الهيئة العامة للرقابة المالية

• New amendments aim to ensure securities companies have sufficient cash reserves to fulfill their obligations and continue serving clients
• Introducing a margin calculation model based on actual cash availability instead of relying solely on equity
• Setting a three-month timeframe for calculating minimum equity requirements
• Short selling is excluded from the cash and cash equivalents upon assessing customer credit coverage
• Adjusting the ‘delivery versus payment’ item to apply a 100% weighting factor for two days instead of four.
• The goal of these amendments is to minimize the risk of disruptions or cash flow issues and provide solutions for all situations where companies report exaggerated set-aside amounts
• Adding settlement account balances at Clearing and Settlement Company to reflect the introduction of new financial instruments.
• Establishing a six-month deadline for companies to reconcile their status in response to FRA’s decree

Dr.  Mohamed Farid – FRA Chairman issued Decree No. 2132 of 2024 which updates solvency standards for securities companies. This decree amends FRA’s Chairman decree No. 14 of 2007 aiming to address evolving circumstances and find solutions to challenges arising from the application of existing rules and procedures. Ultimately, it contributes to reducing liquidity risks and mitigating the risk of disruptions or cash shortages that could hinder the ability to pay clients dues within the settlement period.

The Authority has established guidelines and controls for companies to ensure they calculate net liquid capital in a way that enables them to meet their obligations. Subsequent reviews have highlighted the importance of emphasizing companies’ obligation to calculate net liquid capital in a manner that prevents disruptions that could negatively affect the activity and harm clients’ rights.

Net liquid capital indicates company’s capacity to fulfill financial obligations using cash or easily convertible assets, regardless of their presence on the financial statement.

FRA’s decree introduces a new model for calculating margin requirements of margin trading. As outlined in Annex (C) of company financial statements, the model is based on company equity, representing funds allocated for margin trading. However, this model did not accurately reflect companies’ actual cash liquidity, relying instead on book values of capital, reserves, and dividends. Consequently, several companies reported higher margin amounts for margin trading to the Authority and the Exchange than their actual available fund.

Therefore, this decree restricts companies from notifying the Authority of margin amounts that exceed their actual available cash. Companies will be required to calculate off-balance sheet liabilities in the net liquid capital report with respect to the increase in margin purchase clients’ balances above the maximum limit per client (10%) of the margin amount or the associated group (15%).

An associated group refers to a group of clients that are under the control of the same individuals or entities. This includes individuals related to each other up to the second degree, legal entities with two or more owners where one party controls the majority, and companies that are holding, subsidiary, or sister companies.

On the other hand, the decree exempts fixed asset revaluation item from the calculation of minimum equity for companies approved to conduct specialized mechanisms and activities. These companies are required to have a minimum equity, as per the latest audited financial statements, plus supporting loans, of no less than 15 million Egyptian pounds. Companies falling under this provision will be allowed a three-month period to comply, pursuant to No. 1842 of 2024.

This decree is a continuation of Decree No. 3019 of 2023 that increase the minimum equity requirement for companies engaged in specialized mechanisms and activities from 5 million Egyptian pounds to 15 million pounds.

Also, the decree excluded short selling from the calculations used to determine customer credit coverage. Short selling credit balances are not considered as part of book obligations for financing gap calculations, as they are accounting entries, not actual cash liquidity.

In addition, ‘delivery versus payment’ item, which is included in receivables, has been amended and weighting factor is 100% for only two days instead of four (two days after the settlement date). This aligns with the settlement of the company’s payables, aiming to improve liquidity and keep pace with the latest developments and practical situations that have arisen from the application of the current rules and procedures. This is intended to mitigate risks and is consistent with the nature of the item, as it is related to funding gap equation and its use in covering payables due to creditors. The settlement of these transactions is linked to the standard settlement period “T+2”.

The decree also added settlement account balances at Clearing and Settlement Company in the cash items. This amendment was made to accommodate new financial instruments, such as carbon credits which will be settled by Settlement and clearing Company. Separating these settlements from securities clearing will streamline review and verification process.

The decree provides companies with a 6-month grace period to comply with its provisions. The Authority can extend this grace period if the company provides valid justifications. However, companies with specialized mechanisms and activities must meet the minimum ownership rights stipulated in Decree No. 1842 of 2024, which sets a final deadline of last August for them to reconcile their conditions with the solvency standards for securities companies stated in FRA Chairman decree no.16 of 2007.