Dubai Eye - Business Breakfast:
NASDAQ Dubai is going to open an equity futures market to kick off at the beginning of September. They will offer 10 of the biggest UAE stocks including Arabteq and DP World. Equity futures trading is a new market in the UAE. Why is this good news for Dubai Investors?"
Mohamed Ali Yasin: Let’s take a step back. NASDAQ attempted to have a futures market on single stocks in the UAE after the crisis. This wasn’t a bad move and there was some interesting trading happening in regards to this, especially in 2010 and 2011 when there was no activity in the local exchange. We found that international institutions and some regional institutions were interested in using the options on those stocks as a tool in terms of hedging their position or having an exposure to the UAE market without actually having to pay for the full shares as you would in a local exchange.
The issue with any options market as you know is that you need to have a set of market makers who set the contracts for people to buy and sell. At the time there was an Australian company that had a limit of 5 million USD per stock per position because of lack of liquidity and fear of taking risks. This time, we hear that NASDAQ has improved that set up with those initial 10 names, because they are the most traded ones and because there is a foreign institution portion allowed into it - it is believed that the foriegn institutions will make the most use of this product.
I also think that one of the most interesting additions this time is Etisalat as it has now opened up to foreigners, which will increase the interest there. The market maker is also Shuaa capital this time, rather than a foreign supplier as in 2008- 2010. So overall, I think it is a positive development because markets only live on long-only transactions like our exchanges so if there is no interest for people to buy or if shares have reached a fair value which we cannot break based on results, then options present a great opportunity for investors to try to have the exposure without paying the full value of those shares or even to hedge certain positions that they may have in their portfolios by buying these options just like they do for gold or when they buy international equities.
What are investors doing at the moment to hedge the local markets?
The internationals have already developed their own over-the-counter product lines and they sell these to institutions This is one of the changes NASDAQ Dubai is trying to implement by making this product available and useful for individual investors, high-net-worth individuals or medium to experienced investors, who will be able to trade these options. This wasn’t available to them before if you weren’t part of an international financial institution or a client. The transparency introduced will be important and the opportunity for more experienced investors who understand what hedging and using options is will be able to take advantage of this without being part of financial institutions over the counter. Hopefully the pricing will be more attractive than when you function in a market that is not transparent.
Now we have 10 UAE stocks that make up about 55% of the traded value of listed equities in this country. What do we know of the futures contracts in terms of maturities?
I think they have 3 sets - one, two and three months - so short term. I think they are trying to take small steps before they jump. They want to measure if there is a real appetite, and bid and asks for the market maker, to make a market. If they see the appetite growing and the volume increase, they may be able to increase these for a long period of time. The issue with options and market maker is when the latter gives out options/contracts, he needs to hedge his position, so he needs to be able to borrow stocks and things like that. These kinds of regulations weren’t available in 2008-2010. So I would say that even the regulatory environment in the local exchanges has now become more friendly, so as to allow NASDAQ to take this step in Dubai.
And what do you think of the choice of these 10 big names? They are really household name aren’t they here? Emaar, Etisalat, Union Properties...
For options you need the liquid stocks. It seems like a no-brainer to me. 1-you pick the most liquid stocks, and 2-they allow non-UAE investors to invest in them. These two criteria are the most important in order for you to have a contract for these options to sell. These are the top ten. No one wants to have an exposure in the UAE on illiquid stocks. If this succeeds it will translate into more activity in the exchanges, once we have these options. And if this happens, we may see other companies knocking on NASDAQ Dubai’s door, asking to be included.
Thank you very much. We know you are meeting with NASDAQ Dubai tomorrow and we are going to have you on the show on Thursday to find out what you have learned and have your insight on how this is all going to work.
My pleasure, thank you.
Mohammed Ali Yasin on Business breakfast Show - Dubai Eye - 09 August 2016