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Arab News, Tues, Nov 28, 2023 | Jumada Al-Uola 14, 1445

​​Single stock options launched on Saudi Exchange

RIYADH: Saudi Exchange has officially launched single stock options, the newest offering in its derivatives market, with trading beginning on the morning of Nov. 27.

In an event inaugurating the launch at the Tadawul headquarters in Riyadh, the CEO of the body, Mohammed Al-Rumaih, outlined that this introduction to the market will serve to increase liquidity within the exchange, providing an opportunity for investors to diversify their portfolios while simultaneously mitigating risk.

The body disclosed its plan to introduce 100 shares of US-style, physically settled options, with four underlying assets selected from the biggest and most liquid companies on the exchange, which include Saudi Telecom Co., SABIC, Al-Rajhi Bank, and Saudi Aramco.

As standard option contracts with an individual stock as an underlying asset, options “stand out to other derivatives offerings in the market as they entail the physical settlement of the stock at the end of the contract,” Khalil Al-Abdulwahab, chief of business development at Muqassa, said during his address at the event.

The effect of derivatives on a nation’s economy has been evident and studied through international markets, the Head of Research at Al-Rajhi, Mazen Al-Sudairi, told attendees.

Highlighting the Indian market as an example, Al-Sudairi underscored the correlation between the introduction of derivatives and the surge in foreign direct investment.

Emphasizing that India adopted derivatives in 2000, he noted that from 2000 to 2019, the country experienced a consistent and robust growth in FDIs, amounting to $1 trillion.

According to Al-Sudairi, this is due to the fact that markets “do not become attractive for international investors until they become developed and have the attributes of a leading indicator or proactive indicator for the economy.”

For a market to become a leading indicator, it must be diverse, and offer a range of products rather than focusing on a specific sector.

It must also reflect the economy in all sectors, changes, and growth rather than depend on one sole economic element.

Thus, the new offerings by Tadawul serve to propel the Saudi markets to a higher level of sophistication, making them inherently more attractive, the head of research outlined.

Al-Sudairi said: “The more developed the market, the more it becomes a leading indicator, the more attractive it will become for the international investor. If it reaches this, it will be an indicator for the nation’s economy as a whole, demonstrating the changes it is undergoing.”

He further noted that within Tadawul itself, the inclusion of global indicators to the Exchange, such as index futures, has increased the percentage of qualified foreign investors by over 6 percent, despite the fact that their ownership in the market represents only about 2.7 percent.

As it stands, most foreign investors within the Saudi Exchange are not active, acting as mere observers of the indices. Therefore, the introduction of derivative products will aid in increasing the number of active foreign investors, according to Al-Sudairi, due to the newfound ability to mitigate risk, which will gradually increase liquidity in the derivatives market.

Hossam Badr, chief operating officer at Derayah, echoed these notions while speaking alongside Al-Sudairi, adding: “The launch of single stock options in the Kingdom will attract a group of investors who are seeking risk mitigating and hedging tools, adding more trust for institutional investors and increasing the amount of liquidity in the market.”

Elie Geagea, head of equity derivatives solutions at HSBC, further noted that this step taken by Tadawul will serve to align the Kingdom’s exchange with global practices, saying:

“Launching SSOs today is not an isolated event, from the past few years to today, various steps have been taken by Tadawul to provide a basket of solutions and offerings that are comprehensive and complementary to each other aligning with the offerings of global exchange markets.”

Geagea highlighted that 15 percent of stocks on the Saudi Exchange are currently owned by foreign investors, underscoring that as a global bank, HSBC sees the Saudi market as a strategic one and aims to position itself to facilitate growth in bilateral investment between East and West.

However, for this to be fulfilled, the bank requires a certain level of risk mitigation, a hindrance that the launch of single stock options will be able to reduce, the head of equity added. Through offering these contracts on their platform, Tadawul facilitates institutions to trade in the market with increased ease and a reduced level of risk, thus encouraging more institutions to trade or invest in the Saudi Exchange.

According to its CEO, Tadawul seeks to play a pivotal role in the comprehensive transformation that the Kingdom is witnessing and aims to aid and align itself with the financial sector development program within the agenda of the Kingdom’s Vision 2030 goals.

Looking to the future, the CEO concluded that Tadawul will continue developing and offering more products to diversify investment opportunities within the exchange, allowing investors to access new tools to expand their portfolios.

The CEO of Maqassa said: “This new offering by Tadawul embodies a strong addition for investment opportunities. We trust that single stock options will aid in the continuation of the growth and progress of the Exchange.”

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