The launch of two exchange-traded funds (ETFs) involving Saudi Arabia’s Tadawul market, the largest stock exchange in the Middle East, and the HKEX signals an investment shift between the two jurisdictions.
CSOP this year collaborated with Albilad Capital – the investment arm of Bank Albilad – to launch Saudi Arabia’s first China-focused fund – the Albilad CSOP MSCI Hong Kong China Equity ETF. As of 23 October, Albilad CSOP ETF has raised USD1.3 billion.
In November last year, CSOP launched the Asia-Pacific’s first ETF on the HKEX, which tracks Saudi Arabian equities on the Tadawul market – CSOP Saudi Arabia ETF.
Michelle Wong and Matthew Ma, CSOP’s legal advisers for the Albilad CSOP ETF, shared their insights on navigating the Mideast’s unique legal system and corporate culture.
Wong, the general counsel and head of legal and compliance at CSOP, said that since the Albilad CSOP ETF debuted in Saudi Arabia, it was essential for the product issuer to ensure the underlying assets the ETF had invested in complied with Sharia law.
Ma, legal counsel in CSOP’s legal and compliance department, said the legal team should pay attention to and respect Sharia law’s unique traits such as the prohibition of receiving interest. For example, the product issuer should examine whether the index being chosen and its underlying assets were linked to interest, he added.
“As we understand, if the index’s underlying assets buy bonds, meaning there is interest, this is not in compliance with Sharia law,” said Ma, citing another example.
Apart from interest, Ma said Sharia law also prohibited investments related to pork, alcohol and gambling.
Another unique feature of Islamic finance is that all transactions must be reviewed by the Sharia Committee, which ensures financial products comply with Islamic law.
For example, when launching an ETF in Hong Kong, it will only need to be approved by the Securities and Futures Commission and the HKEX. However, in Saudi Arabia, ETFs must also be vetted by the Sharia Committee, and obtain approval from regulatory bodies in Saudi Arabia.
Due to differences between legal systems, Ma said the Saudi counterpart requested more robust anti-bribery and anti-corruption clauses in contracts. He said in-house counsel should remain creative when drafting contract terms and designing transaction structures to meet the requirements of the company’s business team, the Sharia Committee and the business partner.
Wong said in-house counsel should stay open-minded and accommodate cultural differences as Saudi Arabia’s legal system was rigorous. “You need to accept that every contract will be reviewed by the Sharia Committee and sufficient time must be allocated for this. We need to factor this into our scheduling of work,” Wong said.
The difference in the work week between Hong Kong and Saudi Arabia had also been a challenge for CSOP’s legal team. Hong Kong workdays are Monday to Friday, while it is Sunday to Thursday in Saudi Arabia. Ma said, “There were quite a few Sundays when we had to be on standby.” He said in-house counsel should plan for such situations.
CSOP is the second-largest ETF issuer in Hong Kong and has launched several innovative and first-of-its-kind ETFs as well as leveraged and inverse products.
Speaking at the launch of the Albilad CSOP ETF, Hong Kong Financial Secretary Paul Chan said this fund would provide Middle Eastern investors a convenient route to invest in Hong Kong and mainland markets. Chan added it would also create capital flows between Hong Kong and Saudi Arabia.
Albilad Capital was established in 2008 in Saudi Arabia, providing innovative and Sharia-compliant investment products and services for both individual and institutional investors.
