CAIRO: Egypt’s financial regulator outlined a set of control mechanisms ahead of the stock market’s expected opening, including preventing transactions by investors whose assets have been frozen.
The Egyptian Financial Supervisory Authority outlined a set of control mechanisms and policies to be implemented when trading resumes on the Egyptian Stock Exchange, which has been closed since Jan. 27.
Measures will be taken to prevent transactions by individuals whose assets have been frozen by the prosecutor general, the statement read without providing details.
According to the statement, this will involve contacting all brokerage firms and making sure they do not proceed without prior consent or orders from relevant authorities, prohibiting transactions for those who have already been sentenced and ensuring coordination with all foreign financial entities to deny access to offshore accounts.
The stock market closed after falling almost 20 percent and losing LE 69 billion ($11.74 billion) of its value late last month. Its opening has been delayed several times, most recently due to an emergency banks closure last week. It has not yet announced when it will reopen.
According to a statement released Sunday, the authority justified the decision to suspended trading in the past weeks of unrest, saying that it awaits the return of the environment necessary for the resumption of trading to protect the rights of institutional as well as individual retail investors.
“I agree that there is a need to resume transactions in the stock market and there are some pending risks. Absent of guidelines to contain the risk, the stock market could plunge which could cast further clouds on the economic outlook of the Egyptian economy,” Magda Kandil, director of research at the Egyptian Center for Economic Studies, said.
The decision to resume trading on the stock market should await clear evidence of stability in the financial system following the reopening of banks Sunday.
Kandil agreed with the “guidelines for surveillance of transactions by suspected traders and the emphasis to separate the company’s financial positions from the clouds that could be hanging over some shareholders.”
The authority grouped the controls mechanisms into five categories, the first of which aims to reduce a sharp fluctuation in prices.
After reducing trading hours from 10:30 am to 1:30 pm instead of 2:30 pm, it was also decided to cancel posting of the normal pre-session exploratory prices before trade opens, restricting price fluctuations by suspending trading for a half hour if the EGX 100 falls by 5 percent as well as suspending trading for a period of time specified by the head of the exchange if the fluctuations exceed 10 percent.
For specific stocks, the market regulator set the same regulations for a change in price of 5 percent; and if the change exceeds 10 percent, trading is to continue at the same price until the end of the session.
The regulator reduced the minimum percentage of net liquid capital for brokerage firms with respect to financial solvency to 5 percent of the total obligations instead of 10 percent, and suspended same-day trade.
Margin trading and buying on credit was cancelled, and limits were placed on price fluctuations of Nilex listed companies to a decrease of 5 percent compared to the previous day.
The stock exchange will require listed companies to disclose the ownership of any individuals with legal proceedings against them, as well as disclosure of the financial and operational positions of their companies during the period of suspension of the stock market
To reduce the negative impact on small retail traders of shares bought on margin or through funding from financial intermediaries, brokerage firms are required to notify the clearing company of any purchased shares through debt or on margin before the start of trading and limiting trading of these shares.
To stimulate demand in the market, the third goal of the regulations, the authority calls for the coordination of initiatives launched recently by Egyptian citizens calling on the public to invest in the stock exchange, facilitating share of treasury bills, encouraging leading financial institutions to invest to support the market and communicating with global or regional stock exchanges and financial institutions.
The authority vowed to preserve the interests of brokerage firms and their employees by coordinating on how they can benefit from the Ministry of Finance fund to compensate for property damage that occurred during the early days of the revolution.
The finance ministry will provide funding for brokerage firms under the Settlement Guarantee Fund to be used for current expenditures in order to preserve the rights of workers in companies so that companies recover their ability to work fully, and finally the regulations would reduce the regulatory fees and services charges paid to the stock exchange or the authority in next three months.
Karim Helal, CEO of CI Capital, pointed out that the measures proposed are intended to achieve stability and limit downward spiral and to protect small retail investors adding that it remains to be seen whether they will work.
Although Helal was cautions in his analysis of the regulations, he remained optimistic about the performance in general.
“I don’t think we will see a collapse in price level as a result of panic selling as was the case in the wake of the 2008 global crisis, because the tide was clearly in favor of the revolution and what it stood for culminating in president Mubarak ceding power, as GDR prices shot up, and CDS cost went sharply down reflecting foreign investors positive view of events,” he said.
He added that there is a very concrete and heightened spirit of patriotism and a renewed sense of ownership of the country, which he believes will go a long way to support the market and prevent a wave of panic selling form retails investors.
“There will surely be some selling pressure particularly in the first few days, let’s not forget that many investors had the cash locked in for nearly a month and there will surely be some need to liquidate, after which I believe the market may well show some stability and even upward trend given what will be deemed as good bargains,” he concluded.
Kandil stressed the need for more financial reform in the long run.
“While I am sympathetic to the need to enforce these guidelines, they will only succeed to contain risk in the short horizon. Absent of improved economic and political fundamentals, I am afraid these guidelines could only serve to cast additional clouds on the economy and may not succeed to contain impinging risks,” she said.
According to Kandil, authorities should mobilize demand for what could be considered bargains in the stock market once it resumes operations.
