Nasdaq Dubai's move to offer Saudi futures welcomed by market analysts

Participants believe move could inject impetus into a thus-far moribund regional derivatives market

Image used for illustrative purpose. People attend a ceremony for listing of Nasdaq Dubai at Dubai Financial Market (DFM) in Dubai, UAE September 5, 2016.

Image used for illustrative purpose. People attend a ceremony for listing of Nasdaq Dubai at Dubai Financial Market (DFM) in Dubai, UAE September 5, 2016.

REUTERS/Celine Aswad

The announcement by Nasdaq Dubai on Monday that it will begin offering futures contracts on some of Saudi Arabia's biggest stocks has been welcomed by market participants, who have told Zawya that they expect trading in these to be more robust than the futures trades that have so far taken place with stocks in the United Arab Emirates.

Nasdaq Dubai announced on Monday that it "is preparing to launch equity futures on leading companies listed in Saudi Arabia" in the third quarter of 2018, but did not give an exact date.

It said in a press statement that futures contracts would be offered on "some of the Middle East’s largest businesses active in sectors including petrochemicals, real estate, banking and transport", but did not name the firms for whom futures contracts will be created.

Vijay Valecha, chief market analyst at Dubai-based Century Financial Brokers, described Nasdaq Dubai's move as "a big milestone in the development of Middle Eastern equity markets".

"Some might not be enthusiastic as the volume in UAE equity futures continues to be lacklustre, but even growth in UAE equity futures will happen gradually as retail and institutional participation gets bigger," he told Zawya via email on Monday.

Futures contracts are an agreement to pay a set price for an underlying asset - a stock, a commodity, a currency or even a market index - at a fixed date in the future.

Nasdaq Dubai initially began offering futures contracts on seven UAE stocks in September 2016, and increased this number to 17 in February this year - the same month in which it began offering futures contracts on both Dubai and Abu Dhabi market indices. However, trading volumes have remained thin.

Data from Thomson Reuters Eikon shows that there were just 85 trades on one-month futures (i.e. contracts to be settled within one month) of Dubai's blue-chip Emaar Properties in the three months to the market's close on Tuesday. Abu Dhabi's Aldar Properties fared better, though, with 14,500 one-month futures contracts trading hands during the same period.

Issam Kassabieh, a senior financial analyst at Menacorp, said that derivatives trading in the UAE had not been very active for multiple reasons - one of which has been the recent lack of activity on the main UAE stock markets.

If the stocks on which futures contracts are traded are not frequently changing hands, pricing becomes more volatile, which makes trading in derivatives more risky.

"Looking at futures, they're leveraged instruments. People have lost quite a lot of cash in the past in equities trading margin. They have experience of leverage and try to stay away," Kassabieh told Zawya in a phone interview on Tuesday.

Risky business
He argued that the amount of leverage usually adopted when trading futures is "almost three-to-one" when compared with trading equities. "It's quite high for people to take that risk, especially in UAE equities."

A spokesman for Nasdaq Dubai said that the performance of its futures market was “comparable to many leading futures markets during their launch phase”.

He said that trading in other futures contracts had been more active than Emaar Properties, citing Damac Properties, Dubai Islamic Bank and DXB Entertainments as examples.

“In 2018, around 76,000 contracts traded in Damac with around 200 trades,” the spokesman added.

Talal Touqan, the head of research at brokerage firm Al Ramz Capital, added that another reason why derivatives remain unpopular is "the lack of sufficient experience" in trading them.

"It's relatively new, and the liquidity of the market is still at low levels. But ultimately, these markets will pick up, and having more companies and geographic extensions to the market will attract more attention and at some point the trading should pick up," he told Zawya in a phone interview on Monday.

Currently, there are only two active market makers on UAE contracts, Nasdaq Dubai said in its statement, but it added that "more market participants are preparing to join as Nasdaq Dubai adds the Saudi single stock futures and expands its derivatives platform" to include other stocks and exchanges from around the region.

"Having more market-makers in derivatives will increase competition, and increased competition will narrow bid-ask spreads," Touqan argued. "For the time being, bid-ask spreads in the derivatives market are relatively wide," he said, adding that when combined with broker commissions, potential traders may deem transactions to be unfeasible.

A bigger market
He also argued that the Saudi market was much bigger - and more active - than the UAE's main exchanges, meaning that futures trading on Saudi stocks was likely to be more active. Valecha agreed, pointing to Tadawul's higher market capitalisation of $506.7 billion at close on Tuesday, compared to the Dubai Financial Market's $80 billion and Abu Dhabi Securities Exchange's $114.2 billion.

"For example, global petrochemical giant SABIC has market capitalisation of almost $100 billion. The presence of such large petrochemical and financial sector institutions is likely to perk up interest in Saudi equity futures," he said.

Fadhel Makhlooq, chief capital markets officer at Bahrain-based SICO, said that "the take-off maybe slow" in the trading of Saudi futures contracts, but he added in an email on Tuesday that he does expect interest in the products.

"The GCC markets need to develop and this is one way of increasing sophistication into the product offering," he said. "Saudi is likely to be very similar to UAE at the early stage, but I do expect the derivatives space to develop in the region as there is an ever-increasing need to hedge or play market-neutral strategies."

Nasdaq Dubai's move to offer futures contracts on Saudi stocks certainly seems to have stolen a march on Saudi Arabia's own market, Tadawul. The latter announced a series of reforms in January this year aimed at improving market access and liquidity, including the setting up of a market-making programme to pave the way for exchange-traded products and derivatives.

A paper published by Jeddah-based AlKhabeer Capital published earlier this month also said that derivatives trading on Tadawul could begin next year. Tadawul did not respond to requests for comment.

Touqan said that one useful feature of Saudi futures would be that it will allow traders to carry out 'pair trades' if they feel one market, such as Tadawul, becomes overvalued by short selling equities in one while buying stocks in another.

"You can accommodate different views," he said.

(Reporting by Michael Fahy; Additional reporting by Gerard Aoun; Editing by Shane McGinley)

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