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Monday, 13 March 2023

A new lending pool to resuscitate short selling?

The Financial Regulatory Authority (FRA) could within days create a central “lending pool” in cooperation with Citibank through which investors can engage in short selling, Al Borsa reports, citing FRA boss Mohamed Farid. The regulator has been discussing amendments aimed at boosting short selling with EGX representatives and clearing house Misr for Central Clearing and Depository (MCDR), according to Al Borsa.

How it would work: Investors who want to short a certain stock currently have to approach and sign contracts with the custodian and broker of that specific security. The lending pool would streamline the process, giving investors access to any of the securities licensed for short selling in one place without having to approach custodians and brokers, according to the news outlet. MCDR would manage the lending pool.

Short selling? When investors think the share price of a company is set to fall, they try to make money on that stock by shorting it. They borrow shares from a broker, sell them immediately, then later buy them back, or “close out” their position, at a (hopefully) lower price and return them, pocketing the difference minus fees. Short selling is a riskier form of investment as there’s theoretically no limit to the level of losses investors can rack up if they make a bad pick. The opposite play is known as taking a long position, where an investor buys a security with the hope that its value will rise over time and net them gains.

We knew this was coming: Authorities have in recent months been working with Citibank and other foreign investors and experts on best practices to boost short selling activity and improve clearing procedures in the country. The EGX last year increased the list of securities eligible for short selling to 66. Short selling was launched for around 30 securities on the bourse back in 2019 but has so far failed to take off.


Our futures exchange is expected to launch before year end: The country’s long-anticipated futures exchange is expected to launch in 6-8 months, Farid is quoted as saying. The FRA approved the ownership structure of the exchange and any related clearing companies “months ago,” he added. EGX boss Ramy El Dokany in December said the bourse was aiming to finalize the exchange’s ownership structure in 1Q 2023.

What’s the hold up? Some technical issues around futures contracts still need to be studied and reviewed, including “determining risk ratios and volatility rates,” according to Farid. The FRA had initially hoped to launch the exchange by the end of 2022. The plan is for the exchange to initially allow traders to buy and sell index futures contracts, before launching stock futures, and stock and index options at a later date.

Ownership limits on new futures clearing companies to be scrapped: A 10% limit on the stake each investor can hold in new clearing companies that will serve the futures exchange will be scrapped under the new amendments set to land this week, Farid said. Clearing companies will need to pay in a minimum EGP 25 mn in capital to register with the regulator and have capital of around EGP 100 mn to start operations, he added.

We only know of one clearing company in the works — and there doesn’t seem to be any private-sector involvement: State-owned banks and the EGX will be allowed to own stakes in the clearing company authorities are setting up for futures trading.

Who’s involved? The regulator has allocated at least 75% of the exchange to financial institutions that meet solvency standards and / or with experience in futures contracts. The National Bank of Egypt, Banque Misr, Banque du Caire and United Bank all reportedly want a piece of the potential exchange.

Futures trading? Futures are derivative contracts where a buyer and a seller exchange an asset at a future date at a price they both agree upon in advance. Check out our explainer on all things futures here.

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