August 26, 2019

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  • EFSA to regulate foreign stock trading

    In early June, Kamal El-Ganzoury signed a decree amending the capital market law, making it illegal for brokerages and investment firms to trade in foreign securities.


    Cairo: A sudden decision to ban Egyptian brokerages from trading foreign stocks will likely be reversed as guidelines are currently being drawn up to attempt to regulate this activity on the market.

    Ashraf El-Sharkawy, chairman of the Egyptian Financial Supervisory Authority, told The Egypt Monocle that an article may be added to the amended capital market law to regulate the way local brokerages and investment firms deal with foreign securities.

    Over the past two weeks, “we’ve had two meetings with representatives of brokerages and investment firms to [discuss] regulating this activity…to make sure they [investors] are buying real stocks.”

    Youssef Kamal, head of international securities desk at CIBC, said they have already presented a trading manual to EFSA “showing them how we work…maybe it can help with formulating new procedures.”

    In early June, then prime minister Kamal El-Ganzoury signed a decree amending the capital market law, making it illegal for brokerages and investment firms to trade in foreign securities.

    A surprise to many and generally viewed as a decision that may result in losses for some financial institutions, the decree gave local fund managers a six-month window to readjust their portfolios in compliance with the amended law.

    But representatives of financial institutions are using the six months to negotiate with authorities and reverse the ban.

    Depending on the size of the firm, trading in foreign securities may equal 20-60 percent of a financial institution’s bottom line, said Kamal.

    “Many small companies that don’t have the capacity to serve institutional clients rely heavily on retail clients and diverse products…they offer foreign trading and maybe 60 or 70 percent [of their revenue] comes from this,” he added.

    El-Sharkawy said that within these six months, discussions are ongoing with all relevant and affected parties to determine the best way to move forward.

    The decision “banned [trading in] foreign stocks, but we will add an article in the law to regulate this activity [to be in line with international standards],” he added.

    He likened the difference in regulations for local and foreign stocks to how “local hotels abide by different standards than international hotels.”

    In the meantime, those who trade in foreign stocks are proceeding normally, hoping that by the time the six months are up, officials will have come to an understanding with representatives of Egypt’s capital market to regulate and not ban the activity.

    “I think everyone will wait until the last minute [to readjust portfolios] because they’re hoping the ban decision becomes some sort of government procedure. I think everyone is trading normally but just being cautious, maybe not accepting new clients, until a final decision is made,” according to Kamal.

    Protecting investors
    Authorities argued that initially, the decision was a safeguard measure to protect investor rights. Some saw it as merely an attempt by officials to limit the transfer of hard currency out of the country.

    Either way, it seems there was little thought given to the effect on brokerages and investment firms. For those who deal in foreign securities, it’s a main part of the diversified portfolios they offer clients.

    It’s also an important source of revenue, especially in a time when little commission is made from trading local stocks on the turbulent and constantly fluctuating Egyptian Stock Exchange.

    “Investment banks are not relying 100 percent on Egypt [market] for revenues, there has to be some sort of diversification …and this [diversification] also somewhat protects the investor,” Kamal said.

    One source who preferred to remain anonymous said the brokerage firm where they work has come to rely heavily on trading foreign markets after Egypt’s market took a beating in 2011. Two of the company’s three branches were shut down and any further restrictions on trading foreign stocks may result in a complete closure.

    Right away, executives and representatives of local financial instantiations began engaging in talks with officials in hurried attempts to block implementation of the amended law, and in the meanwhile, offering their own expertise on the guidelines needed to regulate this activity on the market.

    Several sources made it clear that the main issue was the market regulator’s lack of awareness of how exactly to regulate and monitor this activity — when problems arose, the easiest solution was to ban it altogether.

    In a statement released early June, EFSA said it had received many complaints from people dealing with brokerage firms “stating that they have lost large sums of money as a result of following the guidance and advice these firms gave to invest through them in foreign securities traded on foreign exchanges.”

