Background
The year 2009 has so far witnessed an impressive amount of legislative efforts in the area of financial markets regulation. In February Law Number 10 of 2009 was issued, establishing the Egyptian Financial Supervisory Authority "EFSA" (covered in the March Egypt Legal Update), and in May Law Number 127 of 2009 was passed, introducing key changes in the governance of the Central Securities Depository Company (reviewed in the June Egypt Legal Update).
Briefly, EFSA has become, since July 1
st, 2009, Egypt's sole and unified regulator for all non-bank financial services and markets (including capital markets, insurance, mortgage finance, financial leasing, factoring, and other forms of non-bank finance). The entities previously undertaking these regulatory functions have all become part of the new organization by operation of law.
Last month, further steps were undertaken to complete this new regulatory structure, through the issuance of three further key decrees;
- New Statues for the Egyptian Stock Exchange (issued by Presidential Decree Number 191 of 2009 and published in the Official Journal on June 14th, 2009),
- The EFSA Statutes (issued by Presidential Decree Number 192 of 2009 and published in the Official Journal on June 14th, 2009), and
- New Rules governing the election of the members of the new board of directors of the Egyptian Stock Exchange (issued by Decree of the Minister of Investment Number 126 of 2009 and published in the Egyptian Gazette on June 30th, 2009). s
Following is an account of the main changes and provisions introduced by the three Decrees.
Statutes of the Stock Exchange
The new Statutes replace the ones issued and applied since 1997, and include a number of key provisions that are worth highlighting. They may be grouped under two headings; structure and supervisory powers as follows:
Structure and Governance
- The new Statutes resolve one of the key gaps in previous legislation by stating that there shall be a Deputy Chairman for the Exchange. This is an important amendment because it formalizes what has been an established practice for many years and provides the right legal basis for the actions of the Deputy Chairman.
- The Exchange Board of Directors is now composed differently from the Chairman, the Deputy Chairman, a representative of the Central Bank of Egypt, three (instead of six) representatives of securities companies, one (instead of two) representative of custodian banks, two (new) representatives of issuing companies, one of which is a small or medium company.
- Perhaps the most significant change in the Board composition is the elimination of a representative from the Capital Market Authority (or EFSA). This is an expression of an important development in the new regulatory framework whereby a separation is maintained between the Exchange as the market place and EFSA as the regulator.
- The term of the Board is stated in the Statutes to be four years.
- The Board is explicitly stated wider functions in the internal oversight of the Exchange, including the powers to approve its organizational structure, its annual budget, to issue its Membership Rules, to issue rules pertaining to information dissemination, to determine fees for the services it provides, and to approve loans and grants to the Exchange.
- The Statutes explicitly state that the Exchange may participate in the establishment of companies and in subscribing thereto.
- Finally, the Exchange shall from now on have two external auditors, to be appointed by the Chairman of EFSA.
Supervisory Powers
- The new Statutes introduce a new approach to the supervisory authority of the Exchange, whereby it is empowered to "…undertake all actions and measures necessary to avoid the infringement of the rules and provisions governing the market…". This is a wider approach to supervision that was stated previously and should allow the Exchange a wider latitude in dealing with market violations.
- An important clarification in the new Statutes is that although the Exchange is entirely empowered to issue its decisions, including Trading and Membership Rules, such decisions must be communicated to the chairman of EFSA for ratification within fifteen days, or else they are deemed effective. This sets the tone for the supervisor to continue to have regulatory oversight, but within a reasonable time frame.
Election Rules for the Exchange
In application of the new Exchange Statutes, the Minister of Investment issued – on June 30
th, 2009 – Decree Number 126 of 2009 providing the rules for election of representatives of securities and listed companies to the Board of the Exchange. Here are some of the key provisions:
- The three representatives of securities companies must include at least one representative of brokerage companies.
- Companies represented must have at least two years of operation, and not have been subject to suspension of license during the previous three years.
- Companies may only be represented by their chairmen or managing directors.
- A committee composed of a representative of each of the Ministry of Investment, EFSA and the Exchange shall determine the eligibility of contestants on the basis of the published rules, and another committee composed of representatives of the same entities shall oversee the elections.
EFSA Statutes
On July 1
st, 2009 EFSA came into operation, and its Statutes were published on June 14
th, 2009. The Statutes merely provide for its governance rules, the most important of which are the following:
- The principal address for EFSA shall be in Sixth of October Governorate. Currently it is in the Smart Village, although most of its employees continue to be in the previous locations of the Capital Market, Insurance and Mortgage Authorities.
- The Statutes reiterate the important provision that EFSA shall be in charge of supervising "… non-bank financial markets and instruments, including capital markets, future contract exchanges, and insurance, mortgage, financial leasing, factoring and securitization activities".
- The Board term is for four years, including that of the Chairman and the two Deputy Chairmen and the Assistants.
- One new feature of the EFSA Statutes, is that they state that "Advisory Committees" are to be formed by the Board. This is intended to provide a forum for private sector market participants, regulated companies and international experts to have a dialogue with EFSA.
