NextFin News - Saudi Arabia is cutting the cost of trading derivatives and tightening market-making rules in a push to win over global investors and trading firms, giving them the hedging tools they need to manage risk in a market that has long been dominated by domestic retail traders. The Saudi Exchange and its clearing house, Muqassa, lowered fees on index and single-stock futures effective August 19, waived futures transaction and settlement fees for a year, and activated market makers in the derivatives sector — steps discussed by Eric Swats, senior executive officer at Rasmala Investment Bank, as Riyadh races to make its capital market investable for institutions that would otherwise stay away.
The timing is deliberate. The fee cuts land six months after Saudi Arabia opened direct stock trading to all foreign investors, a move that removed the Qualified Foreign Investor gatekeeping but did not, on its own, deliver the liquidity global managers require. A market that welcomes every foreign investor on paper still struggles to attract them in practice if they cannot hedge index, single-stock, or currency exposure at a reasonable cost. Riyadh's answer is to deepen the derivatives layer — and to subsidize it until the liquidity arrives.
The Fee Cuts Are the New Lever
The latest measures are specific, and they target the exact frictions that keep professional flow out. Trading fees for MT30 Index Futures — contracts on the index of the 30 largest and most actively traded Saudi companies — were cut from SAR 25 to SAR 7 per party, while settlement fees at maturity fell from SAR 30 to SAR 2.8 per contract. For single-stock futures, trading fees were set at a flat SAR 1.4 per contract, down from 2.5 basis points of notional, and settlement fees at SAR 0.504, down from 3 basis points. On a SAR 10,000 single-stock future, the old fee schedule would have charged SAR 2.50 to trade and SAR 3.00 to settle; the new schedule charges SAR 1.40 and SAR 0.504. The savings are small in absolute terms but meaningful at the margins where high-frequency and market-making firms decide whether a book is worth running.
Alongside the fee cuts, the exchange revised the margin calculation methodology to enhance netting across maturities and futures products, improving capital efficiency for members who run offsetting positions. It removed margin multipliers previously applied to certain investor categories on single-stock futures and MT30 contracts, launched a public margin calculator so members can simulate requirements, and adjusted the daily settlement-price methodology to a unified theoretical futures price. The exchange also raised the minimum price fluctuation on single-stock futures from 0.05 to 0.1 — SAR 10 per contract — a move that tightens the tick structure and makes quoting cleaner for market makers.
The missing piece until now was the other side of the trade. A derivatives contract is zero-sum: for every hedger there must be a speculator or a market maker willing to take the other side. The exchange says it has now activated a market-making framework for derivatives with competitive obligations and incentives, and connected members in real time to trades, collateral, and margin data through the FIS system. Cheaper hedging without a counterparty is an invitation to an empty room. Riyadh is trying to ensure the room is staffed.
The Opening Was Only the First Half of the Reform
The derivatives push sits on top of the biggest regulatory change in the market's recent history. On January 6, 2026, Saudi Arabia's Capital Market Authority announced amendments that took effect February 1: the QFI regime is gone, the regulatory framework governing equity swap agreements is abolished, and all categories of foreign investors — including individuals — may invest directly in the Main Market of the Saudi Exchange, or Tadawul. The ownership caps stay in place: non-resident foreigners cannot hold 10% or more of a single issuer, and aggregate foreign ownership, excluding foreign strategic investors, remains capped at 49%.
The numbers show why the reform matters and how far there is to go. Foreign ownership of Saudi equities stood at 6.8% according to one legal analysis citing market data, compared with 25.3% in India and 58.3% in Brazil. Other estimates put overseas ownership at just over 4.7% at the end of 2025, and around 7% in the third quarter of 2025, when international investors held more than SAR 590 billion in the Saudi capital market. As of the end of July 2026, the Saudi Exchange reported total foreign holdings of SAR 437.87 billion (USD 116.77 billion) against a market capitalization of SAR 9.45 trillion (USD 2.52 trillion) — roughly 4.6% of the market, and a decline from the Q3 2025 level.
