CAIRO: As the Egyptian capital market seeks new ways to build shareholder value and trust, overall risk management becomes increasingly critical for participants and regulators of the market.
Even more so, with the launch of second level investment tools and trading positions, such as short-selling or margin-trading being offered under license to brokerage firms by the Egyptian Capital Market Authority (CMA) over the next year.
From the perspective of listed companies and financial institutions, risk management is the process of analyzing, reporting and monitoring the balance between an organization’s strategy and the risks attached to business decisions and, ultimately, how that affects shareholders’ position.
Senior officials at brokerage firms explained to Daily News Egypt how the overall risk of an organization is broken down into different categories, all of which are interrelated: strategic, financial, operational, system, regulatory and people risk.
Contrary to popular belief, risks are not always hazards to be avoided. In many cases, they are opportunities to be embraced.
When an organization opens a branch in a new market, for example, studies are conducted to evaluate the risks attached, which come as a result of operating in a different business environment, under a new set of regulations, with different process and new people. While risky, these factors can create value to the company and shareholders.
Mohamed Aboul Ghait, deputy managing director of operations and compliance at Pharos Holding, said that risks become a problem when they are mismanaged or are unexpected. If the risk is a “surprise, he said, it “causes volatility to company performance and value.
The importance of risk management, he said, is that it forces listed companies, banks and financial institutions to analyze their business position so they can perform better. They also have to disclose that position so there is transparency between the company and investors as well as other market participants, who base their decision on information and research released by the company.
Aboul Ghait emphasized that risk management legislation “was developed to guarantee governance and shareholder (and not only company) protection.
Providing accurate and timely information to individual investors is central to the functioning of a fair market.
Angus Blair, head of research at Beltone Financial, shared some aspects of risk management within brokerage firms. “With brokerage, we are only trading in listed stocks, so in the ‘getting to know you’ process where we go through a significant list of questions with the client, we include a risk profile of the client, and we try to cater our service to that particular client.
“In that sense, the risk is actually on the client because whenever they want to trade the position is entirely theirs.
Beltone’s Cairo office boasts an in-house research department where extensive reports are researched to their London standard. This type of in-depth analysis, as well as technical share-price listings, announcements and end of trading day summaries, are forms of financial advisory services or risk management that investors should seek.
To trade in the market today, a client must have cash in place to purchase securities with their broker. However, this is changing as new trading positions are introduced to the market, accompanied by new elements of risk
In margin-trading, for example, “an investor will be able to pay a fee (a margin) on certain stock. If it goes down then the risk would be on the brokerage firm to ensure they have collateral on the other side to pay if the client were to lose from this investment. Blair said.
The regulator’s function in the capital market is to implement risk management functions into listed companies and financial institutions, and to monitor and reprimand participants who are not in compliance.
Omar Radwan, executive director of HC Asset Management, shed light on the current changes. “The Egyptian authorities have put in place the guidelines that govern several tools such as short-selling, margin-trading and exchange traded funds (ETFs). The new Stock Market Trading Platform even allows trading of derivatives. Market participants including HC have to conduct careful analysis of the effects of such products on the market and train their staff extensively to ensure safety of capital invested on behalf of clients.
The implementation process in Egypt is driven by regulators in the form of corporate governance, where checks and balances are put into place for protection, including information technology (IT) systems, people development and financial controls.
In Egypt, “the Capital Market Authority is developing a capital adequacy act which mitigates the liquidity risk and internal financial structure of brokerage companies, said Aboul Ghait, as well as “money laundering legislation with obligatory compliance by all companies and disclosure requirements for all listed companies to provide transparency.
Katharine Rowlands, head of internal audit and risk management at Beltone Financial, said that “risk management is still developing globally in terms of finding its structure and agreed practices.
It is critical to integrate risk management functions into business’s activities as opposed to performing them as a side function, she added.
HC’s Radwan said, “Even professional investors can be lured into investments they do not entirely understand, which occurred during the sub-prime market crisis in the US. Rating agencies granted certain offerings ‘AAA’ credit ratings without realizing the true nature of such offerings, which then collapsed when the real estate market turned around.
Risk management is a work in progress even in the developed capital markets of the United States and Europe, agreed the experts. Global investment banks get caught off-guard in an increasingly sophisticated and high-risk environment.
As increasingly sophisticated, higher-risk trading positions yield growth for the capital market, attention to corporate governance and thorough investigation into irregular transactions become more critical.
Radwan ties it together, saying “Regulatory bodies in Egypt.will need to monitor the markets closely when these tools become active until participants gain enough expertise. Self-governing bodies also have a role to play.
With the right systems in place, new trading positions and financial tools are set to spur further – and much anticipated – growth in Egypt’s capital market.
As Angus Blair said, “The Egyptian market is much more mature than almost all other regional markets, and I think.that level of maturity gives it greater depth and hopefully greater trust from all participants in the market.
To read the other stories in our bi-monthly special focus on Egypt s capital market, click here:
http://www.thedailynewsegypt.com/article.aspx?ArticleID=15717
http://www.thedailynewsegypt.com/article.aspx?ArticleID=15716
