Under the umbrella of Saudi Arabia’s long-term socio-economic development strategy Vision 2030, the Financial Sector Development Plan (FSDP) provides a road map for the Kingdom’s banking, insurance and capital markets sectors. The creation and growth of an advanced capital market is outlined as a key strategic pillar. Such a market would offer opportunities for product diversification and greater security, providing investors with opportunities to hedge and manage risk.
As a result, a derivatives market was put forward as a major goal of the FSDP at its launch in 2017. That step came to fruition in August 2020, with the initiation of a derivatives contract based on the MSCI Saudi Exchange 30 Index (MT30), the MT30 Index Futures. This was an important move as, until that point, the only other equity-based exchange traded derivatives available in the GCC region had been a limited market on the Kuwait Stock Exchange – plus Nasdaq Dubai, where derivatives trading was limited to the GCC only. The launch of the Saudi futures market thus opened up an avenue for trading derivatives on a regulated exchange. By opening up such a regulated market, risk was managed and the level of transparency increased.
In July 2022 a second derivatives product was introduced with the launch of single stock futures (SSF) contracts. Some 10 underlying stocks were selected by the exchange from among its largest and most liquid companies. As the exchange seeks to widen and deepen its offerings, more derivatives are set to be added in the future, such as single stock options and index options.
Long-term Basis
A vital step in establishing any derivatives market is the provision of robust enhancements, such as instituting technologically advanced trading systems and regulatory frameworks. In this regard, the Kingdom has been making progress.
The derivatives market was launched in tandem with the Securities Clearing Centre Company (Muqassa), the central clearing house owned by Saudi Tadawul Group, the parent company of the Saudi Exchange. The clearing company was designed to provide tools for technological development and regulatory enhancements. In April 2022 the group implemented a series of modifications aimed at developing post-trade infrastructure and improving efficiency. This impacted Muqassa, the Saudi Exchange and the Securities Depository Centre Company (Edaa). SSF contracts can now be cleared and settled according to international best practices – as can derivatives on the MT30 Index Futures, with Nasdaq market technology used for both.
In terms of the MT30 Index Futures, four contracts were listed in mid-2022 for July, August, September and December of that year. SSFs on the exchange were more plentiful, with 40 contracts listed from the 10 underlying companies. There are four contracts available for both index and single stock futures: current month, next month and the next two quarters.
Future Growth
A wider range of derivatives will bring in more institutional investors, attracted by the regulated, exchange-traded nature of the Saudi futures market. The stock exchange is the largest in the GCC in terms of market capitalisation. There is an expectation that, given its weight in regional finance, others will want to follow Riyadh’s lead. In turn, this could lead capital markets throughout the region and beyond to strengthen and deepen as others try to catch up – benefitting both international and domestic investors.
With these developments, momentum is being created for further innovation, more complex products and the robust regulation needed to manage them, as well as technologies to enable trades. Therefore, the 2022-23 period should see derivatives boost capital markets within the Kingdom and throughout the region.
These efforts align with FSDP goals to establish Saudi Arabia as a premier destination for investment. This is a popular target in the region, with competitors already active in the field. Even so, the authorities are working to expand and diversify the product portfolio to cater for demand from a wider, more international client base.
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