Middle Eastern Exchanges are poised to capitalize on the forthcoming economic recovery, yet challenges lie ahead.

While most Western economies are struggling to pull out of the recession, some Middle Eastern markets are showing evidence of recovery. Rich in oil reserves, the Middle East has long been a magnet for foreign investment. Local exchanges, however, have often struggled to become global players. Today, exchanges in Egypt, Saudi Arabia and the United Arab Emirates are striving to capitalize on positive fundamentals to grow and diversify their business. Yet, significant challenges lie ahead.
 

Pyramidal stability

As the oldest, most open exchange in the region, The Egyptian Exchange's (EGX’s) vision is to be the premier  trading venue providing top-notch market technology, innovative products and a fair, transparent and efficient marketplace. With 149 member firms and 595 listed companies, EGX currently offers trading across multiple sset classes including equities, government bonds, corporate bonds and funds.

EGX’s competitive advantage stems from its diversity, low transaction and listing fees, and lack of restrictions on foreign transactions. One of its top strategic goals is to promote these advantages domestically, regionally and internationally, and to encourage cooperation among global exchanges to increase cross-border trading.

This strategy is driving the launch of the EGX FIX HUB, which will provide connectivity services for Egyptian and international brokers and open up new revenue streams and opportunities for brokers and investors. EGX  hopes this initiative, which is the first of its kind in the Middle East and North Africa, will draw liquidity to the exchange.
 

Efforts are underway to increase transparency and make information more available. The soon to be launched EGX Data Warehouse will compile detailed data and information about the Egyptian market and facilitate reporting and analysis.

The exchange’s overall growth plan includes broadening the product mix to include ETFs and sukuk, and establishing a derivatives market with a foreign partner. There are also plans to attract more foreign and domestic listings to the EGX main board and to attract prominent, fast-growing companies to NILEX, which is geared to mid-cap and small-cap companies.

EGX’s biggest challenge is attracting investors to Egypt. Therefore, the exchange arranges road shows, publishes educational and informational brochures, and participates in international associations including the African Securities Exchanges Association, World Federation of Exchanges and Common Market for Eastern and Southern Africa.

Despite the global economic downturn, the outlook for local and international investment in Egypt is positive. The Egyptian economy grew 4.7% in 2009, one of the highest growth rates in the region. Moreover, the EGX 30 Index gained 14.62% in the first four months of 2010.

"All this, along with our continuous efforts to diversify our product mix and to increase efficiency, reinforces our positive outlook for the flow of local and international investment to Egypt,” says Maged Shawky, CEO of EGX.

Egypt’s highly standardized trading and clearing systems support the growth strategy. The exchange operates on a proven and scalable system based on up-to-date technology that conforms to international standards. In 2008, the trading platform was upgraded to a high performance solution from NASDAQ OMX. EGX also has an in-house program that deals with IPOs and private placements before execution in the market.

Misr for Central Clearing, Depository and Registry (MCDR) acts as the clearinghouse between buying and selling member firms. Settlement is T+0 for securities traded by the Intra-day Trading System, T+1 for government bonds that are traded through Primary Dealers System, and T+2 for all other securities.
 

"All this reinforces our positive outlook for the flow of local and international investment to Egypt." Maged Shawky, CEO of EGX

Integrated services
 

Saudi Arabia’s Tadawul is the region’s largest exchange, with 140 listed companies and over 4 million customers. Its product offerings include equities, bonds and sukuk. The exchange recently launched its first ETF, which tracks the 30 stocks in the Tadawul AllShare Index (TASI).

As the largest economy in the region, there is significant potential for Tadawul to grow by attracting more listings and expanding its product line. And since the stock exchange, depository and registrar come under one umbrella, it can provide an array of integrated services.

Tadawul was the first exchange in the region to license its data to third parties and has established agreements with local and international players including Reuters and Bloomberg. Leading providers such as Dow Jones and S&P use the data to develop indexes and tradable products. Plans are also in the works to launch new investor reporting and post-trade services.

“As a major emerging market, Tadawul is constantly challenged to diversify its services, to meet the demands of an international customer base and to keep up with international standards,” says Abdullah Al Suweilmy, CEO of Tadawul. “We’re no different from many of our colleagues in other emerging markets.”

The strength of Saudi Arabia’s economy has contributed to its capital market’s growth. The Capital Markets Authority (CMA), the industry regulator, was established in 2003, and since then the number of market  participants and IPO activity has increased, and investor awareness has improved.

