Decision of the Board of Directors of the Authority No. (67) of 2014 (Updated Version 2023)

Decision of the Board of Directors of the Authority No. (67) of 2014 dated 27/4/2014 Regarding the Regulation of Margin Trading of Securities by Brokerage Companies and Custodians (Last amended on 8/11/2023)

The 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; And the Central Depository and Clearing Law issued by Law No. (93) of 2000 and its Executive Regulations; And Law No. (10) of 2009 on the Regulation of Supervision over Non-Banking Financial Markets and Instruments; And Presidential Decree No. (191) of 2009 on the Rules Governing the Management and Financial Affairs of the Egyptian Exchange; And Presidential Decree No. (192) of 2009 Issuing the Basic Statute of the General Authority for Financial Supervision; And the Board of Directors Decision No. (36) of 2014 Regarding the Rules and Conditions for Margin Trading of Securities by Brokerage Companies and Custodians; And upon the approval of the Board of Directors in its session held on 27/4/2014; And based on the proposal of the Egyptian Exchange; Has Decided:

Article 1 Brokerage companies and securities custodians shall obtain the Authority's prior approval to trade securities on margin, in accordance with the procedures and controls set forth in this Decision. To apply for the Authority's approval to conduct margin trading, the net shareholders' equity of the brokerage company or custodian must not be less than fifty million Egyptian pounds, and the amount allocated by the custodian from banks must not be less than fifty million Egyptian pounds.

Article 2 Brokerage companies or custodians wishing to obtain approval to conduct margin trading shall submit an application to the Authority requesting approval to conduct such operations, 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 Financial Adequacy Standards for securities companies, signed by the Financial Director and Managing Director, accompanied by an auditor's report on the review of this form.
2. The latest approved annual financial statements, or subsequent periodic financial statements, accompanied by an auditor's report on the review or audit of these statements.
3. A commitment to increase the value of the insurance deposited by the company with the Authority to match the activity's risk level. The Authority shall determine 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 stipulated in Clause (a) of Article (31) of the Capital Market Law, provided the company submits documentation proving it has remedied the grounds for such measure.
5. A statement regarding the IT system for data processing, confirming the existence of an electronic link between the company, the Authority, the Exchange, and the Central Depository and Clearing Company to ensure monitoring and supervision, as well as confirmation of a telephone recording system as stipulated in Article (263) of the Executive Regulations of the Capital Market Law.
6. A document retention system.
7. Internal control and financial audit systems and foundations.
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 qualifications of the manager responsible for margin trading operations, as well as the names of any other employees in the specialized margin trading unit.
10. The standard contract template the company will sign with its clients regarding margin trading operations, according to the Authority's model in this regard.
11. A commitment to open an account for margin trading operations with the Central Depository and Clearing Company immediately upon the Authority's approval of its margin trading activities.
12. Documentation confirming the payment of five thousand Egyptian pounds to the Authority as a fee for reviewing the approval application. Bank custodians or branches of foreign banks registered with the Central Bank of Egypt are exempt from the provisions of items (1, 2, 6) of this Article.

Article 3 The Authority shall issue its decision regarding the application within two weeks from the date of submission or from the date of completing the required documents.

Article 4 Brokerage companies or custodians who have obtained the Authority's approval to conduct margin trading shall comply with the following:

1. Conduct a comprehensive assessment of clients' status before granting them financing, specifically including: (a) Study and analysis of risks associated with trading each security listed on its approved securities list and permitted for margin trading. (b) Verification of clients' ability to meet obligations arising from margin trading, available financing sources, financial adequacy, investment objectives, and identification and analysis of their past trading patterns and data. (c) Inquiry through Authority-designated entities regarding the total financing granted to clients and their affiliated groups at the market level, collateral ratios for total financing, and their exposure during the period preceding financing to inability to meet obligations from margin trading. The company or custodian shall retain this study in the client's file and update it at least once every twelve months or as required, and commit to providing the Authority and the Egyptian Exchange with any data or documents they request under this clause.
2. Enable the Authority and the Exchange to access and obtain all data and documents related to margin trading operations. Upon request by either, the company shall provide such data via the electronic link with the Exchange.
3. Provide the client, upon signing the agreement, with a detailed statement explaining the concept of margin trading, procedures, benefits, risks, and fundamental terms. This statement must be sent to each client at least annually and immediately upon any changes to the fundamental terms provided to the client.
4. Maintain separate books and accounts for recording margin trading operations.
5. At all times maintain a minimum net liquid capital according to the Authority's Financial Adequacy Standards.
6. Notify the Authority, the Egyptian Exchange, and the Central Depository and Clearing Company in advance of the segregated amount for purchasing securities on margin (including any supporting loans designated for this purpose), and retain supporting documents for these amounts. The company's auditor shall verify the existence of the segregated amount, record it for this purpose, and certify it in a report issued by them. The Authority and the Egyptian Exchange shall be notified of the data and documents proving this whenever requested.
7. Notify the Central Depository and Clearing Company via the electronic link of any margin trading operation on the same day the operation is executed.

