Saudi Arabia's stock exchange said it would extend the period for settling trades and introduce short-selling on April 23, reforms that may help the market join international equity indexes, attracting billions of dollars of fresh investment.
From April 23, trades will be settled within two working days of execution, the exchange said in a statement late on Thursday. That system is used by many big emerging markets.
At present, trades must be settled on the same day, which inconveniences foreign investors as they need to have large amounts of money on hand before trading. This can be hard given Riyadh's time zone and its Sunday-Thursday business week.
Saudi authorities had previously said they would change the settlement period, a reform demanded by index compilers such as MSCI, sometime during the second quarter of 2017 but had not announced a date.
MSCI is due to decide in June whether to begin reviewing Saudi Arabia for inclusion in its emerging market index. An April date for the settlement change would give MSCI time to evaluate its impact before making a decision.
The exchange also said it would permit short-selling of stocks, and the borrowing and lending of securities, on April 23. This could make the market more attractive by giving investors flexibility to hedge.
To limit the risk of destabilising the market, the exchange will impose several restrictions; investors can only sell borrowed stocks short, the practice is limited to certain investors such as funds, and the exchange will specify which individual stocks can be sold short.
Short-selling is banned around the Gulf but foreign investors have been able to get around the ban in some markets by using offshore swaps. In Saudi Arabia, though, banks have refused to offer swaps for fear of jeopardising their business within the kingdom, said regional hedge fund MENA Capital.
The Saudi exchange's decision to allow the practice "will significantly expand our shorting universe", the fund said.
After it starts reviewing whether to admit a country into an index, MSCI usually takes 11 months before deciding, and actual inclusion then tends to come a year later. This could mean Saudi Arabia entering MSCI's emerging market index in mid-2019, though MSCI can move faster if it wishes.
Rival index compiler FTSE has said it will decide this September whether to upgrade Saudi Arabia to a secondary emerging market. A smaller amount of emerging market funds are benchmarked to its index than MSCI's.
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