Chairman of the Authority Decision No. (218) of 2014

Dated 17/3/2014 as per the latest amendment* Regarding the Regulation of Exchange-Traded Funds Operations

Chairman of the Capital Market Authority

After reviewing the Capital Market Law issued by Law No. (95) of 1992 and its Executive Regulations,

and the Central Deposit and Registration of Securities Law issued by Law No. (93) of 2000 and its Executive Regulations,

and Law No. (10) of 2009 regulating supervision over non-banking financial markets and instruments;

and Presidential Decree No. (191) of 2009 regarding the provisions governing the management of the Egyptian Exchange and its financial affairs,

and Presidential Decree No. (192) of 2009 issuing the Statute of the Capital Market Authority,

and Board of Directors decisions of the Authority Nos. (37, 38, 39, 40) of 2014;

Decided

Scope of Application

Article (1)

The rules contained in this Decision regarding the regulation of Exchange-Traded Funds operations, related disclosures, and obligations of relevant parties shall apply.

The Exchange shall prepare the executive procedures for Exchange-Traded Funds activities, market maker trading rules for these documents, and technical specifications for the market maker's information system infrastructure for Exchange-Traded Fund documents, subject to approval by the Authority before implementation.

Amended by Chairman of the Authority Amendment

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Definitions

Article (2)

The following words and expressions shall have the meanings indicated alongside each:

• Authority: Capital Market Authority
• Executive Regulations: Executive Regulations of the Capital Market Law No. 95 of 1992
• Exchange: Egyptian Exchange
• Index Fund: An open-end investment fund that issues documents in exchange for investing its funds in a portfolio of securities that follow one of the price indices on the exchanges, and its documents are registered and traded on the Exchange.
• Index: A tool for measuring market direction, which is a numerical value measuring the change in prices or values of a group of securities constituting the index.
• Market Maker for Index Funds: The company licensed by the Authority to conduct the activity, which facilitates continuous trading on the documents of the fund it makes a market for and provides permanent liquidity by listing sell offers and buy requests (dual orders) on the fund's documents.
• Index Fund Documents: Represent a common share of the document holder in the net asset value of the Index Fund.
• Document Price: The trading price of the fund's document during the trading session on the Exchange.
• Outstanding Documents: The difference between the number of issued documents and redeemed documents at the end of the trading session.
• Net Asset Value of the Fund: The total market value of the fund's assets valued at the closing price of the securities constituting the fund's portfolio, minus liabilities and all due expenses.

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Article (3)

Indicative Net Asset Value of the Fund: The result of deducting liabilities and due expenses from the total value of the fund's assets valued at the last trading price of the securities constituting the fund's portfolio.

Document Value: The result of dividing the net asset value of the fund by the number of outstanding documents.

Indicative Document Value: The result of dividing the indicative net asset value of the fund by the number of outstanding documents.

Correlation Coefficient: A measure of the degree and direction of correlation between the movement of the fund document price and the value of the index it follows, calculated as set forth in Annex No. (1) of the Index Activity Executive Procedures issued by the Exchange and approved by the Authority.

Tracking Error Ratio: The standard deviation of the difference between the daily change rate in the index value and the daily change rate in the document value, calculated as set forth in Annex No. (2) of the Exchange-Traded Index Funds Activity Executive Procedures issued by the Exchange and approved by the Authority.

Central Deposit and Registration Company: Egypt Clearing, Deposit and Registration Company.

Licensing of the Fund Company

Article (3)

The establishment and licensing of the fund company shall be in accordance with the provisions of the Capital Market Law and its Executive Regulations, subject to the following:

1. The paid-up capital of the fund company shall not be less than five million Egyptian pounds or its equivalent.
2. The volume of funds received by the fund and documents issued against it shall not exceed fifty times the paid-up capital of the fund company.
3. Contracting with the entities listed in Article 4 of this Decision.
4. The fund company's articles of association shall include the data specified in Annex No. (1).
5. The Authority's approval of the methodology used in preparing the index, except for indices issued by Egyptian exchanges.
6. There shall be no affiliation between the Authority, the index issuing entity, and either the investment manager or the market maker.

The Authority shall issue its decision to endorse such licensing within 60 days from the date of submitting complete documents to it.

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Fund Company Contracts

Article (4)

The fund company shall be obligated to contract with the following parties:

1. Investment Manager
2. At least one market maker
3. Index Issuing Entity
4. Custodian
5. Management Services Company
6. Any other entity related to the fund's activity

The fund may, after obtaining the Authority's Board of Directors approval, contract with a single market maker, subject to the provisions of Article (12) of these Rules.

The Authority and the Exchange shall be notified of the aforementioned contracts and any amendments thereto immediately upon amendment.

Fund Company Obligations

Article (5)

The fund company shall be obligated to comply with the provisions governing the activity's budget and any amendments thereto, as well as to provide the Authority and the Exchange with any documents or data requested within the specified deadlines.

Publication of the Offering Circular or Information Memorandum for Index Funds

Article (6)

The public offering circular or information memorandum shall be submitted to the Authority endorsed by the fund company's Board of Directors.

The subscription to the fund's documents may be marketed through one of the companies licensed to market securities subscriptions, financing companies, banks, or other entities licensed by the Authority to receive subscriptions.

