Lending, Borrowing and Short Selling Directive 2024

GOVERNMENT NOTICE NO. 34
SECURITIES ACT
(CAP. 46:06)
SECURITIES (LENDING, BORROWING AND SHORT SELLING) DIRECTIVE, 2024 IN EXERCISE of the powers conferred by section 67 (1) of the Securities Act, I, DR. WILSON TONINGA BANDA, Registrar of Financial Institutions, issue the following Directive—

1. This Directive may be cited as the Securities (Lending, Borrowing
   and Short Selling) Directive, 2024.
2. In this Directive, unless the context otherwise requires—
   “lending agent” means a person who provides support services to securities lenders, including the monitoring of loans, the negotiation of lending fees or rebate, and the management of collateral; “lending agreement” means a written security lending agreement executed by a security lender and a security borrower; “lending fee” means a fee charged by a security lender to a security borrower for a security loan contracted under this Directive; “margin” means a minimum amount of collateral required in a security lending transaction as specified in the lending agreement; “rebate” means the net interest earned by a collateral held by a security lender that is remitted to a borrower where the collateral is in the form of cash; “security lending” means the temporary transfer of a security from a lender to a borrower with the concurrent written agreement to return the security either on demand or at a future date; and “short sale” means sale of a security which a seller does not own at the time of the sale. 3.—(1) A security lending and borrowing transaction shall be carried out in accordance with this Directive. (2) The Registrar shall, by notice published on his website, prescribe securities to which this Directive shall apply. (3) The list of securities prescribed under subparagraph (2) shall be determined based on, among other factors— (a) ease of convertibility into cash, with little or no loss in value; (b) low default risk; (c) easiness of ascertaining value; (d) low correlation with risky assets; (e) registered securities under the Securities Act; and 24th May, 2024 173 Citation Interpretation Application of Directive

(f) low default correlation between counterparty transaction and collateral. (4) Market participants may, upon prior written approval of the Registrar, extend application of this Directive to securities that are not on the list prescribed under subparagraph (2). 4.—(1) A person may apply, in writing, to the Registrar to exempt a transaction of a security prescribed under paragraph 3(2) from application of this Directive. (2) An application under subparagraph (1) shall state the reasons for which the exemption is sought. (3) An application under subparagraph (1) shall be determined within fourteen days from the date the application is received by the Registrar. 5.—(1) A security lending and borrowing transaction shall be carried out by a— (a) financial institution; or (b) person authorised for the purpose by the Registrar, whose name is published on the website of the Registrar. (2) A financial institution and a person authorised to carry out a security lending and borrowing transaction under subparagraph (1) shall comply with— (a) this Directive; and (b) any additional requirement imposed by the Registrar. (3) A financial institution may act as an intermediary for a security borrower or lender. (4) Where a financial institution acts as an intermediary, the financial institution shall disclose to the borrower and lender any potential or actual conflict of interest in relation to its role in the security lending or borrowing transaction. 6.—(1) A lender and a borrower in a security lending and borrowing transaction shall enter into a written agreement before undertaking the lending and borrowing transaction. (2) A lending and borrowing agreement shall, at a minimum, include the information prescribed in the Schedule. 7.—(1) A market intermediary shall, by the 10th day of the following month, submit a report on securities lending and borrowing transactions carried out in the previous month to the Registrar and the security exchange on which the securities are listed. (2) The Registrar may, by notice published on his website, require each financial institution to report, at such intervals as the Registrar my prescribe, the net securities lending and borrowing position of each security held by the financial institution. 174 24th May, 2024 Exemption from application of Directive Persons authorised to transact in securities lending and borrowing transactions Lending and borrowing agreement Lending and borrowing agreement

8.—(1) A borrower in a security lending and borrowing transaction shall provide the lender with collateral of at least one hundred percent of the value of the borrowed security. (2) The lender in the security lending and borrowing transaction may require the borrower to provide an additional margin on the collateral provided under subparagraph (1). (3) The collateral provided under subparagraph (1) may be in the form of— (a) cash, in Kwacha; (b) Government security; (c) bank guarantee; or (d) any other security as may be specified by the Registrar by notice published on his website. (4) A security that is lent out and its collateral shall be revalued every working day and the value of the collateral shall be adjusted accordingly. (5) A borrower of a security shall, from time to time, pay to the lender of the security such amount as may be required to ensure that the collateral provided remains sufficient. 9.—(1) A lender who receives collateral in accordance with paragraph 8— (a) in the case of cash, shall deposit the collateral in an interest￾bearing account; (b) in the case of a Government security, may use the collateral in a repo transaction within the agreed borrowing period; or (c) in any other case, may use the collateral in such a manner as the Registrar may prescribe by notice published on his website. (2) The lender may appoint a lending agent, in writing, to manage the collateral and the appointment instrument shall specify the use to which the collateral may be put. 10.—(1) A lender of a security shall continue to enjoy the economic benefit associated with the security during the validity of the lending agreement, including receipt of dividends. (2) The lender shall be entitled to receive a lending fee from the borrower.
11. A borrower in a security lending and borrowing transaction shall—
(a) have full legal title of the security he has borrowed; and (b) where the collateral provided under the lending agreement is in the form of another security, continue to receive the economic benefit associated with the other security, including receipt of dividends. 24th May, 2024 175 Collateral requirements Use of collateral Benefits to accrue to lender Borrower to have legal title and receive benefits

