Interview: Alex Krunic
What efforts have been made to enhance investors’ access to Kuwait’s financial markets?
ALEX KRUNIC: To attract foreign direct investment into any emerging market, it is essential to raise standards to international levels. This involves providing the same degree of legal certainty for international investors as domestic ones. Additionally, creating a stable financial market infrastructure is crucial to avoid disruptions. This has been a focus in the GCC, as seen with the implementation of central counterparties (CCPs) and central securities depositories (CSDs). These initiatives ensure efficiency, transparency and stability by managing risk and facilitating transactions, as well as by building infrastructure comparable to developed markets.
How is Kuwait addressing challenges related to clearing and settlement processes?
KRUNIC: A robust and independent risk framework aligned with global standards is essential for weathering disruptive events. CCPs preserve financial stability by taking sufficient collateral, and initial and variation margin, as well as minimum member contributions to the CCP’s mutualised default fund. Variation margin is collected based on mark-to-market movements, where the exposure increases and additional capital is required to mitigate the incremental risk.
Indeed, holding more collateral during normal business operations (collateral buffer) safeguards against exponential margin calls during volatile periods. This approach avoids excessive capital demands or procyclical margin calls during economic instability, which can lead to liquidity shortages and defaults. Allowing investors to hedge is a critical risk mitigation mechanism. A market limited to cash equities restricts hedging, so introducing derivatives augments market liquidity. This allows investors to exit their positions without substantial market shifts. Kuwait’s development strategy is in line with Saudi Arabia and the UAE, as it promotes the introduction of listed derivatives on the market.
In what ways are regional securities markets encouraging cross-border trading and listings?
KRUNIC: Integration among regional markets is significant, as it acts as a catalyst for adopting best practices. What proves effective in one regional economy, such as Saudi Arabia, can be adopted in other GCC markets successfully. Therefore, embracing common regional standards that are familiar to financial institutions will make market access and account opening easier, ultimately boosting investor confidence and market activity. This dynamic has paved the way for burgeoning Kuwait-Saudi collaborations aimed at harmonising legislative frameworks, and facilitating more efficient and attractive conditions for institutional investors.
There is also a growing interest in enhancing cooperation between CCPs and CSDs across the region. Historically, market infrastructure in developed markets was based on vertically integrated models, where exchanges, CCPs and CSDs were owned by the same entity. The GCC markets are similar, but in Kuwait we have different shareholders for post-trade entities. This structure makes it more difficult to establish a multimarket or cross-border CCP.
To what extent are emerging technologies and digital innovation being leveraged?
KRUNIC: In our pursuit of automation, the goal is to eliminate as much human or manual involvement within operational processes. This encompasses tasks ranging from reconciling financial transactions, to removing physical payments or checks for sales and dividends. This thrust toward automation is particularly pertinent in Kuwait, where the banking sector has taken the lead in embracing innovation and digital transformation.
Concurrently, the shift to digital can enhance the process of positive confirmation between issuers and the CSD, which facilitates the verification of dividend disbursement. Such measures are set to eliminate significant risk and exposure for the CSD and its users.
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