t+2 settlement cycle - tadawul

T+2 Settlement Cycle

Proposed Business Model

9th January 2017

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Business Model Overview v1.3.5 of 39

Contents

1. Introduction ...................................................................................................................... 4

2. Definitions ......................................................................................................................... 4

3. Structure ........................................................................................................................... 6

4. Settlement Cycle ............................................................................................................... 8

5. Pre-order checks ............................................................................................................. 11

6. Custody Controls ............................................................................................................ 15

7. Pre-settlement and failed trades chains identification .................................................. 18

8. DvP Settlement ............................................................................................................... 20

9. Fails Management .......................................................................................................... 21

10. Short Selling ................................................................................................................ 27

11. Securities Borrowing and Lending .............................................................................. 29

12. Corporate Actions ....................................................................................................... 34

13. Murabaha Transfers .................................................................................................... 37

14. Tradable Rights ........................................................................................................... 39

Table of figures

Figure 1: Market Structure ...................................................................................................... 6

Figure 2: Market Structure (Independent Custody Model) ..................................................... 7

Figure 3: Transaction Workflow ............................................................................................... 9

Figure 4: Rejection Workflow ................................................................................................ 16

Figure 5: Settlement Workflow .............................................................................................. 20

Figure 6: Fails Management Overview .................................................................................. 22

Figure 7: Short Selling Workflow ........................................................................................... 28

Figure 8: SBL Initiation ........................................................................................................... 31

Figure 9: SBL Return ............................................................................................................... 32

Figure 10: SBL Return ............................................................................................................. 33

Figure 11: Corporate Actions ................................................................................................. 34

Figure 12: Murabaha Workflow ............................................................................................. 37

Figure 13: Tradable Rights Workflow .................................................................................... 39

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Disclaimer

This document is developed for awareness purposes only. While Tadawul intends to follow

the Model explained hereunder, nothing in this document shall be construed to impose

any obligation on the part of Tadawul. This document does not constitute a basis for legal

reference nor is it intended as advertisement material or an invitation to invest. Further,

upon implementation, Tadawul may, at its sole discretion, make changes, additions

and/or deletions to this document due to technical, legal or other reasons without

incurring any liability on its part.

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1. Introduction

The purpose of this document is to describe the business model (“the Model”) which will be

implemented by Tadawul during the first half of 2017. The Model is based on infrastructures:

Tadawul, SDC, SAMA and participates: Trading/Custody Members, Settlement Members.

Key model components include:

Migration to T+2 settlement cycle

Improvement of Custody Controls

Introduction of DvP settlement

Introduction of Covered Short selling

Introduction of Securities Borrowing and Lending (SBL)

2. Definitions

Available Securities – securities available for carrying out transactions which shall include

securities which have been purchased but not yet settled to client accounts.

BIS DvP Model 2 – a DvP settlement mechanism where final transfer of securities from the

seller to the buyer (delivery) occurring on a gross (trade by trade) basis, but final transfer of

cash from the buyer to the seller (payment) occurring on net basis.

Borrowing Agent – a Custody Member appointed by borrower for conducting SBL

transactions.

Custody Member – Authorized Person (AP); a member of SDC providing custody services for

investors. AP that is a Custody Member can, but doesn’t have to be an Exchange Member at

the same time.

Depository System – Equator, IT system used by SDC for facilitation of clearing, settlement,

safekeeping and registry functions.

Delivery versus Payment (DvP) – a securities settlement mechanism that links a securities

transfer and a funds transfer in such a way as to ensure that delivery occurs if and only if the

corresponding payment occurs.

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Exchange Member – Authorized Person (AP); a member of exchange providing trading

services for investors. AP that is an Exchange Member has to be a Custody Member at the

same time.

Execution Broker – an Exchange Member providing trading services in respect of

transactions in deposited securities custody services for which are provided by another legal

entity - Independent Custody Member.

Independent Custody Member - a Custody Member providing custody services if trading

services are provided by Execution Broker (please see Execution Broker).

Lending Agent - a Custody Member appointed by lender for conducting SBL transactions.

Saudi Arabian Monetary Agency (SAMA) - central bank of Saudi Arabia.

Saudi Arabian Riyal Interbank Express (SARIE) - national RTGS payment system operated by

SAMA that facilities cash settlement for SDC.

Saudi Stock Exchange (Tadawul) – a stock exchange in Saudi Arabia.

Securities Depository Center (SDC) – Central Securities Depository (CSD) of Saudi Arabia,

performs securities settlement and cash netting, performs safekeeping and registry

functions. SDC operates end beneficial accounts.

Securities Borrowing and Lending (SBL) – a collateralized loan of securities from one party

(lender) of transaction to another (borrower). SBL is conducted in order to cover failed

settlement, facilitate short selling or other activities.

Settlement Limit - a cash limit as determined by the relevant Settlement Member for each

Custody Member from time to time

Settlement Member – a bank nominated by Custody Member to facilitate cash settlement

for this Custody Member; sets Settlement limit.

Trading System – X-Stream INET, IT system used by Tadawul for facilitating trading functions.

Tadawulaty – is a suite of services offered by Tadawul in cooperation with the Authorized

Persons. It encompasses a bundle of financial services targeted at the different segments of

investors as well as issuers.

