WHAT ARE EXCHANGE TRADED FUNDS, HOW AND WHEN THEY STARTED?
ETFs are investment funds divided into equal units that are traded on the exchange during trading time. ETFs enjoy advantages of both mutual funds and stocks at the same time without any major disadvantages.
ETFs entered global markets for the first time in 1989 through the Canadian market followed by the U.S. in 1993. Since then ETF have enjoyed rapid growth, the ETF asset under management (AUM) have increased from $72 billion in 2001 to $700 billion by the end of 2009 in the U.S. market alone.
HOW CAN INVESTORS BUY THE EXCHANGE TRADED FUNDS ETFS?
Investors can buy and sell ETF units throughout the exchange trading time. The units can also be created / redeemed through the market maker or any other authorized party.
IS THERE ANY UPPER OR LOWER LIMITS ON THE NUMBER OF THE EXCHANGE TRADED FUNDS( ETFS) UNITS THAT AN INVESTOR CAN BUY OR SELL?
Minimum ETF units that an investor can purchase over the exchange is one unit, whereas creation of ETF units would be as per ETF terms and conditions.
WHAT ARE THE DIFFERENCES BETWEEN EXCHANGE TRADED FUNDS( ETFS) AND MUTUAL FUNDS?
WHAT ARE THE BENEFITS OF INVESTING IN THE EXCHANGE TRADED FUNDS ETFS?
In general, the investors could gain from the increase in the value of the underlying assets of the ETF in addition to any dividends paid.
DO THE EXCHANGE TRADED FUNDS( ETFS) INVESTORS GET DIVIDENDS IN-KIND OR IN CASH?
This is decided according to the policy of ETF as disclosed in the prospectus.
DOES THE UNIT PRICE OF THE EXCHANGE TRADED FUNDS( ETFS) EQUAL THE STOCK PRICES OF THE UNDERLYING CONSTITUENT OF THE ETF?
One must clearly distinguish between the trading price of the ETF units which is subject to supply and demand and the value of net assets (NAV) of the unit which represents the market value of assets consisting of the ETF unit. Often buying and selling of ETF units happen at a price very close to the value of net assets.
WOULD THE EXCHANGE TRADED FUNDS( ETFS) PROSPECTUS BE AVAILABLE BEFORE THE ETF STARTS TRADING ON THE PRIMARY AND SECONDARY MARKETS?
Yes it will be available, The Fund Manager, as per Capital Market Authority regulations particularly ETF regulations, is obliged to provide the ETF prospectus and the terms and conditions an adequate period ahead of the ETF trading.
WHAT ARE THE RISKS THAT INVESTORS MAY FACE BY INVESTING IN THE EXCHANGE TRADED FUNDS( ETFS)?
The risks that investors may face by investing in ETF are the same as that of investing in securities. However, due to benefits of diversification, risks of investing in ETF may be less.
ARE THE EXCHANGE TRADED FUNDS( ETFS) LIMITED TO STOCKS ONLY?
No, ETFs are not limited to the stocks only they may also include other instruments or commodities such as gold and silver. However, in the initial phase of this product, ETFs will be limited to Saudi equities only.
WHO WILL BE THE PROVIDER OF THE EXCHANGE TRADED FUNDS( ETFS)?
Authorized participants having Asset Management license issued by the Capital Market Authority.
ARE THERE ANY LIMITS TO THE OWNERSHIP OF THE EXCHANGE TRADED FUNDS( ETFS)?
No, it is subject to ETF available volume in the stock market.
WOULD ALL CATEGORIES AND NATIONALITIES BE ALLOWED TO INVEST IN THE EXCHANGE TRADED FUNDS( ETFS)?
Yes, ETFs will be available to all categories of investors who are registered to trade in the exchange.
WOULD THE EXCHANGE TRADED FUNDS( ETFS) OWNERS HAVE THE RIGHT TO ATTEND ASSEMBLIES AND VOTE?
ETFs are managed completely and directly by the fund manager and subject to the Investment Fund Regulations issued by the Capital Market Authority (CMA), therefore no general assembly is arranged for these funds.
WOULD THE TRANSFER PROCESS BE AVAILABLE BETWEEN THE CUSTOMER'S PORTFOLIOS?
