Saudi Capital Markets Reform: CMA Reforms, Market-Making, Derivatives, and ESG Disclosure Requirements

Saudi Capital Markets Reform: Building a World-Class Market Infrastructure

Saudi Arabia’s capital markets reform agenda — one of the most ambitious and comprehensive market modernization programs in the emerging world — has transformed Tadawul from a domestically-focused, retail-dominated exchange into a globally-connected, institutionally-sophisticated market that meets or exceeds the standards of most major emerging-market exchanges. The reform program, led by the Capital Markets Authority (CMA) in coordination with the Saudi Exchange and other financial sector stakeholders, encompasses regulatory modernization, product innovation, governance improvement, and the development of new market segments including derivatives, ESG-linked instruments, and digital assets.

This page provides a detailed analysis of the key elements of the Saudi capital markets reform agenda, covering the CMA’s regulatory modernization program, market-making initiatives, derivatives market development, ESG disclosure requirements, corporate governance reforms, and the forward trajectory toward potential developed-market classification.

CMA Regulatory Modernization

The Capital Markets Authority, established in 2003, has served as the primary architect of Saudi Arabia’s capital markets development. The CMA’s regulatory modernization program since 2016 has encompassed virtually every aspect of market regulation, from listing requirements and disclosure standards through trading rules and investor protection.

Securities Regulations. The CMA has progressively updated the core securities regulations governing the Saudi market. Key changes include the modernization of the Offering and Listing Rules (simplifying the IPO process and introducing new listing categories), the revision of the Corporate Governance Regulations (strengthening board independence requirements, audit committee standards, and related-party transaction rules), the update of the Market Conduct Regulations (enhancing insider trading prohibitions, market manipulation penalties, and surveillance capabilities), and the introduction of new regulations for specific market segments (including REITs, debt instruments, and investment funds).

Enforcement Capability. The CMA has significantly enhanced its enforcement capabilities, investing in market surveillance technology, expanding its enforcement staff, and demonstrating willingness to pursue sanctions against market participants who violate securities regulations. The improvement in enforcement has been critical for building investor confidence, as credible enforcement of market rules is a prerequisite for institutional investment.

Regulatory Technology. The CMA has adopted regulatory technology (regtech) solutions to improve the efficiency of its supervisory and compliance activities. Digital filing platforms, automated compliance monitoring, and data analytics tools have reduced the administrative burden on market participants while improving the CMA’s ability to identify and address regulatory concerns.

Market-Making Programs

The introduction and expansion of market-making programs has been one of the most significant developments in Saudi capital markets over the past several years. Market-making — the practice of designated firms providing continuous bid and ask quotes for specific securities — addresses one of the persistent challenges facing Tadawul: the concentration of trading activity in a small number of large-cap stocks, with limited liquidity for mid-cap and small-cap companies.

Program Structure. The Saudi Exchange’s market-making program allows CMA-licensed firms to serve as designated market-makers for specific securities. Market-makers are required to maintain continuous bid and ask quotes within defined spread parameters during trading hours, provide minimum quote sizes, and meet minimum quoting time requirements (the percentage of the trading day during which the market-maker must maintain active quotes).

Incentives. Market-makers receive incentives from the Saudi Exchange, typically in the form of reduced or waived exchange trading fees, compensation for the cost of maintaining market-making positions, and priority access to certain exchange services. The incentive structure is designed to ensure that market-making is economically viable for participating firms.

Impact. The market-making program has had a measurable impact on trading liquidity for participating securities. Companies that have active market-makers have experienced tighter bid-ask spreads, increased trading volume, and reduced price volatility relative to comparable companies without market-making coverage. The program has been particularly impactful for Nomu-listed companies, where baseline liquidity is lower and the marginal impact of market-making is greater.

Expansion Plans. The Saudi Exchange has indicated plans to expand the market-making program, increasing the number of participating market-makers, broadening the coverage of securities included in the program, and enhancing the incentive structures available to market-making firms. The expansion of market-making is a key component of the exchange’s strategy to improve overall market liquidity and to support the listing pipeline by ensuring that new listings will have adequate post-IPO trading liquidity.

Derivatives Market Development

The development of a derivatives market on Tadawul represents one of the most significant current initiatives in Saudi capital markets reform. Derivatives — financial instruments whose value is derived from the value of an underlying asset (such as an equity index, a single stock, or a commodity) — are essential tools for institutional portfolio management, enabling investors to hedge risk, express market views, and manage exposure with greater precision than is possible through cash equity trading alone.

Product Roadmap. The Saudi Exchange has articulated a phased product roadmap for derivatives development. The initial phase has included the introduction of single-stock futures — standardized contracts that allow investors to buy or sell specific Tadawul-listed stocks at a predetermined future date and price. Subsequent phases are planned to include index futures (based on the TASI or MSCI Saudi Arabia Index), single-stock options, index options, and potentially commodity derivatives.

