Decision of the Board of Directors of the Authority No. 36 of 2014

Date: 12/3/2014

Regarding the Rules and Regulations for Securities Brokerage Companies and Custodians to Conduct Margin Purchase Operations

Board of Directors of the General Authority for Financial Supervision

Having reviewed the Capital Market Law issued by Law No. (95) of 1992 and its Executive Regulations; the Central Depository and Registration of Securities Law issued by 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. (192) of 2009 issuing the Basic Statute of the General Authority for Financial Supervision; and upon the approval of the Authority's Board of Directors in its session held on 12/3/2014;

Decided

(Article One)

Securities brokerage companies and securities custodians are required to obtain the Authority's prior approval to trade securities on margin, in accordance with the procedures and regulations set forth in this Decision.

The conditions for applying to the Authority for approval to conduct margin purchase operations are that the net shareholders' 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.

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(Article Two)

Securities brokerage companies or custodians seeking approval to conduct margin purchase operations must submit an application 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 application date, according to the form specified by the Authority's solvency standards for securities companies, signed by the company's CFO and Managing Director, 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 deposited by the company with the Authority to match 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 application, except for the measure mentioned in paragraph (a) of Article (31) of the Capital Market Law, provided the company submits evidence of having removed its causes.
5. A description of the information processing system, and documentation confirming the existence of an electronic connection link between the company, the Authority, the Exchange, and the Central Depository and Registration Company to ensure monitoring and supervision, as well as documentation confirming the existence of a telephone recording system as stipulated in Article (263) of the Executive Regulations of the Capital Market Law.
6. The document retention system.
7. Internal control and financial audit systems and principles.
8. A certificate from the company's auditor confirming that the applied accounting system ensures compliance with the requirements of the operations to be conducted.
9. A statement of the name and experience of the manager responsible for margin purchase operations, as well as the names of any other employees in the regulatory unit specialized in margin purchases.

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(Article Three)

The Authority shall issue its decision regarding the application within two weeks from the date of submission or from the date of providing the requested documents.

(Article Four)

Securities brokerage companies or custodians approved by the Authority to conduct margin purchase operations shall comply with the following:

1. Exercise due diligence to verify customers' ability to fulfill obligations arising from margin purchases based on their financial status, investment objectives, funding sources, and other information available to the company at the time of contracting, and to reassess the customer's status whenever deemed necessary.
2. Enable the Authority and the Exchange to access and obtain all data and documents related to margin purchase operations, and require the company to provide such data via the electronic connection link with the Exchange upon request by either party.
3. Provide the customer with a detailed statement upon concluding the agreement explaining the concept of margin purchase, procedures, benefits, risks, and fundamental terms, and this statement must be sent to each customer at least once annually and immediately upon any amendments to the fundamental terms contained in the statement provided to the customer.
4. Issue separate books and accounts to record margin purchase 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 required for margin securities purchases (including any auxiliary loans designated for this purpose, if any), and retain supporting documents for this amount.
7. Ensure that the amounts allocated for conducting margin purchase operations exceed the mandatory minimum net shareholders' equity of the company, which is five million Egyptian pounds.
8. Notify the Central Depository and Registration Company via the electronic connection link of any margin purchase operation on the same day of execution.

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(Article Five)

Securities brokerage companies and custodians approved by the Authority to conduct margin purchase operations shall comply with the following regulations when trading:

1. Not conduct margin purchases except on securities that meet the standards set by the Exchange and approved by the Authority.
2. Not exceed the total financing provided for margin purchase operations beyond the amount mandated for this purpose.
3. Not exceed the financing ratio for a single security for a single customer by more than 30% of the limit permitted for that customer.
4. Not exceed the debt ratio of a single customer by more than 15% of the funds available for margin purchase operations, with the condition that this ratio does not exceed 20% for the customer and their affiliated group.

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(Article Six)

The affiliated group refers to any group of customers subject to the actual control of the same natural persons or legal entities, or bound by an agreement to coordinate voting at shareholders' general meetings or their boards of directors.

The Authority or the Egyptian Exchange may request data on any affiliated group to be traded via margin purchase at any time.

Securities brokerage companies and custodians are prohibited from accepting margin purchase applications in the following cases:

1. If the company's shareholders' equity falls below five million Egyptian pounds.
2. If the securities brokerage company or custodian has utilized the entire mandated amount for margin purchase operations for its operations.
3. If the company's net liquid capital falls below the threshold indicated by the Authority's solvency standards.

In all cases, the company or custodian is committed to increasing the net liquid capital to the prescribed minimum within a maximum of five days, and failure to comply will result in the company being prohibited from conducting operations, the revocation of the Authority's approval in this regard, and the taking of necessary measures.