Yes, with the same terms and conditions of the transfer of shares.
WHEN DOES THE EXCHANGE TRADED FUNDS( ETFS) EXPIRE AND BE DELISTED FROM THE MARKET?
Upon redemption of all ETF units by the Fund Manager.
CAN AN AUTHORIZED PARTICIPANT ISSUE MORE THAN ONE THE EXCHANGE TRADED FUNDS( ETFS) AT A TIME OR AT DIFFERENT TIMES?
Yes, an authorized participant can issue more than one ETF, at the same time, based on different styles or strategies.
CAN AN AUTHORIZED PARTICIPANT ISSUE ETFS CONSISTING OF LOCAL AND INTERNATIONAL SHARES?
Yes, after the approval of Capital Market Authority (CMA).
WHAT ARE THE MOST POPULAR INTERNATIONAL MARKETS FOR THE EXCHANGE TRADED FUNDS( ETFS)?
ETFs are generally traded in the international markets however ETFs are traded more actively in the United States, Canada and Germany.
WHAT ARE THE PROCEDURES TO OPEN A DEPOSITORY CENTER ACCOUNT FOR A QUALIFIED FOREIGN INVESTOR (QFI)?
A QFI can open a Depository Center account through the Custody member after completing the following requirements:
- QFI details form.
- A copy of the certificate of incorporation or commercial register or an equivalent document.
- Disclosure of the QFI’s investments in listed companies.
The identification of QFI and non-resident foreigners shall be through Custody Members.
WHERE WILL FOREIGN OWNERSHIP INFORMATION BE AVAILABLE, AND HOW OFTEN WILL IT BE UPDATED?
Foreign ownership information will be available on Tadawul website, and it will be updated on daily basis after market close.
HOW WILL FOREIGN OWNERSHIP INFORMATION BE DISPLAYED ON TADAWUL’S WEBSITE?
Under the QFI page, a foreign ownership limit section will have:
- Maximum ownership percentage per issuer and existing ownership percentage per issuer by all QFI’s.
- Maximum ownership percentage per issuer and existing ownership percentage per issuer by all foreign investors.
- Total ownership of QFI’s and swaps as a percentage of total market value.
Under each issuer’s web page, the “Major shareholders Foreigners” ownership section will contain:
- Maximum ownership percentage for the issuer and existing ownership percentage for the issuer by all QFI’s.
- Maximum ownership percentage per issuer and existing ownership percentage per issuer for all foreign investors.
HOW WILL INVESTMENT LIMITS IN LISTED COMPANIES BE DISCLOSED?
Investment limitations set forth in the articles of association or by-laws of the listed companies or any instructions issued by the supervisory or regulatory authorities to which these companies are subject, will be available under each issuer’s profile page; under the label “investment limits”.
HOW CAN SECURITIES IN A SWAP ACCOUNT BE TRANSFERRED TO THE DEPOSITORY CENTER ACCOUNT OF( QFIS)?
To transfer holdings under a swap account to a QFI, the following requirements should be met:
- CMA’s approval.
- Filling out the Securities Depository Center transfer form.
- A certified copy of the certificate of incorporation, and the commercial register or an equivalent document.
WHAT ARE THE TRANSFER FEES?
SAR 20 per issuance transferred.
WHAT IS TADAWULATY?
Tadawulaty is a service offered by Edaa and includes a bundle of services for investors:
Consolidated Reporting, Electronic Voting, Dividends Entitlement Reports, Expected Dividends Notifications, Shares Certificate Search, and Tender Offers.
You can access Tadawulaty through your member’s website, or click here.
WHAT IS THE ROLE OF THE CUSTODIAN?
The custodian is the investor’s settlement and asset servicing agent in the market. It is used by the investor to support and manage pre and post trading activities in the market. The custodian will be assigned by the investor in the market for the following services:
- Settlement: guaranteeing the settlement of all investor’s trades in the market. Responsible for receiving/delivering cash/securities.
- Safekeeping: safeguarding investor’s assets.
- Corporate actions: administers corporate actions on securities held such as securities dividends, tender offer, rights issue, etc.
- Cash Management: maintains cash bank accounts, deposits, withdrawals and other cash transactions.
