Saudi Riyal Option Ban Came After `Exponential' Corporate Demand

The Saudi Arabian Monetary Agency told banks to stop offering options contracts on riyal forwards after a rapid increase in their use by corporate users, the chairman of the country’s treasurers committee said.

QuickTake Currency Pegs

“SAMA has been observing the growing use of complex derivatives in the local market, which for the last year took on an exponential increase,” Shujaat Nadeem, who attended a meeting with the Saudi Arabian Monetary Agency on the matter this week, said by phone Thursday from Riyadh. “The main concern of SAMA was about the appropriateness of these products.”

The agency told banks to halt the sale of options contracts on riyal forwards at a meeting with treasurers in Riyadh on Jan. 18., five people with knowledge of the matter said earlier this week, asking not to be identified as the information is private. The directive is aimed at banks’ corporate clients, with the banks themselves still free to enter into the contracts, according to Nadeem.

“SAMA instructed banks to suspend all non-linear product dealings with their clients,” said Nadeem, who is also group treasurer at Samba Financial Group. The agency’s decision is “absolutely the right prudent step,” he said.

Countries with currencies pegged to the dollar are coming under increasing attacks by traders speculating that it’s become too expensive to continue defending exchange rates amid a soaring U.S. dollar and a collapse in commodities. Bets for a devaluation of the riyal reached their highest in almost two decades this month, driving 12-month forward contracts for the riyal to their highest since at least December 1996.

Saudi Arabia pledged on Jan. 11, the second time in four months, to stick with its currency peg. SAMA will “uphold its mandate" of maintaining the riyal at 3.7500 per dollar, Governor Fahad Al-Mubarak said at the time.

SAMA is “using administrative measures to limit speculation and local banks’ exposure to speculative positions against the riyal,” Jean-Michel Saliba, a Middle East and North Africa economist at Bank of America Merrill Lynch, said in a research note e-mailed on Thursday. “We cannot exclude further intervention either directly, indirectly or through prudential measures.”

Calls made to SAMA outside regular business hours weren’t immediately returned.

Before it's here, it's on the Bloomberg Terminal.