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3. Structure

The Model is built on the current market structure and will not introduce significant

structural changes to it. The current market structure is the following:

Figure 1: Market Structure

If client is using Independent Custody Model, i.e. separate Exchange and Custody Members,

the market structure is the following:

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Figure 2: Market Structure (Independent Custody Model)

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4. Settlement Cycle

4.1. Overview

Under the Model, settlement cycle is differed to T+2, therefore, settlement of cash and

securities is conducted two business days after the trading. However, “purchasing” and

“selling” powers are granted immediately i.e. expected cash proceeds from executed but

not yet settled trades could be used for prospective purchases and purchased securities

could be sold before settlement (please refer to the section 5 “Pre-order ” for more details).

T+2 settlement cycle as described in the Model would be used for all on-exchange and off-

exchange trades1 for all securities traded at Tadawul, namely:

Equities

Sukuks & Bonds

ETFs

Tradable Rights

REITs

T+2 model (where “purchasing” and “selling” powers are granted immediately) is used for all type of securities traded on the market.

Time window between trading and settlement could be used by custodian to confirm

trades with clients and submit rejections to SDC accordingly (valid for Independent Custody

Model only).

4.2. Transaction workflow

Under the Model workflow of the transactions is the following:

1 Settlement cycle for special buy-in trades is T+0 or T+1 (please refer to the section 9 “Fails Management” for

more details).

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Figure 3: Transaction Workflow

# Action Description Timing

1 Pre-order checks

Exchange Member performs all necessary checks and sends order to the Trading System. Before placing an order into the order book, Trading System checks2 it: for buy orders - against Adjusted Settlement Limit (ASL), for sell orders – against Available Securities. If amount of ASL/Available securities is not sufficient – system rejects the order.

T+0; during trading hours

2 Order Placement

If order is not rejected at pre-order checks stage, it is placed into the order book.


3 Trade execution

As soon as order is matched with another order, trade executes.


4 Custodian Rejections

Independent Custody Member can reject any trade executed on behalf of its clients.

From moment of trade execution until cut-off

2 All other current checks in the Trading System, including Ownership Limits, will be maintained.

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time - T+2 11:00 a.m.

5 Rejections Management

Broker executed a trade which then has been rejected ought to perform necessary actions (find cash or securities) to ensure settlement of the rejected trade.

From moment of trade rejection until pre-settlement at T+2 1:00 p.m.

6 Pre-Settlement SDC identifies trades which would fail to settle due to the lack of securities and subsequent trades (failed trade chain) and rolls over settlement of such chain to the next business day.

T+2 1:00 p.m.

7 Settlement SDC conducts DvP Settlement of the trades. T+2 2:00 p.m.

8 Fails Management

Broker/SDC conducts various types of fails management to ensure settlement of the failed trades.

From T+3 until T+6

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5. Pre-order Checks

5.1. Prefunding

5.1.1. Cash Prefunding

Cash prefunding requirement is maintained for Natural Persons. For other investor types

cash prefunding requirement is to be defined by the corresponding Member. As in the

current model, cash prefunding requirements are checked by the corresponding Exchange

Member, not by the Trading System.

5.1.2. Securities Prefunding

Securities prefunding requirement is maintained for all investors, however, purchased but

not settled securities could be utilized for onward sell trades.

As in the current model, securities prefunding requirements are checked by the Trading

System.

5.2. System Checks

5.2.1. Available Securities

Before placing a sell order into the order book, Trading System checks it against quantity of

securities available. If quantity is not enough, then the order is rejected by the Trading

System. Such checks are conducted at account (i.e. individual investor) level.

Available securities are the securities that an investor will ultimately have on his or her

account, i.e. securities currently held by the investor plus securities purchased, but not yet

settled minus securities sold, but not yet settled. More precisely:

Available Securities= Inventory + Securities Pending-in – Securities Pending-out – Securities

blocked for active sell orders – Securities blocked for failed trade chains

Where:

Inventory – securities balance of investor’s account, free of pledge or other restrictions;

Securities Pending-in - securities bought by the investor but not yet settled;


Securities Pending-out - securities sold by the investor but not yet settled;

Securities blocked for active sell orders – total volume of active sell orders;

Securities blocked for failed trade chains – pending-in securities blocked as a result of failed

trade chain identification (please refer to the section 7 “Pre-Settlement and Failed Trade

Chains Identification” for more details).

Available securities are checked on the account level and recalculated after any action

affecting one of the components e.g. sell order placement.

5.2.2. Available Inventory

In cases where settlement/transfer of security takes place earlier than the relevant

settlement cycle (i.e. immediate, T+0 or T+1) in order to prevent potential settlement fails,

Depository System checks not “available securities”, but “available inventory”. Available

inventory is actual securities on the investor’s account that are not reserved for any sell trade

or order. More precisely:

Available Inventory=Inventory – Securities Pending-out – Securities blocked for active sell

orders

Cases where “available inventory” is checked instead of “available securities” are the

following:

Free of Payment (FOP) transfer of securities (excluding Murabaha transfers)

Securities Borrowing and Lending

Buy-in trades

5.2.3. Adjusted Settlement Limit

Before placing a buy order into the order book, Trading System checks it against Adjusted Settlement Limit (ASL). If ASL is not enough, the order is rejected by the Trading System e.g. if ASL is non-positive, no buy order will be accepted. Such check is conducted on Execution broker level.

