Tarek Abdelbary, managing director of Misr for Central Clearing, Depository, and Registry (MCDR), revealed the new mechanism of short selling in Egypt, in a statement to Daily News Egypt.
The new system includes the presence of a number of vessels, named custodians, at MCDR, each with a number of securities offered for lending in a determined quantity, while the brokerage companies whose clients want to borrow securities can access the MCDR system and choose the custodian with targeted securities. The securities lending is only implemented through inking a contract between the brokerage and the custodian.
The next step is that the client sells the securities that he borrowed in the market, provided that the proceeds are retained with the broker seller, in preparation to buy the securities again after their prices get lower.
Abdelbary explained that the lender client receives an investment return of 100% of the total sale value (including brokerage commission rate), and 50% goes to the borrower.
He noted that the old system of short selling relied on MCDR’s central vessel that contains all securities. It is now replaced with several vessels, so that the responsibility can be shared among custodians and brokerage companies.
He added that the MCDR has conducted trial operation of the new system with five brokerage companies and five custodians affiliated to them, and it has been re-tested with one brokerage company and its custodian. After ensuring the success of the trial, the system was presented to the MCDR’s advisory committee to obtain its approval before implementation.
Abdelbary explained that his company will start to communicate with the brokerage companies to ensure the compatibility of the “back office” systems of companies with the electronic system of MCDR, calling for the brokerage companies to adjust their “back office” to the new mechanism.
He pointed out that the MCDR company will launch intensive training courses for brokerage companies by the end of next week to work under the new system, stressing that the activation of the new mechanism required a large number of brokerage companies to engage in the process which would increase the amount of shares offered for sale as well as clients wishing to lend and borrow. It is difficult to achieve the desired result of this mechanism with a small and limited number of companies.
Abdelbary said the Financial Regulatory Authority (FRA) and the MCDR will launch the new mechanism in November, provided that brokerage companies adjusted their “back office” systems and trained their staff to work under this mechanism.
He noted that the new mechanism may result in some problems for small brokerage firms, which will be solved immediately, as it will be under development until it becomes satisfactory to all parties.
Khaled Al-Nashar, vice chairperson of the FRA, presided a meeting of the members of the capital markets, including the EGX Chairperson Mohamed Farid and his deputy, to discuss the activation of the new mechanism of securities lending.
He said that according to what was presented during the meeting, the FRA has given the green light to start the mechanism of short selling in November.
Al-Nashar pointed out that the chairperson of MCDR will announce at the beginning of October on the celebration of the 25th anniversary of the establishment of the company, the readiness of the new system.