Derivatives market upgrades target liquidity, cut costs: Analysts

Tadawul trading screen

Saudi Arabia’s financial derivatives market entered a new phase of development with a package of structural enhancements aimed at boosting liquidity, improving trading efficiency, and optimizing capital use. The changes are expected to broaden the market’s participant base and improve its overall effectiveness.

The Saudi Exchange (Tadawul) and the Securities Clearing Center Co. (Muqassa) began implementing the enhancements to MT30 Index Futures and Single Stock Futures (SSFs) on Aug. 19. The changes cover market making, fees, margin requirements, and clearing mechanisms.

The move comes nearly six years after Saudi Arabia’s financial derivatives market officially began operations on Aug. 30, 2020, with the listing of MT30 Index Futures as its first derivatives product.

Speaking to Argaam, several analysts said the latest enhancements address factors that have constrained market growth in recent years, particularly liquidity, market depth, trading costs, and capital efficiency.

Liquidity weakness, not lack of products

Mohammed Al Suwayed, CEO of Razeen Capital, said the latest amendments target the core challenges facing the derivatives market, particularly by strengthening market makers’ obligations, enabling multiple market makers, and reducing fees, while improving margin and clearing mechanisms.

Mohammed Al Suwayed, CEO of Razeen Capital

He said the main obstacle to the market’s development was not a lack of products but limited liquidity and market depth, which contributed to wider bid-ask spreads, higher trading costs, and less efficient capital use.

Al Suwayed said the success of the enhancements should not be assessed solely by activity during the initial phase. Instead, it should be measured by the market’s ability to sustain liquidity and depth after incentives and exemptions expire.

Dr. Abdullah Alsalloum, Professor of Finance at Imam Mohammad Ibn Saud Islamic University

Dr. Abdullah Alsalloum, Professor of Finance at Imam Mohammad Ibn Saud Islamic University, said the derivatives market remains relatively young compared with other markets. Its growth therefore requires an integrated ecosystem, starting with a clear legislative and regulatory framework, followed by contracts that are sufficiently suitable and diverse to meet the needs of different market participants, as well as lower costs and more efficient margin requirements.

He said derivatives derive their value from underlying assets, meaning greater liquidity in the stocks or indices underlying these contracts helps drive demand. Conversely, limited trading activity in the underlying asset can make it more difficult to price these instruments and develop the market.

Demand exists, but liquidity limited its potential

Al Suwayed said there is latent economic demand for financial derivatives, particularly among asset managers, funds, family offices, and institutions seeking to hedge and manage their exposure to the Saudi market.

He said the need for these products does not necessarily translate into an active market. When liquidity is limited, bid-ask spreads are wide and the cost of entering and exiting positions is high, investors may prefer to sell the underlying stocks rather than use derivatives for hedging.

Al Suwayed said the current phase will provide a clearer test of underlying demand after removing a significant portion of the constraints related to costs and operational infrastructure.

Qaiser Noor, Managing Director of Strategy at RSM

Qaiser Noor, Managing Director of Strategy at RSM, said the challenge facing the market since its launch was more a matter of how its various components were built than a structural weakness in demand. The market expanded its product offering and clearing infrastructure faster than it developed the continuous liquidity and two-way pricing on which derivatives markets rely.

He said demand was not the primary issue in a market where daily trading value in the cash equity market exceeds SAR 5.7 billion and foreign investors hold more than SAR 457 billion in assets. Rather, the missing elements were continuous bid and ask prices, trading costs, and capital efficiency that would allow transactions to be executed repeatedly.

Market makers key to enhancements

Noor said the updated market-making framework was, in his view, the most impactful of the measures that took effect on Aug. 19. He said Saudi Exchange signed agreements with SNB Capital on behalf of five derivatives market makers, with market-making activities commencing in August 2026.

He said other measures improve the economic viability of market making, including raising the minimum price fluctuation for SSFs from SAR 0.05 to SAR 0.10, equivalent to SAR 10 per contract. SSFs are also now available on 10 of Saudi Arabia’s largest companies by market capitalization across several sectors.