Conclusion
The set of regulations and decrees issued during June with respect to the financial market framework are a further indication of the intention of the Government to vigorously complete the re-organization of financial supervision in Egypt. Key features of the new overall trend are the empowerment of both the supervisor and the Exchange, and more importantly the separation between both entities in accordance with best international practices. This is a welcome development and should lead to a more transparent and efficient regulation of the market. s
Background
The year 2009 has so far witnessed an impressive amount of legislative efforts in the area of financial markets regulation. In February Law Number 10 of 2009 was issued, establishing the Egyptian Financial Supervisory Authority "EFSA" (covered in the March Egypt Legal Update), and in May Law Number 127 of 2009 was passed, introducing key changes in the governance of the Central Securities Depository Company (reviewed in the June Egypt Legal Update).
Briefly, EFSA has become, since July 1
st, 2009, Egypt's sole and unified regulator for all non-bank financial services and markets (including capital markets, insurance, mortgage finance, financial leasing, factoring, and other forms of non-bank finance). The entities previously undertaking these regulatory functions have all become part of the new organization by operation of law.
Last month, further steps were undertaken to complete this new regulatory structure, through the issuance of three further key decrees;
- New Statues for the Egyptian Stock Exchange (issued by Presidential Decree Number 191 of 2009 and published in the Official Journal on June 14th, 2009),
- The EFSA Statutes (issued by Presidential Decree Number 192 of 2009 and published in the Official Journal on June 14th, 2009), and
- New Rules governing the election of the members of the new board of directors of the Egyptian Stock Exchange (issued by Decree of the Minister of Investment Number 126 of 2009 and published in the Egyptian Gazette on June 30th, 2009). s
Following is an account of the main changes and provisions introduced by the three Decrees.
Statutes of the Stock Exchange
The new Statutes replace the ones issued and applied since 1997, and include a number of key provisions that are worth highlighting. They may be grouped under two headings; structure and supervisory powers as follows:
Structure and Governance
- The new Statutes resolve one of the key gaps in previous legislation by stating that there shall be a Deputy Chairman for the Exchange. This is an important amendment because it formalizes what has been an established practice for many years and provides the right legal basis for the actions of the Deputy Chairman.
- The Exchange Board of Directors is now composed differently from the Chairman, the Deputy Chairman, a representative of the Central Bank of Egypt, three (instead of six) representatives of securities companies, one (instead of two) representative of custodian banks, two (new) representatives of issuing companies, one of which is a small or medium company.
- Perhaps the most significant change in the Board composition is the elimination of a representative from the Capital Market Authority (or EFSA). This is an expression of an important development in the new regulatory framework whereby a separation is maintained between the Exchange as the market place and EFSA as the regulator.
- The term of the Board is stated in the Statutes to be four years.
- The Board is explicitly stated wider functions in the internal oversight of the Exchange, including the powers to approve its organizational structure, its annual budget, to issue its Membership Rules, to issue rules pertaining to information dissemination, to determine fees for the services it provides, and to approve loans and grants to the Exchange.
- The Statutes explicitly state that the Exchange may participate in the establishment of companies and in subscribing thereto.
- Finally, the Exchange shall from now on have two external auditors, to be appointed by the Chairman of EFSA.
Supervisory Powers
- The new Statutes introduce a new approach to the supervisory authority of the Exchange, whereby it is empowered to "…undertake all actions and measures necessary to avoid the infringement of the rules and provisions governing the market…". This is a wider approach to supervision that was stated previously and should allow the Exchange a wider latitude in dealing with market violations.
- An important clarification in the new Statutes is that although the Exchange is entirely empowered to issue its decisions, including Trading and Membership Rules, such decisions must be communicated to the chairman of EFSA for ratification within fifteen days, or else they are deemed effective. This sets the tone for the supervisor to continue to have regulatory oversight, but within a reasonable time frame.
Election Rules for the Exchange
In application of the new Exchange Statutes, the Minister of Investment issued – on June 30
th, 2009 – Decree Number 126 of 2009 providing the rules for election of representatives of securities and listed companies to the Board of the Exchange. Here are some of the key provisions:
- The three representatives of securities companies must include at least one representative of brokerage companies.
- Companies represented must have at least two years of operation, and not have been subject to suspension of license during the previous three years.
- Companies may only be represented by their chairmen or managing directors.
- A committee composed of a representative of each of the Ministry of Investment, EFSA and the Exchange shall determine the eligibility of contestants on the basis of the published rules, and another committee composed of representatives of the same entities shall oversee the elections.
EFSA Statutes
On July 1
st, 2009 EFSA came into operation, and its Statutes were published on June 14
th, 2009. The Statutes merely provide for its governance rules, the most important of which are the following:
- The principal address for EFSA shall be in Sixth of October Governorate. Currently it is in the Smart Village, although most of its employees continue to be in the previous locations of the Capital Market, Insurance and Mortgage Authorities.
- The Statutes reiterate the important provision that EFSA shall be in charge of supervising "… non-bank financial markets and instruments, including capital markets, future contract exchanges, and insurance, mortgage, financial leasing, factoring and securitization activities".
- The Board term is for four years, including that of the Chairman and the two Deputy Chairmen and the Assistants.
- One new feature of the EFSA Statutes, is that they state that "Advisory Committees" are to be formed by the Board. This is intended to provide a forum for private sector market participants, regulated companies and international experts to have a dialogue with EFSA.
Conclusion
The set of regulations and decrees issued during June with respect to the financial market framework are a further indication of the intention of the Government to vigorously complete the re-organization of financial supervision in Egypt. Key features of the new overall trend are the empowerment of both the supervisor and the Exchange, and more importantly the separation between both entities in accordance with best international practices. This is a welcome development and should lead to a more transparent and efficient regulation of the market. s