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EFSA’s Decree regarding T+1 Settlem

EFSA’s Decree regarding T+1 Settlement for Security Transactions
In line with the intention of the Egyptian Financial Supervisory Authority (“EFSA”) and the Egyptian Stock Exchange (“ESE”) to boost the performance of the stock exchange, guaranteeing a high level of liquidity and incentivizing investors to trade on the market, EFSA issued decision No. 74 of 2015[1] on 31 May on T+1 settlement for security transactions (the “Decision”).
Subject of the Decision
The Decision provides that investors may trade on some or all shares or index fund notes listed on ESE on the day following the day they have been acquired (T+1), without prejudice to the clearing and settlement dates of other transactions of the same parties. The newly introduced settlement system is not intended to replace the T+2 settlement system currently in place. According to the Decision, a security may be traded one day after it has been acquired. ESE and the central clearing and custody company shall lock a sufficient number of shares and notes intended to be sold in the seller’s settlement account.
Obligations of the Brokerage Companies
The Decision sets out the brokerage companies that may carry out T+1 transactions:
  • Companies that have been licensed by EFSA to carry out intra day trading, a settlement system that was approved by EFSA pursuant to its decree No. 67 of 2012, amended by decree No. 6 of 2015.
  • Companies that are not licensed as per point 1 above, but are allowed to carry out T+1 trading within the limits of the their funds allocated to such trading at the clearing house.
It is worth noting that according to the Decision, the shares and notes must be sold the next day following their acquisition through the same brokerage company used by the buyer to acquire the shares and notes. The brokerage companies shall obtain sell orders in order to be able to perform such orders. In the interest of the stability of the market or investors trading on the market, EFSA has the authority to suspend a brokerage company’s T+1 trading activities.
The Egyptian Stock Exchange
The Decision further provides that ESE and the central clearing and custody company shall charge a fee not exceeding the fees payable for intra day trading services. ESE shall also supervise T+1 trading activities, cancel non-compliant transactions and notify EFSA of all cancelled transactions.
Conclusion
EFSA had introduced intra day settlement trading in 2012 to encourage the flow of capital into the Egyptian Stock Exchange by helping them overcome the risks of rapid price fluctuation of securities especially overnight risks, predominant in the wake of the 25 January 2011 Revolution. And in line with EFSA’s efforts to revive the market and boost the performance of the ESE, EFSA’s board adopted the Decision to allow T+1 trading at conditions less stringent than those applicable to intra-day trading. This is likely to lead to higher liquidity in the market, a higher performing stock exchange and lower risks. The Decision comes after EFSA had already introduced the concept of market makers earlier this year in an effort to create new tools to encourage investors and increase liquidity on the market. It shall be seen in the next weeks whether such new tools are indeed fulfilling their purpose.   [1] EFSA Board of Directors’ Decision No. 74/2015 on the T+1 Settlement for Security Transactions, Egyptian Gazette, Issue No. 130 (cont.), 7 June 2015.
In line with the intention of the Egyptian Financial Supervisory Authority (“EFSA”) and the Egyptian Stock Exchange (“ESE”) to boost the performance of the stock exchange, guaranteeing a high level of liquidity and incentivizing investors to trade on the market, EFSA issued decision No. 74 of 2015[1] on 31 May on T+1 settlement for security transactions (the “Decision”).
Subject of the Decision
The Decision provides that investors may trade on some or all shares or index fund notes listed on ESE on the day following the day they have been acquired (T+1), without prejudice to the clearing and settlement dates of other transactions of the same parties. The newly introduced settlement system is not intended to replace the T+2 settlement system currently in place. According to the Decision, a security may be traded one day after it has been acquired. ESE and the central clearing and custody company shall lock a sufficient number of shares and notes intended to be sold in the seller’s settlement account.
Obligations of the Brokerage Companies
The Decision sets out the brokerage companies that may carry out T+1 transactions:
  • Companies that have been licensed by EFSA to carry out intra day trading, a settlement system that was approved by EFSA pursuant to its decree No. 67 of 2012, amended by decree No. 6 of 2015.
  • Companies that are not licensed as per point 1 above, but are allowed to carry out T+1 trading within the limits of the their funds allocated to such trading at the clearing house.
It is worth noting that according to the Decision, the shares and notes must be sold the next day following their acquisition through the same brokerage company used by the buyer to acquire the shares and notes. The brokerage companies shall obtain sell orders in order to be able to perform such orders. In the interest of the stability of the market or investors trading on the market, EFSA has the authority to suspend a brokerage company’s T+1 trading activities.
The Egyptian Stock Exchange
The Decision further provides that ESE and the central clearing and custody company shall charge a fee not exceeding the fees payable for intra day trading services. ESE shall also supervise T+1 trading activities, cancel non-compliant transactions and notify EFSA of all cancelled transactions.
Conclusion
EFSA had introduced intra day settlement trading in 2012 to encourage the flow of capital into the Egyptian Stock Exchange by helping them overcome the risks of rapid price fluctuation of securities especially overnight risks, predominant in the wake of the 25 January 2011 Revolution. And in line with EFSA’s efforts to revive the market and boost the performance of the ESE, EFSA’s board adopted the Decision to allow T+1 trading at conditions less stringent than those applicable to intra-day trading. This is likely to lead to higher liquidity in the market, a higher performing stock exchange and lower risks. The Decision comes after EFSA had already introduced the concept of market makers earlier this year in an effort to create new tools to encourage investors and increase liquidity on the market. It shall be seen in the next weeks whether such new tools are indeed fulfilling their purpose.   [1] EFSA Board of Directors’ Decision No. 74/2015 on the T+1 Settlement for Security Transactions, Egyptian Gazette, Issue No. 130 (cont.), 7 June 2015.