The Financial Regulatory Authority (FRA) has issued a regulatory decision governing securities borrowing for the purpose of sale, commonly known as short selling, aimed at enhancing market efficiency and increasing liquidity and depth while supporting trading stability and protecting market participants’ rights.
Under the decision, the central securities lending system will operate with full transparency and real-time oversight and will be conducted exclusively through Misr for Central Clearing, Depository and Registry (MCDR), which will act as the executing entity.
The regulation sets out three priority criteria for executing lending requests: the lowest lending rate offered, the longest lending duration, and the order in which requests are entered into the system.
It also requires the provision of cash collateral equivalent to 150% of the value of the open position prior to execution. This includes 100% of the value of the borrowed shares and an additional 50% cash margin. The framework allows for alternative forms of supplementary guarantees in accordance with relevant regulations.
In addition, the decision establishes a comprehensive set of requirements to ensure that brokerage firms are equipped to manage the risks associated with short-selling activities. These requirements are structured around three main pillars.
The first pillar relates to solvency and financial capacity. Brokerage firms must maintain shareholders’ equity of no less than EGP 5m for standalone short-selling activities, rising to EGP 10m if the activity is combined with margin trading. Firms must also maintain an average liquid capital ratio of at least 15% during the six months preceding their application.
The second pillar concerns technical and operational readiness. Brokerage firms must establish a specialised department staffed by at least three qualified professionals, complete accredited tests and training programmes, and maintain advanced accounting systems. They must also obtain certification from their external auditor confirming that their accounting system meets the requirements of the activity, in addition to implementing robust record-keeping and internal control mechanisms.
The third pillar focuses on integrity and the protection of client funds. Firms must have a clean regulatory and legal record for the six months preceding their application, with no court rulings or administrative sanctions. They must also commit to placing client margin in a separate account. The regulation permits these funds to be invested, subject to client agreement, exclusively in fixed-income instruments.
To safeguard market stability and prevent excessive concentration, the decision sets limits on securities lending and borrowing. The total volume of securities available for lending must not exceed 25% of the issuing company’s free-float shares.
It also caps exposure at 5% of a company’s free-float shares for each lender and its related group, and approximately 2% for each borrower and its related group.
The framework also establishes a supervisory mechanism to ensure the adequacy of collateral throughout the lending period. Borrowed securities and all guarantees will be revalued daily based on official closing prices published by the stock exchange.
If the collateral ratio falls to 140%, the client must restore it to 150% within two working days. Failure to do so will result in the automatic return of the borrowed shares.
The decision also safeguards the rights of the original owners of the securities, the lenders, and regulates mechanisms for exiting open positions.
Under the rules, the lending client retains all financial rights associated with share ownership during the lending period. These include cash dividends, realised profits, and bonus shares from capital increases, subscription rights, and any other financial or in-kind benefits.
The regulation also outlines the mechanisms for returning borrowed shares, either through securities held in the borrower’s account or through repurchasing them on the open market using the proceeds from the original sale.
Finally, the decision identifies three situations in which a borrowing transaction must be terminated immediately to preserve legal and market stability: when a security is removed from the list of eligible securities for trading; in cases of precautionary seizure, disposal bans or the death of the investor; and during corporate actions such as mergers and acquisitions, tender offers, demergers or liquidation.
