FRA issues new short-selling rules with 50% minimum cash collateral

The Financial Regulatory Authority (FRA) has issued a new regulatory framework for short selling, requiring investors to provide cash collateral equal to at least 50% of the market value of the borrowed securities before executing a transaction, as per a statement.

The framework, issued under FRA Board Resolution No. 155 of 2026, regulates securities lending for selling and the sale of borrowed securities on the Egyptian Exchange (EGX).

The FRA developed the rules following consultations with the EGX, Misr for Central Clearing, Depository and Registry (MCDR), brokerage firms, and other capital market participants. The discussions examined proposals from stakeholders and practical challenges identified during pilot phases.

FRA Chairman Islam Azzam said activating short selling marks a new step in modernizing Egypt’s capital market instruments. The mechanism is intended to increase liquidity, improve pricing efficiency, deepen the market, and accommodate a wider range of investment strategies.

The framework establishes safeguards for lenders and borrowers and places transactions under the FRA’s supervision. It also requires continuous connectivity among MCDR, the EGX, brokerage firms, and custodians through the Central Lending System developed by MCDR.

The system will document every stage of a transaction and allow short sellers to view available lending offers and select those that suit their investment objectives. Lenders will also be able to review other offers registered on the platform.

Under the new rules, brokerage firms must establish integrated systems for managing borrowing clients’ accounts and documenting transaction procedures. They must assess clients’ financial solvency and ability to meet their obligations, while ensuring that borrowing volumes are proportionate to each firm’s financial capacity.

Brokerages must collect the minimum 50% cash collateral before executing a lending transaction. They will also monitor deposits and withdrawals from settlement accounts and revalue borrowed securities during the trading session based on the closing price.

If a brokerage firm’s license is revoked or its operations are suspended, the firm must transfer its borrowing clients’ positions and collateral to another brokerage licensed to conduct short-selling transactions.

MCDR will operate the central lending system and monitor lending and borrowing limits to ensure that the prescribed thresholds are not exceeded. It will value borrowed securities and total collateral at the end of each trading day based on the security’s latest closing price and settle any resulting difference daily through the brokerage firm’s settlement account.

The company must also take the necessary measures to return securities to the lender if the brokerage fails to do so.

MCDR will retain the full proceeds generated from selling borrowed securities and invest them on behalf of the lending client from the settlement date in fixed-income instruments or other investment vehicles approved by the FRA. It must pay the lender the agreed lending rate and investment returns within two trading days after the position is closed.

When the price of borrowed securities increases, the brokerage firm must settle the difference daily from its settlement account. Any proceeds exceeding the original selling price must be invested through the permitted channels for the borrowing client’s benefit. If the security’s price later declines, the corresponding difference in market value must be returned to the brokerage firm.

The framework does not allow all companies listed on the EGX to participate automatically. Eligible securities will be selected according to criteria set by the EGX and approved by the FRA.

Borrowed securities may not exceed 40% of a listed company’s freely traded shares. Contracts involving a brokerage firm, lending client, and borrowing client will be capped at 5%, while the total securities borrowed by an individual client and related parties may not exceed 2% of the company’s freely traded shares. The FRA may also establish or adjust maximum limits for lenders in line with market conditions.

Lenders will retain the financial rights and benefits attached to their securities during the lending period, including cash and in-kind dividends, subscription rights, and other entitlements. Voting rights at general assembly meetings, however, will belong to the holder of the borrowed security on the date of the meeting.

MCDR must adjust the number of lent and borrowed securities when related rights or benefits increase or reduce the total number of issued securities.

Brokerage firms and custodians must provide the FRA and the EGX with all requested transaction data, documents, and information. The FRA may exclude securities from the list of eligible instruments, adjust discount rates applied to securities and financial instruments submitted as collateral, or temporarily prohibit particular lenders or borrowers from conducting transactions.

The regulator may also prevent brokerage firms from entering into new short-selling transactions for a specified period or revoke their approval to conduct the activity.

Brokerage firms already authorized by the FRA to carry out short-selling transactions will have one month from the decision’s publication in the Official Gazette to establish the required technological infrastructure.

Participating firms must maintain minimum net shareholders’ equity of EGP 5 million. The threshold rises to EGP 10 million for firms seeking to conduct both margin trading and securities lending.

Firms must also maintain an average net liquid capital ratio of at least 15% during the preceding six months. Additional requirements include transaction recording and documentation systems, internal controls, financial auditing procedures, and at least one employee with relevant practical experience who has passed the tests or training courses required by the FRA.

The framework follows the FRA’s recent decision regulating the establishment of hedge funds and allowing existing investment funds to undertake hedge fund activities for the first time. These funds will be permitted to conduct short selling and invest in financial derivatives.

The decision will be published in the Official Gazette and on the FRA’s website within days. It will take effect the day after its publication.