Dubai, UAE — Only three years ago, the mention of a derivatives market in Saudi was met with quizzical stares. There was neither a culture of futures trading nor regulations to support it.
All that changed when Tadawul’s derivatives market launched the MSCI Tadawul 30 Index (MT30) Futures on August 30, 2020. The index represents the performance of the 30 largest, most liquid securities listed on the Tadawul equity market, offering index derivatives and exchange-traded funds (ETFs).
The market further expanded on July 4, 2022, with Single Stock Futures (SSFs), a pure derivatives contract focused on a single company stock instead of a basket of shares, without owning the stock itself. Institutional investors use SSFs to hedge their portfolios and curtail losses in unfavorable market conditions, having the ability to short sell.
Tadawul’s SSFs are based on hyper-liquid companies, including Saudi Aramco, Saudi National Bank (SNB), SABIC, STC, Al Rajhi Bank, Saudi Electricity Co. and Saudi Arabian Mining Co.
SNB’s late November 2023 launch of Single Stock Options (SSOs) on Tadawul is seen as a further step forward in enhancing liquidity, providing new investment opportunities within the Saudi financial market, while availing efficient tools to manage risks.
Single Stock Options launch
SNB Capital, represented by its CEO, Rashed Sharif, and Managing Director of Securities, Loai Bafaqeeh, launched SSOs in Tadawul, boosting the derivatives market with four highly liquid underlying assets: Aramco, Al Rajhi Bank, STC, and SABIC. This suite of SSO contracts is expected to expand to include more listed and liquid companies.
Bafaqeeh said, “We congratulate the Saudi Exchange for achieving this milestone that aligns with the Financial Sector Development Program (FSDP) objectives to further deepen the Saudi capital market to create an advanced attractive market for local and international investors.”
SSOs are one of the fastest-growing investment products worldwide. In 2021, the daily national trading value for SSOs exceeded the value of daily stock trading, with $6.9 trillion being traded on SSO or short-term options contracts by the end of 2022.
SNB Capital Company manages assets worth $62.4 billion and leads Tadawul with an 18.24 percent market share of value traded.
ETF promotion: Tadawul and Shanghai Stock Exchange
The Saudi Tadawul Group signed an MoU with the Shanghai Stock Exchange to promote mutual development and cooperation between the two exchanges. The parties will explore opportunities in cross-listing, Fintech, ESG, data exchange and research, as well as facilitate dual-listings of ETFs.
The move comes as part of Saudi Tadawul Group’s efforts to develop an advanced capital market in Saudi Arabia, which is one of the pillars of the FSDP, a Saudi Vision 2030 program.
Growing share of derivatives trading on Tadawul
Based on Tadawul’s statistical reports, the total derivatives volume traded in 2022 reached SAR 91.6 billion ($24.7 billion) compared to SAR 44.9 billion ($12.1 billion) for 2021.
Tadawul’s trading in the equity market reached SAR 1,708.04 billion ($460 billion) in 2022 compared to SAR 2,235.90 billion ($602 billion) in 2021.
The share of derivatives in 2022 as a percentage of the total volume of trade on Tadawul was 5.37 percent.
According to Tadawul, the value of all the securities traded on the exchange was about $3 trillion (SAR 9.7 trillion) at the time of writing, including derivatives. Full-year results for options trading are not out yet but assuming a conservative similar percentage of total trade volume as in 2022, we are looking at some $160 billion so far this year.
According to Mordor Intelligence, the Saudi financial derivatives market is projected to grow 12.5 percent yearly between 2021 and 2026.
The derivatives market is still small compared to the equity market in Saudi and is still dominated by institutional investors. Local individual investors lack the proper knowledge to fully participate in the market and hence are not a factor in propelling this market’s growth or adding new elements of speculative trading.
The derivatives market plays a major part in developing the overall financial system, capital markets, and economic growth. It creates opportunities for effective capital allocation and portfolio diversification and acts as a risk management instrument, key ingredients for attracting investors and informed traders.
In an interview with the Oxford Business Group, Mohammed Al Rumaih, CEO of Saudi Exchange, said that the private sector and investors, both foreign and local, have been increasing their participation in the economy.
“Our strategy moving forward is to connect firms with the international market, attract additional global investors, boost liquidity… and provide access to a diverse range of financial instruments and new products,” he said.
One of the ways Tadawul sought to achieve that was with its debut $1 billion IPO in December 2021, which attracted orders of $122 billion from investors. The UAE and Saudi have collectively raised more than $7.35 billion from 35 IPOs.