x Abu Dhabi, UAEWednesday 26 July 2017

Stockbroker patience tested with wait on for Dubai derivatives

Stockbrokers are awaiting the implementation of a newly introduced law that should help to create a fully fledged derivatives market in Dubai, which they say will bring new investors, fresh money and boost trading volumes.

Stockbrokers are awaiting the implementation of a newly introduced law that should help to create a fully fledged derivatives market in Dubai, which they say will bring new investors, fresh money and boost trading volumes.

The federal market regulator last year approved rules on securities lending, a process in which a stock can be lent from one party to another with an underlying collateral as a guarantee.

The regulations could boost demand for options, as market makers find a way to hedge their bets and provide supplies of shares to investors that purchase contracts on the Nasdaq Dubai.

The bourse introduced derivatives trading in 2008, but because of rules restricting the lending of shares on the Dubai Financial Market, premiums to take positions on stocks are expensive.

The DFM, which allows long-only trading strategies, enjoys a bigger share of volumes than Nasdaq and has a wide span of stocks that are actively traded.

The DFM acquired the Nasdaq Dubai in 2010 and shares a common platform with the bourse.

The DFM is yet to officially allow stock borrowing and lending.

However, informally, global investment banks have been doing it for each other's clients but at such a low level as to make the activity very expensive as well as opaque. "If the DFM wants to increase its velocity and volumes structurally and promote the Nasdaq Dubai exchange as a derivatives market, they should implement the law," said Anastasios Dalgiannakis, the head of institutional sales trading at Mubasher Financial Services in Dubai.

"At the moment, the options market is effectively inactive."

If an investor wants to buy a call or put an option on the Nasdaq Dubai for shares in DFM-listed Emaar, the market maker who would provide the investor with the contract would require Emaar to have adequate inventory available.

But without a hedge in the event that a "strike" price is exercised, the trade becomes a "highly risky affair", Mr Dalgiannakis said.

"It's very expensive," he said.

"Volumes on the derivatives are not big, implying that there is not enough of an easy hedge.

"The introduction of stock borrowing and lending will allow for the creation of a bigger derivatives market and bring in new investors, such as hedge funds, who will inject activity and new trading styles. You won't just have long-only, but long and short."

Mr Dalgiannakis, alongside other stockbrokers, plans to ask the DFM chief executive, Essa Kazim, when the bourse expects to implement the regulation.

"From a business point of view, I would say the sooner, the better," said Fathi Ben Grira, the chief executive at MenaCorp, an Abu Dhabi investment company.

 

halsayegh@thenational.ae