    Reuters reported at the time that traders said the restrictions were imposed after Egyptian investors suffered losses from a sharp drop in Facebook shares after its initial public offering.

    According to Mohamed Qabil, team head of international trading markets desk at Prime Securities, agrees that the Facebook IPO was a turning point.

    But it wasn’t about shoddy transactions on the part of local brokerages. He said it was an issue of allocation. As one of the biggest IPOs ever conducted in the technology sector, investors from all over the world wanted in. The shares allocated to Egyptian brokerages, therefore, were minute in comparison to major hedge funds globally.

    One Egyptian retail company bought in at a premium of 18-20 percent, and then sold to some local investors. After the IPO went through and the price collapsed, “it created a big shock for these normal users, or normal speculators,” Qabil said.

    What this mess did highlight was the lack of monitory and regulatory control the EFSA has over local firms trading on foreign exchanges.

    CIBC’s Kamal said, “I think it’s more about complaints coming from retail investors that have lost money in foreign markets, [but this is] mainly due to the lack of awareness of traders themselves as well as the clients. … Some are unaware of the risks and market dynamics of foreign markets.”

    And since authorities “cannot govern these markets and don’t have the authority to govern local brokerage firms, they decided on the ban,” he added.

    According to Kamal, the EFSA only has a monitory mandate over companies working in the Egyptian market, meaning those that trade stocks listed on the Egyptian exchange, “because they can actually see the screens themselves.”

    They have access to on the spot surveillance over this activity, as well as preserving “the right to visit brokerage firms and seeing the flow and documentation of orders,” he explained.

    In that sense, the EFSA can monitor every part of the transaction conducted between investors and financial institutions. Not so when it comes to trading foreign securities.

    Kamal explained, “With international markets, we deal with international brokers. The EFSA cannot see us instantly, and there’s no way to govern this unless they want to take serious action about the mechanics of the trading.”

    For example, they have no power to control potential price manipulation, one of the violations the market regulator watches out for on the local market. But in any case, Kamal says, this would be impossible to commit given the low volume of trades conducted on behalf of local retail investors on the US market, the London Stock Exchange or others.

    The alternative, he suggests, would be for the EFSA to implement restrictions or rules regarding market monitoring, “by recording phone calls, timings, how the order was placed, the name, quantity, prices. That’s enough to govern this activity,” he said.

    He also suggested that a special license be obtained by local brokerages wishing to trade foreign securities. Another restriction can be a disclaimer added into contacts between brokers and investors, saying that the EFSA is not responsible for clients trading foreign equities.

    Limited exposure?
    Qabil said that only a handful of the approximately 160  licensed brokerages in Egypt are active in trading foreign securities, but most market share is with three brokerages.

    Karim Helal, chairman of ASEAN Egypt Business Association and investment banking expert, agreed, and didn’t think the decision would have a significant affect on the overall market.

    Trading foreign stocks is “an extremely insignificant portion of the volume of the typical Egyptian broker[ages], even the very big ones,” and very few brokers of the hundreds in Egypt even offer this service, he said.

    “I wasn’t really sure why they bothered coming up with this regulation,” Helal said.

    However, Qabil said, the activity “contributes a very important part of the company’s revenues. After the turnover of the local markets,” and the decline in the local economy, commissions generated from trading in foreign markets have become significant.

    Both Qabil and Kamal were hopeful that the ban will not be implemented at the end of the six months.

    “It was a dream to form a global trading desk in 2005…now we’re trading all of Europe, the Gulf, the US, etc. This would be a big step back for the capital markets sector in Egypt,” Kamal said.

    It would even mean losing out on some potential investors who may be lured to the local market in the future, he argued.

    “Some investors may want to open an account with us just to trade in euros or dollars, they don’t want to touch the local market. Even though we promote it, but some clients want to trade only in foreign currencies…with this ban, I’m losing this investor altogether. I won’t even be able to offer them Egyptian securities in the future.” –Additional reporting by Henry Shull for The Egypt Monocle

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