SSOs contracts to boost capital market cash flow: Muqassa CEO

Wael Al-Hazzani, CEO of Muqassa 

The single stock options (SSOs) contracts will boost cash flows in the Saudi Exchange (Tadawul) and enable investors to capture new diversified opportunities, Wael Al-Hazzani, CEO of Securities Clearing Center Company (Muqassa), told Argaam.    

Al-Hazzani highlighted Muqassa’s risk-reduction role in clearing the transactions in the derivatives market, aligning with the applicable regulations and the highest international practices.   

The SSOs contracts are available to all investors including individuals, said Al- Hazzani, explaining the difference between the SSOs and the single stock futures (SSFs) contracts.

The following are the details of the interview:

Q: Could you explain how SSOs contracts affect the market and investors?

A: The SSOs contract gives its owner the right but not the obligation to buy or sell an underlying asset at an agreed-upon price and date, and the SSOs value is based on the value of an individual stock (underlying asset). These contracts represent an appropriate tool for those investors who want to hedge against and efficiently manage the risks of their investment portfolios. 

Additionally, SSOs allow traders to gain exposure to the price movement of the underlying stock instead of a basket of stocks in comparison to index futures contracts. They further boost profitability by utilizing financial leverage and enable short selling without owning the underlying stock. 

The launch of the SSOs contracts is significantly crucial for the market, as they increase cash flows generation, and enhance market efficiency aligning with the highest applicable international practices.

Q: How about Muqassa’s role in clearing SSOs contracts? 

A: Muqassa plays a crucial risk-reduction role in clearing the derivatives transactions through a set of applicable regulations, in accordance with the best international practices. 

Margin requirements are calculated based on market prices, while orders are issued by the clearing members daily or multiple times a day to close and clear the short positions based on the volatility of derivatives prices in the market. 

In the event SSOs are not cleared, Muqassa will compensate the affected entity until the transaction is cleared. 

In addition to offering a new service in the derivatives market, Muqassa delivers stocks upon settlement in the main market. 

In the event of practicing the right of a SSO, Muqassa delivers the stocks by giving the owner the right but not the obligation to buy or sell an underlying asset at an agreed upon price and date, in a way that ensures direct and automated transaction. 

Q: Will the SSOs be available to all individual investors? 

A: Yes. However, individual investors should open an account with a registered derivatives exchange members.

The registered members in the derivatives market can trade these settled contracts through delivering the underlying asset. SSOs are American style, with margin requirements applying to the sellers only.

Tadawul has previously registered a number of derivatives exchange members, and we will pursue these efforts to facilitate the investors’ access to market.

Q: What are the differences between SSFs and SSOs in terms of purpose, mechanism and costs?

A: Both are financial derivatives for investors to explore market changes and hedge against risks. Both provide different investment opportunities for market participants at a set price and date.

SSOs are contracts that give the owner the right but not the obligation to buy or sell an underlying asset at an agreed upon price and date. Meanwhile, SSFs contracts represent an agreement made between a buyer and a seller who are obligated to complete a transaction at a date in the future, unless the positions are not closed before that time.

Q: What is the number of the clearing members that would be available upon the product launch?

A: HSBC Saudi Arabia, Derayah Financial and Riyad Capital are expected to act as direct clearing members (DCMs), while Saudi National Bank (SNB), Al Rajhi Bank and Bank Albilad will act as general clearing members (GCMs).

Q: What is your expectation for SSOs liquidity?

A: The introduction of SSOs will boost market liquidity and further enable investors to capture new diversified opportunities, in addition to efficiently managing their portfolios.

Q: What are the major risks that may hit the market upon the SSOs introduction? How do you prepare the market to overcome these risks?

A: Derivatives, like other capital market products, contain risks. SSOs may expose the trading parties to risks including market volatility and liquidity.