Clearing Infrastructure. The development of derivatives trading has required the establishment of dedicated clearing infrastructure. Muqassa, the Saudi central counterparty clearing house, has been established to provide clearing and settlement services for derivatives transactions. Muqassa’s creation was a prerequisite for derivatives trading, as central counterparty clearing is essential for managing the counterparty risk inherent in derivatives markets.

International Benchmarking. The Saudi Exchange has benchmarked its derivatives market development against leading international exchanges, drawing on the experiences of exchanges including CME Group, Eurex, ICE, and SGX. The benchmarking has informed decisions about product design, trading rules, margin requirements, and clearing procedures, ensuring that the Saudi derivatives market meets international institutional standards from its inception.

Impact on Market Quality. The introduction of derivatives is expected to improve overall market quality on Tadawul by enhancing price discovery (derivatives markets provide additional information about market expectations), increasing liquidity (derivatives trading generates additional order flow in the underlying cash equity market), and attracting institutional investors (many institutional investment mandates require the availability of derivatives for risk management purposes).

ESG Disclosure Requirements

The CMA has introduced environmental, social, and governance (ESG) disclosure requirements for Tadawul-listed companies, reflecting the growing importance of ESG factors in global institutional investment and the Kingdom’s own sustainability commitments under Vision 2030 and the Saudi Green Initiative.

Disclosure Framework. The CMA’s ESG disclosure framework requires listed companies to provide information on environmental metrics (including carbon emissions, energy consumption, water usage, and waste management), social metrics (including workforce diversity, employee health and safety, community engagement, and human capital development), and governance metrics (including board composition, executive compensation, risk management, and anti-corruption policies).

Implementation Timeline. The ESG disclosure requirements have been implemented in a phased approach, with initial requirements focusing on governance disclosures (which were already partially captured under existing corporate governance regulations) and subsequent phases introducing environmental and social disclosure requirements. The phased approach allows companies to develop reporting capabilities and data collection processes incrementally.

Alignment with International Standards. The CMA has aligned its ESG disclosure framework with leading international standards, including the GRI Standards, the TCFD Recommendations (Task Force on Climate-Related Financial Disclosures), and the SASB Standards (Sustainability Accounting Standards Board). This alignment ensures that Saudi ESG disclosures are comparable to those of international peers and meet the information requirements of global institutional investors who use standardized ESG frameworks for investment analysis.

Market Impact. The introduction of ESG disclosure requirements has several implications for the Saudi market. It positions Tadawul to attract ESG-focused international capital (a growing share of global institutional assets are managed under ESG-integrated mandates). It encourages Saudi companies to improve their sustainability practices (disclosure creates accountability and competitive pressure for improvement). And it provides investors with the information necessary to assess ESG risks and opportunities in Saudi-listed companies.

Corporate Governance Reforms

The CMA’s corporate governance reform program has strengthened the governance standards applicable to Saudi-listed companies across multiple dimensions.

Board Independence. The CMA requires listed companies to maintain independent directors on their boards, with minimum independence ratios that have increased over time. Independent directors are defined as individuals who have no material relationship with the company (financial, business, or familial) that could compromise their independent judgment.

Audit Committees. All listed companies are required to establish audit committees composed of independent and non-executive directors with financial expertise. The audit committee is responsible for overseeing financial reporting, internal controls, external audit processes, and compliance with accounting standards.

Related-Party Transactions. The CMA has strengthened regulations governing related-party transactions — business dealings between the company and its directors, major shareholders, or their affiliates. Enhanced disclosure requirements, independent director approval requirements, and shareholder vote requirements for material related-party transactions provide protection against self-dealing and conflicts of interest.

Executive Compensation Disclosure. Listed companies are required to disclose detailed information about executive compensation, including the components of compensation (base salary, bonuses, equity awards), the performance criteria used to determine variable compensation, and the total compensation paid to the highest-paid executives and board members.

Minority Shareholder Protection. The CMA has strengthened protections for minority shareholders, including enhanced voting rights for significant corporate actions (mergers, acquisitions, related-party transactions), appraisal rights (the ability to demand fair value for shares in certain corporate actions), and class-action mechanisms (enabling groups of shareholders to pursue claims against companies for securities violations).

Digital Assets and Financial Innovation

The CMA and SAMA have begun developing regulatory frameworks for digital assets and financial innovation, positioning Saudi Arabia to participate in the evolution of global financial markets technology.

Digital Asset Regulation. The Saudi regulatory approach to digital assets has been cautious but progressive, with the focus on establishing clear regulatory parameters before enabling broad market participation. The development of a regulatory framework for tokenized securities (traditional financial instruments represented in digital token form) is expected to precede any broader regulation of cryptocurrency trading or issuance.

