Saudi Arabia is pressing ahead with a long-awaited plan to open up its stock market to foreigners and is now hoping to formalise its rules by January 15, a source with knowledge of the matter told Reuters.

The dialogue is clearly intensifying, and they are looking at mid-January for publishing the term sheet for access, said the source, who declined to be identified.

The country has been considering a wider opening of its market for several years and, earlier this month, two industry sources revealed that it planned to offer a limited direct foreign ownership. At the time, sources expected this to happen by mid to late first quarter of 2012.

The opening up of the stock market is likely to attract considerable interest as it offers foreigners a chance to invest directly in blue chips like Saudi Basic Industries (SABIC) <2010.SE>, the world's most valuable chemical company. Other big players in the exchange include Samba Financial <1090.SE>, the country's second-largest lender by market value, and former monopoly Saudi Telecom <7040.SE>.

Foreign investors currently are allowed to invest in Saudi Arabian companies only by share swap transactions via international investment banks, who deal with local partners.

We expect costs for trading to come down by 70-80 basis points if we're allowed direct access, said the source, who expected implementation of the guidelines to follow in the first or second quarter of the year.

He said that the main points of contention centred around rules governing the number of custodians, financial institutions that offer a range of services including arranging settlements of trade and administering dividends.

The local banks do not want to be cut out of the deal; all the big international banks are setting up offices in Saudi and the Saudi banks are fighting the likes of HSBC, he said.

If you take 5 percent of market cap and custodial fees thereon of 10-12 basis points, that's a lot at stake, said the source.

The Saudi Stock Exchange is the largest market in the Middle East with around 150 listed companies valued at $337 billion, according to Thomson Reuters data. By comparison, Dubai exchange's market cap is $28.5 billion while Qatar's is $97 billion, according to Thomson Reuters data.

A spokesman for the Capital Markets Authority, the country's stock market regulator, was not immediately available for comment.

STEP IN RIGHT DIRECTION

According to the latest version of proposals which the CMA has circulated to investors, each qualified foreign investor (QFI) and its affiliates may own a maximum of 5 percent of any listed Saudi firm.

The maximum that all categories of foreign investors -- QFIs and those who don't qualify -- can own in any Saudi company will be 49 percent, with the portion cumulatively controlled by QFIs and QFI-approved clients capped at 20 percent.

The draft Qualified Foreign Investor limits that are circulating are certainly a step in the right direction. It looks like a number of larger funds will be owning direct Saudi equities, rather than Swaps or P notes, sometime in 2012, said Daniel Broby, chief investment officer at Silk Invest in London.

They will clearly want to be careful about opening capital markets from a domestic perspective, but once they go on that track, it's hoped that they won't reverse, he said.

Another source said that the Saudis' main concern appeared to be sudden inflows and outflows of portfolio money.

They are going to be very strict on things like the Know Your Customer (KYC) document. Saudis are concerned about hot money -- they're worried about who would invest and so they would be doing as much due diligence that would not necessarily be normal for them, he said.

According to one version of the proposals that were sent around, the Saudis wanted fund investors to provide projections on returns, an unusual requirement that the first source said was unlikely to survive when the final rules were published.

There will also be rules about the size of the institutions allowed to invest. According to the proposals, the minimum assets under management will be $5 billion.

(Editing by Mike Nesbit)