Debt instruments are transforming Dubai's capital markets

Despite the ubiquity of futures trading on advanced markets around the globe, they remain a relatively new concept in the Gulf. Futures represent an essential risk-management tool for fund managers, and their arrival to the region has long been anticipated by stakeholders. In this regard, Dubai has established itself as a regional pioneer, with three of its markets either offering futures products or providing a basis for futures products from other domestic exchanges.

Hard Sell

Critics have long acknowledged the benefits of forward contracts as useful crop and commodity market signals, but generally argue that standardised and traded futures contracts are inherently speculative, and therefore represent an unnecessary layer of market risk. That said, in developed markets, futures contracts have emerged as one of the most important means by which investors hedge risk and, as such, have become essential components of the investment toolbox for individual and corporate traders.

However, religious concerns have delayed their adoption in the region. Selling what you do not own is prohibited under sharia-compliant investment banking, as are debt-for-debt transactions, such as when a seller owes a commodity and a buyer owes money. While there are workarounds, the potential conflict with religious principles has been a historical barrier.

Gradual Approach 

However, as exchanges in the GCC compete for scarce liquidity and seek inclusion on influential market indices, such an important market function cannot be ignored. In January 2016 the Dubai Gold and Commodities Exchange (DGCX) became the first in the Middle East to offer futures on international single stocks, with contracts offered on 18 US and Indian shares. Nasdaq Dubai’s introduction of the instrument came later in the same year, with the exchange offering futures on seven prominent UAE-listed companies. In 2017 the DGCX broadened its offering with the launch of equity index futures based on the main indices of the Dubai Financial Market and the Abu Dhabi Securities Exchange. The products provided investors with exposure to nearly 40 of the Middle East’s most prominent listed companies, including Dubai Islamic Bank and real estate developer Emaar Properties.

The most recent step in Dubai’s expansion of futures came in January 2019, when Nasdaq Dubai launched single stock futures trading on 12 Saudi companies. Between them, the companies cover sectors including petrochemicals, real estate, banking, mining and industrial materials, with a combined market capitalisation of $211.7bn as of the outset of 2019. The move was a timely one: the Saudi market, always a focus of investment in the region, was of particular interest in early 2020 due to the anticipated addition of the Saudi Stock Exchange, commonly referred to as the Tadawul, to the MSCI Emerging Markets Index, as well as the ongoing process of economic reform undertaken by the kingdom’s ambitious Saudi Vision 2030 strategy.

The traded value of Nasdaq Dubai’s equity futures market is growing as a result of the recently added instruments. In April 2019 total traded value for the month stood at approximately Dh47.5m ($12.9m), representing a 239% year-on-year increase. How long this growth trend can be maintained, however, remains in question. For some stakeholders, regulatory structures pose a potential block to future expansion. There is also the broader question of how appealing futures will be to the non-institutional investors who make up a significant proportion of the region’s investor base. Seeking to address this problem, the Securities and Commodities Authority and Nasdaq Dubai jointly ran an awareness seminar on derivatives trading for individual investors in March 2019.

While the growth trajectory of futures trading in Dubai remains uncertain, the introduction of the instruments in domestic markets has already had a profound effect, transforming them from simple long markets to investment platforms in which participants can secure a margin in either bullish or bearish market conditions.