Chairperson of the Financial Regulatory Authority (FRA) Mohamed Farid has revealed that the authority is in the process of making legal amendments to allow companies to establish subsidiary clearing companies to settle future contracts with no maximum stake in the capital.
The FRA approved several months ago the ownership structure of the “Futures Exchange” and its “clearing” companies, and that each company will be allowed to hold a maximum 10% stake in its clearing company.
According to the amendments to the Capital Market Law, futures contracts whose value is derived from financial or in-kind assets, price indices, commodities, or others determined by the Authority will be traded on that stock exchange.
Farid said that an amendment will be made to allow the entity that has experience in organizing trading and full knowledge of all aspects of the process to be the main shareholder in the company to be established for futures trading and settlement, stressing that the amendments will be more appropriate to the current market situation.
He added, in an interview with Daily News Egypt, that the amendments expected to be issued will allow those who wish to establish a futures clearing company to pay EGP 25m initially of the capital, which is scheduled to be in the range of EGP 100m, to obtain the license, provided that the rest of the capital is paid before starting operation and practicing activity.
Farid further added that these companies will work in a sector that requires a certain amount of technical and technical knowledge, so the necessary technical requirements must be met, and he has sufficient experience in that industry, in addition to the necessary technological systems, which are expensive.
Farid mentioned that those who have experience in this industry are usually the stock exchanges, clearing companies, and depository companies, especially since they have sufficient experience in settlement in the stock markets, bearing in mind that the settlement of futures contracts is different from stocks due to the nature of the risk, explaining that they can have the desire to establish futures clearing companies.
He stressed that after these steps, the rules for the settlement itself, risk management, and contracts for self-delivery will be determined from cash delivery, pointing out that 98% of the markets apply the rules of cash delivery.
Farid also said that the rules that the authority will apply with regard to the settlement of futures contracts will take into account self-delivery through specific cases, as well as the requirements for margin purchase in futures contracts and options contracts.
He stressed that the future price that will be determined in the contracts is based on “unweighted” rates, which makes the seller and buyer not pay money in the contract.
He added that the guarantee that will be taken to ensure the implementation of the contract will range between 5-10% of the contract value, to be collected by the seller and buyer of the future contract to ensure its implementation, especially since at the end of the contract there will inevitably be a losing party.
Farid stated that the percentage of the guarantee will vary from one contract to another according to the risks based on the fluctuations related to the type of the contract, and it is determined based on an agreement between the Egyptian Exchange and the futures settlement company until a date of trading is recorded.
He pointed out that the law will stipulate obligations for the members of the board of directors of the clearing company and the settlement of futures contracts, especially the use of guarantees and their amendment on a daily level, explaining that the clearing company is at the interface of dealing with the stock exchange.
It is likely that the futures exchange will be launched within a period ranging from 6 to 8 months, explaining that the launch of the exchange is linked to the establishment of the futures contract settlement company.
“There are many details related to the issuance of the stock exchange, including determining risk ratios in contracts, volatility rates, and other technical matters that need extensive study for their issuance in a controlled manner,” Farid said.
He pointed out that the law allows the Egyptian Exchange to trade futures contracts, and regulated that process, explaining that the law regulated the possibility of establishing the Egyptian Exchange “future contracts” in a separate company, or through internal trading, explaining that the matter is up to the stock exchange itself and its estimates of the financial costs and financial affairs related to the project.
Regarding government offerings, Farid revealed that the authority is studying the listing of 2 to 3 companies within the government offerings program, which includes 32 companies announced by the Prime Minister.
He added that the FRA gave the registered companies a period of 6 months until the implementation of the offering, stressing that the new amendments have paid off at the level of companies’ registration.
Farid added that the financial regulator is in the process of making amendments to the “short selling” mechanism, which will be announced within days, after discussion with market parties from the Egyptian Exchange and the Misr for Central Clearing, Depository, and Registry (MCDR), explaining that the main objective is to activate that mechanism.
He explained that the new amendment will be through the creation of a central credit pool in cooperation with Citibank, provided that this pool is managed through the MCDR.
Farid explained that the amendment would allow the client to deal with the pot individually, or through the old method, which represents the short sling, a tripartite contract between the broker, the custodian, and the client, which did not witness spread.
The “Short Selling” mechanism is about selling a security before you own it with the aim of buying it later at a lower value, and then making a profit equal to the difference between the open sale price and the purchase price minus the interest paid by the investor in return for borrowing the security in the period between buying and selling.
