FRA Amendment to Market-Maker Regul

Market-making is a regulated activity related to the securities market. It refers to specialized companies that continuously quote, buy and sell offers for securities that are traded on the stock exchange in a manner which allows participants in the market to buy and sell these securities at any point of time. This system has two advantage: it provides liquidity in the market and the makes information available on the price of securities in a completely transparent manner. This activity was added to the various services supervised by the Financial Regulatory Authority (“FRA”) since 2007 (which was the Capital Market Authority at the time), by virtue of Minister of Investment Decision No. 293 of 2007. This was later complimented by various decrees by the authority, the most important of which is decision No. 265 of 2014 with the conditions and procedures for licensing market-makers,[1] which is the subject of the most recent amendment.

The New Decision

On 30 October 2018, the Egyptian Gazette published FRA Decision No. 1200 of 2018 (the “Decision”)[2] amending its 2014 decision containing the conditions and procedures of licensing market-makers. The decision states that it comes into effect the day following its publication, i.e. starting 31 October 2018, and it only affects the conditions for licensing market-making companies as described below.

Main Amendments

• Whereas the previous decision did not provide a minimum capital requirement for market-making companies, the new Decision sets the issued and paid capital of these companies at EGP 10 million at least.

• The previous decision mandated that more than 50% of the securities transacted by the market-making company must be shares of securities companies supervised by FRA, such as brokerage, asset management, investment funds, and so on. This condition was amended so that market-making companies must maintain the 50% threshold but in transacting with companies authorized by the FRA to operate in securities-related activities. This is a broader term that includes all activities pertaining to the capital market.

• The third and most important amendment is that the previous rules required market-making companies to allocate no less than EGP 10 million to each market-made security i.e. for each security for which the company offers buy and sell quotations in a continuous manner. The most recent amendment has made a distinction between market making for index funds, and market making for securities. With respect to index funds – which are investment funds that deal, not in the securities themselves, but in indices tracking said securities – the new Decision requires the market-making company to allocate no less than EGP 10 million for each index fund. As for market-making for ordinary securities, the Decision requires that the company allocates a minimum of 20% of the average daily traded value for each security, given that the sum may not be less that EGP 250,000 for each of the securities on the principal stock exchange list, and EGP 100,000 for securities on the SME list.

• Finally, the fourth amendment relates to the segregation of accounts. The previous decision required market-making companies to segregate accounts for this activity from accounts of other activities they undertake, such as securities brokerage. The new Decision re-iterates the same principle, while adding the requirement that accounts pertaining to market making for index funds be segregated from accounts pertaining to ordinary securities.

Conclusion

The new amendment generally aims to encourage market-making activity in listed securities, which is a worthy cause as it increases liquidity and the availability of information on the Stock Exchange and thus stimulates trading. However, the new Decision states that it comes into effect the day following its publication and thus it does not give existing companies the usual grace period to comply with the new regulations.   [1] FRA Board of Directors Decision No. 265/2014 with the conditions and procedures for licensing market-makers stipulated under Article (27) (b) of the Capital Market Law, Egyptian Gazette, Issue No. 244, 30 October 2018. [2] FRA Board of Directors Decision No. 1200/2018 amending Decision No. 265/2014 with the conditions and procedures for licensing market-makers stipulated under Article (27) (b) of the Capital Market Law, Egyptian Gazette, Issue No. 82, 9 April 2014.