New initiatives striving to boost securities finance in the Gulf

Key Takeaway

• Surge in Gulf sovereign bond issuance and international interest
• A fragmented repo market hinders transparency and liquidity
• New standards, tech, initiatives aim to address challenges

Bond issuance in the Gulf countries (GCC) has grown significantly and the region is firmly on the international radar in terms of securities finance transactions.

In 2023, it reached USD 64.7 billion, marking a 74% increase from 2022, while the broader MENA region saw an 83% increase, with total bond issuance hitting USD 69.9 billion. The momentum has continued into 2024 as governments seek to bridge budget shortfalls and corporations leverage tight spreads to raise debt.

For example, Saudi Arabia issued USD 12 billion in bonds in January with orders hitting USD 30 billion. Demand for Doha Bank’s recent USD 500 million bond issue reached USD 2 billion, drawing interest from investors in Asia, Europe and the US as well as local institutions. And in a rare euro-denominated debt issue by Middle Eastern sovereigns, the Government of the Emirate of Sharjah in July issued a 6.5-year EUR 500 million sustainable bond for which books were over EUR 2.2bn, according to Debtwire.

The interest in the GCC also extends to securities lending, with Saudi Arabia and Dubai leading the way. Last July, HSBC’s first international securities lending and borrowing transaction on the Dubai Financial Market was seen as a milestone for emirate and the wider GCC.

Despite the boom in sovereign bond issuance and interest of international investors, the region lacks a robust, more integrated cross-border repo market. Repo markets are crucial for facilitating cash and securities flow within the financial system. They can help increase liquidity for local bonds, mitigate the risk of illiquid bonds becoming stuck in investor portfolios and improve collateral management.

An underdeveloped repo market

Different regulatory frameworks across the Gulf region complicate standardization for repo transactions, making it difficult to integrate and grow.

A fragmented Islamic repo market, with repo facilities established in countries such as Malaysia, Bahrain, or Saudi Arabia but not in others, like Oman, Bangladesh, or Jordan, poses a challenge during tight liquidity periods.

‘This was an issue in Oman in 2020 when the Central Bank of Oman created OMR 8 billion (USD 20+ billion) of liquidity by reducing interest on repo facilities,’ said Fitch in a 2022 report.

Legal enforceability of repo agreements can be unclear, deterring international investors. Moreover, the lack of centralized clearinghouses and settlement systems hinders efficient cross-border transactions, and is an obstacle to reducing counterparty risk and improving liquidity.

Effective collateral management is crucial for repo markets, but challenges in valuation, transfer, and re-use persist. Additionally, a lack of diverse investor participants, including global financial institutions, reduces depth and liquidity, hampering the creation of a vibrant cross-border repo market.

Enhancing transparency and liquidity

Legal, regulatory, technological, and institutional steps have been taken to standardize Islamic repo transactions to enhance liquidity and interoperability in the Gulf.

The International Islamic Financial Market (IIFM) has created the Sharia-compliant Master Collateralized Murabaha Agreement (MCMA) to facilitate Islamic repos transactions. MCMA involves a sale contract where the seller discloses the cost and profit margin to the buyer, allowing them to purchase goods at a deferred payment arrangement. In repo transactions, a bank buys a commodity, sells it to the customer at a higher price, and sells it to a third party for liquidity. Adoption of the agreement varies widely, with significant use cases noted in the UAE.

Another development is the Sharia standard on repurchase transactions, developed by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI). In effect since March 2017, it provides guidelines on permissible repurchase forms, including sales, leasing, and repo transactions, and adoption is widespread in mandatory AAOIFI countries like Bahrain, Qatar, and the UAE. The standard promotes consistency across Islamic financial institutions, enhances transparency, reduces ambiguity, and fosters investor confidence. It facilitates cross-border transactions, contributing to a more integrated repo market in the Gulf region.

But there is more work to be done.

Deepening the regional collateral market

The local market still faces structural, fragmentation and standardization issues, and the absence of a uniform legal framework and inconsistent use of Islamic repo facilities continue to hinder integration.

Aligning local practices with global standards will bolster the infrastructure of the emerging repo market, boost cooperation, and attract foreign investment. Enhancing risk management and promoting a more interconnected market, supporting both conventional and Islamic banks with standardized documentation, will also increase the region’s attractiveness to investors. Moreover, new platforms, such as the one launched by Absolute Collateral in Bahrain last October, can promote intra-GCC bond trading, deepen the regional collateral market, and improve sukuk trading efficiency.

Continued bond issuance and investor interest could further drive market integration in the region, and new technologies like DLT platforms open a pathway to more efficient cross-border transactions.