Tadawul Stock Exchange (TASI), the largest bourse in the Middle East and Africa in terms of market capitalization, has witnessed a remarkable performance in the past couple of years in terms of market improvement and development. Capital Market Authority (CMA) and Saudi Tadawul Group (“the exchange” or “Tadawul”) have undertaken a wide range of market reforms under Vision 2030’s Financial Sector Development Program. These reforms are aimed at deepening the market, supporting small & medium-sized companies for listing, easing regulations for both local and international investors to broaden the investor base, enhancing the overall standing of the market, and increasing products available to investors beyond traditional cash, equity, and sukuk/bonds.

The introduction of derivatives instruments is one such step toward the Financial Sector Development Program which promises to bring capital markets in KSA a step closer to its other comparable emerging and developed markets. Tadawul launched the Kingdom’s first exchange-traded derivatives market and clearing house on 30 August 2020 as part of broader efforts by authorities to make the equity market more attractive to foreign investors and to boost liquidity. Tadawul, using Nasdaq technology, launched its first exchange-traded derivatives product, the “MT30 Index Futures”, a futures contract based on the MSCI Tadawul 30 in August 2020. The MT30 Index Future includes the 30 largest and most liquid companies in Tadawul.

Tadawul is now gearing up to take the next step by introducing futures trading on single stocks to further improve liquidity and enhance the interest of retail clients. Initially, the exchange plans to allow futures trading in ten stocks in the second quarter of 2022, with the option to include more stocks on the futures counter when they meet the required criteria.

Futures contracts on stocks or indices are a relatively new concept for a large number of the current investor base in the Kingdom of Saudi Arabia (“KSA”), which is primarily dominated by retail clients. Therefore, to enhance investors’ knowledge about these new products, we have presented some basic guidelines and concepts about these products to develop a better understanding. The discussion below primarily refers to futures contracts on stocks; however, it is equally applicable to other listed assets such as commodities, currencies, bonds, and interest rates.