ASL is a total “purchasing power” of a Custody Member i.e. it is a Settlement Limit set

by Settlement Member plus expected incoming funds from sell trades minus expected

outgoing funds for buy trades and subscriptions and funds blocked for rejected sell

trades. ASL is a rolling limit i.e. includes all unsettled trades for all settlement dates. More

precisely:

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ASL=Settlement Limit + Funds Pending-in - Funds Pending-out – Funds blocked for active

buy orders – Funds blocked for rejected sell trades

Where:

Settlement Limit – limit set by the corresponding Settlement Member; can be adjusted by

Settlement Member anytime intraday via Depository System.

Funds Pending-in – value of unsettled sell trades3 with any settlement date (on-exchange

and off-exchange trades).

Funds Pending-out – value of unsettled buy trades with any settlement date (on-exchange

and off-exchange trades) and value of unsettled tradable right subscriptions

Funds blocked for active buy orders – value of active buy orders

Funds blocked for rejected sell trades (for Execution Brokers only) – value of the rejected

sell trades. Since rejected sell trades are generally not covered by securities i.e. could fail to

settle, value of such trades is not added but subtracted from ASL. This field is applicable only

for Custody Members that act as Execution Brokers.

5.2.3.1. Daily recalculation of ASL

ASL is based on the value of unsettled trades, therefore, in addition to recalculation after

every order/trade, it is also recalculated after every settlement to exclude the value of

settled trades. In order not to intervene with trading activities, such adjustment is always

conducted after the trading hours.

In order to allow Members to foresee necessity to adjust the Settlement Limit, Depository

System allows Member to see their expected ASL at specified date e.g. ASL as of tomorrow

excluding trades which will settle today.

5.2.3.2. Negative ASL

ASL could become negative due to the following reasons:

After settlement (since settled trades are excluded)

Upon rejection (for Execution Broker)

3 Excluding rejected sell trades i.e. trades which could fail to settle


If ASL is negative, as explained in the section before, Member will not be able to place any

buy orders.

Negative ASL could be resolved by either of the following:

Executing sell trades

Increase of Settlement Limit by the Settlement Member (could be done intraday)

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6. Custody Controls

6.1. Overview

Currently Independent Custody Member can open the following types of accounts for

investor:

Custody account – an account only for safekeeping; cannot be used for

trading/settlement purposes;

Access account – an account for trading/settlement; could also be used for

safekeeping.

In order to make securities from Custody account available for trading, custodian has to

transfer them into the Access account, prior a sell order could be placed into the Trading

System.

The Model introduces two important enhancements to the custody controls available under

ICM:

Multiply override accounts4

Trade rejections

Above-mentioned enhancements make usage of Custody accounts obsolete, however this

functionality is retained in the Depository System.

6.2. Multiple Override Accounts

Under the Model, Independent Custody Member can open several Access accounts and

restrict trading from such accounts to the specific Execution Broker(s). Allocation of the

same account to the multiple Execution Brokers is permissible.

If Execution Broker is not assigned to the account, it is notable to place an order on behalf

of this account (the order is rejected by the Trading System).

4 Multiple override account will be available before the migration to T+2.

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6.3. Trade Rejections

6.3.1. Overview

Trade rejections are available only for the trades executed on behalf of clients using

Independent Custody Model and could be made only by Independent Custody Member for

its clients.

There is no trade confirmation functionality in the Depository System, only trade rejections

are possible. All trades that are not rejected until the cut-off time, which is 11:00 a.m. T+2,

are treated as confirmed and will be settled from clients’ accounts.

All rejections are final and cannot be reversed or canceled, neither by Independent Custody

Member nor by Execution Broker.

Responsibility for the settlement of rejected trades lies completely with the Execution

Broker. If the trade is rejected, SDC cannot put any claim on client’s assets e.g. a force sells

on the client’s securities.

All rejected trades are placed to (and settled from) a special principle account of the

corresponding Execution Broker – Rejection Account. Rejection Account cannot be used for

trading activities apart from the fails management activities (please refer to the section 9

“Fails Management” for more details).

If rejection of the buy trade leads to a shortage of securities on client’s account (i.e. negative

amount of Available Securities), Independent Custody Member has to reject corresponding

sell trade(s) to resolve the shortage (i.e. make amount of Available Securities non-negative).

6.3.2. Rejection workflow

Figure 4: Rejection Workflow


# Action Timing

1 Execution Broker conducts a trade at the Trading System

During trading hours at T+0

2 Independent Custody Member can see trades in Depository System real time or in the end of day report

Immediately upon execution/end of day T+0

3 Client rejects or does not confirm the trade From trade execution until cut-off time specified by Independent Custody Member

4 Independent Custody Member rejects the trade From trade execution and until 11:00 a.m. T+2

5 Broker is notified about rejection via FIX message Immediately upon rejection input

6 Rejection is executed i.e. trade is transferred from client’s account under Independent Custody Member to the Broker’s Rejection account; Available Securities, Available Inventory and ASL are recalculated.