12.—(1) A short sale of a security shall be carried out in accordance with this Directive. (2) The Registrar shall, by notice published on his website, prescribe securities that may be subject to a short sale. (3) The list of securities prescribed under subparagraph (2) shall be determined based on the criteria set out in paragraph 3(3), with the necessary modifications. (4) Short-selling transactions shall only be carried out by a financial institution in accordance with this Directive and any other additional requirements imposed by the Registrar in writing. 13.—(1) A short sale of a security shall be carried out in the same trading environment as other types of purchase and sale of securities. (2) A seller who intends to engage in a short-selling transaction shall declare to the security exchange or, if acting through a market intermediary, to the intermediary that the transaction is a short sale. (3) A buyer in a short sale of a security shall open a margin account with the intermediary institution. (4) An intermediary institution shall enter into a short sale agreement, in writing, with each customer. (5) A buyer shall deposit in advance at least one hundred percent of the current market value of the security under short sale, in cash or a security. (6) A buyer shall only enter into a covered short sale agreement. (7) A seller may enter into a short sale transaction if the seller provides documentary evidence to show that he has— (a) entered into an agreement to borrow a security to cover the short sale; (b) reasonable grounds to believe that the security will be delivered to him in time to cover the short sale; and (c) entered into an arrangement with another person under which the other person has confirmed in writing that the person will have the security and deliver it in time to cover the short sale. (8) For purposes of this paragraph “covered short sale’’ refers to a situation where the seller has made an arrangement to borrow a security before the sale. 14.—(1) A securities exchange or a trading platform shall, for the purposes of facilitating short-selling transactions, formulate short sale trading rules in line with this Directive. (2) The trading rules formulated under subparagraph (1), shall provide for identification of each short sale as a short sale by the selling broker. 176 24th May, 2024 Regulation of short sale of securities Short sale of securities Short sale trading rules

15.—(1) A participant on a securities exchange or trading platform who holds a short position in a security of at least five per cent of the total amount of the security shall, within five days of attaining the position, report the position to the Registrar and the relevant exchange or trading platform. (2) A participant and a related person shall not hold a short position in any security that exceeds ten per cent of the total value of the security in issue. (3) For purposes of this paragraph “short position” means the net investment position in a security in which the security has been borrowed and sold but not yet replaced. 16.—(1) The Registrar may suspend the short sale of a security or impose a control on the price that may input on the short sale of the security to maintain or restore the fair, efficient and transparent trading of the security where— (a) the price movement of the security meets the conditions set out in the relevant rules of a securities exchange or other infrastructure provider for the imposition of price controls or suspension of trading; (b) the short sale of the security is temporarily prohibited under the rules of a securities exchange; or (c) the short sale of the security has been prohibited in another jurisdiction or has been made subject to a price control as a result of a concern about market order. (2) The Registrar shall review suspension of the short sale or imposition of a price control under subparagraph (1) at least once every week. (3) Where the Registrar reviews the suspension of a short sale or imposition of a price control on a short sale under subparagraph (2), the Registrar may— (a) maintain the suspension or price control; (b) lift the suspension; or (c) remove the price control. 17.—(1) A person who contravenes a provision of this Directive commits an offence and shall be liable to a monetary penalty of— (a) in the case of an institution, up to K50,000,000; or (b) in the case of a natural person who is a member of a board of directors or senior management of a broker or dealer, up to K10,000,000. (2) In addition, to the monetary penalty imposed under subparagraph (1), the Registrar may impose any administrative penalty prescribed under the Act or the Financial Services Act. 24th May, 2024 177 Short position in securities Suspension of short sale of securities and imposition of price controls Offences and penalties

SCHEDULE (para. 6(2)
MINIMUM CONTENT OF A SECURITY LENDING AND BORROWING AGREEMENT (a) Particulars of the lender. (b) Particulars of the borrower. (c) Particulars of the security to be lent. (d) Number of securities to be lent. (e) Acceptable equivalent security for paying back the loan. (f) Agreed value of the security to be lent for the purposes of the transaction. (g) Terms and conditions of the transaction. (h) Method for calculating lending fee and rebate. (i) Payment schedule for lending fee and rebate. (j) Nature and value of collateral for the lending. (k) Transfer of title and interest in the security to be lent. (l) Transfer of title and interest in the collateral provided. (m) Methodology for revaluation of collateral provided. (n) Particulars of the person responsible for revaluation of collateral. (o) Margin attached to the lending and borrowing transaction. (p) Nature and consequence of default or other failure in relation to the terms of the lending agreement. (q) Exercise of voting rights associated with the security to be lent. (r) Exercise of voting rights associated with collateral, where the collateral is a type of security that has voting rights associated with it. (s) Procedure for recalling or returning the lent security. Issued this 1st day of May, 2024. DR. W. T. BANDA (REF. NO. FIN/PFSPD/02/12) Registrar of Financial Institutions GOVERNMENT NOTICE NO. 35 SECURITIES ACT (CAP. 46:06) SECURITIES (CLEARING AND SETTLEMENT) DIRECTIVE, 2024 IN EXERCISE of the powers conferred by section 67 (1) of the Securities Act, I, DR. WILSON TONINGA BANDA, Registrar of Financial Institutions, issue the following Directive— 178 24th May, 2024