Open Banking. SAMA’s open banking framework, which mandates data sharing between financial institutions and licensed third-party providers, is creating new possibilities for capital markets innovation, including account aggregation services, automated investment management, and integrated financial planning tools.

RegTech and SupTech. The CMA and SAMA are investing in regulatory technology (regtech) and supervisory technology (suptech) capabilities, using AI and data analytics to improve the efficiency and effectiveness of market supervision. These investments are expected to enhance the CMA’s ability to detect market manipulation, insider trading, and other market abuses while reducing the compliance burden on market participants.

Pathway to Developed-Market Status

The ultimate measure of Saudi Arabia’s capital markets reform agenda may be the question of whether the Kingdom can achieve reclassification from Emerging Markets to Developed Markets status within the MSCI and FTSE Russell frameworks. This reclassification would represent the pinnacle of capital markets development, placing Saudi Arabia alongside the United States, United Kingdom, Japan, and other developed-market economies in the global equity allocation framework.

Requirements. MSCI’s Developed Markets classification requires meeting stringent criteria across economic development (GNI per capita above defined thresholds), market size and liquidity (defined minimums for market capitalization and trading volume), and market accessibility (including openness to foreign investors, settlement efficiency, short-selling availability, and other operational criteria).

Current Gaps. Saudi Arabia currently falls short of Developed Markets classification in several areas, including GNI per capita (which, while high in absolute terms, is sensitive to oil price fluctuations), certain market accessibility criteria (particularly around short-selling restrictions and derivatives availability), and some institutional quality metrics. The reform agenda is systematically addressing these gaps, and the trajectory suggests that Developed Markets classification could become feasible within the next decade.

Strategic Implications. Reclassification to Developed Markets would trigger a fundamental restructuring of capital flows into Saudi equities, as the Kingdom would move from the EM allocation category (where it competes for allocation alongside China, India, and other emerging markets) to the DM category (where it would compete for allocation alongside the US, Europe, and Japan). The net flow impact is uncertain — DM allocation pools are larger but Saudi Arabia’s weight within DM would be smaller than its current EM weight — but the reputational and institutional implications of DM classification would be substantial.

Short-Selling and Securities Lending

The development of short-selling and securities lending frameworks has been a significant component of the Saudi capital markets reform agenda.

Securities Lending. The CMA has introduced regulations permitting securities lending — the temporary transfer of securities from a lender (typically a long-term holder) to a borrower (typically a trader or market-maker) in exchange for a fee. Securities lending improves market efficiency by enabling short-selling, facilitating market-making, and providing additional income for long-term investors.

Short-Selling. Covered short-selling (selling securities that have been borrowed through a securities lending arrangement) is now permitted on Tadawul, subject to regulatory safeguards including uptick rules, position limits, and disclosure requirements. Short-selling improves price discovery by allowing investors to express negative views on specific securities, contributing to more efficient pricing and reducing the risk of asset bubbles.

Impact on Market Quality. The introduction of securities lending and short-selling has improved Tadawul’s market quality by reducing pricing inefficiency, increasing trading liquidity, and providing additional tools for risk management. These capabilities are particularly important for international institutional investors, many of whom require the ability to short-sell as part of their portfolio management and hedging strategies.

Investor Education and Market Participation

The CMA has implemented comprehensive investor education programs designed to broaden market participation and improve financial literacy among Saudi investors.

Retail Investor Programs. The CMA’s retail investor education programs cover topics including securities market basics, investment analysis, portfolio diversification, risk management, and the identification of investment fraud. These programs are delivered through online platforms, in-person workshops, and partnerships with educational institutions.

Institutional Development. The CMA has supported the development of the domestic institutional investor base through regulatory frameworks for mutual funds, private funds, and alternative investment vehicles. The growth of the domestic institutional investor base reduces the market’s dependence on retail trading and contributes to more stable and efficient market dynamics.

Forward Trajectory

Saudi Arabia’s capital markets reform agenda shows no signs of deceleration. The CMA’s stated vision is to make Tadawul one of the top ten global exchanges and to establish Saudi Arabia as a financial services hub for the Middle East and North Africa region. The reform trajectory encompasses continued regulatory modernization, derivatives market expansion, ESG framework development, fintech and digital asset regulation, and the sustained improvement of market quality metrics that will position the Kingdom for potential developed-market classification.

The reform agenda has already achieved remarkable results — transforming a closed, retail-dominated market into an open, institutionally-sophisticated exchange within less than a decade. The next decade will determine whether the reforms can produce a truly world-class capital market that stands alongside the leading financial centers globally.

For the exchange overview, see Tadawul Overview. For MSCI inclusion dynamics, visit MSCI Inclusion. For foreign investor access, see Foreign Investors. For the banking sector implementing many reforms, see Banking Sector. For the IPO pipeline benefiting from reforms, visit IPO Pipeline.