Tehran Exchange Begins Trading Futures to Attract Investors

Mohammad Reza Rahimi. Photograph: Getty Images

The Tehran Stock Exchange, home of the world’s second-best performing equity index, began offering derivatives based on local banks to diversify and attract foreign investors.

Four futures contracts were “symbolically” traded at an opening ceremony yesterday, Hassan Ghalibaf-Asl, the exchange’s managing director, said in a phone interview today. The exchange is introducing six futures contracts based on Parsian Bank and Karafarin Bank, which will expire in two, four and six months, he said. The exchange hopes to increase the number of companies covered by futures contracts to at least 10 by March.

“This new product will attract the foreign investors to Iran’s capital market, which isn’t very well known to them,” Ali Karamad, owner of Tehran-based asset management company Karamad Group, said by telephone July 23. “It gives them security, knowing that Iran’s market is introducing instruments similar to those in international markets.”

Investors in emerging markets have received better returns than those in Europe and the U.S. over the last year. The MSCI Emerging Markets Index rose 19 percent in the past 12 months, compared with a gain of about 12 percent in the Standard & Poor’s 500 Index and 16 percent for the Stoxx Europe 600 Index. The TSE’s benchmark index, the TEDPIX, surged 55 percent in the first half, making it the second-best performing broad market index, according to the World Federation of Exchanges.

While Ghalibaf-Asl predicts the exchange will be “attractive to foreign investors,” it faces the obstacle of international sanctions on Iran over its nuclear development.

Banking Sanctions

The U.S. and many of its allies say the atomic program may be aimed at developing weapons. Iran, the second-largest oil producer in the Middle East after Saudi Arabia, insists the work is for civilian purposes, such as generating electricity.

The U.S. expanded its own sanctions against Iran on July 1, when President Barack Obama signed a bill to block access to the American financial system for banks that do business with Iran, and to punish foreign suppliers of gasoline to the country.

European Union governments tightened sanctions against Iran today. The package includes restrictions on export-credit guarantees and insurance, a ban on investing or selling equipment to Iran’s oil and natural-gas industries and closer monitoring of banks doing business with Iran.

“It is questionable that they can attract a significant level of foreign investment or trading” because of the sanctions, Bruce Weber, who specializes in electronic trading and exchanges at the London Business School, said July 23 by e- mail.

‘Intermediary Banks’

Karamad said that while the sanctions “won’t be entirely ineffective,” the government has promised that the measures won’t threaten foreign investors’ funds.

“Iranian banks are working with intermediary banks,” Karamad said. “HSBC and Barclays may comply with sanctions, but we can work with banks in Kuwait, Azerbaijan and other countries. The whole world hasn’t sanctioned us.”

The Tehran Stock Exchange, founded in 1967, today lists 337 companies with a total value of 742 trillion Iranian rials ($74 billion). An average of 9,886 trades were completed per day in the Iranian month of Khordad, which ended June 21, according to data on the exchange’s website. The TSE index stood at 15,746 at today’s close of trading.

Exchange Currencies

Since April, foreign investors have been able to open foreign-currency accounts at Iranian banks and exchange their currencies to rials and vice versa, according to the TSE website. Foreigners who want to trade in Iran must get a license, which the exchange says will take seven days, according to the website.

They can transfer their original investment, capital gains and dividends outside Iran, according to the TSE website. Thirty-one of the 88 brokerages active in the TSE are licensed to trade the futures contracts, Ghalibaf-Asl said. They will only deal in the derivatives electronically, he said.

Derivatives are financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in interest rates.

“The futures market will be received very warmly,” Karamad said. “It gives the traders a 1-to-10 leverage, which will lead to higher profits for clients and for the brokers. Those who have a higher appetite for risk will favor futures deals.”

Risk Appetite

Vice President Mohammad Reza Rahimi told reporters in Tehran July 22 that his country has rates of return of 25 to 75 percent for investment. “It’s not possible anywhere else in the world,” Rahimi said on state television. Iran has improved its laws, making it easier for foreigners to invest, he said.

Emerging markets that have yet to mature into “true market economies,” such as Brazil and some Asian markets, have provided the best returns from equities in the last five years, Weber said.

“Will they be able to attract international investors?” Weber said in a July 22 telephone interview. “Some of the questions people will have are ‘could an investor repatriate the dividends?’ A local investor might not need to ask, but an international investor would.”

TSE, which completed its demutualization in 2006, is a member of the Federation of Euro-Asian Stock Exchanges and the World Federation of Exchanges.

Exchange Member

Iran’s markets regulator, the Securities and Exchange Organization, reports to a government body that is headed by the minister for economic affairs and finance. The Central Bank governor and representatives of the private sector are members of the council. It has an electronic system for tracing market abuse, and insider trading and market abuse may lead to fines or imprisonment, Ghalibaf-Asl said.

“Our plan is to increase the number of companies whose shares are offered in futures contracts to at least 10 by the end of this year,” Ghalibaf-Asl said, referring to the Iranian year ending March 20. “We’re working on an index whose futures could be offered next year,” he said.

“Sukuk and options may be the next instruments in line to be available for Iran’s traders,” Hossein Khezli-Kharazi, general secretary of the country’s Securities & Exchange Brokers Association, said by telephone July 22. Sukuk are bonds that comply with Islam’s Sharia law.

To contact the reporters on this story: Ali Sheikholeslami in London at alis2@bloomberg.net; Nandini Sukumar in London at nsukumar@bloomberg.net.