Approval of Margin Trading Requires Extension of Deadline
With the launch of the final legislative framework for the listing of sukuk and bonds last April, and the assurance that listing processes for these instruments would commence within six months, alongside the official implementation of margin trading amendments, these are strategic ambitions aimed at enhancing diversity in the financial market and making a wide range of investment tools available to the investing public.
However, investors in the market continue to question why the futures and forward sales instrument has not been reconsidered. This instrument represented a historic milestone in the stock exchange’s evolution and remains one of the most successful tools introduced to the market since its regulation, evidenced by the high volume of interest and trading activity from both individual and institutional investors, as well as the number of service providers.
If new investment tools require six months for approval, implementation, and execution, why has the market been left in a void since the privatization in 2019, without reviewing or reconsidering the return of the futures market in both its conventional and Islamic forms, as it previously existed?
Regarding this strategically important file for a broad base of investors and the market at large, investment sources emphasize that if the objective of eliminating futures and forward sales was risk mitigation, then risks are inherent in all types of trading in the financial market generally, whether through loans, financial financing, stock or bond investments, or funds. There is no investment opportunity devoid of risk, even if minimal.
In confirmation of this, the amendments to margin trading stipulate: “Service providers must verify the client’s ability to bear the risks arising from margin trading, assess the client’s existing expertise, and determine its suitability for margin trading services.”
Furthermore, to ensure risk hedging, one of the conditions regulating margin trading mandates that traders must have at least one year of experience in securities trading, with the exception of professional clients.
Additionally, clients are required to submit a declaration and undertaking acknowledging their prior knowledge of margin trading services and the associated risks.
The above confirms that margin trading involves a certain level of risk, and futures trading is a service similar to margin trading but structured differently. It enables clients to purchase larger quantities of shares with smaller upfront payments, with deferred settlement under a conventional system and Sharia-compliant forward sales mechanisms.
Financial markets require a high degree of diversity, allowing investors to choose options that suit their needs, while implementing appropriate controls that clearly disclose risks. Clients bear their responsibilities in accordance with the declarations and undertakings required or mandated.
According to previous data, there were approximately 18 service providers for futures trading in the market. The Public Authority for Investment supported the service in its early stages through a significant contribution to a dedicated fund, with the initial contribution valued at approximately 20 million dinars. These funds grew to nearly 40 million dinars, confirming the viability and success of the service. Notably, one of the key indicators of success is the level of investment interest in any given instrument.
The forward sales file represented an investment outlet for companies that held strategic stakes of 5% or more for a period of one year. This confirms that the service is not limited solely to generating quick profit margins for the parties involved, but can also be used to enhance turnover rates and allow investors to acquire share quantities at a low cost, represented by a contract advance. This enables a broad base of investors to expand their trading activities.
It is worth noting that if futures trading is considered risky, there are substantial and numerous risks in the market surrounding investors, many of which exceed the risks associated with futures transactions. For example, and without limitation, there are companies that have lost more than 74% of their capital and trade in the market at a 1% spread from the positive-reward-to-risk ratio, with a stop-loss level set at 75%. Is that not a risk? Others have lost 90% of their capital, in addition to dozens of companies that suddenly halt trading or are delisted. These are also serious risks.