During the rejection batch, which is not earlier than 30 minutes, but not later than 60 minutes after the rejection (during trading hours)

6.3.3. Batch Processing

Rejections are processed in batches. Batches run every 30 minutes and include all rejections

which were input into the Depository System at least 30 minutes before the batch start. For

example, a rejection received at 10:29 is executed during the batch at 11:00, at 10:31 – at

11:30. This is done to give the Execution Broker time to prepare for the rejection (since it

will affect its ASL).

6.3.4. Rejection Input Process

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Rejections should be input by Independent Custody Member via two Channels:1. Manually via Depository System 2. Fix Messages Through Depository system, independent Custody Member could reject individual trades (exchange executions). However, search of the trades is conducted by either NiN or account, settlement date, and order number. Independent Custody Member can choose particular trades from the search output or reject all at once. Partial rejection (i.e. rejection of the part of the trade) is not possible. Through Fix messages, independent Custody Member could reject trades via Equator Fix by either trading member, symbol code, order number.


7. Pre-Settlement and Failed Trade Chains Identification

7.1. Trades Failed to Settle

Since all orders are checked by the Trading System for securities prefunding requirements,

normally sell trades cannot fail to settle. However, if the sell trade has been rejected by the

Independent Custody Member, Execution Broker may not be able to find securities to cover

such trade until the pre-settlement time and therefore will fail to settle. This is the only

possible cause for a trade to fail to settle at the first place. However, since settlement is

conducted according to BIS DvP Model 2, i.e. net cash and gross securities, a failed trade

might cause consecutive trades to fail (e.g. a rejected buy trade could cause a failure of the

consecutive sell trade). Such trades are also considered as failed but treated differently

(please refer to the section 9 “Fails Management” for more details). Depository System

always tries to settle trade against Inventory i.e. even if sell trade is preceded by the buy

trade which failed to settle, but amount of Inventory is sufficient, such sell trade will be

settled.

Execution Broker has to have securities on its Rejection Account at pre-settlement time

which is at 1:00 p.m. on T+2, otherwise sell trades will be considered as failed.

Partial settlement is Allowed from T+2.

If a trade fails to settle at a Record Date of a corporate action, market claim is generated or

trade transformation is conducted (please refer to the section 12 “Corporate Actions”

for more details).

7.2. Pre-settlement

Before processing the actual settlement, SDC conducts a pre-settlement run. During the

pre-settlement, SDC identifies trades which will fail to settle at upcoming settlement run

due to the shortage of securities (rejected sell trades) or due to the failure of

settlement of the preceding trade. Such trades form a failed trade chain. The failed trade

chain is rolled over for the next day settlement and is subject to fails management process

(please refer to the section 9 “Fails Management” for more details).

During the pre-settlement, only trades with intended settlement date of current day

or earlier are considered; i.e. trades with intended settlement date in the future are

not considered (the failed trade chain is potentially incomplete).

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7.3. Failed Trade Chains

At the end of the day, SDC identifies trades with intended settlement date in the future

which will fail because settlement of the trade(s) identified at pre-settlement has failed. Such

trades are added to the failed trade chain and failed trade chain is considered as complete.

Failed trade chain has the following links:

First link: failed seller – an Execution Broker who has not covered the rejected sell

trade in time.

Intermediate links (if any) – Investors who failed (or will fail) to settle sell trades

because of the first link or other intermediate link.

Last links: end-buyer(s) – investors who haven’t received (or will not receive)

purchased securities because of the first link or intermediate link.

As soon as full chain is identified, end buyer(s) is restricted from selling securities, which are

expected to be received from failed trade, until the failed trade chain is resolved. This is

done in order to prevent failed trade chain to grow.

For example:

Trade #1: ABC sells 100 securities to DEF (rejected sell trade);

Trade #2: DEF sells 100 securities to GHI;

If ABC fails to find securities for settlement, then:

Failed Seller is ABC;

Intermediate link is DEF;

End-buyer is GHI;

GHI cannot sell 100 securities he/she is expecting to receive from Trade #2.

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8. DvP Settlement

8.1. Overview

Settlement is conducted according to BIS DvP Model 2 – gross settlement of securities, net

settlement of funds. Gross settlement of securities is conducted on trade-by-trade basis

between the accounts of beneficial owners in SDC. Net settlement of funds is conducted as

cash transfers between Settlement Members and SDC account in SAMA. Such cash transfer

is net for each Settlement Member i.e. cash settlement of all trades of Custody Member(s)

that uses this Settlement Member, is netted into a single debit or credit.

In compliance with the Principle of DvP, delivery of securities occurs if and only if the

corresponding payment occurs.

In order to ensure that there is no securities shortages, settlement is always preceded by

pre-settlement.

8.2. Settlement workflow

Figure 5: Settlement Workflow

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# Action Timing

1 SDC calculates net cash debits or credits for each Settlement Member. One Settlement Member could either have a net debit or net credit, not both.

14:00

2 SDC instructs SAMA to debit accounts of the corresponding Settlement Members in SARIE and credit SDC account.

14:00

3 SDC initiates securities settlement. Securities settlement is conducted on the gross basis - trade-by-trade transfers between the beneficial owner accounts in SDC.

