- A real-time, transparent lending system managed exclusively through MCDR.
- Lending requests are prioritized based on three standardized criteria.
- Participating firms must meet strict requirements across three primary pillars.
- Transactions require 150% initial collateral, comprising full share value plus a 50% cash margin.
- Daily re-valuation of borrowed securities and collateral based on closing prices.
- A maximum cap of 5% for a single lender and 2% for a single borrower of the listed company’s total free-float shares.
Financial Regulatory Authority (FRA) has issued a new regulatory framework governing Short Selling. Designed to enhance market efficiency, boost liquidity, and deepen the exchange, the mechanism aims to stabilize trading while safeguarding investor rights. The new system is built upon the following pillars:
- Centralized Lending System
The regulations mandate a Centralized Lending System characterized by transparency and real-time oversight. Operations are conducted exclusively through the execution agent, Misr for Central Clearing, Depository and Registry (MCDR).
The decree – issued by the Authority prior to Dr. Mohamed Farid’s appointment as Minister of Investment and Foreign Trade – defined the priority criteria. Lending orders are executed based on the lowest offered lending rate, followed by the longest duration, and finally, the time priority of order entry into the system.
A 150% pre-execution cash collateral is mandatory for all open positions. This comprises 100% of the borrowed securities’ value and a 50% cash margin, subject to approved alternative collateral guidelines.
- Key Requirements for Brokerage Firms
To ensure robust risk management, FRA has established a three-pillar compliance framework for brokerage firms:
- Solvency & Capital Adequacy: Net shareholders’ equity must be at least EGP 5 million for standalone short selling activity, or EGP 10 million if combined with margin trading. Firms must maintain a minimum Liquid Capital Ratio (LCR) of 15% for the six months preceding their application.
- Technical & Operational Efficiency: Firms must establish a specialized department with at least three certified experts. Additionally, they must implement advanced accounting systems – validated by an external auditor- to ensure compliance with record-keeping and internal audit requirements.
- Integrity & Client Asset Protection: Firms must have a clean regulatory record (no judicial rulings or administrative measures) for the six months prior to the application. Furthermore, “Security Margins” must be held in segregated accounts and may only be invested in fixed-income instruments upon client agreement.
III. Concentration Limits & Regulatory Caps
To maintain market stability and prevent price manipulation, FRA has set the following exposure limits:
- Borrowable securities may not exceed 25% of a listed company’s total free-float shares.
- A single lender (and its related group) is capped at 5% of free-float shares, while a single borrower (and its related group) is capped at 2%.
- Daily Oversight & Margin Call Mechanisms
A rigorous monitoring system ensures collateral adequacy throughout the lending period:
- Borrowed securities and all provided collateral are revalued daily based on stock exchange closing prices.
- If collateral value drops to 140%, the client must replenish it to 150% within two business days. Failure to comply triggers an automatic buy-back/return of shares without further notice.
- Financial Rights & Mandatory Termination
FRA ensures that original owners (lenders) retain their economic interests:
Lenders retain all financial rights, including cash dividends, bonus shares from capital increases, subscription rights, and any other corporate actions.
The decree also outlines the mechanisms for returning shares, which can be executed either through the borrower’s existing securities balance or by re-purchasing shares from the open market using the sale proceeds.
The decree specifies three cases that necessitate the immediate termination of the lending process to ensure the stability of legal positions.
- The security is removed from the list of eligible short-selling stocks.
- Legal actions occur, such as asset freezes, disposal bans, or the death of the investor.
- Corporate restructuring, including mergers, acquisitions, tender offers, demergers, or liquidation.