Article 5 A client wishing to purchase on margin shall pay the brokerage company or custodian in cash an amount not less than 50% of the price of the securities purchased for their account, or not less than 20% for government bonds. Alternatively, they may provide and place under the company's or custodian's control 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 subject to the Central Bank of Egypt's supervision, provided they are frozen at the bank in favor of the brokerage company or custodian and are callable on demand without requiring the client's consent, valued at 90% of the deposit amount. The client may also place the following securities under the company's or custodian's control as collateral, provided their market value on the submission date is not less than 100% of the price of the securities purchased for their account: (a) 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 criteria set by the Exchange, approved by the Authority, and accepted by the brokerage company or custodian as collateral, valued at 100% of their market value, subject to Article 7 of this Decision. The brokerage company or custodian shall notify the Central Depository and Clearing Company of the securities submitted as collateral to have them endorsed and pledged in favor of the company as security for the client's margin-purchased securities.

Article 6 Brokerage companies and custodians approved by the Authority to conduct margin trading shall comply with the following controls when trading:

1. Margin trading shall only be conducted on securities meeting the criteria set by the Exchange and approved by the Authority.
2. The total financing provided for margin trading operations shall not exceed the amount segregated for this purpose.
3. A single client's debt shall not exceed 10% of the total segregated amount, and shall not exceed 15% for a client and their affiliated group. "Affiliated group" means any group of clients under the actual control of the same natural or legal persons. Related persons include natural persons and their relatives up to the second degree, and legal persons where two or more do not have a majority of shares or stakes directly or indirectly owned by the other, or are owned by a single person, including holding, subsidiary, and sister companies as applicable. The Authority or the Egyptian Exchange may request data on any affiliated group to be traded with margin at any time.
4. If a client submits the securities referred to in Clause 1 as collateral for margin trading, the concentration ratio of a single security from those listed in Clause 1 for a single client shall not exceed 75% of the maximum limit available for the client's portfolio on the purchase date. Brokerage companies and custodians shall not accept margin trading applications in the following cases:
5. If the company's net shareholders' equity falls below five million Egyptian pounds.
6. If the brokerage company or custodian has used the entire segregated amount for margin trading for its clients.
7. If the company's net liquid capital falls below the limit specified in the Authority's Financial Adequacy Standards. In all cases, the company or custodian shall, within a maximum of five days, increase the net liquid capital to the prescribed minimum. Failure to comply shall result in the suspension of the company's operations and the revocation of the Authority's approval, along with necessary enforcement measures.

Article 6 bis Repealed.

Article 7 Brokerage companies and custodians shall accept Egyptian government bonds submitted as collateral from all clients at 100% of their market value. Brokerage companies or custodians shall also notify the Authority and the Exchange in advance of a list of securities accepted by them as collateral among those permitted for margin trading, according to the Exchange's criteria and the Authority's approval, as follows:

1. A decision by the company's Board of Directors or the Managing Director (for bank custodians) must be issued to determine these securities and the collateral ratio for each.
2. The company shall commit to accepting these securities from all its clients.
3. The company shall make a list of these securities and the collateral ratio for each clearly visible at its headquarters, all branches, and its website.
4. The Authority and the Egyptian Exchange shall be notified in advance of all decisions related to securities traded under this mechanism. If a brokerage company or custodian modifies the aforementioned list or the collateral ratio for any security, it shall:
5. Comply with all provisions of the preceding paragraph.
6. Notify its clients of the margin trading mechanism with the new list, granting clients a period of not less than two months to replace securities removed from the list with eligible securities or provide additional collateral as per Article 5. The brokerage company or custodian may sell securities removed from the list when the client's debt ratio reaches a level permitting sale and the client fails to provide additional collateral.

Article 8 Brokerage companies or custodians shall revalue the securities subject to margin trading at the end of each working day according to their market value. If a decrease in market value reveals that the client's debt exceeds 60% of the market value at the Exchange's announced closing price, they must notify the client to reduce this ratio either by cash payment or by providing additional collateral. This measure must be taken if the ratio reaches 85% for government bonds. The brokerage company or custodian may take measures to sell the securities and liquidate the client's collateral to bring the debt ratio down to 50% of the market value of the margin-purchased securities, or 80% for government bonds, in the following cases: (a) If the client fails to reduce the debt ratio as mentioned after one working day from notification via the agreed contractual mechanism and fails to provide additional collateral. (b) If the client's debt ratio reaches 70% of the market value of the securities or 90% for government bonds. This applies unless the margin trading contract specifies lower liquidation ratios, and after notifying the client per Clause (a) of this Article. The client's debt ratio shall be reduced either by cash payment or by providing one of the following guarantees:

1. Unconditional bank guarantees in favor of the brokerage company or custodian issued by a bank or foreign bank branch under the Central Bank of Egypt's supervision.
2. Deposits with a bank or branch under the Central Bank of Egypt's supervision, frozen in favor of the company/custodian and callable on demand without client consent, valued at 90% of the deposit amount.
3. Egyptian government bonds pledged in favor of the company/custodian, valued at 100% of their market value.
4. Securities accepted by the brokerage company or custodian as collateral per Article 5.

