Index compiler MSCI said on Tuesday evening it had agreed a deal Saudi Arabia's stock exchange, Tadawul, to create a new tradeable index based on the country's stock market that can be used for derivatives trades and in exchange-traded funds.

The index will be made available in the fourth quarter of this year, MSCI's statement said. (Read more here).

A separate announcement by Tadawul said it would introduce exchange-traded derivatives as an instrument on the exchange early next year, starting with an index futures contract based on the tradeable index developed with MSCI.

Khalid Al Hussan, the chief executive officer of Tadawul, said that the introduction of derivatives trading was part of the plan to develop the kingdom's financial sector under its Vision 2030 initiative.

"This reflects Tadawul’s ongoing commitment to create new opportunities for investors and to increase institutional investors' participation in the Saudi market,” he said.

He added that derivatives trading would "enable efficient price discovery of our securities in the home market".

Derivatives are an instrument that allow an investor to buy or sell an underlying asset - a stock, commodity, currency or an index - for a predetermined price at a fixed date in the future.

Nasdaq Dubai had already announced plans to offer futures trading in individual Saudi equities in May this year, and in July it named the first 12 equities for which futures contracts would be offered. Futures trading in these stocks - including Sabic, Al Rajhi Bank and Saudi Arabian Mining Company - is due to begin this month.

Nasdaq had previously launched index futures to trade both the Dubai Financial Market's General Index and the Abu Dhabi Securities Index in February this year. This followed on from the launch of futures on individual equities from both markets in September 2016.

The Saudi stock exchange has been one of the region's strongest performers in 2018, gaining 10.3 percent in the year to date as it has benefited from investor inflows following announcements by index compilers FTSE Russell in March, MSCI in June and S&P Dow Jones in July that Tadawul would be upgraded from Frontier Market to Emerging Market status next year.

In its announcement on developing the new tradeable index, MSCI's chairman and chief executive, Harry Fernandes, said: “Saudi Arabia has undergone a remarkably rapid period of change in the past few years. This joint index is possible as a result of the kingdom’s adoption of international standards and desire to create additional investment opportunities for domestic and international investors.”

Further reading:
• Monthly markets review: Egypt and Abu Dhabi's stock markets outperform in August
• Nasdaq Dubai's move to offer Saudi futures welcomed by market analysts
• GCC Equities Review: Investors pile into Saudi stocks after upgrades, but does the market still offer value?
• Saudi Tadawul begins listing $2.39bln government debt
• After MSCI upgrade, Tadawul chief turns to the next challenge for Saudi Arabia

(Writing by Michael Fahy; Editing by Shane McGinley)
(michael.fahy@thomsonreuters.com)

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© ZAWYA 2018