Vice Chairman of the Authority

Circular No. (16) of 2019

Date: 2019/9/4

Subject:

The Minimum Requirements to be Met in Securities Lending Agreements for Short Selling

---

In the context of the General Authority for Financial Supervision's commitment to fulfilling its role in promoting financial culture and awareness

Advisory:

And in implementation of the provisions of the Chairman of the Board of Directors' Decision No. (268) of 2019 regarding the regulation of securities lending operations for short selling.

And in light of what the Decision contains regarding the model contract concluded between the brokerage company and its clients, as well as the contract concluded between the custodian and its clients. And in implementation of the provisions of the aforementioned Decision, the General Authority for Financial Supervision has deemed it appropriate, to facilitate matters for the relevant entities applying the mechanism and subject to its supervision in providing non-banking financial services in the financial markets, to issue this Circular Letter to clarify the minimum requirements that must be met in the contracts for executing securities lending operations for short selling, in addition to the terms and conditions stipulated in the Executive Bylaws of the Capital Market Law, particularly Chapter Nine thereof, as follows:

First: Agreement to Make Securities Available for Lending (Lending Client and Custodian)

1. Lending client details.
2. Communication methods between the contracting parties.
3. Lending duration (Stipulation that the duration shall not be less than thirty days from the date of sale of the borrowed securities).
4. Custodian obligations:
   • Offer or make the client's shares available for lending in accordance with the client's instructions.
   • Receive the shares at the end of the period with all attached rights and benefits.
   • Deliver the returns to the brokerage company for the lending client.
   • Provide the client with a statement clarifying the concept of lending.
5. Cases of death and issuance of preservation orders and their remedies, such as the brokerage company's plans for preservation cases due to non-renewal of contracts.
6. A clause clarifying commissions and fees.

---

Second: Agreement Regarding the Execution of Securities Lending Operations for Short Selling (Borrowing Client and Brokerage Company)

1. Borrowing client details.
2. Communication methods between the contracting parties.
3. Provision of collateral (deposits / cash / shares).
4. Agreement on the distribution of returns from investing the collateral value, in case it is cash.
5. Placing the proceeds from the sale of borrowed shares in a special account in the company's name, invested for the benefit of the lending client.
6. Borrowing client obligations (paying a return of at least five working days in case the borrowed shares are returned within only 5 days of execution).
7. A special clause on commissions.
8. Brokerage company's obligation to monitor the collateral in accordance with the controls stipulated in the Chairman of the Board of Directors' Decision regarding the regulation of the lending mechanism for short selling, and the contract must include the following:
   • a. Cases entitling the company to request additional collateral from the client.
   • b. Cases under which the borrowed securities are requested to be returned to settle the loan.
   • c. Cases entitling the company to take action to buy back and close positions without consulting the client, such as (takeover bids, exceptional coupons).
9. Investing the proceeds from the sale of borrowed securities and the collateral in risk-free yield financial instruments, while adhering to the minimum investment yield.
10. Broker's obligation to transfer the net return from investing the entire proceeds of the sold borrowed shares to the lending client's account through the custodian and clearing company after closing the lending operation.
11. Procedures the company may take in case the borrowing client fails to provide collateral or return the borrowed shares upon request.
12. Procedures the company may take in case of the client's death or issuance of judicial government orders regarding the freezing of the borrowing client's balances (cash and securities).
13. Issuance of preservation orders and death cases of the lending client.
14. Client's right to recover the difference in collateral value in case the market value of the borrowed securities decreases.
15. Providing the client with a statement clarifying the risks of securities lending for short selling.
16. Lending broker's obligation to inform the client of investment avenues and the actual return generated from investing the cash collateral, including its yields, and to send the same details to the lending client regarding the investment of the sale proceeds.
17. Lending broker's obligation to inform the lending custodian of investment avenues and the actual return generated from investing the proceeds of the sold shares.

Proceeds from Share Sales

18. Broker's obligation to execute the client's instructions to transfer the proceeds from the sale of borrowed securities along with the collateral and accrued returns up to the transfer date to another broker in case any administrative decision results in the suspension of the company's activities.

This Circular Letter shall be published on the Authority's website, on the Egyptian Exchange screens, and on its website.

---

Vice Chairman of the Authority

Judge / Khaled El-Nashar

---

General Authority for Financial Supervision
FINANCIAL REGULATORY AUTHORITY

Smart Village, Building 1136, Giza, Egypt
Postal Code: 110
Telephone: +202 35345350
Fax: +202 35370036
WWW.FRA.GOV.EG

Building Bridges not Walls