Article 8 bis The brokerage company or custodian shall have the right to set off its debt against the securities submitted as collateral by the client in case of default on margin trading debt, subject to the following controls:

1. The contract between the company and its client must include the right to take selling and liquidation measures in the aforementioned cases and as specified in the contract.
2. The company or custodian shall notify the Central Depository and Clearing Company to remove the endorsement and lift the pledge on the submitted collateral to enable the company/custodian to sell them to recover its debt. Execution on the submitted collateral endorsed and pledged at the Central Depository and Clearing Company shall follow the order determined by the company/custodian, unless the contract states otherwise, without prejudice to judicial orders, decisions, or rulings, including those related to disposal bans or precautionary/executory attachments. If the brokerage company or custodian recovers the full outstanding debt from the client, it shall notify the Central Depository and Clearing Company to remove the endorsement and lift the pledge on the remaining previously submitted collateral immediately, and no later than before the start of the trading session on the next working day. This applies if the submitted collateral is replaced.

Article 9 Brokerage companies or custodians who previously obtained the Authority's approval to trade securities on margin shall comply with all rules and controls in this Decision, and commit to the following: (a) Notify the Authority and the Central Depository and Clearing Company of the segregated amount for margin trading, and provide proof of opening a margin trading account with the Central Depository and Clearing Company, within a maximum of two weeks from the effective date of this Decision. (b) Not accept margin trading applications if net shareholders' equity is less than five million Egyptian pounds, according to the latest periodic financial statements. (c) Regularize their status regarding the maximum financing ratio per security for a single client, and the maximum debt ratio for a single client and their affiliated group, according to the ratios in this Decision, within a period not exceeding June 30, 2014.

Article 10 The Central Depository and Clearing Company shall immediately notify the Authority if a brokerage company or custodian exceeds the maximum limit for permitted margin trading operations.

Article 11 The Authority may revoke the approval issued to any brokerage company or custodian for margin trading, with all resulting consequences, in cases it deems necessary to preserve trading stability, prevent harm to the market, participants, or companies dealing with these firms. Based on risk analysis related to the volume of granted financing and its actual/potential impact on market stability, and considering the concentration of margin trading on the security level, client/affiliated group level, or financing company level, the Authority or the Egyptian Exchange may take any of the following measures:

1. Excluding one or more securities from the list of securities permitted for margin trading.
2. Reducing the reliance ratio on the securities referred to in Clause 1 as collateral for margin trading.
3. Reducing the maximum allowed price limits for trading the securities referred to in Clause 1. All without prejudice to existing legal positions prior to the date of taking any of the aforementioned measures.

Article 12 The provisions governing securities trading in the Capital Market Law and its Executive Regulations shall apply to matters not explicitly addressed in these rules and controls.

Article 13 This Decision replaces the Board of Directors Decision No. (36) of 2014 referenced herein. It shall be published in the Egyptian Official Gazette and on the websites of the Authority and the Egyptian Exchange, and shall take effect from the day following its publication in the Official Gazette.

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Footnotes: [1] This Decision was amended by Board of Directors Decisions No. 61 dated 27/4/2021, No. 72 dated 31/8/2022, and No. 245 dated 8/11/2023. [2] Clause 1 of Article 4 was amended by Board of Directors Decision No. 72 dated 31/8/2022. [3] Clause 6 of Article 4 was replaced by Board of Directors Decision No. 245 dated 8/11/2023. [4] Clause (b) of the second paragraph of Article 5 was replaced by Board of Directors Decision No. 245 dated 8/11/2023. [5] Clause 3 of the first paragraph of Article 6 was replaced by Board of Directors Decision No. 245 dated 8/11/2023 (The amendment shall apply to transactions of clients following the effective date of this amendment, without affecting the previous ratios applied under it prior to this Decision's issuance). [6] Article 6 bis was added by Board of Directors Decision No. 61 dated 27/4/2021, then repealed by Decision No. 72 dated 31/8/2022. [7] Article 8 bis was added by Board of Directors Decision No. 245 dated 8/11/2023. [8] The second paragraph of Article 10 was added by Board of Directors Decision No. 61 dated 27/4/2021, then repealed by Decision No. 72 dated 31/8/2022. [9] A second paragraph was added to Article 11 by Board of Directors Decision No. 72 of 2022 dated 31/8/2022.