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(Article Seven)

Except for Egyptian government bonds provided as collateral in accordance with the regulations in Article (294) of the Executive Regulations of the Capital Market Law, securities brokerage companies or custodians are required to notify the Authority and the Exchange in advance of the value of securities accepted by them as collateral among those permitted for margin trading according to standards set by the Exchange and approved by the Authority, as follows:

1. The value accepted by the company for these securities as collateral shall not exceed 80% of their market value.
2. 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 collateral ratio for each security.
3. The company's commitment to accept these securities from all its customers.
4. The company shall make a list of these securities and the collateral ratio for each security publicly available at its headquarters, all branches, and on its website.
5. Notify the Authority and the Egyptian Exchange in advance of all decisions regarding securities traded through this mechanism.

Securities brokerage companies or custodians, in the event of amending the aforementioned list or the collateral ratio for any security, shall comply with the following:

1. Comply with all provisions of the preceding paragraph.
2. Notify their counterparties of the margin purchase mechanism with the new list, granting their customers a period of no less than two months to replace securities accepted as collateral with those removed from the list, or to provide additional collateral as stipulated in Article (294) of the Executive Regulations of the Capital Market Law.

The securities brokerage company or custodian shall allow the customer a debt ratio at the threshold permitting sale of securities removed from the list when the customer's ratio reaches the threshold permitting disposal by providing additional collateral.

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(Article Eight)

Securities brokerage companies or custodians must re-evaluate margin purchase collateral at the end of each working day according to its market value. If a decrease in market value reveals that the customer's debt has exceeded 60% of the market value, they must notify the customer to reduce this ratio either through cash payment or by providing additional collateral, and must take this action if the ratio reaches 80% for government bonds.

Securities brokerage companies or custodians may take measures to sell securities and liquidate customer-provided collateral to bring the customer's debt ratio to 50% of the market value of the margin-purchased securities, or 80% for government bonds, in the following cases:

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(Article Nine)

(a) If the customer fails to reduce their debt ratio below the aforementioned threshold within one working day of notification according to the mechanism agreed upon in their contract, and does not provide additional collateral. (b) If the customer's debt ratio reaches 70% of the market value of the securities or 90% of the market value of government bonds.

Unless the margin purchase contract with the customer stipulates a lower threshold for facilitating provided collateral, and after notifying the customer in accordance with paragraph (a) of this Article.

The customer's debt ratio shall be reduced either through cash payment or by providing one of the following collateral types:

1. Unconditional bank guarantees in favor of the securities brokerage company or custodian issued by a bank or branches of foreign banks subject to the supervision of the Central Bank of Egypt.
2. Deposits with a bank or branches of foreign banks subject to the supervision of the Central Bank of Egypt, provided they are frozen at the bank in favor of the brokerage or custodian, are callable upon request without requiring customer consent, and are valued at 90% of the original deposit amount.
3. Egyptian government bonds, provided they are pledged in favor of the securities brokerage company or custodian, and are valued at 90% of their market value.
4. Securities accepted by the securities brokerage company or custodian in accordance with the provisions of the preceding Article.

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(Article Ten)

Securities brokerage companies or custodians that previously obtained the Authority's approval to trade securities on margin shall comply with all rules and regulations governing trading set forth in this Decision, along with the following commitments:

(a) Notify the Authority and the Central Depository and Registration Company of the mandated amount for margin securities purchases, and open an account for margin trading operations with the Central Depository and Registration Company, within a maximum of one week from the effective date of this Decision. (b) Not accept margin purchase applications if net shareholders' equity is less than five million Egyptian pounds, according to the latest periodic financial statements. (c) Adjust their status regarding the maximum financing ratio for a single security for a single customer, and the maximum debt ratio for a single customer and their affiliated group, according to the ratios set forth in this Decision, within a period not exceeding two months from its effective date.

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(Article Eleven)

The Central Depository and Registration Company is committed to immediately notify the Authority in the event that a securities brokerage company or custodian exceeds the maximum limit for margin purchase operations permitted to them.

(Article Twelve)

The Authority may revoke the approval issued to any securities brokerage company or custodian for margin securities trading, along with its consequential effects, in cases it deems necessary to preserve transaction stability and prevent harm to the market, participants therein, or those dealing with these companies.

(Article Thirteen)

This Decision shall be published in the Egyptian Gazette and on the websites of the Authority and the Egyptian Exchange, and shall take effect from the day following its publication in the Egyptian Gazette.

Chairman of the Board
Sherif Samy

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