Increased options in future for investors

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DAMBLY: The size and liquidity of local equities markets can now support active derivatives trading.

Arqaam Capital believes conditions in the Gulf are right for a successful equity derivatives scene.

As the activity on TraX, the derivatives exchange launched by Dubai International Financial Exchange (DIFX) last year, demonstrates, Gulf investors are not totally enthusiastic about structured products.

Most days, the platform has seen no trading volume at all (which could be why historical trading data is no longer available on the DIFX website).

Over the counter trading does exist in some Middle East markets, but it still seems that many investors are still not comfortable with equity derivatives.

However, Arqaam Capital is confident that it can make derivatives an integral part of GCC securities trading. The firm recently received authorisation from Dubai Financial Services Authority to begin trading, and will offer brokerage and equity derivatives, debt and credit derivatives, and structured products.

Dr Laurent Dambly, executive director, capital markets - equity and equity derivatives, Arqaam Capital, says: "There has been derivatives trading in the region for a while. What's holding it back has been the size of the market, the liquidity in the market, but that is changing dramatically. Emaar has been trading $20m daily - now it's $78m, and that is just one stock."

Arqaam predicts that the derivatives market in the GCC will reach around 25% of the total trading volume of the regional equities markets in the medium term. Arqaam's figures put the potential size of the derivatives trading opportunity in the GCC in five years' time at around $250 bn to $300 bn, and it aims to capture around 5% of that market.

The firm will not sell directly to retail, but will sell to banks, which can distribute products to their own clients.

Arqaam recently acquired UAE brokerage firm Falcon Securities, which will conduct its transactions.

Dambly says that the regulatory environment in the region, which requires buyers of securities to have an investment card number in each market, can create some red tape, but it is not a major problem.

"It's legally heavy, but if you trade derivatives it's less of an issue," he says.

"It reminds me of Europe 10 or 25 years ago."

By tackling the regulatory issues itself, Arqaam may even make it easier for overseas investors to gain exposure to regional stocks than if they had bought them directly.

When it comes to local investors, however, education is likely to be critical in making sure that investors understand the potential risks and benefits associated with the asset class.

"A lot of people believe derivatives are dangerous," says Dambly. "I believe derivatives are just a tool that allows a company to manage their risk more efficiently. We place a lot of emphasis on ensuring investors understand the product they are buying."

Arqaam has had to undergo a learning curve of its own, ensuring that it keeps up with developments in local regulatory frameworks, and learning what can and cannot be done in the region's markets.

"Being local, we really understand better what is required and what are the sensitivities," says Dambly. "Some things do not exist yet and we have to work on developing them, but we have to give credit to the regulators who have been doing a lot in a very short time. If they continue this way they are going to overtake a lot of countries very quickly."

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