The Securities Depository Center Company - Edaa, was established in 2016 and its main mission is to maintain a depository and settlement system that maintains a record of securities and tracks their ownership. It also provides many value-added services.
Functions of Edaa
Edaa aims to achieve the strategic objectives of the financial market in terms of developing the infrastructure and implementing the resulting procedures to execute transactions in line with international standards. It also aims to enhance the efficiency of services related to securities deposit and ownership registration by developing a more streamlined environment that promotes excellence in all sectors related to the financial market. Edaa supports the first objective of the Financial Sector Development Program, which is to ensure the establishment of an advanced capital market.
The main activity of Edaa is to operate the depository and settlement system used to register and maintain securities and their ownership electronically. Edaa seeks to develop its infrastructure, systems and procedures to comply with international standards while providing the highest levels of reliability and efficiency. In 2020, deposit revenue was 47% of total Group revenue.
In addition to its basic tasks, Edaa provides many other services that add more value to its role, such as organizing general assemblies, electronic voting, and submitting reports and notifications.
Edaa provides services for a full range of securities, which are offered by “Tadawulaty” and also provides services in partnership with custodians through the “Tadawulaty” platform. Brokers or custodians can vote on behalf of investors through the “Tadawulaty” platform that also facilitates public meetings.
The types of securities that Edaa deals with include stocks, debt instruments, Sukuk and bonds, exchange-traded funds, real estate investment-traded funds, closed-end exchange-traded funds, and investment funds.
Dealing with the pandemic
The Covid-19 pandemic caused many challenges to Edaa operations, as changes had to be made in operating systems and processes, while adhering to the precautionary measures and the requirements of the Capital Market Authority. In this context, the Capital Market Authority issued instructions to suspend the holding of assemblies for companies listed in the financial market physically, and to accept holding them virtually.
To keep pace with the new situation, an intelligent system has been developed to include an electronic attendance system and extend the time for electronic voting until the closing of the general assembly meeting. Moreover, 361 public meetings were held virtually and using electronic voting service in 2020, and the method of submitting reports and notifications related to holding public meetings has been improved for successful implementation. Since reducing direct contact between people was an imperative, it was necessary to deal electronically with the requirements of signature and stamping of documents by the authorized person, and this also required the use of e-mail to clients to confirm procedures.
Among the improvements made to the voting mechanism was the introduction of the partial voting system. In cases where institutional investments are managed by more than one asset manager, it is permissible to divide the vote among several individuals when voting for the managers.
In 2020, a profit distribution service was introduced to facilitate the process of dividend distribution through the “Tadawulaty” system. This service resulted in many benefits for shareholders such as maintaining confidentiality, obtaining accurate reports throughout the system, standardizing procedures, and paying tax for non-resident shareholders. The value provided to securities issuers has also been enhanced through rapid dividend distribution to shareholders. Edaa also significantly contributed to strengthening the debt market, as a new business system was introduced for the offering process in cooperation with the National Center for Debt Management and the main dealers. This development helped improve efficiency due to its limited risks. Depository also provides a guarantee transfer process in transactions. Through these transactions, the Company also facilitates the transfer of guarantees from the seller to the buyer, thus providing a safe financing framework and reducing credit risk.
Depository also played an important role in giving more opportunities for foreign investors; and the introduction of the framework for certificates of deposit would enable local custodians to facilitate redemptions. Through these facilities, foreign investors can keep certificates of deposit representing Saudi securities and trade them in their own stock markets without being registered in Tadawul. Edaa has also become the sole central authority for all fixed securities data of the National Numbering Agency Association that issues International Securities Identification Numbers (ISINs). Edaa also provides a number of registration services for unlisted companies. Depository services include maintaining ownership records and transferring ownership, depositing shares in the centre's accounts, electronic voting, dividend reports, enabling issuers and market makers to access detailed reports and profit data, as well as updating their records through “My Trading”. It should be noted that the facilities provided by Edaa enable companies to maintain a service that is fully compliant with regulatory instructions.
Edaa and Clearstream also signed a Memorandum of Understanding to establish cross-border links to facilitate foreign investors' access to the debt instruments market in the Kingdom of Saudi Arabia, especially government debt securities, in line with the goals of the Kingdom's Vision 2030. Developing the financial sector and the Capital Market Authority to facilitate access to the debt market for foreign investors, contributed to improving liquidity. Edaa also participated in the “Biban Riyadh” forum organized by the Small and Medium Enterprises Authority “Monshaat”. This forum gave the opportunity for small and medium-sized companies to adopt new solutions while presenting their innovative products.
