ADX sees glitches for derivatives

The Abu Dhabi Securities Exchange (ADX) is still planning to introduce derivatives as part of an ongoing development strategy but the scheme is beset with hurdles, the bourse’s deputy CEO has said.

Rashed Al Baloushi said the 2008 global fiscal distress had hit foreign investment flow into to the emirate and dampened IPO issuance but expected the flow to resurge after the market stabilizes and measures to enhance transparency.

In comments published by Oxford Business Group, Baloushi said ADX has a responsibility to put in place an efficient infrastructure, which he described as a critical success factor in the introduction of derivatives.

“Having an efficient infrastructure with full operational capability comes first in ADX’s priorities…thereafter, products such equity futures can be added as demand grows,” said Baloushi, also ADX’s director of operations.

“While the infrastructure for a derivatives market is the first step, there are clearly a number of hurdles to jump before a market is fully operational….these include technical support, trading and central counterparty, and rules and regulations…one of the biggest challenges in launching a new derivatives market comes from market awareness and educational programmes—having knowledgeable and astute investors is a critical success factor.”

ADX, one of the biggest stock exchanges in the Middle East, has long planned to introduce exchange trade funds, derivatives and other new instruments as part of a long-term expansion strategy. While ETFs have already started trading, plans to launch derivatives have been blocked by the global crisis.

Besides new investment vehicles, ADX has also been locked in plans to strengthen governance and transparency to attract foreign capital and institutional investors, who it believes are vital for stimulating the market.

“ADX has enjoyed foreign investor growth both in terms of numbers and value but in percentage terms foreign investment remains modest…the crisis which began in late 2007 impacted negatively the holdings of both national and foreign investors but this was part of a global trend rather than reflective of doubts about the Abu Dhabi market,” Baloushi said.
“Indeed, the relative strength of Abu Dhabi emirate’s economy compared to other economies suggests that when global markets stabilize, Abu Dhabi will be a strong target for foreign investors.”

Baloushi said the crisis had also hit IPOs at ADX, which had nearly 60 companies with a market capitalization of nearly $70 billion at the end of October.

“The business environment for such programmes will remain unpredictable for some time…that said, the emerging markets that benefit from the economic stability will fare better than others and Abu Dhabi is perceived by many to be a fertile ground for economic growth and diversification.”

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