14:15

4 SDC instructs SAMA to debit SDC account and credit accounts of the corresponding Settlement Members in SARIE.

14:15 (in parallel with

#3)

9. Fails Management

9.1. Overview

In order to prevent settlement of rejected sell trades to fail or resolve failed settlement,

Execution Broker or SDC could/will conduct variety types of fails management. Such

activities could be categorized as follows:

Type Description Timing

Pre-fail Management

Activities which could be conducted by the Execution Broker before rejected sell trade fails to

settle

From T+0 until T+2

Optional Fails Management

Activities which could be conducted by the Execution Broker after the trade settlement has

failed

From T+3 until T+4

Mandatory Fails Management

Activates conducted by SDC to ensure settlement of failed trades

From T+5 until T+6

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Late Settlement Fee5

Fee for every day of settlement delay

The following figure shows the overview of the types of fails management:

Figure 6: Fails Management Overview

The following sections provide explanations of each type of the fails management.

5 Despite “Late Settlement Fee” is not particularly a type of fails management i.e. it cannot resolve the fail by itself, Late Settlement Fee is an important part of the settlement discipline, it encourages participants to settle in time, and therefore considered in this section.

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9.2. Transfer from Principle Account

In order to cover shortage of securities, Execution Broker can transfer such securities from

its principle (proprietary trading) account to its Rejection Account using same NIN FOP

transfer.

This operation could be conducted at any time until the end of day T+4.

Transfer is subject to normal FOP transfer fee, no special fee is charged.

9.3. Securities Borrowing

Execution Broker can borrow needed securities via SBL functionality. Standard processes and

standard SBL fees are applied.

This operation could be conducted at any time until end of day T+4.

9.4. Buy from The Open Market

Execution Broker can buy needed securities from the open market. Standard processes and

standard fees are applied.

This operation could be conducted at any time until the end of trading session T+3 i.e. trade

should settle before or at T+5. However, if purchase is conducted after T+0, than

corresponding sell trade will still fail to settle at T+2 and will settle two business days after

the purchase. Therefore, only buying from the open market at T+0 is considered as “pre-fails

management”, while from T+1 to T+3 – as “optional fails management”.

9.5. Optional Buy-in

9.5.1. Overview

Optional buy-in is a special type of trade. The buy side account of buy-in trade could be only

an Execution Broker’s rejection account with (potential) shortage of securities i.e. sell trades

failed (or expected to fail) to settle. The sell side account of the buy-in trade could be a

principle account of another Exchange Member or client’s account of this or another

Exchange Member. Sell side account cannot be an account belonging to a client using

Independent Custody Model. Buy-in trade is checked (from the sell side) against Available

Inventory, not Available Securities i.e. seller has to have securities inventory in order to be

able to conduct such trade.

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Buy-in trades are negotiated bilaterally between participants. Tadawul provides a special

functionality in Tadawulaty system, which allows Execution Broker to request interest (RFI)

for buy-in from other Exchange Members. However, usage of this system is optional, failing

Execution Broker may opt for finding counterparties by itself.

Buy-in trades are manually input by failing Execution Broker in Depository System and should

be approved by the counterparty (similar to the current process of off-exchange trades

input).

Input of buy-in trade is possible only after pseudo pre-settlement at 11:30 a.m. and until

actual pre-settlement at 1:00 p.m. (for same day settlement) or the end of day (for next day

settlement).

Amount of securities purchased via buy-in trade(s) cannot exceed the shortage of these

securities on the rejection account, it however may be less.

Settlement of buy-in trades is conducted during the normal settlement run, cash side is

netted with other trades:

If buy-in is conducted at T+1 i.e. one day before the intended settlement date of the

rejected trade, then settlement of the buy-in trade is conducted next business day.

If buy-in is conducted at T+2, T+3, T+4 i.e. on or after the intended settlement date

of the rejected trade, then settlement of the buy-in trade is at the same day.

Buy-in trade are subject to normal trading fee. No admin fee is charged.

9.5.2. Process

Time Action

T+1 to T+4

Any Failing Participant to request interest for buy-in in Tadawulaty (Security, Quantity, optionally: Price)

Any Participants to agree on trade details

For buy-in at T+1: from 11:30 and until 16:00 For buy-in at T+2, 3 and 4: from 11:30 and until 13:00

Failing participant to enter the transaction and seller to approve

For buy-in at T+1: 14:00 (next business day)

Buy-in trades together with the trades from corresponding failed trade chain are settled during the normal settlement run.

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For buy-in at T+2, 3 and 4: 14:00 (same day)

9.6. Late Confirmation Transfer

Rejections are irrevocable, however if client provides late confirmation for the trade (until

T+4), Execution Broker and client (via Independent Custody Member) can facilitate an FOP

transfer to rectify the rejection. Cash transfer should be conducted bilaterally outside of the

Depository System. Cash transfer should be conducted by the value of original transaction

and all interest claims, fees and penalties should be explicitly mentioned.

In order to facilitate such transfer, party holding securities (Execution Broker in case of buy

trade rejection and Independent Custody Member in case of sell rejection) should send a

special request to SDC specifying accounts for transfer and providing evidence for the

purpose of such transfer (the rejected trade details).

