Egypt’s Financial Regulatory Authority (FRA) is considering amendments to the regulations of the securities borrowing mechanism for short selling purposes which would increase the role of the Misr for Central Clearing, Depository and Registry (MCDR) company, while other amendments are concerned with the form of guidance contracts of brokerage firms for the execution of short selling operations.
Mohamed Maher, chairperson of the Egyptian Capital Market Association (ECMA), said the association made a list of the necessary amendments to the short selling operations and discussed them with the Capital Market Advisory Committee of the FRA to prepare a final draft. The committee submitted the draft to FRA’s board of directors for approval.
Maher told Daily News Egypt that the amendments include providing MCDR a screen to feature the shares offered for borrowing thus brokerage firms can know the shares available for borrowing and reserve them. Therefore, MCDR will operate like a platform to show the shares available for borrowing to ease the burden on brokerage companies in finding the party willing to offer its shares for borrowing, a problem facing many brokerage firms, especially small ones. Some of those companies may have the borrower but cannot find lenders.
The second amendment is concerned with the form of guidance contracts of brokerage firms for the execution of short selling operations. It is to be a unified form that all companies have to adhere to it. It would be a bilateral contract between the brokerage firm and the borrower or between the brokerage firm and the lender, instead of the tripartite contract between the three parties, which was confusing for the probability that the lender and borrower can be from different companies.
Daily News Egypt learned from informed sources that FRA will soon meet with MCDR to discuss possible ways to display the available shares for borrowing through the company.
Managing Director of MCDR, Tarek Abdel Bary, said his company is fully prepared to provide a screen through which all brokerage firms can be informed of short selling shares, noting that the company’s technological infrastructure can handle the role. He affirmed that MCDR will not hesitate to support and contribute to the activation of such important mechanism in the market.
Regarding the possibility of holding training sessions of short selling for brokerage firms at the MCDR, Abdel Bary explained that the short selling mechanism is similar to margin trading, noting that those firms which are familiar with margin trading will face no problem in practicing short selling.
Mohamed Farid, chairperson of the Egyptian Exchange, said he recently met with the ECMA to learn about brokerage companies’ views about the short selling and the reasons behind their reluctance to use this mechanism. He added that these mechanisms cannot succeed if companies do not want to use them.
Brokerage companies interested in short selling with reservations
Moataz Ashmawy, managing director of Arabeya Online Brokerage, criticised his company and other similar companies’ exclusion from the short selling mechanism amendment negotiations.
The amendments should not be limited to the form of brokerage contracts, but rather include other important aspects such as reinvestment of sale proceeds of short selling, explaining that there is no standard measure for these proceeds, which would be chaotic for many customers.
He added that the technological infrastructure of needed for short selling mechanism is unclear to neither brokerage firms nor developer companies, so it is necessary to hold meetings between both sides, organised by the regulators, before the application of the mechanism.
Ashmawy called for holding an expanded dialogue with all parties involved in the market to identify the problems of each party and discuss possible ways to overcome them, especially for small brokerage firms, which Ashmawy considered as the most firms that face problems when applying new mechanisms.
He stressed that large brokerage firms can easily find lenders and borrowers because of their large base of customers, while the small companies cannot find lenders easily because they do not necessarily have large customer base, so small brokerage companies cannot practice short selling without the proposed screen featuring the available shares at MCDR.
Ashmawy revealed that his company will be one of the first companies that will work with the mechanism of short selling, once the required technological infrastructure of the company is ready.
Shawkat El Maraghy, managing director of HC Securities, stressed the need for a bilateral contract between brokerage companies and lender or between brokerage companies and borrower where it is difficult for the contract to be tripartite, especially that the small brokerage companies will not be able to provide both lender and borrower.
He said that his company is waiting for the final amendments to the short selling to evaluate its feasibility and decide whether they will adopt the mechanism or not. However, he stressed that the company is always positive in regard with new mechanisms out of its desire to provide all services to its customers.
Although none of brokerage firms has yet applied for a license to operate with the short selling mechanism since the FRA has issued its regulations last February due to the companies’ reservations about some of the mechanism’s procedures, many firms showed their interest to work with the new mechanism as soon as the regulators listen to their opinions, including Mubasher, Arabeya Online, Commercial International Brokerage Company (CIBC), Arqam, Naeem, Pharos, HC, Prime, and Pioneers.
The FRA has issued last February the regulations of securities lending, which require brokerage firms to manage the securities lending system, provide both the borrower and the lender, follow up the cash guarantee, reinvesting the sale proceeds, and provide customers with the return on investment.
The controls set the ratio of securities available for lending at 20% of the total number of securities for the issuing company, provided that the ratio of a single client to the lender does not exceed 5% of the total number of shares issued by the company. The ratio of each customer and its related group shall not exceed 0.5% of the total issued shares. The controls also require brokerage companies to invest cash guarntee in fixed-income investment instruments (bank deposits, treasury bills, central bank deposit certificates). The Egyptian Exchange and MCDR are to prepare and equip the automated systems and the technical requirements of the mechanism and notify the FRA prior to activation.
The mechanism allows stock traders to borrow shares from their holders for a fixed period of time for a specified fee for the purpose of selling after borrowing, hoping that the price will decline during that period to buy them again at a low cost and return them to lenders.
The conditions for licenses of short selling stipulate an equity of EGP 5m up to EGP 10m in case of practicing margin trade along with short selling, in addition to a line linking all parties of the capital market, providing efficient infrastructure, and lack of any punitive measures against the brokering company and the presence of a specialised department with at least three persons.
