Why derivatives in the Middle East are still behind – And how to unlock their potential
Across the world, derivatives markets are booming. Equity index futures, single-stock options and commodities contracts are used every day to hedge risk, optimise portfolios and generate yield.
In fast-growing financial centres in the Middle East, the infrastructure is increasingly in place:
- clearing houses exist in several markets,
- exchanges are launching futures and options,
- regulations are moving forward.
And yet, when you look at actual trading activity, one thing stands out:
Commodities derivatives are thriving. Equity derivatives are not.
So what is holding back derivatives trading in the region, especially equity derivatives and what can be done about it?
This article explores the key themes raised during a recent derivatives roundtable in a Gulf financial hub, with a particular focus on education, liquidity and market structure.
1. The current landscape: infrastructure is here, activity is not
On paper, the region is not starting from zero.
Several markets in the Middle East already have:
- Clearing houses capable of handling derivatives
- Equity index futures and single-stock futures and options listed
- Strong commodities benchmarks, especially in energy
However, if you look at trading data, the picture is very uneven:
- Commodities derivatives (especially crude oil benchmarks) show solid, often growing volumes, driven by real hedging needs in the energy value chain.
- Equity derivatives in many Gulf markets show almost no open interest and near-zero daily volume, even when the underlying indices have moved significantly over the year.
In some local equity indices, the market can fall sharply over several months with almost no derivatives trading to hedge the downside. This tells you a lot about the dominant investor profile.
2. A “buy and hold” culture that doesn’t use derivatives
One of the strongest messages from the discussion was that the investor culture in the region is very long-term and cash-equity oriented.
Typical local investors include:
- long-only asset managers,
- family offices,
- high-net-worth individuals with significant strategic shareholdings.
Their approach is simple:
- buy shares in strong local companies,
- collect attractive dividends,
- hold for many years.
Short-term drawdowns are often seen as noise. If an index drops, the view is: “It will come back. We invest for 20 years.”
In that context, equity derivatives are not yet seen as essential. They are perceived as speculative tools rather than as risk management instruments.
This creates a structural challenge:
If your main local investor base doesn’t feel they need equity derivatives, it is very hard to build a liquid derivatives market.
3. Education and tools: two missing pillars
Two structural issues keep coming back in the region:
a) Education: many investors simply don’t know how to use derivatives
There is still limited understanding of how futures and options work among many local investors and even some intermediaries.
Typical gaps include:
- how to use index futures to hedge a long-only portfolio,
- how to structure simple option overlays to protect downside,
- how to interpret concepts like volatility, delta, and time decay.
You can’t trade what you don’t understand. Even if products exist, a lack of education means they remain unused.
b) Technology & operations: many brokers cannot process derivatives properly
Even when there is interest, brokers’ infrastructure is often not ready:
- front ends designed only for simple “buy/sell” cash equity flows,
- back-office systems that do not support margining and lifecycle events of derivatives,
- limited risk tools for monitoring positions and exposures.
In other words, investors may be willing, but their intermediaries are not equipped.
Until brokers and banks upgrade both their front-office platforms and back-office systems to handle derivatives as a core business, it will be difficult to scale market participation.
4. Why commodities derivatives work better in the region
If you look at commodities derivatives in the Middle East, the story is very different.
Energy contracts linked to regional crude benchmarks or new oil grades have found strong traction, because they are:
- directly connected to the real economy (producers, refiners, traders),
- clearly understood as hedging tools,
- used by regional and international players to manage price risk and exposure.
These contracts are not launched for the sake of launching a product. They solve a concrete problem:
“How do we hedge our exposure to this specific regional crude or feedstock?”
This is a key lesson:
Derivatives that are anchored in real, local industrial needs tend to succeed.
Equity derivatives launched without a clear user base tend to struggle.
5. What other markets can teach: the example of a balanced ecosystem
To understand what a successful local derivatives market can look like, it can be useful to look beyond the usual US/Europe examples.
One Asian market in particular was mentioned during the roundtable as a model: a country where retail, proprietary traders and institutions all actively trade derivatives.
There, it is not unusual for:
- a café waiter to have open positions in equity index futures or palm oil futures,
- retail investors to represent a meaningful share of exchange volume,
- local proprietary trading firms and international participants to complete the ecosystem.
The key point is balance:
- retail traders,
- local prop houses,
- domestic and international institutions.
This mix creates continuous two-way flow, which is essential for liquidity.
In comparison, many Middle Eastern markets are:
- heavily institutional and family-office driven,
- focused on buy-and-hold cash equities,
- lacking active retail and prop trading participation in listed derivatives.
6. Market-making and product design: getting the microstructure right
Even when there is an exchange, a clearing house and a listed contract, microstructure matters.
A few recurring issues in the region:
- Market-making frameworks for options sometimes copy equity or futures models,
- focusing on simple bid/ask spreads instead of volatility-based pricing,
- lacking realistic inventory and risk compensation for market makers.
- Incentive schemes for market makers may not reflect the true risk of providing continuous quotes in illiquid underlyings.
- Product design sometimes misses the target:
- launching micro contracts where there is no retail access,
- or listing equity index options when the real need is in industry-specific hedging (for example, jet fuel for airlines or feedstock for petrochemicals).
If you want deep, consistent liquidity in derivatives, you need:
- products that solve real problems (hedging, risk transfer, capital efficiency),
- market-making rules that make sense for options and futures,
- a framework where market makers can operate profitably and sustainably.
7. The specific role of local education and outreach
One positive trend in the region is the effort of some brokers and exchanges to run regular educational events:
- monthly seminars explaining futures and options,
- sessions on how to hedge currency, equity or commodities risk,
- outreach to both professional and retail audiences.
Even if attendance starts small, consistency matters. Over time, such initiatives can:
- shift the perception of derivatives from “speculation only” to “risk management and portfolio tools”,
- create a first generation of local derivatives users,
- encourage more brokers to invest in the systems and people they need.
Education is not a “nice to have” it is a core strategic pillar for anyone who cares about building a real derivatives ecosystem.
8. What needs to happen next
For derivatives markets in the Middle East to reach their full potential, several levers need to move together:
- Exchanges
- Focus on products linked to real regional needs (energy, aviation fuel, industrial feedstocks, local benchmarks).
- Design market-making schemes that reflect the realities of options pricing and inventory risk.
- Brokers and banks
- Upgrade front-end platforms to support multi-asset, derivatives-friendly workflows.
- Invest in back-office, margining and risk systems that handle futures and options as first-class products.
- Regulators
- Provide clear, supportive frameworks for derivatives trading and market-making.
- Encourage a shift from unregulated high-leverage products to transparent, exchange-traded instruments.
- Investors (local and international)
- Recognise that even long-only, dividend-focused strategies can benefit from hedging and overlay strategies.
- Push their intermediaries for access to tools that help manage risk more efficiently.
Conclusion: A region with the right ingredients if the recipe is correct
The Middle East has:
- growing capital markets,
- ambitious financial centres,
- strong commodities flows,
- a rising profile on the global investment map.
The foundations for vibrant derivatives markets are already there.
But to unlock the full potential, the region needs:
- better education,
- better tools,
- better market structure,
- and products that truly match local economic reality.
Equity derivatives in the region are not doomed to stay illiquid. With the right mix of infrastructure, incentives, and investor understanding, they can evolve from dormant listings on a screen to active, useful tools that support both local and international investors.
Now is the right time for exchanges, brokers and regulators in the region to turn derivatives from an afterthought into a real strategic priority.
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