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Kuwait’s Market Development Program and ‘Net Settlement’ trade mechanism implementation - MENATalks
17 Plays4 years ago
After the successful inclusion in the MSCI Emerging Markets Index last November, Kuwait is continuing its ambitious Market Development Program with the implementation of the new “Net Settlement” trade mechanism.
Listen to Stuart Warner and Frankie Vaz, as they discuss this in-depth in the 1st edition of the MENATalks podcast series.
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Transcript
Introduction to HSBC Global Viewpoint
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This is HSBC Global Viewpoint, your window into the thinking, trends and issues shaping global banking and markets.
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Join us as we hear from industry leaders and HSBC experts on the latest insights and opportunities for your business.
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A heads up to our listeners that this episode has been recorded remotely, therefore the sound quality may vary.
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Thank you for listening.
Overview of MENAT Talks Podcast
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Welcome to our first edition of the MENAT Talks podcast series.
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We will be featuring a variety of different topics and market developments that are currently trending in the MENAT region.
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In our first podcast, we will be focusing on Kuwait's market development program.
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Joining me to discuss this further is Stuart Warner, Head of Product for Europe, MENAT, and the Americas, banks and broker-dealers, and Frankie Vaz,
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Senior Regional Product Manager for MENET, Banks and Broker Dealers, Security Services HSBC.
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Stuart, over to you.
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Thanks, Gabriella.
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Welcome, everyone.
Kuwait in MSCI Emerging Markets Index
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The Kuwait market has just been through a very successful inclusion event last November, where the Kuwait Index was added to the MSCI Emerging Markets Index.
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Continuing its ambitious market development program, the Kuwait market is now implementing a new mechanism for trade settlement called net settlement, whereby settlement will be on a net basis for both cash and securities.
Introduction of Net Settlement Mechanism in Kuwait
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Frankie, can you talk us through the new change, please?
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Yes, sure, Stuart.
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As our clients would be aware, the Kuwait market has been making a series of interesting changes under their market development program.
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which helped it successfully get upgraded to emerging market status last November.
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The market development program has a number of forthcoming market developments that will be gradually introduced in the market post the MSCI inclusion.
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And net settlement is the first of these changes that is being implemented.
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If we take a look at the current model that the market follows, it is settled in version of model one, BIS-DVP,
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which is gross cash and gross securities.
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This is now changing to a new settlement mechanism whereby settlement of trades will be on a net basis for both cash and securities.
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The introduction of this netting feature was initially expected to be implemented in May 2020 when Kuwait was originally intended to be added to the MSCI Emerging Markets Index.
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However, due to COVID-19 pandemic,
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The inclusion event was moved from May to November 2020, as was the implementation of the netting feature.
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It was subsequently decided to further postpone the implementation of this netting feature, as not all market stakeholders were ready to implement it prior to the MSCI inclusion event.
Model 3 BIS-DVP Adoption in Kuwait
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The market is now ready to implement this feature, following which the Kuwait Capital Market
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will move to Model 3 BIS-DVP that settles transport instructions for both securities and funds on a net basis, with settlement of both securities and funds being completed at a set time on the settlement date.
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Thanks, Frankie.
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That sounds like a really interesting change.
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Do we know the exact date when the market is intending to go live with this new settlement mechanism?
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During the recent Minat Virtual Securities Forum that HSBC hosted in March 2021, the Quaid Clearing Company who had participated therein had announced that they are looking to implement net settlement in April 2021, which is this month.
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The KCC had been conducting several market-wide tests for all market participants to ensure readiness for implementation.
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Following the completion of these market-wide tests,
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The KCC is now in the process of ascertaining if the market participants have any residual concerns.
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And if there are none, the KCC will submit a proposal to the CMA to go live around the 25th of April.
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We anticipate that upon receipt of the CMA approval, the go-live date will be officially announced.
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As of now, it stands as tentatively 25th of April.
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Okay, so it sounds like we can expect the confirmation of that announcement in the coming days.
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Moving on from the date, can I ask you to elaborate a little more on the new mechanism in terms of trade settlement and how it impacts investors in Kuwait?
