Regulator caution hinders Riyadh bourse

08 November 2010

Regulator showing caution towards derivatives and short-selling

Plans to allow derivatives trading on the Saudi Stock Exchange (Tadawul) is being held up by the kingdom’s market regulator, which is concerned with increased volatility on the exchange.

“We think the launch of derivative products on Saudi equities would prove very lucrative for the exchange,” says John Von Stein, chief operating officer of the Tadawul.

“Regardless of what we want to do in terms of rolling out traditional products and services, at the end of the day it’s the regulator’s decision as to what they approve, and they have a very cautious stance to developing the capital markets here,” he says.

Derivative products, which include futures and options on Saudi equities, would serve as a convenient hedging strategy for local investors, who currently have no means of protecting their downside risk.

“They have no option other than to sell their assets and therefore they tend to exit the market,” says Von Stein. “The Tadawul would be much more healthy and active if they were able to keep their position.”

He also highlighted the benefit that could be gained from the approval of short-selling, which would enable investors to profit from a fall in the value of shares, hence boosting liquidity on the trading platforms.     

The UAE’s Securities & Commodities Authority (SCA) is currently working on new regulations for the local stock exchanges that could pave the way for the introduction of short-selling. However, the Saudi Capital Markets Authority (CMA) is showing some reluctance.  

“What the CMA is rightfully very wary of is hot money coming in from day traders around the world,” says Von Stein.  

“They are trying to balance the consumer and institutional demand for new products with the perception that some of these instruments are not sharia-compliant. We don’t want to alienate the local investor population as they account for roughly 90 per cent of retail investment.”                      

A MEED Subscription...

Subscribe or upgrade your current MEED.com package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.