That gap between Saudi Arabia and its emerging-market peers is not an accident of investor taste. It is the residue of a market built for locals. Saudi equities closed 2025 down nearly 8% in dollar terms even as most global markets rallied, lagging the FTSE Emerging Index by roughly 34% according to one asset manager's analysis. A market that cannot be hedged is a market that only the already-exposed will own. And the political leadership behind the reform has just changed: Mazen Al-Sudairi, former head of research at Al Rajhi Bank, was appointed chairman of the Capital Market Authority in August 2026, replacing Mohammed El-Kuwaiz after nearly nine years at the helm. The derivatives fee cuts are among the first concrete signals of the new chairman's priorities.
The Derivatives Layer Is Still Thin
Here is the mechanism Swats' point rests on, and the reason it is not yet working. A global portfolio manager allocating to Saudi equities faces three risks: the stock, the index, and the currency. The Saudi riyal is pegged to the US dollar, so currency risk for a dollar-based investor is muted — but not for a euro, yen, or sterling investor, and not for anyone who wants to express a view on oil without taking the crude contract itself. Index futures on the MT30, the MSCI Tadawul 30, and single-stock futures and options on names such as Saudi Aramco, Al Rajhi Bank, and Saudi National Bank are the tools that turn a Saudi position from a directional bet into a manageable exposure.
The exchange's own live data shows how thin that layer still is. On a recent session, index futures traded 325 contracts with zero open interest; single-stock futures traded 942 contracts with open interest of just five; single-stock options showed no volume at all. For comparison, a single large US equity options series can clear more contracts before lunch. The infrastructure exists — the derivatives market and its central counterparty launched in August 2020, single-stock futures followed in July 2022, and the exchange now lists futures and options on Aramco, Al Rajhi, Alinma, SABIC, Saudi Telecom, Saudi Kayan, Saudi Electricity, and Almarai — but the liquidity has not yet arrived.
That is the asymmetry the fee cuts are designed to fix. Lower trading costs and a deeper order book do not merely make hedging cheaper; they make the underlying cash market investable for a class of investor that would otherwise stay away. Hedging capacity is a precondition for ownership, not a luxury that follows it.
"The launch of Derivatives Market will provide investors with hedging tools to more effectively manage risk and gives expanded opportunities to gain exposure to the Saudi capital market, the largest and most liquid market in the region," said Khalid Alhussan, Tadawul's chief executive, when the derivatives market and clearinghouse opened in August 2020. "This is a significant step in introducing sophisticated market products and creating a trading environment that is attractive to local as well as international investors."
Why This Is Structural, Not Cyclical
The judgment that matters: this is a structural shift, not a cyclical liquidity wave. A cyclical move would be a temporary surge in trading volume that fades when oil prices roll over. What Riyadh is building is a change in market microstructure — the rules, the product set, the clearing infrastructure, and the cost of trading — that does not revert on its own once installed.
The evidence is in the sequence of reforms. First the exchange built the plumbing: the derivatives market and central counterparty in 2020, single-stock futures in 2022, single-stock options thereafter. Then it removed the legal gatekeepers: the QFI regime and the swap framework in February 2026. Then it turned to the economics of trading: cheaper, easier derivatives access for global investors and trading firms, backed by a year-long fee waiver and an activated market-making regime. Each layer compounds the previous one. A rule change without products is an invitation with no venue; products without rule changes are a venue with no guests. Only now does Saudi Arabia have both.
History supports the structural read. Markets that opened their hedging infrastructure saw participation deepen over years, not quarters. South Korea's KOSPI derivatives complex, launched in the 1990s, helped transform one of Asia's more closed markets into one of its most actively traded. The comparison is not exact — Saudi Arabia retains ownership caps that Korea did not — but the mechanism is the same: once a market offers credible hedging, the investor base broadens beyond those willing to hold unhedged risk.