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Advertisement or Call for Subscription in Documents

Article (7)

The advertisement for subscription in documents, in addition to the data stipulated in Article 145 of the Executive Regulations, shall include the following:

1. Name of the index fund company.
2. Name of the index targeted by the issuance process.
3. Approval of the entity under whose name the index is registered.
4. Expected issuance volume and currency, number of documents, and nominal value of the document.
5. Name of the subscription-holding bank.
6. Name of the investment manager and companies contracted with as market makers.
7. Methodology for periodic valuation of the fund's net assets and issued documents.

Publication of Public Offering Circular Data and Its Duration

Article (8)

The data of the public offering circular shall be published in two widely circulated Egyptian daily newspapers according to the form prepared by the Authority, and the subscription shall remain open for a period of not less than ten days and not exceeding two months. If not all offered documents are subscribed to within that period, the subscription period may be extended for a period not exceeding two months or for another period, subject to the Chairman of the Authority's approval. The subscription window may be closed if the entire offering value is fully subscribed.

All or part of the offered documents may be subscribed to by the fund's establishing entity alone or jointly with others.

Investment Manager

Article (9)

The fund shall entrust the management of its activity to an entity experienced in managing investment funds, referred to as: the Investment Manager. It shall be ensured that those conducting the activity and responsible for managing the fund's portfolio possess the necessary qualifications, experience, and competence in accordance with Chairman of the Authority Decision No. 24 of 2007 and any other controls established by the Authority's Board of Directors in this regard.

Investment Manager Obligations

Article (10)

In addition to the investment manager's obligations stipulated in the Executive Regulations of Law No. 95 of 1992, the investment manager shall be obligated to:

1. Form a portfolio of securities in specific proportions of the total securities constituting the index, using the available funds subscribed to, and continuously maintain those proportions in accordance with the regulatory rules for Exchange-Traded Index Funds activities issued by the Exchange and approved by the Authority.
2. Continuously maintain the correlation coefficient between the document's trading price on the Exchange and the index value, in accordance with the rules set forth in the Exchange-Traded Index Funds Activity Executive Procedures issued by the Exchange and approved by the Authority.
3. Register the fund's documents on the securities exchange within a maximum of two months from the date the subscription window for these documents was closed.

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Article (11)

4. Notify the Authority and the Exchange of any material events that may affect the fund's performance and activity prior to the commencement of the next trading session.
5. Redeem documents from those wishing to sell them in the event the market maker is unable to fulfill its obligations by providing sell offers and buy requests for the documents, subject to the exceptional cases stipulated in Article (159) of the Executive Regulations.
6. Deposit the securities constituting the portfolio with one of the custodians on behalf of the fund.
7. All rules governing the activity in accordance with the provisions of the Law and decisions issued by the Authority.

Prohibited Activities for the Investment Manager

Article (11)

Subject to the provisions of Article (183 bis) of the Executive Regulations, the investment manager and its employees are prohibited from trading the securities constituting the index portfolio except after obtaining prior approval from the Authority.

The investment manager is also prohibited from executing transactions through related persons without disclosing this to the fund's Board of Directors and obtaining approval from the document holders in cases requiring such approval.

Market Maker

Article (12)

The market maker shall provide permanent liquidity on the documents of the Exchange-Traded Index Fund it makes a market for by submitting sell offers and buy requests for the fund's documents on the Exchange, as detailed in the market maker trading rules for Exchange-Traded Index Fund documents prepared by the Exchange and approved by the Authority.

Index funds wishing to contract with a market maker shall submit a request to obtain the Authority's Board of Directors approval, accompanied by the following:

1. Reasons and justifications for restricting contracting with a single market maker.
2. The fund's future plan to contract with another market maker.

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Article (13)

The Authority's Board of Directors approval for the fund to contract with a single market maker shall be based on the availability of companies licensed by the Authority to conduct the activity, the equity rights of those companies, and the number of their existing contracts with other index funds.

Subject to the obligations stipulated for index funds under the Capital Market Law, its Executive Regulations, and decisions issued to implement them, index funds that have obtained the Authority's Board of Directors approval to contract with a single market maker shall be obligated to:

(a) Ensure that the value of documents the fund is permitted to issue does not exceed twenty times the total equity and subordinated loans of the fund's market maker, without prejudice to the maximum limit between issued documents and the fund company's capital.

(b) The fund's contract with the market maker shall include the market maker's commitment in this case to any total value of both sell offers and buy requests it commits to in each session exceeding 150% of the market maker's specific obligations in the approved cases set forth in the market maker trading rules for Exchange-Traded Index Fund documents.

Market Maker Obligations

Article (13)

The market maker shall be obligated to:

1. Automatically notify the Authority and the Exchange of its net centralized transactions following the end of each trading session, with a deadline no later than before the start of the next trading day's session.
2. The market maker shall be obligated in each trading session to trade the documents specified with the fund or in the executive procedures issued by the Exchange and approved by the Authority.
3. Submit, modify, and update sell offers and buy requests for the documents in the quantities and within the periods specified in the market maker trading rules for Exchange-Traded Index Fund documents, as well as adhere to the minimum order size.