Decision No. 67 of 2014 of the Board of Directors of the Authority Regarding the Regulation of Securities Brokerage Companies and Custodians Engaging in Margin Trading

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Egyptian Financial Regulatory Authority Decision No. 67 of 2014 of the Authority's Board of Directors Date: 27/4/2014 Regarding the Regulation of Securities Brokerage Companies and Custodians Engaging in Margin Trading

The Board of Directors of the Egyptian Financial Regulatory Authority Having reviewed: Capital Market Law No. 95 of 1992 and its Executive Regulations: Central Depository and Registration of Securities Law No. 93 of 2000 and its Executive Regulations: Law No. 10 of 2009 Regulating Supervision over Non-Banking Financial Markets and Instruments: Presidential Decree No. 191 of 2009 on the Rules Governing the Management of the Egyptian Exchange and Its Financial Affairs: Presidential Decree No. 197 of 2009 Issuing the Statute of the Egyptian Financial Regulatory Authority: Authority Board Decision No. 36 of 2014 Regarding the Rules and Conditions for Securities Brokerage Companies and Custodians Engaging in Margin Trading: Positions of the Authority's Board of Directors in its meeting held on 27/4/2014: And upon the proposal of the Egyptian Exchange:

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DECIDED:

(Article 1) Securities brokerage companies and securities custodians are required to obtain the Authority's prior approval to engage in margin trading, in accordance with the procedures and conditions set forth in this Decision. To apply for the Authority's approval to conduct margin trading, the net shareholder equity of the securities brokerage company or custodian must not be less than five million Egyptian pounds, and the amount allocated by the custodian from banks must not be less than five million Egyptian pounds.

(Article 2) Securities brokerage companies or custodians wishing to obtain approval to conduct margin trading shall submit a request to the Authority for such approval, accompanied by the following:

1. A statement of the company's net liquid capital and total liabilities as of the last working day of the month preceding the request date, according to the form specified by the Authority's solvency standards for securities companies, signed by the Chief Financial Officer and Managing Director of the company, accompanied by the auditor's report on reviewing this form.
2. The latest approved annual financial statements, or subsequent periodic financial statements, accompanied by the auditor's report on reviewing or examining these financial statements.
3. A commitment to increase the value of the insurance deposit submitted by the company to the Authority to correspond with the risks of the activity, with the Authority determining the increase amount based on the volume of operations conducted by the company.
4. Documentation confirming that no administrative measures or penalties have been issued by the Egyptian Exchange or the Authority during the six months preceding the request, except for the measure mentioned in paragraph (a) of Article (36) of the Capital Market Law, provided the company submits documentation confirming it has removed the grounds for it.

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(Article 3) The Authority shall issue its decision regarding the request within two weeks from the date of submission or from the date of fulfilling the requested documents.

(Article 4) Securities brokerage companies or custodians approved by the Authority to conduct margin trading shall comply with the following:

1. Exercise due diligence to verify customers' ability to meet obligations arising from margin trading based on their financial status, investment objectives, available funding sources, and other information available to the company at the time of contracting. The company must reassess the customer's status whenever deemed necessary, and at least once every twelve months, and must maintain records and documents evidencing this.
2. Enable the Authority and the Exchange to access and obtain all data and documents related to margin trading, and provide such data upon request by either party via the electronic connection line with the Exchange.
3. Provide the customer, upon concluding the agreement, with a detailed statement explaining the concept of margin trading, procedures, risks, benefits, and fundamental terms thereof. This statement must be sent to each customer at least annually and immediately upon any amendments to the fundamental terms contained in the statement provided to the customer.
4. Maintain separate books and accounts to record margin trading operations.
5. Maintain at all times the minimum net liquid capital as per the Authority's solvency standards.
6. Notify the Authority and the Central Depository and Registration Company in advance of the amount allocated for margin trading (including any auxiliary loans designated for this purpose, if any), and retain supporting documents for these amounts.
7. Notify the Central Depository and Registration Company via the electronic connection line of any margin trading operation on the same day of execution.