He said continuous bid and ask prices make it easier to execute hedging, spread, and arbitrage strategies, while lower fees and margin enhancements amplify the impact of market making rather than substitute for it.

Alsalloum said the enhancements across the market ecosystem send a positive signal about improving the attractiveness and economic viability of derivatives for different categories of participants. He added that the effective activation of market makers’ role could be one of the most influential factors in delivering tangible improvements in liquidity and activity.

Fees cut by up to 91%

On trading costs, Noor said fees had been a genuine barrier to market growth. Trading fees for MT30 Index Futures were reduced from SAR 25 to SAR 7 per side, representing a 72% reduction.

He said the contract’s final settlement fee was cut from SAR 30 to SAR 2.8, a reduction of nearly 91%. Meanwhile, trading fees for SSFs were changed from a rate equivalent to 2.5 basis points to a flat fee of SAR 1.4, while settlement fees were reduced from 3 basis points to SAR 0.504.

He said the round-trip cost of entering and exiting an MT30 Index Futures position is now about SAR 14 in trading fees, against a notional contract value of nearly SAR 100,000, compared with about 5 basis points previously. Waivers on trading and final settlement fees for one year will further reduce costs during the market activation phase.

He stressed that the benefit of the enhancements extends beyond the fee-waiver period. Once the waivers expire in August 2027, participants will revert to a permanent fee structure that remains below previous levels, supporting the longer-term sustainability of market activity.

Capital efficiency critical for institutions

Noor said improved margin efficiency could be one of the most impactful changes in attracting institutional participants. Greater scope for netting margin requirements across positions and different maturities allows offsetting positions and hedged portfolios to be assessed based on net risk rather than a gross basis.

He said this reduces the amount of collateral required for each unit of exposure, which is particularly important for asset managers using hedging strategies and proprietary trading firms whose returns depend heavily on efficient capital use.

He said removing margin multipliers for certain investor categories also helps align capital requirements with actual risk levels. The MT30 contract multiplier is SAR 100, meaning one contract represents approximately SAR 100,000 in notional value when the index stands at 1,000 points. This makes any improvement in margin requirements increasingly significant as larger portfolios are built.

Noor said the benefits of the enhancements extend beyond lower capital requirements to greater transparency and operational readiness for institutions. Muqassa’s margin calculator allows participants to estimate margin requirements in advance across different listed derivatives products.

He also said integration with the FIS platform gives members instant access to trade, collateral, and margin requirement data, supporting institutional readiness and improving risk management and operational efficiency.

Alsalloum said improved margin efficiency and lower trading costs significantly enhance the attractiveness of derivatives for institutions and asset managers. Lower margin requirements allow them to build hedging positions without tying up a large portion of their liquidity, improving capital efficiency across portfolios.

He said lower trading, clearing, and settlement fees reduce overall costs, particularly for institutions that frequently rebalance positions. They also improve the economics of market making by reducing the cost of holding positions and executing trades, supporting more competitive bid and ask quotes.

He noted, however, that lower fees and improved margin efficiency alone will not guarantee market growth. Sustained liquidity, active market makers, and contracts tailored to the needs of different portfolios and hedging strategies will also be required.

What will signal the success of enhancements?

Al Suwayed said assessing the success of the new measures requires looking beyond trading volume. Open interest is one of the key indicators, as it shows whether actual positions are being held for hedging or investment purposes.

He said other indicators include bid-ask spreads, order-book depth, the consistency of activity across different maturities, and increased participation by institutions, asset managers, family offices, and professional traders. Trading volume growth and a broader participant base would follow as additional indicators.

He said higher trading volumes indicate a more active market, but rising open interest, deeper liquidity, and narrower bid-ask spreads are the indicators that demonstrate whether the market has become more effective in practice.

Noor described the initial indicators following implementation of the enhancements as encouraging. As of Aug. 25, 2026, MT30 Index Futures and SSFs had recorded more than 1,000 trades combined, representing over 5,000 contracts with a trading value exceeding SAR 220 million.