Executive Procedures for Trading of

On 8 February 2017, the Egyptian Financial Supervisory Authority (“EFSA”) issued a decision regulating the trading of non-listed securities in accordance with its powers and authorities under the Capital Market Law and instructing the Egyptian Stock Exchange (“EGX”) to issue the executive procedures for the implementation of the new rules (please see ELU March 2017 Week 3 Issue). On 9 March 2017, EGX issued the implementing executive procedures which re-iterate the rules stated in EFSA decision while setting out detailed procedures for its implementation and clarifying some of its questionable rules. Most relevant is that EGX decision allows brokerage companies to confirm – by way of issuing a declaration signed by the brokerage company’s authorized representative – certifying that their clients’ sell orders continue to be valid. Although this constitutes an additional liability that brokerage companies might not readily accept, it could still be a more plausible solution to the challenges of applying the new rules to on-going transactions.

Background

Following a Supreme Constitutional Court ruling[1] last February that found an EFSA decision relating to the suspension of trades conducted on non-listed securities for lack of publication unconstitutional, EFSA issued a decision consolidating the regulation of trading non-listed securities in one decision (thereby revoking eight related decisions) (the “EFSA Decision”).[2] EFSA Decision re-iterates the previous market structure, according to which there are two markets for non-listed securities. The first market is for delisted securities where only approved securities are allowed to trade for a limited period (the “OTC Market”). The second market is for all other non-listed securities (the “Ownership Transfer Market”). EFSA Decision officially upholds three significant rules: (i) transactions exceeding the value of EGP 20M must be presented to the Operations Committee at EGX for approval prior to their execution; (ii) the validity of sell orders that are more than a week old will have to be confirmed; (iii) brokerage companies are required to deal with their clients through banks licensed in Egypt except for cases where the client is Egyptian and the value of the transaction is less than EGP 100,000. EFSA Decision requires EGX to issue the executive procedures for the implementation of the above rules and to undertake the necessary measures to ensure the existence of a functional electronic system that achieves the required results.

EGX Decision

EGX issued its decision last week containing the executive procedures for EFSA Decision (the “EGX Decision”).[3] It provides details and clarifications on the implementation of the new rules.

1. The Buy and Sell Process

EGX Decision states that securities brokerage companies are required to (i) notify EGX by using a specific notification form sent by email (in case of physical securities) or through a special software (in case of non-physical securities), (ii) accompanying the notification with all supporting documents and information, (iii) within a week at most from the date of the signature of the sell/purchase orders or sale contract, (iv) during specific hours of the day. Brokerage companies will have to request the registration of non-listed companies whose shares will be sold on the Ownership Transfer Market in an EGX database at least one day prior to sending the official notice of transfer of ownership. EGX Decision further requires brokerage companies to submit all supplementary documentation that are requested by the EGX within a ten-day period. Failure to observe this deadline will give EGX the right to consider the request initially submitted to have never been received and to destroy all documentation in its possession related to this transaction. With respect to transactions exceeding EGP 20M in value, EGX Decision (similarly to EFSA Decision) requires brokerage companies to submit the documents pertaining to these transactions to the Operations Committee at the EGX for approval prior to official announcement of the transfer of ownership. Upon the completion of the transaction, EGX is required to notify the company which issued the sold securities - in case of physical securities -, and to notify the settlement and clearing company where the sold securities are deposited as nonphysical securities.

2. Sell orders older than a week

EFSA Decision requires a confirmation of continued validity to be obtained with respect to sell orders that are more than one week old. In this respect, EGX Decision clarifies that such confirmation could be in the form of (i) a signature by the seller on the sell order confirming that the sell order is still valid, (ii) a new sell order altogether, or (iii) a declaration from the securities brokerage company confirming that the sell order is still valid. The first of these two options may prove to be problematic in practice, as it is common practice in Egypt to obtain signed sell orders and to refrain from executing them until the completion of specific conditions. The last option may be an easier way out, however, it places brokerage companies at an additional significant risk that they may be reluctant to take.

3. Liability of brokerage companies

In addition to the abovementioned risk, brokerage companies are already required by the Capital Market Law (as well as EFSA Decision and EGX Decision) to verify (i) the existence of the ownership documents of such securities, (ii) the ability of the purchaser to pay the purchase price, and (iii) the non-existence of legal or contractual obstacles to the transfer of ownership. In the event of breach by a brokerage company, EGX will be entitled to undertake corrective measures against the brokerage company.

4. OTC Market

In this regard, EGX Decision merely re-iterates the rules stated in EFSA Decision. EGX determines which delisted securities may be traded at the OTC market. These companies are required to negotiate any proposed amendments to the status of their listed securities with EGX. If they fail to do so, or if the amendments are disapproved, EGX is entitled to suspend them from being traded on the OTC market and eventually remove them from the market completely.

Conclusion

EGX Decision complements EFSA Decision in setting out the rules and regulations relevant to the trading of non-listed securities. Together both decisions help in closing many of the gaps that were previously exploited by fraudulent traders, and guarantee a better flow of information between the different involved parties starting from the seller, buyer, issuer of the traded securities and the regulatory authorities   [1] Supreme Constitutional Court Rule for Case No. 14/Judicial Year 37, Official Gazette, Issue No. 6 (bis) (b),15 February 2017. [2] EFSA Decision No. 17/2017 on Trading, Evidencing, and Disclosure of Transactions related to the Transfer of Ownership of Non-Listed Securities, Egyptian Gazette, Issue No. 46, 25 February 2017. [3] Egyptian Stock Exchange Decision No. 39/2017 on the Executive Procedures for the Trading, Ownership Transfer and Disclosure Rules Pertaining to Non-Listed Securities, Available through this link (Arabic).