FRA Sets Licensing Rules for Future

Following its issuance of the regulations for the establishment and licensing of futures exchanges, the Financial Regulatory Authority (“FRA”) issued a decision with the conditions and requirements for licensing the practice of brokerage in futures contracts derived from securities and financial instruments listed on a stock exchange (the “Decision”).[1] These include structural, infrastructural, and financial requirements to be met in addition to post-licensing regulations that must be followed. The Decision has not yet been published in the Egyptian Gazette, following which it goes into effect within a day. Background Futures markets were introduced into Egyptian law last year by virtue of Law No. 17 of 2018, which amended the Capital Market Law No. 95 of 1992 (the “Law”), thus regulating futures markets for the first time after years of legislative discussions. Among other things, the amended Law provides that the execution of trades in futures markets be undertaken by dealers in brokerage companies provided that the company obtains licensing from the FRA for the undertaking of brokerage services in futures contracts, with securities brokerage companies being allowed to obtain FRA licensing to practice this new activity as well. Decision No. 49 of 2019 FRA’s new Decision sets out the conditions and requirements for licensing the undertaking of brokerage services in futures contracts in addition to the regulations that licensed futures brokerage companies must abide by thereafter.

• Licensing Requirements

1. Structural Requirements

When applying for licensing, at least half of the capital of futures brokerage companies must be owned by legal persons/corporations, and at least a quarter of capital must be owned by financial institutions. In addition, board members of these companies must meet certain criteria related to experiences, qualifications, and reputation, among which is that the majority of board members, including the chairman, must have no less than five years of experience in stock exchanges and securities markets (or four years in case of passing FRA-ratified trainings on securities markets). The board’s term is three years, subject to renewal, and a set of roles/positions must be filled in the company, including a trading manager, an operations manager, and a contracts operations administrator. Finally, governance rules applicable to securities companies – as set out in a previous FRA Decision No. 107 of 2016 – apply to companies wishing to obtain licenses for the undertaking of futures brokerage as do the board member requirements for listed companies and companies supervised by FRA, as provided for in FRA Decision No. 162 of 2018.

2. Infrastructural and Internal Regulatory Requirements

Company headquarters must be appropriate for the undertaking of brokerage in futures contracts, and arrangements must be made to provide the necessary technical and technological systems in the company and its branches. This includes the infrastructure required for the electronic linking to the futures market and to the company responsible for the clearance and settlement of futures contracts (“Futures Clearance and Settlement Company”); the licensed applications and software required to operate the different services; data protection systems; and a separate emergency headquarters. Companies wishing to apply for licensing must also have a system for internal regulation in addition to providing an operational guide with a risk management system that anticipates potential risks and ways of managing them.

3. Financial Requirements

In accordance with the amended Law, the Decision provides that the issued and paid-in capital of the aforementioned companies does not fall below EGP 10 million (or their equivalent in foreign currency). Insurance must also be paid to FRA, at a rate of 0.05% of the issued and paid-in capital, taking into consideration that it does not fall below EGP 25,000. This percentage is increased in case of the company’s request for FRA’s approval to increase its capital. The deposited insurance amount will be returned – in whole or in part depending on violations – in case of a license revoke. Finally, a sum of EGP 5,000 must be paid as fees for the examination of the licensing application.

4. Requirements Specific to Licensed Securities Brokerage Companies

Licensed securities brokerage companies wishing to additionally undertake brokerage services in futures contracts must meet the structural and infrastructural requirements mentioned above, as well as the payment of the application examination fees, when applying for licensing of futures brokerage. The minimum capital requirements for both securities’ brokerage (EGP 15 million) and futures brokerage (EGP 10 million) must be fulfilled and no administrative measures by FRA or the Egyptian Stock Exchange must have been taken against the company within the six months prior to the licensing application submission (or six months should have passed since removing the violations in question). Finally, extra documents are required of these companies when applying for licensing, which include the extraordinary general assembly’s decision to amend the company’s bylaws and to add futures brokerage to its activities as well as the last audited annual financial statements.

• Post-Licensing Regulations

In addition to the requirements for licensing, the Decision outlines the different regulations that companies must follow upon obtaining the license to undertake brokerage services in futures contracts. These include record keeping, FRA’s access to these records, confidentiality, compliance with FRA’s rules and procedures on internal regulation, continuous compliance with FRA’s financial adequacy standards, reporting to the Futures Clearance and Settlement Company the details of trades on futures contracts to be executed through the company, and the adherence to FRA’s template and requirements in written contracts with clients. Licensed companies must also provide clients, when entering into contracts with them, with a statement clarifying the concept of trading in futures contracts and its procedures, advantages, and risks. This statement must be sent to clients once every year and whenever contract provisions are amended.   [1] FRA Board of Directors Decision No. 49/2019 with the conditions and requirements for licensing the practice of brokerage in futures contracts derived from securities and financial instruments listed on a stock exchange, available through this link (in Arabic).