Saudi Arabia’s stock exchange should be ready to introduce equity futures and options in about 24 months after it completes reforms to help it manage the risks of such products, the exchange’s Chief Executive Officer (CEO) Khalid Abdullah Al-Hussan said.
Futures and options would provide hedging tools for the foreign institutional investors that are expected to enter Saudi Arabia with the listing of national oil giant Saudi Aramco, expected next year, and with the market’s entry into MSCI’s emerging market index, which may occur in mid-2019.
It is part of the rapid growth of the exchange, the Arab world’s largest with a capitalization of $436 billion, about two-thirds the size of leading emerging market Moscow’s, but counting.
One necessary reform was launched on Sunday when the exchange moved from same-day settlement of trades to settlement within two working days of execution. It also allowed covered short-selling of stocks.
In addition, the exchange is in the process of setting up a clearing house, which will be at the center of managing trading risks, and replacing its back-office technology, also vital to handle equity derivatives, Al-Hussan said.
“It is very important to look at the size of the Saudi capital market, and the risk associated with such size, so we have to have all controls in place before we think about introducing” equity derivatives, he said.
“So, I would say our plan is to look at this in the next 24 months, so everything is in place within that window.”
Tadawul, the Saudi stock market, looks set for even more growth in coming years partly because of a government reform program launched last year to diversify the Saudi economy beyond oil by 2030.
The program includes privatizations, and these are likely to result in around 100 new stock market listings in sectors including mining, health care and retail, HSBC’s chief executive for the Middle East said last week. Close to 180 companies are currently listed on the Saudi exchange.
Sarah Al-Suhaimi, chair of the exchange and also chief executive of local investment bank NCB Capital, said investment-banking activity in the country had been increasing since last year because of preparations for privatization.
Also, the exchange’s launch in February this year of a parallel market with streamlined listing rules and disclosure requirements was creating interest among smaller and family-run firms that previously might not consider listing, she said.
“Attracting new investors, create more liquidity, having more international standards, being on indices... All these things will attract more issuers to list in our market, so it is all interconnected,” she said.
The exchange opened to direct investment by foreign institutions in mid-2015 and last year made it easier for companies to meet standards to become Qualified Foreign Investors (QFI).
The exchange does not disclose the identity of QFIs but Al-Suhaimi said their number had now risen to about 60. She called that number unsatisfactory but predicted it would rise in the wake of the recent reforms and if Saudi Arabia joined international equity indexes.
In June, international index compiler MSCI will announce a list of countries under review for possible inclusion in its emerging market index; entry into the index would attract billions of dollars of foreign funds.
The exchange has taken the steps needed to meet the requirements, now they will have to wait for institutional investors to give their feedback to MSCI, Al-Suhaimi said, adding she was generally optimistic.

Source: Arab News