Reuters/Dubai

Saudi Arabia's market regulator has further tightened its restrictions on anonymous investors trading shares through brokers, citing the need to prevent money laundering and financing of militant groups.

The Capital Market Authority (CMA) told licensed brokers last week that they would have to open an account in the name of each client rather than using the name of the broker or someone else, according to a CMA circular seen by Reuters.

The new rules apply to Saudi and Gulf-based brokers and banks which offer opportunities to invest in the Saudi stock market through funds called "nominee accounts". Under these arrangements, investors pool their money and the broker buys indirect ownership in stocks through participatory notes.

"The regulator in Saudi is getting more active. From a medium- to long-term perspective, this is a regulatory step in the right direction," said Sachin Mohindra, portfolio manager at Abu Dhabi-owned fund Invest AD.

The new rules follow the introduction of regulations in 2012 that obliged Saudi institutions trading on behalf of clients to register ownership of shares under the names of individual clients.

Participatory notes are one of the main channels through which foreigners invest in the Saudi stock market; exchange data suggest the notes account for about 1% of ownership of Saudi shares.

In mid-June, Saudi Arabia began allowing Qualified Foreign Investors (QFIs) to buy Saudi shares directly after obtaining permits. The new rules on nominee accounts may have the effect of pushing more foreigners to invest through QFIs rather than via participatory notes.

So far, use of the QFI system has been very small, with only about half a dozen institutions licensed as QFIs and a tiny amount of money entering the market through that channel.

"Now they've opened up to QFI, they don't want international capital to enter through a different route," Mohindra said.