JEDDAH, 2 September 2006 — Some local banking analysts are urging authorities to curb the trading of futures on the Saudi stock exchange, called the Tadawul, citing concerns over a shift of liquidity from the trading of options to the trading of these fixed-term contracts. Analysts have noticed a marked increase in the trading of futures contracts on the Tadawul.
“The increasing popularity of the fixed-term contract should raise some concerns,” said Abdullah Marei ibn Mahfouz, a Saudi financial analyst. Unlike options, a futures contract is an agreement to deliver a commodity, bond, currency, or stock index on a specific future date (such as three months from the date of the contract) at a price that’s fixed at the signing of the contract. Futures are a common mechanism on other, larger bourses.
Local analysts say the increase in the trading of futures is robbing more fluid liquidity from he local market. Common stock options are transactions where stockholders can execute the option to buy or sell from the market at their discretion. Since holders of futures contracts cannot pull out before the date of delivery, many banks in the region have reportedly expressed concern over the increased use of futures.
Financial institutions restrict the trading of these contracts based on the ability of the purchaser to prove at the time of the signing that they can cover the potential losses that could occur at the future delivery date. This requires a greater reserve of cash in order to invest in futures.
The trading of futures, therefore, is often limited to those who can afford to cover the potential future fixed loss at the signing of the contract. Financial authorities are reportedly planning to initiate a campaign to inform the public of the unique risk involved in futures trading.