- Reporting: provides the investor with information and analysis of the positions and performance of his/her portfolios.
IS THE INDEPENDENT CUSTODY SERVICE MANDATORY FOR INVESTORS?
It is not mandatory, the service is optional and investors may choose to use the current custody model (combined brokerage and custody) instead.
SHOULD THE CUSTODIAN TRANSFER SECURITIES/CASH TO THE EXECUTING MEMBER OF THE EXCHANGE TO PLACE AN ORDER IN THE MARKET?
No, The executing member only has “remote” access (without the ability to view the investor’s assets) to enter buy-sell orders on behalf of the investor. All executed trades will be reflected in the investors account held by the custodian. The executing member acts as an execution agent only and retains no investor balance on its own account as a result of any trade.
WHO IS RESPONSIBLE OF COLLECTING TRADING COMMISSIONS?
Trading commissions will be collected by the executing broker.
SETTLEMENT CYCLE (T+2)
HOW IS A TRANSACTION EXECUTED?
A transaction is executed by matching the sell order with the buy order.
WHAT IS THE SETTLEMENT OF SECURITIES?
It is the process of transferring securities of executed transactions from the seller’s investment portfolio to the buyer’s investment portfolio.
WHAT IS THE SETTLEMENT OF CASH?
It is the process of transferring the value of securities for executed transactions from the buyer’s investment account to the seller’s investment account.
WHEN IS A SETTLEMENT OF SECURITIES COMPLETED?
A settlement is complete when securities and cash settlements are complete.
WHAT IS MEANT BY THE DURATION OF SECURITIES SETTLEMENT CYCLE?
It is the period that starts when the sell and buy orders are matched, and ends when securities and cash settlements are completed.
WHAT IS THE DURATION FOR THE NEW SETTLEMENT CYCLE OF SECURITIES’ TRANSACTIONS?
In the new settlement cycle, all types of securities’ transactions are completed after two business days following the transaction execution date; i.e. (T + 2).
WHAT DOES THE LETTER (T) STAND FOR? AND WHAT DOES THE ADDED NUMBER REFER TO?
The letter (T) stands for the term (Trade); i.e. transaction.
As for the added number, it refers to the duration required for completing the settlement of a transaction.
DOES THE TRANSITION FROM (T + 0) TO (T + 2) SETTLEMENT HAVE AN IMPACT ON TRADERS IN THE SAUDI CAPITAL MARKET?
No, there is no impact on traders. Buyers can sell securities directly upon executing transactions with no need to wait for completing the settlement of securities.
Also, sellers gain purchasing power that enables them to buy new securities directly upon executing transactions with no need to wait for completing the settlement of securities.
WHICH TYPES OF SECURITIES WILL THE NEW SETTLEMENT CYCLE APPLY TO?
The new settlement cycle will apply to transactions of securities listed in the market of all types (stocks, SUKUK, bonds, Exchange-Traded Funds (ETFs), tradable rights), in addition to over-the-counter transactions (OTC).
WHAT IS BORROWING SECURITIES?
Borrowing securities is the temporary transfer of securities from its owner (lender) to an investor (borrower) with an obligation to return them back to their owner at a future agreed upon date. A borrower shall provide and maintain financial collateral as agreed with the lender and shall at all times be not less than 100% of the current market value of the borrowed securities. The value of the collateral provided may be amended at the discretion of The Capital Market Authority.
WHAT IS SHORT SELLING?
Short selling is the action of selling borrowed securities; provided that the investor returns them to the lender within an agreed upon period.
WHAT IS THE PURPOSE OF SHORT SELLING?
Short Selling aims to increase liquidity in the market and activate the role of the market maker. It also helps investors in short selling transactions to gain profits.
WHAT ARE THE ADVANTAGES OF APPLYING THE NEW (T+2) SETTLEMENT CYCLE?
- Increasing levels of asset safety for investors, and providing enough time to verify transactions and deal with errors should they occur.
- Activating the role of market makers in the stock market.
- Aligning the Saudi Stock Market with leading global settlement practices, which will open up new listing opportunities for the Saudi market among other global market indexes.
- Developing an investment environment that promotes institutional-level investments and meets necessary requirements for coping with any future changes.
Allowing short selling on condition of borrowing equities.