Benefits of Net Settlement for Investors
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Yes, of course.
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So what net settlement will do is allow flexible settlement on individual and institutional investors' trade.
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What this means is if an investor executes both trades,
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purchase and sale trades in the same trading session, they will not be required to pay the full value of the purchase transaction, something they currently do, but rather they will have to bring in only the net amount of the purchase and sale.
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This is assuming the purchase value is higher.
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Conversely, if the sale value is higher than the purchase, the investor will receive the net amount from the KCC, in which case they don't have to pay anything to the market, but instead
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will receive the net value of their trades.
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While on the cash side, this is aggregated at the investor account level across all their trades.
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When it comes to the securities, netting is done at each individual security level.
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So for each security traded in the same trading session, investors will be able to pay or receive the resultant net quantity of their sale and purchase trades for each security.
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So will this have any change on the impact of the timelines in the market?
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Yes, it does indeed.
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And I am pleased to say that it will be a significant change that will benefit investors as they will receive cash much earlier.
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Allow me to explain this.
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As per the existing process, the payment for the purchase obligations is made to the KCC by 9.30 a.m.
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wait time on the settlement date.
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while the sale proceeds are paid by the KCC by 1 p.m.
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Kuwait time.
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Under the new settlement mechanism, cash settlement for both purchase and sale trades, which will happen on a net basis, is expected to be completed by 9.30 a.m.
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Kuwait time on the settlement date.
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So this benefits investors significantly as their counterparty risk also reduces further.
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Thanks, Frankie.
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That's clear.
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So you mentioned benefits to the investors.
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Are there other benefits in addition to the reduction in counterparty risk?
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Yes, indeed.
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I think one of the biggest benefits is that investors now have the option to fund their net cash obligations for their trades in the same settlement cycle.
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This reduces the current exposure they have on currency fluctuations when they book the effects for their buy and sell trades.
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Under the net settlement mechanism, they would only need to book FX for the net amount, thereby significantly reducing their FX exposures.
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So in terms of implementation, how is the new mechanism going to be implemented?
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Can clients or investors start netting their trades as soon as this feature is live in the market?
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I can share what we are doing currently with our clients regarding the implementation.
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Our clients have the option to fund their net cash obligation for trades in the same settlement cycle.
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This is the benefit that the market is providing them currently in the new mechanism.
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But we're also offering clients who wish to continue with the existing process to do so.
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Clients wishing to benefit from the netting facility would, however, need to consider certain aspects under their new process.
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For example, the presence of multiple counterparties to the trade, which is a unique feature of this region.
Successful Trade Settlement Requirements
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An integral part of the trade settlement process here requires all counterparties to a trade,
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to instruct accurately and in a timely manner.
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This is important because all these linked trades are part of the trade matching process and have to be fully matched before the trade is confirmed for settlement.
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In case any of the linked trade instruction is not fully matched, the trade is not confirmed.
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And this in turn would impact the calculation of the net settlement amount and also the resultant FX booking.
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Further, as the Kuwait market does not allow foreign investors' securities cash account to be overdrawn, the custodian cannot confirm a trade that could potentially lead to an overdraft situation.
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Therefore, it is important that these aspects are carefully considered while switching to a new process for netting.
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Thanks, Frankie.
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Clearly a lot to take in, but this is a big step forward for the market.
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So we will await the announcement and the confirmation of that go-live date in the coming days.
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As always, if clients do have questions, please do follow up with your client service manager and our local team in Kuwait.
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We'll be more than happy to help answer questions.
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But Frankie, for now, thank you very much.
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And Gabriella, back over to you.
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Thanks so much, Frankie and Stuart.
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This was quite enlightening also for me.
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I would also like to thank you for listening to our first edition of MENET Talks.
Encouragement to Stay Tuned for More Insights
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We hope that you enjoyed learning about the latest market developments from Kuwait.
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Stay tuned for more from the MENET region as we explore more trends in the coming months.
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Thank you for listening today.
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This has been HSBC Global Viewpoint, Banking and Markets.
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For more information about anything you heard in this podcast or to learn about HSBC's global services and offerings,
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please visit gbm.hsbc.com.