Transfer could be conducted only between the account of the client from which the original

trade has been conducted and Execution Broker Rejection account for the amount of the

original trade.

Late settlement fee (for the number of days the trade has failed to settle) is charged from

the Execution Broker, who in turn could charge it from the client.

Independent Custody Member should submit a report on periodical basis of all such

transfers including the cash leg (explicitly specifying amount of interest claims, fees,

penalties, etc. claimed) and original rejected trades.

9.7. Mandatory Buy-in

9.7.1. Overview

Mandatory Buy-in is an auction conducted by SDC on behalf of the failing Execution Broker

at T+5 (i.e. 3 days after the intended settlement date of the failed trade).

The auction is conducted with a fixed price where offers are prioritized by volume – the

largest volume has the highest priority. This allows to minimize number of buy-in trades. If

two offers have the same volume, they are prioritized by the time of receipt (First In – First

Fulfilled). Offer with a volume bigger than requested buy-in volume is assumed to have the

requested volume.

Buy-in price is 110% of the last day reference price adjusted for corporate actions.

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Since buy-in trades are special cum i.e. have corporate action proceeds attached even if

conducted on or after the ex-date, but before or on record date (please refer to the section

12 “Corporate Actions” for more details), reference price is adjusted in the following way.

If buy-in is conducted at the ex-date:

Adjusted reference price = last day reference price as it was i.e. without any adjustments

If buy-in is conducted at the record date and corporate action is not tradable rights issuance:

𝑨𝒅𝒋𝒖𝒔𝒕𝒆𝒅 𝒓𝒆𝒇𝒆𝒓𝒆𝒏𝒄𝒆 𝒑𝒓𝒊𝒄𝒆 =𝑳𝒂𝒔𝒕 𝑫𝒂𝒚 𝑹𝒆𝒇𝒆𝒓𝒆𝒏𝒄𝒆 𝑷𝒓𝒊𝒄𝒆

𝒂𝒅𝒋𝒖𝒔𝒕𝒎𝒆𝒏𝒕 𝒇𝒂𝒄𝒕𝒐𝒓+ 𝑫𝒊𝒗𝒊𝒅𝒆𝒏𝒅 𝒑𝒆𝒓 𝒔𝒉𝒂𝒓𝒆

Where:

Reference Price – a closing price of the securities calculated in accordance with Tadawul’s

methodology: Volume Weighted Average Price for the equities, Last Normal Price for other

securities; not adjusted for corporate actions;

Adjustment factor – the multiplier applied by Tadawul for adjustment of the price in Trading

System at Ex-date for securities corporate actions such as splits or bonus shares;

Dividend per share – a value of the cash dividend per share; zero if no cash dividends.

For example:

Price of security is 100 (and not changing); corporate action is a 1:1 bonus shares issuance;

Buy-in is conducted at the record date.

At the ex-date: Tadawul will adjust the price in the Trading System by multiplying it by 0.5;

New price = 100*0.5 = 50.

At the record date: Adjusted reference price = 50/0.5+0=100; Buy-in price=110%*100=110.

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9.8. Cash Substitution

9.8.1. Overview

If mandatory buy-in was not fully successful i.e. there are still some unsettled trades with

intended settlement date of T+2, SDC conducts a cash substitution6.

Cash substitution is a method of settlement where securities obligations are substituted with

cash obligations, i.e. as if end-buyer sold securities to the failed seller at the Cash

Substitution Price.

9.9. Late Settlement Fees

In case of the failed settlement, SDC charges a late settlement fee for every day of delay i.e.

for each day from T+2 (intended settlement date) and until successful settlement or T+5

(cash substitution), whichever comes first.

For each failed trade chain, Late Settlement Fee is charged to the failed seller (the first link

of the chain) and distributed to the end-buyers (the last links of the chain). The fee is charged

based on the trade value and distribution is made pro rata by the amount of the shares of

end-buyers’ trades.

For example: if SAR 1000 is charged from the failed seller and there are two end-buyers: A

with the trade for 8 securities and B with the trade for 2 securities. Than A will receive SAR

800 and B will receive SAR 200.

Administrative fee is additionally charged from the failed seller for the late settlement fee

management.

10. Short Selling

10.1. Overview

Covered short selling is allowed for investors other than Natural Persons. However, investor

has to borrow securities and have them settled on its account before selling short.

6 For the Tradable Rights cash substitution is also initiated for all trades that remain unsettled two business days after the end of the Tradable Right trading period.

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Short selling could only be conducted from specially designated accounts - Short Selling

Accounts. Short Selling Accounts could only be used for short selling related activities

including borrowing securities, short selling, buying back and returning the securities loan.

Ordinary trading from such accounts is prohibited.

10.2. Workflow

Figure 7: Short Selling Workflow

# Action

1 Investor originates securities borrowing transaction

2 Investor receives securities from the borrowing transactions

3 Investor conducts short sell trade

4 Investor buys securities back

5 Investor returns securities to the lender

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11. Securities Borrowing and Lending

11.1. Overview

11.1.1. Origination

Securities Borrowing and Lending activities are handled completely bilaterally where SDC

only facilitates an FOP transfer of securities based on instructions from counterparties.

