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Saudi Arabia bolsters its national stock exchange, the Tadawul, with major derivatives push

Investors monitor a screen displaying stock information at the Saudi Stock Exchange (Tadawul) following the debut of Saudi Aramco’s initial public offering (IPO) on the Riyadh’s stock market, in Riyadh, Saudi Arabia, December 11, 2019.

Ahmed Yosri | Reuters

Saudi Arabia announced the launch of derivatives trading Tuesday, seeking to enhance its capital markets despite anxiety over slowing growth and slumping oil prices. 

“We believe that this is an appropriate time,” Tadawul Chief Executive Khalid Al Hussan told CNBC’s Capital Connection. “We have noticed an increasing appetite in the Saudi market compared to the region,” he said. 

The Saudi Tadawul is the largest exchange in the Middle East and ranks among the top 10 largest exchanges globally in terms of market capitalization. The exchange hosts listed shares of state oil giant Saudi Aramco, and is included in the MSCI, S&P and FTSE Emerging Market Indices. 

“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,” Al Hussan said. “Liquidity is high and the index performance is either stable or growing,” he added. 

The first derivatives product to be traded will be an index futures contract, the Saudi Futures 30, based on the MSCI Tadawul 30 Index. Al Hussan said other products will be added as the market continues to mature. 

“We’re looking at single stock futures as the next phase, then we’ll tap into indices, into options as well as commodities in the future,” he said.  

Derivatives, such as futures, options and swaps, are used by sophisticated investors to enhance trading and investment opportunities and mitigate risk. Such products are rare in the Middle East, where regional markets often grapple with low liquidity and limited investor participation. 

“These types of products are a little bit complicated for individual investors or retail investors as we classify them. That’s why we made sure this product is launched alongside the Saudi Clearing House which has been activated on the same day to clear the derivatives, to protect all types of investors, in particular retail investors, from getting into a new product that they might not understand very well.” 

Pandemic impact will linger into the second half 

The Kingdom hopes the new derivatives market will attract domestic and international investors, even as domestic economic growth takes a hit due to the coronavirus pandemic.  

The IMF said Saudi Arabia’s economy will shrink by 6.8% this year, a much sharper decline than the 2.3% contraction estimated in April. 

“These forecasts are very much living forecasts,” Al Hussan said in response to the dire economic projections.  “We have noticed a good level of increase and growth in oil prices,” he noted, sounding more optimistic on the outlook for the world’s largest oil exporter and the Gulf’s largest economy. 

“We are very positive about the state of the capital market as well as its contribution to the Saudi economy in the future. The second half I think is going to be important for all economies to watch, because this is where we’re going to see the actual impact of the pandemic on corporates and economies that I don’t think we have seen yet.”

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