Saudi bourse unveils derivatives product to lure foreign investors

The Saudi Stock Exchange has announced that trading in its first exchange-traded derivatives product will start at the end of next month, as the kingdom seeks to draw more foreign investors into its capital markets.

Tadawul, as the exchange is known, said on Tuesday that it would launch an index futures product, the Saudi Futures 30, or SF30, based on the MSCI Tadawul 30 Index created last year.

“Today, we can proudly say that our capital market is not only the largest in the region but also developing faster than most exchanges in terms of both the products and the services we offer,” said Tadawul chief executive Khalid al-Hussan in a statement. Trading in the new product should begin on August 30.

Saudi stocks have attracted more investment from foreign fund managers since the market was admitted to key emerging-market indices run by FTSE and MSCI last year, and after the mammoth listing of Saudi Aramco, the state oil company, in December. Authorities hope that developing hedging tools such as index futures will attract more interest from abroad.

The launch of the SF30 is part of a financial-sector reform programme under the banner of Saudi Vision 2030, an ambitious plan led by Crown Prince Mohammed bin Salman to liberalise the Saudi economy and make it less dependent on revenues from oil.

Last year the kingdom introduced new regulations allowing for broader foreign ownership of publicly traded firms and also tweaked rules to make it easier for foreign companies to sell shares on the main market. Tadawul also promoted trading and listing on the parallel market for small and mid-caps, known as Nomu, which has lighter listing requirements.

The kingdom’s economy has been battered by the twin blows of the coronavirus pandemic and low crude prices. The IMF said last month that it expected Saudi Arabia’s gross domestic product to shrink 6.8 per cent this year — much sharper than the 2.3 per cent fall the organisation had predicted in April.

The benchmark Saudi stock index, meanwhile, has dropped about 12 per cent so far this year. But Mr Hussan, addressing a virtual press conference, noted that trading volumes on the Tadawul were higher than in 2019.

While derivatives trading is a common feature of many major stock exchanges around the world, it remains a rarity in the Middle East.

Tarek Fadlallah, chief executive of Nomura Asset Management Middle East, described the launch as “an important milestone, signalling a level of maturity associated with more developed markets”.

But he added that “the practical effects” of such a move were still uncertain, given “the overwhelmingly retail-based nature of activity in the cash market”.

Mr Hussan acknowledged that introducing derivatives to a market dominated by individual investors could bring a new element of risk, but stressed that the exchange was offering tools to educate investors. The exchange’s clearing house, too, would maintain controls “based on international and common standards”, he said.

Additional reporting by Simeon Kerr in Dubai

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