Securities Borrowing and Lending transactions are originated outside of the exchange and

negotiations are taking place bi-laterally. However, SDC provides Tadawulaty platform that

allows to initiate a request for interest (RFI) for borrowing or lending securities.

There are two types of SBL transactions available:

Fixed term – where date of return is predefined;

Open-ended – where return occurs by request of borrower or lender subject to

notice period.

SBL transactions cannot last more than one year i.e. should be returned and rebooked every

year.

SBL transaction could be conducted for the following purposes:

Short Selling; through a designated short selling account

Failed Settlement; through an Execution Broker rejection account

ETF creation

Relending 7(lending a security, which has been borrowed)

Other purposes specified by SDC

11.1.2. Facilitation

In order to initiate SBL transaction, Lending Agent needs to input transaction into the

Depository System and Borrowing Agent needs to approve it. As soon as approval is received,

SBL transaction is settled immediately by FOP transfer from lender’s account to borrower’s

account.

7 Security could be relent only once

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SDC does not initiate automatic return of securities nor process notifications for return (such

actions should be handled bilaterally).

In order to facilitate a return for SBL transaction, Borrowing Agent needs to input return

instruction into the Depository System and Lending Agent needs to approve it. As soon as

approval is received, SBL transaction is settled immediately by FOP transfer from borrower’s

account to the lender’s account.

Initiation and return requests are checked against Available Inventory (not Available

Securities) i.e. lender/borrower should have securities inventory (settled securities) in order

to perform such transactions.

Action with SBL transaction should always be requested by party that holds the securities at

the moment of time i.e. Initiation of SBL transaction in the system is requested by Lending

Agent, while return – by Borrowing Agent.

11.1.3. Eligible Participants

SBL activities are prohibited for Natural Persons.

Borrower/Lender (end investors) has to appoint Borrowing/Lending Agent – a Custody

Member who would facilitate SBL transaction for the investor. Borrowing/Lending Agent

could also act as borrowers/lenders i.e. proprietary SBL transaction.

11.1.4. SBL Agreement

Borrower and Lender have to sign an SBL Agreement and define key aspects of their SBL

activities: such as notification periods, corporate actions handling, rules governing failure to

return and default, etc.

SDC may require Agents to lodge SBL Market Agreement with SDC.

11.1.5. Collateral and Fails Management

Collateral management activities for SBL (including marking-to-market) are conducted

bilaterally (or via a third party). SDC does not act as principle for SBL transactions and is not

be accountable for any risks.

In the case of failure to return securities, SDC is not responsible for any fails management as

it will be handled completely between Borrower and Lender through their agents. However,

if SBL transaction is terminated without return of securities, Borrowing and Lending Agents

must terminate SBL transaction in the Depository System by filing a request to the SDC

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stating a mutual consent (or consent of liquidator, court order, etc.) and justification of the

reason to terminate without return of securities.

11.1.6. Corporate Actions

SBL transaction is a transfer of legal ownership, therefore lender is not eligible for corporate

actions entitlements and loses its voting rights. SBL Agreement should specify process of

manufacturing of corporate action’s proceeds and recalling securities for voting purposes.

SBL transactions are transformed by SDC in case of a corporate event in form of bonus shares

issuance, split, consolidation or capital decrease (please refer to the section 12 “Corporate

Actions” for more details). Dividends, tradable rights, compensation payments for any lost

fractions (if any), etc. should be handled bilaterally.

11.1.7. Ownership Limits

For the purpose of ownership limits (e.g. Foreign Ownership Limit) calculation, lent securities

are considered as owned by both lender and borrower. Therefore, return of lent securities

cannot lead to the breach the ownership limits.

11.2. Process

11.2.1. Initiation

Figure 8: SBL Initiation

# Action

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1 Borrower and lender negotiate SBL transaction bilaterally

2 Lending Agent inputs request for a loan into the Depository System 3 Borrowing Agent approves the request 4 SDC immediately transfers loaned securities from the lender’s account

to the borrower’s account on FOP basis; SBL transaction is created in the system

* Initial and day-to-day management of collateral is conducted bilaterally between borrower and lender (or through a third party)

11.2.2. Return

Figure 9: SBL Return

# Action

1 Borrower or lender to request return with appropriate notice period

(to be defined in SBL Agreement) or at the expiry date of fixed term

SBL transaction (bilaterally)

2 Borrowing Agent inputs request for return of the loan into the

Depository System

3 Lending Agent approves the request

4 SDC immediately transfers loaned securities from the borrower’s

account to the lender’s account on FOP basis; original SBL transaction

is deemed closed

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* Return of the collateral is managed bilaterally between borrower and

lender (or through third party)

11.2.3. Termination without return

Figure 10: SBL termination

# Action

1 Termination without return event occurs (to be specified in the SBL

Agreement), e.g. default of a counterparty, inability to find securities,

etc.

2 Counterparties to submit to SDC an official request to terminate

without return the loan stipulating the reason for the termination

without return and showing consent of both parties for termination (or

liquidator consent or court order, etc.)

3 Original SBL transaction is deemed terminated

* All claims to be handled bilaterally

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12. Corporate Actions

12.1. Key dates

Due to the transition to the deferred settlement cycle and therefore introduction of a time

period between the trading and the settlement, the corporate actions framework is

amended.