There is also a second-order effect worth naming. A liquid derivatives market does not just serve foreigners; it changes the domestic market itself. When local institutions can hedge cheaply, they hold larger cash positions with less risk. When market makers can warehouse flow in futures, the cash market's bid-ask spreads compress. The hedging tail begins to wag the cash dog — and that is exactly what a market trying to graduate from retail-dominated to institutionally run needs.
The Counter-Thesis: Cheap Hedging Does Not Create Demand
The strongest case against this view is straightforward: liquidity begets liquidity, and no amount of regulatory engineering can manufacture it. A derivatives contract is a zero-sum instrument — for every hedger there must be a speculator or a market maker willing to take the other side. If global trading firms do not see enough flow to justify posting quotes, spreads stay wide, open interest stays near zero, and the hedging tools remain theoretical. The Saudi market's own snapshot — 325 index-futures contracts, five contracts of open interest in single-stock futures, none in options — is Exhibit A. Fee cuts can lower the cost of being wrong; they cannot create a reason to be right.
There is a second, sharper objection. The investors who most need hedging tools — global macro funds, quantitative managers, and systematic strategies — are also the ones most sensitive to index inclusion and benchmark weights, not to the availability of single-stock options. Saudi Arabia already commands roughly 4% to 5% of the MSCI Emerging Markets Index. Passive flows from that weighting have largely arrived; the marginal dollar is active, and active managers are paid to be selective. Cheaper hedging may widen the pool of willing investors, but it does not force them to deploy capital, and it does nothing to change the Kingdom's exposure to oil prices, regional geopolitical tension, or a domestic retail base that still dominates turnover. The regional conflict has already been cited as a factor that stalled momentum after the February opening.
The counter-thesis is real, but it mistakes the goal. Riyadh is not trying to ignite a volume explosion next quarter. It is trying to remove a structural reason for global investors to say no. The falsifying signal is concrete: if, by the end of 2027, single-stock options open interest remains below 1,000 contracts and foreign ownership of the Main Market has not risen above 10% of market capitalization, then the derivatives push has failed to change market structure, and the low-liquidity trap is self-perpetuating rather than transitional.
What to Watch
The near-term read is technical: watch whether open interest in MT30 index futures and single-stock futures begins to accumulate rather than reset toward zero daily, and whether the activated market makers hold tight spreads through volatile sessions. That is the difference between hedging that actually happens and hedging that is merely available. The one-year fee waiver creates a natural experiment — if liquidity does not build within the waiver window, the problem is demand, not price.
The medium-term read is fundamental: watch the foreign-ownership line. The Saudi Exchange reported SAR 437.87 billion in foreign holdings at the end of July 2026, down from more than SAR 590 billion in the third quarter of 2025. If that figure climbs back toward and beyond SAR 600 billion as the fee cuts and market-making regime take hold, the reforms are working their way through. If it stalls, the access change alone is not enough.
The long-term read is structural: watch whether global trading firms and market makers establish a visible presence in Riyadh, and whether the product set expands to index options and commodity-linked derivatives, as Tadawul has long signaled it intends. A market that can hedge oil exposure without trading crude would be a genuinely different proposition. The new CMA chairman's first moves will also matter — Al-Sudairi inherits a reform agenda that is half-built, and the market will read his early decisions as a signal of whether liberalization continues or pauses.
Base case: derivatives liquidity builds slowly, foreign ownership drifts toward the low-teens percentage range over several years, and Saudi Arabia becomes a more normal emerging market rather than a frontier outpost. Upside case: a credible market-making regime and lower costs draw systematic capital, pushing foreign ownership toward the 15% range and compressing the valuation discount Saudi equities have carried — they traded at roughly 16.7 times trailing earnings in early 2026, a reset that active managers are only now reassessing. Downside case: open interest stays dormant, the ownership caps remain a binding constraint, regional tensions weigh on sentiment, and the market stays dominated by domestic retail flow and oil-correlated sentiment.
The reform is not a bet that global investors will rush in. It is a bet that the reason they stayed away was the lack of tools, not the lack of interest. The next two years will show which it was.
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