. The ability to appoint an independent custodian means that a QFI Manager or the QFI Manager’s depositary has the freedom to appoint a custodian to hold its Listed Shares, which has a better credit rating than the QFI Manager’s AAP or executing broker.