Derivatives market in GCC cutting a (very) long market short (page 4 of 4)

Hence, it is pertinent to form a committee of highly experienced and qualified people drawn from various financial institutions to come up with a customized regulatory framework for the orderly governance of derivatives. A lot can be learned from the experience of some of the Asian capital markets that have successfully set-up such frameworks.

3.Introduce Index Equity Derivatives: Equity derivatives are the most common worldwide, especially index futures followed by index options and security-specific options. Internationally, options on individual stocks are common; futures on individual stocks are not that common. Index based equity derivatives (options and futures) are quite popular among investors as they are excellent hedging tools and also present few regulatory headaches when compared to leveraged trading on individual stocks. This has led to regulatory encouragement of index futures and discouragement against futures on individuals stocks.

4.Introduce Short-Selling: As we explained earlier, market efficiency can be significantly enhanced through introduction of short-selling. Just as we have margin requirements on the long-side, we can have similar regulatory checks to prevent misuse of this important tool. If dealt with properly, short-sales can check bear-side excesses in a falling market.

5.Introduce Stock Equity Derivatives: With a well stabilized index based equity derivatives, the risks of stock-based equity derivatives is well contained.

As we can see from the above, except for Kuwait none of the other GCC markets have taken any of the steps suggested above. Even in the case of Kuwait, introduction of derivatives in the form of call options did not adhere to a structured process as explained above. There are still gaps to be addressed.