The Saudi Stock Exchange has announced the establishment of a clearing company backed by SAR600m ($159.9m) of capital.
The company will seek to develop future clearing services in line with best practices, according to Saudi Press Agency.
The Capital Markets Authority is collaborating with the Saudi Arabian Monetary Agency (SAMA) to enable the clearing house to start full operations in the second half of 2019. It then aims to introduce derivatives in the second half of 2020, according to reports.
SPA said the company would introduce new mechanisms to reduce risk and ensure the completion of market transactions.
Stock exchange CEO Khalid Bin Abdullah Al-Hussain, who was been appointed chairman of the new body, said it would support the kingdom’s diversification objectives by helping to attract foreign investment.
Speaking at a conference on Wednesday, he said the exchange would ensure the weighting of national oil giant Saudi Aramco’s planned listing would not be too large and it could impose an “index cap”.
Aramco’s planned 5 per cent listing is expected to value the company at up to $2 trillion compared to the Saudi Stock Exchange’s current capitalisation of $500bn.
Al-Hussain told Reuters that the Saudi index focussed only on freely floated shares so it would not register the 95 per cent of the company retained by the government.
Assuming no second listing on an international exchange and the lack of an index cap, he suggested Aramco might make up 40 per cent of the index. Other stocks on the exchange already have large weights like Al Rajhi Bank, with 13 per cent.
The Saudi stock market is introducing major reforms designed to encourage foreign investment that could be essentially for a successful Aramco listing.
The country’s inclusion on global emerging market indexes is expected bring big inflows of money into the kingdom and help ensure the IPO is successful.
“What you effectively do is to build a pipe from this market to the rest of the world, and as long as that pipe is efficient and as long as that pipe is unencumbered, then effectively capital will flow from one centre to another, from one market to another …” Al-Hussain told Reuters.
MSCI is expected to decide to add Saudi Arabia to its emerging market index in June, with the change taking effect from next year.
FTSE Russell decided in March to upgrade Riyadh to emerging market status.
The Capital Market Authority said on Wednesday there were 140 qualified foreign investors on the stock market, with 40 registered in the last quarter.
With contributions from Reuters