(Article 5) A customer wishing to buy on margin must pay in advance to the brokerage company or custodian an amount not less than (50%) of the price of the securities purchased on their account, which shall not be less than (20%) for government bonds, or provide and place under the custody of the brokerage company or custodian one of the following guarantees of equivalent value: (a) Unconditional bank guarantees issued in favor of the brokerage company or custodian by a bank or branch of a foreign bank subject to the supervision of the Central Bank of Egypt. (b) Deposits with a bank or branch of a foreign bank subject to the supervision of the Central Bank of Egypt, provided they are frozen at the bank in favor of the brokerage company or custodian and are deliverable upon demand without requiring customer monitoring, to be valued at (90%) of the original deposit amount. The customer may also place the following securities under the custody of the brokerage company or custodian as acceptable guarantees: (a) Securities purchased on their account:

• Egyptian government bonds, provided they are pledged in favor of the brokerage company or custodian and valued at (100%) of their market value. (b) Securities meeting the standards set by the Exchange and approved by the Authority, and accepted by the brokerage company or custodian as guarantees, to be valued at (100%) of their market value, subject to the provisions of the preceding article of this Decision.

(Article 6) Securities brokerage companies and custodians approved by the Authority to conduct margin trading shall comply with the following conditions when trading:

1. Not conduct margin trading except on securities meeting the standards set by the Exchange and approved by the Authority.
2. The total financing provided for margin trading operations shall not exceed the amount allocated for this purpose.
3. The leverage ratio for a single customer shall not exceed (15%) of the funds available for margin trading operations, provided that the ratio does not exceed (20%) for the trader and their affiliated group. The affiliated group refers to any group of customers subject to the actual control of the same natural or legal persons. The Authority or the Egyptian Exchange may request data on any affiliated group to be traded with margin trading at any time.

(Article 7) Securities brokerage companies and custodians shall accept Egyptian government bonds provided as guarantees from all customers at (100%) of their market value. Securities brokerage companies shall also conduct margin trading in accordance with the standards set by the Exchange and approved by the Authority, preceded by a list of securities accepted by them as guarantees among those permitted for margin trading, as follows:

1. A decision by the company's board of directors or the managing director in the case of a bank custodian shall be issued to determine these securities and the guarantee ratio for each security.

(Article 8) Securities brokerage companies or custodians shall re-evaluate securities provided as guarantees by the customer when their market value changes, according to their market value. If it becomes apparent as a result that the customer's leverage ratio has exceeded (60%) of their market value at the opening price announced by the Exchange, they must notify the customer to reduce this ratio either through cash payment or by providing additional guarantees, and must take this action. The securities brokerage company or custodian may take measures to sell the securities provided as guarantees and liquidate the guarantees provided by the customer to bring the customer's leverage ratio to (50%) of the market value of the margin-purchased securities, or (80%) for government bonds, in the following cases: (a) If the customer fails to reduce their leverage ratio to the aforementioned level within one working day of notification according to the quantity agreed upon in the contract concluded between them, and fails to provide additional guarantees. (b) If the customer's leverage ratio reaches (70%) of the market value of the securities or (90%) of the market value of government bonds. Unless the margin trading contract with the customer stipulates a lower threshold for liquidating the provided guarantees, and after notifying the customer in accordance with paragraph (a) of this Article. The customer's leverage ratio shall be reduced either through cash payment or by providing one of the following guarantees:

1. Unconditional bank guarantees issued in favor of the brokerage company or custodian by a bank or branch of a foreign bank subject to the supervision of the Central Bank of Egypt.
2. Deposits with a bank or branch of a foreign bank subject to the supervision of the Central Bank of Egypt, provided they are frozen at the bank in favor of the brokerage company or custodian and are deliverable upon demand without requiring customer monitoring, to be valued at (90%) of the original deposit amount.
3. Egyptian government bonds, provided they are pledged in favor of the brokerage company or custodian and valued at (100%) of their market value.
4. Securities accepted by the brokerage company or custodian as guarantees in accordance with the provisions of Article 5 of this Decision.

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