Local retail investors transact more than 90% of the trades on Tadawul. A key challenge for the exchange is to attract more institutional investors, including those from abroad.

Technology helps Tadawul achieve maximum efficiency. Transactions are cleared using the Saudi Arabian Riyal Interbank Express (SARIE), which provides real time gross settlement for Saudi Riyal transactions. Since 2001, settlement has occurred in T+0 making it possible to operate without a single settlement failure. This has also allowed Tadawul to have very low transaction costs.

“Our standardized, efficient, robust technology infrastructure has made it possible to process trades from order entry to execution, settlement, clearing and delivery without any manual intervention,” says Al Suweilmy. “It  has equipped us to expand our customer base and transaction volumes quickly. Now we are looking to leverage technology to reduce time to market for new products and services.”

"As a major emerging market, Tadawul is constantly challenged to diversify its services. " Abdullah Al Suweilmy, CEO of Tadawul in Saudi Arabia

Regional hub
 

One of seven emirates of the United Arab Emirates (UAE), Dubai is a global city and business hub. The economy is diversified, and Dubai has become a center for service industries, such as IT and finance. Dubai is also known for its innovative construction projects, sporting events, trade and tourism.

Founded in 2000, The Dubai Financial Market (DFM) promotes itself as “The Market of Choice.” It currently lists 66 companies, and about 552,000 investors own portfolios containing equities, bonds and sukuk. The exchange is working with banks to launch ETFs and index products. Moreover, derivatives contracts are listed on NASDAQ Dubai*.

DFM generates revenue solely from fees based on the value of transactions, whereas other exchanges charge fees for listings, market data and other services. Compared to other exchanges, however, DFM’s margins are among the highest in the world.

"Our profit margin averages 80-85 % because the cost of our operation is minimal." Essa Kazim, Executive Chairman at DFM in Dubai

DFM will continue to generate revenue through trade transactions, but monetizing market data and charging for listings will expand the business. Clearing and depository services also will be fee-based, and new services such as stock lending and short sales will be introduced.

DFM is the first exchange to distribute cash dividends to investors on stored value cards (iVESTOR Cards) through its Financial Services Division. The cards are convenient for investors because they can be used at the point of sale, at ATMs and even for commercial transactions. Moreover, they will be a good source of revenue for the exchange.

One major challenge for DFM is regaining market capitalization lost during the economic downturn. Dubai faced a severe crisis of confidence in Q4 2009, as the government-owned conglomerate, Dubai World asked its creditors for a six-month debt moratorium and fears of a property crash mounted. A second challenge is attracting a more diverse set of listings.

“The companies listed on DFM are predominantly in the real estate/construction and financial services industries,” says Kazim. “Only about 20-25% of our GDP is represented.”

Dubai is known for trading, logistics, tourism, transportation and storage. It is a successful export distribution hub. IPO activity globally has been weak, but Kazim believes there is pent up demand for new listings in those sectors.

DFM traditionally has been a magnet for foreign money. Activity from non-UAE nationals, especially European and U.S. investors, accounts for 40% of the volume. But DFM wants to attract more investors, both domestic and foreign. If oil prices hold above US$80, it would help create wealth and generate liquidity in the capital markets and real estate.

DFM hopes to change the mix of institutional and retail investors. The exchange has a large retail investor base, some of whom run portfolios as large as US$1-2 billion. “Around 70% of the activity comes from retail investors,” says Kazim. “We want to see a change in the mix to favor institutional money.”

Like Tadawul and EGX, technology is a key enabler of growth at DFM. Exchanges in other parts of the world compete on speed, but for DFM, efficiency is more important than latency. DFM is a fully-automated capital market that has run on NASDAQ OMX technology since its inception. The exchange, clearing and depository functions are linked allowing for straight through processing, which keeps operation costs to a minimum.

Tadawul, EGX and DFM each have unique selling propositions, but they have a few goals in common. All of them hope to attract new investors, diversify their product and service offerings, and recover market capitalization. Each hope their innovative, individualized approach combined with reliable, efficient technology will put them on the path to realizing their dreams.

^{*Dubai Financial Market (DFM) is in the process of acquiring NASDAQ Dubai. Once that process is complete, NASDAQ OMX will hold a minority stake of 1% in DFM.}

By Sherree DeCovny
Photos: Getty Images, Istock Photo, AFP photo/STR, AFP Photo/Karim Sahib