Issuer’s sharebook is defined based on the settled positions i.e. based on securities inventory

on investors’ accounts. Such sharebooks (at different points of time) are used for defining

the list of investors eligible for attending General Meetings and for corporate actions

entitlements. Moreover, a new key date is introduced, which is an “Ex-dividend date” (Ex-

date). The following chart explains the key dates for the corporate actions:

Figure 11: Corporate Actions

Key Dates Definition Timing

Announcement Day

Issuer announces General Meeting (GM) and key dates

At least 10 calendar days before GM

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Eligibility for GM

Investors registered in issuer’s sharebook at the end of the day (inventory i.e. settled position) are eligible to attend GM and vote

General Meeting date

General Meeting (GM)

Eligible investors attend GM

Ex-Dividend Date

Security starts to trade at market opening without CA’s proceeds attached. Security price is adjusted by the Exchange for securities corporate actions (splits, bonus shares, rights issuance). Exchange does not adjust price in case of cash dividends

One business day before the record date

Record Date

Investors registered in the issuer’s sharebook at the end of the day (inventory i.e. settled position) are eligible to receive CA’s proceeds

Two business days after GM

Payment Date (securities)

Securities dividends are credited to the investors’ accounts

Record Date

Payment Date (cash)

Cash dividends are paid by the issuer. SDC is not involved into the process of cash dividends distribution

Within 15 calendar days after the Record Date

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12.2. Market Claims and Trade Transformations

Sharebook is defined on settled position, therefore the buyer who was supposed to receive

corporate actions proceeds (securities were purchased before the ex-date) would not

receive them if settlement of the trade fails. However, SDC will generate market claim or

perform a trade transformation in order to enable buyer to receive corporate actions

proceeds.

Administrative fee is charged from the failed seller [first link] for the trade transformations

or market claims generation.

12.2.1. Bonus Shares, Splits, Consolidations, Capital Reductions

All trades that fail to settle at the record date of corporate action, which is bonus shares

issuance, split, consolidation or capital reduction, are transformed. Transformation is

conducted by adjusting the volume (number of the traded securities) of the trade according

to the corporate event description. Value (cash amount) of the trade remains unchanged

and price is adjusted in accordance to the new volume.

All SBL transactions at the record date of corporate action, which is bonus shares issuance,

split, consolidation or capital reduction, are transformed as well. Transformation is

conducted by adjusting the loan volume (number of lent securities) according to the

corporate event description.

12.2.2. Cash Dividends, Tradable Right Issuance

In case of cash dividends, lost corporate action proceeds are handled via market claims. The

market claim is generated between a buyer and a seller of every trade failed to settle at the

record date. Such claims are communicated to the relative Custody Members in a form of

special report.

12.2.3. Voting Rights

No market claim, transformation or compensation is conducted for the voting rights.

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13. Murabaha Transfers

13.1. Overview

Murabaha is a special type of transfers designed for Sharia compliant loans. In order to

facilitate Murabaha, lender of cash buys securities and transfers them to the borrower`s

account, then borrower, almost immediately, sells the securities and receives money.

In order to make such activities possible, special transfer is designed, called as a “Murabaha

transfer”. Unlike normal FOP transfers, Murabaha transfers could be made from Available

Securities (not from Available Inventory) i.e. the lender is able to transfer purchased but not

settled securities.

Murabaha transfers could only be made from special Murabaha accounts and only between

the accounts under the same Custody Member.

Murabaha Transfer is executed immediately but settlement of corresponding trades follows

the standard T+2 settlement cycle. Therefore, money for the sell trade will be settled only in

two days after the trade. However, since cash is settled on the net basis, net settlement of

cash for the whole Murabaha transaction is only the difference between the value of

lender’s buy and borrower’s sell trade.

13.2. Workflow

Figure 12: Murabaha Workflow

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Step Action Time

1 Lender of cash buys securities from the market using Murabaha account.

Any time

2 Custody Member requests Murabaha transfer Immediately

3 SDC transfers purchased but not settled securities Immediately

4 Borrower sells securities on the market Immediately

5 SDC settles the difference between values of buy and sell trades (securities settlement is effectively 0)

T+2 14:00

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14. Tradable Rights

14.1. Overview

Tradable rights are distributed based on the sharebook generated by the same principle as

for the cash dividends.

Subscription is based on settled position, i.e. Available Inventory is checked before

subscription request is accepted. In other words, buyer can subscribe only after trade is

settled. Therefore, in order to allow at least one day for subscription, trading period for

tradable rights is three days shorter than the subscription period. Moreover, SDC checks it

against Custody Member ASL before accepting subscription (please refer to the section 5

“Pre-order ” for more details).

As soon as tradable right is subscribed, it is blocked, i.e. cannot be sold or transferred.

Settlement of the subscription amounts handled in two business days after submission of

the subscription request.

Subscription is irrevocable, however subscription can we cancelled within the day of the

subscription request submission.

Fails Management for Tradable Rights follows the same rules as for the other securities

(please refer to the section 9 “Fails Management” for more details). However, all trades that

remain unsettled two business days after the end of trading period are cash compensated.

14.2. Workflow

Figure 13: Tradable Rights Workflow

t+2 settlement cycle - tadawul

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