Functions of Muqassa
The Securities Clearing Center Company, Muqassa, was established in 2018 as a wholly owned subsidiary of Tadawul. The Company was formed with a share capital of SAR 600,000,000 divided into 60,000,000 shares with a nominal value of SAR 10 each. Muqassa operations was an important objective of the Financial Sector Development Program (FSDP). The Company's core functions are to reduce post-trade risks, eliminate counterparty risk and develop clearing services in accordance with international best practices. This will contribute to increasing the safety and transparency of the capital market.
Muqassa is an entity that acts as an intermediary between two parties to a trade, by becoming the buyer to each seller and the seller to each buyer. The establishment of a clearing centre was an essential step if the Exchange was to go forward in development of new products and services. Muqassa will introduce new mechanisms to the market to reduce post-trade risks and provide centralized counterparty risk management. The Company will also carry out netting of transactions on a multilateral basis that will reduce the value and number of payments and security transfers. As a potential economic benefit of netting efficiency, CCP will bring to the market more than 80% combined value of cash and securities, which will be unlocked for the market to utilize.
A number of procedural steps had to be carried out before Muqassa could become operational. Changes had to be made to the Capital Market Law; Muqassa's role in the trading process had to be legally enshrined. New clearing laws, rules and procedures had to be enacted. The organization structure of the new entity had to be drawn up and responsibilities and procedures assigned to business units.
The challenges faced
The COVID-19 pandemic was a major obstacle to Muqassa's operations and the fulfilment of its objectives. However, the Company was able to overcome the challenges by working in tandem with the Tadawul Group and by taking all the necessary health measures. Muqassa documented and disseminated all the necessary health precautions. Awareness materials were distributed and training sessions were conducted. Staff at all levels was well motivated to deal with the situation and gave their utmost cooperation. Where possible, employees were facilitated to work from home; necessary messages and instructions were issued for work to proceed seamlessly. In spite of the constraints, Muqassa was able to commence operations. However although Muqassa was not able to achieve all the desired objectives, the work is in progress to amend the plans considering minimizing the deviation. Finally, Muqassa has to acknowledge the support received from its partners such as CMA, SAMA, and the clearing members, because without their support none of the above would have been achieved.
Developments of the year
Muqassa became operational in 2020. One of the functions implemented is index futures clearing, as a first step in opening the derivatives market. This is a key objective of the Tadawul Group as well as a contribution to the goals of FSDP. While implementing this, Muqassa has also assumed the counterparty risk in trading. Netting of transactions has also been implemented in the payment process and margin related transactions. The introduction of derivatives was a major step forward in achieving parity with leading global exchanges. This also delivered cost benefits to the investors, as they need to pay only the margin portion of the contract upfront instead of the full cost of the security. Muqassa has also made a contribution to the integrity of the market by acting as a guarantor to the completion of the trade.
Looking at the future
The derivatives market has so far been limited to index futures. However, in 2021, it will be expanded to include derivatives and clearing services for the equity market. New products and services take time to be introduced as they need careful study, adaptation, and measurement to ensure that they meet the desired objectives. Our success in dealing with and commencing operations during the COVID-19 pandemic, is an example that is worthy of emulation and could be adopted as a case study by many organizations. With this experience in hand, we are well positioned to act proactively to meet any challenges we may face in the future.
Tadawul Advanced Solutions Company was established in 2020. It is a closed joint stock company wholly owned by the Group with a capital of SAR 300 Mn divided into 30 million shares, the nominal value of each share being SAR 10. Wamid aims to employ modern technologies and data in developing the Saudi financial market and enhancing economic growth to contribute to achieving the Kingdom's Vision 2030. It also aims to enhance efficiency in providing innovative solutions and pioneering technologies to the financial sector and other sectors, and to add value to all market participants and target groups. By providing access to a list of data, specifically financial market data, Wamid also provides innovative solutions and products to all participants in the Saudi financial market and other sectors. The main activity of Wamid is the development of innovation-based solutions, providing the appropriate dynamic solutions for companies, and advancing the development of the Saudi financial market by creating modern products and services. Wamid also seeks to create additional value for the Saudi Tadawul Group by expanding the scope of its objectives; by diversifying its business sector, developing a new generation of solutions based on innovative technologies, and promoting the sustainable growth of the Group. Wamid also contributes to supporting market members to upgrade their offerings by providing data and technical solutions to ensure that investors receive continuously developed products, and to provide an advanced technical infrastructure that supports financial market products such as investment fund platforms, financial technology companies and their products, and other areas of interest to different categories of investors.