FRA Decision for the Establishment

After amending the Capital Market Law by virtue of Law No. 17 of 2018  and the addition of specific provisions to regulate futures exchanges, the Financial Regulatory Authority (“FRA”) issued a decision setting out the conditions and rules for incorporating these exchanges while limiting the scope of application to futures exchanges that specialize in derivative contracts from securities listed on one of the stock exchanges. One of the most important conditions for establishing these exchanges is that the participation percentage of financial institutions and exchanges may not be less than 75% of the capital of the futures stock exchange company. The decision also includes the conditions required for licensing the Egyptian Stock Exchange (“EGX”) to undertake trading of contracts derived from securities listed on it without having to establish a joint stock company. In general, the decision reiterates the provisions of the Capital Market Law and its executive regulations, and adds some provisions that the law gave FRA the power to determine.

Background

In March 2018, Law No. 17 was issued amending the Capital Market Law No. 95 of 1992 and it included many important amendments (the “Law”),[1] one of which is that it regulates the futures exchanges. The Law gives FRA the competence to set the conditions, rules, and templates to put the futures exchanges into action. This includes the rules and standards for the shareholding structure, the rules and conditions for licensing futures exchanges activity, and the requirement to pay insurance, its value and the procedures for withdrawing from it. The Law includes the basic rules for these exchanges. It limits the tools that could be traded on these exchanges to one or more types of securities, even though the tools the trading of which is being regulated are in fact – as per the definition of futures exchange in Article 26 (bis) of the Capital Market Law – “contracts, the value of which is derived from the value of financial assets, proprietary assets, price indexes, securities, commodities, financial tools, or other indicators determined by FRA, whether they are in the form of future contracts, options contracts or swap contracts or other template contracts”. One of the basic rules that the Capital Market Law also provides is that the futures exchange must take the form of a joint stock company the issued and paid‑in capital of which must not be less than twenty million Egyptian pounds. The Law also permits EGX to carry out the activity of futures exchanges by itself without having to establish a separate company, provided the trading is limited to contracts derived from the securities listed on it.

FRA’s Recent Decision

In this context, FRA issued decision No. 33 on 19 March 2019 (the “Decision”).[2] The Decision provides for the conditions for establishing the exchange companies and requires that an attorney acting on the company’s behalf submits to FRA evidence that the exchange company satisfies such conditions in order for FRA to issue its approval on the establishment. Most importantly, these conditions include requirements that (a) the headquarters of the exchange company be in Egypt, (b) the shareholding percentage of financial institutions, exchanges, or companies licensed to work in the capital markets not fall below 75% of the total shareholding structure of the exchange company, (c) compliance with the corporate governance code of companies working in the capital markets issued by FRA decision No. 107 of 2016, and (d) that a technical, financial and administrative study of the exchange be submitted to FRA. FRA also set out the licensing conditions for futures exchanges. These conditions include payment of the licensing fee and insurance, and fulfilment of technical electronic software, and connection requirements, in addition to other requirements that guarantee the safety and protection of data and trading. With respect to the right of EGX to carry out the activity of futures exchanges by itself, FRA also provided some rules for this matter. Among other things, FRA requires EGX to allocate an amount of twenty million Egyptian pounds for the operation of the new activity. FRA also requires EGX to (a) separate the accounts and the financial statements of the futures exchange activity from its regular activity, (b) appoint a dedicated executive manager, and (c) form a committee to supervise this activity. If EGX decides to establish a separate company to undertake futures exchange activity, it will have to comply with the provisions of this Decision as they apply to companies established for the purpose of acting as futures exchanges. In addition to the above, FRA has also set out some disclosure rules. It requires the chairman of the board of directors of the exchange to notify FRA chairman of any developments or incidents that may affect trading on the exchange immediately upon their occurrence as well as of any violations by futures brokerage companies. This includes amendments to the shareholding structure or to any of the data provided to FRA to obtain the licensing. It also includes cases of conflict of interest and lawsuits in which the exchange or any of its employees are a party to due to carrying out exchange activity. One of the disclosure rules also requires submission of all exchange board decisions related to trading, membership and market regulation in general to FRA. This board decision does not become effective except after ratification by FRA. Finally, FRA defines in this Decision the amount of insurance at five per thousand of the issued and paid-in capital of the company. FRA is authorized to deduct from this amount in two cases: (a) to fulfil the financial obligations that arise due to the violation of the law by the exchange, and (b) to fulfil the financial obligations that the exchange has failed to satisfy despite the lapse of thirty days from the date it was notified that payment has become due. In these circumstances, the company is required to complete the insurance amount within fifteen days from the date it was notified of FRA’s decision to withdraw.

Conclusion

Although Law No. 17 of 2018 explicitly stated that trading at the futures exchange will be limited to one or more types of securities, it also defined futures exchange as an exchange in which “contracts” will be traded. Considering the complexities that arise from treating contracts as securities, and what this entails in terms of the different methods of “trading” of those contracts in accordance with Egyptian Law, it will be important to wait for the issuance by FRA of the templates and conditions for the trading of these contracts on the futures exchange. The Decision is effective one day following its publication in the Egyptian Gazette, i.e. from 18 April 2019.   [1] Law No. 17/2018 amending certain provisions of the Capital Market Law No. 95/1992, Official Gazette, Issue No. 10 (bis) (h), 14 March 2018. [2] FRA Board of Directors Decision No. 33/2019 on the rules, conditions, and licensing procedures for undertaking the activity of futures exchanges for the trading of contracts that are derivative from securities listed on one of the stock exchanges, Egyptian Gazette, Issue No. 90, 17 April 2019.