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Structured derivative products to cushion impact of credit crisis

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Points of Essence:

  • Options market is being developed in Kuwait to bring stability to the GCC equity markets in this period of uncertainty as it will address investors’ liquidity concerns and provide investors with the ability to maneuver the markets.
  • Believed to be the cause for the current financial turmoil, structured derivatives products have since put under an intense scrutiny. However, products with solid credit origination and valuation standards like the Shariah-compliant financial instruments and structured products, will gain more credibility. This is in addition to stricter controls from regulators. Put options and ‘Arboun’ Contract were being developed to encompass all these features.

By Querubin J. Minas Saudi Gazette JEDDAH – Structured derivative products are currently in spotlight for their role in elevating the present global credit crisis, said Hussein Zeineddin, assistant vice president of the Equity Derivatives and Structured Products Department in Kuwait Financial Centre S.A.K. (Markaz), one of the leading investment banking and asset management companies in the Middle East, recently.

Explaining the implications of current financial crisis on derivatives growth in GCC, he said regulators will be stricter for any such products at least in the near term.

Due to the substantial re-assessment of risk across the markets, regulators will focus more on products with solid credit origination and valuation standards. “In such scenarios, we think that Shariah-compliant financial instruments and structured products will have a wider acceptance globally,” he pointed out.

As such, structured products were created to meet specific needs that cannot be met from the standardized financial instruments available in the markets. Structured products can be used as an alternative to a direct investment, as part of the asset allocation process to reduce risk exposure of a portfolio, or to utilize the current market trend.

These products that are derived from and/or based on a single security or securities, a basket of stocks, an index, a commodity, debt issuance and/or a foreign currency, among other things and include index and equity linked notes, term notes and units generally consisting of a contract to purchase equity and/or debt securities at a specific time.

These are securities whose cash flow characteristics depend upon one or more indices or that have embedded forwards or options or securities where an investor’s investment return and the issuer’s payment obligations are contingent on, or highly sensitive to, changes in the value of underlying assets, indices, interest rates or cash flows.

Speaking at a Euromoney seminar titled “Derivatives in the Middle East” held in Dubai, he said “Markaz believes that options can create many positive developments in GCC equity markets such as addressing investors’ liquidity concerns and providing investors the ability to maneuver the markets in this highly volatile boom and bust market cycles.”

Forsa Fund, which acts as the sole options market maker in Kuwait is also the first options fund in the Middle East. Markaz is also a market maker for futures trading in the Kuwait Stock Exchange (KSE).
He presented a case study of Markaz role in launching options in the KSE in 2005, making it the first exchange to offer this tool in the Middle East.

Commenting on upcoming derivatives products, Zeineddin said: “As part of Markaz responsibility to develop the options market, we are planning to introduce Put options (to become a valuable addition to the already offered Call options). Also, Markaz structured the ‘Arboun’ Contract, the Shariah-compliant alternative to the conventional Call Option. Both products’ proposals are pending the KSE’s approval. We remain ready with the necessary infrastructure like trading and risk management systems. If approved, the KSE is poised to become the first exchange to offer traded Islamic derivative products.”

Markaz is also calling for allowing investors to write options and not just to buy them; having multiple market makers,; and trading options during official market trading hours, he added.


Written by Suapi Shaffaii

November 6, 2008 at 11:52 am

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