FRA issues model short-selling contract, with launch weeks away

The Financial Regulatory Authority (FRA) issued a model contract for short selling, ticking off another requirement ahead of the mechanism’s launch. Brokerages and investors borrowing shares to short will use a single template setting out each side’s obligations, according to a statement from the regulator.

Here’s how it works: The template governs the relationship between the brokerage and the borrowing client — the lender is a separate party that supplies shares through the central lending system run by Misr for Central Clearing, Depository, and Registry (MCDR), not a signatory to this contract. Investors must put up margin before the borrowing is executed, at no less than the regulatory minimum, with brokerages required to hold the funds in segregated accounts and revalue borrowed shares against the live closing price during the session. All fees must be disclosed upfront, and any changes require the client’s explicit consent.

When things go wrong: If an investor fails to return borrowed shares on time, the brokerage must buy them back. Positions must also be closed if a stock is removed from the list of eligible securities or the issuer becomes subject to an acquisition, merger, tender offer, demerger, or liquidation. Brokerages must invest clients’ margin funds in FRA-approved instruments for the duration of the loan, disclose where it sits, and credit the return to their accounts. They also owe clients a detailed, plain-language guide to the mechanism and its risks, refreshed whenever the rules change and handed over at least once a year.

So what’s the holdup? The FRA is finalizing operational guidelines for the other parties involved, while MCDR works on linking its central securities lending system to brokerages in real time, allowing borrowers to see every available offer and pick what fits while letting lenders see what else is on the system. That shouldn’t take long, according to FRA Chairman Islam Azzam, who said in Alexandria last week that short selling would go live “within weeks,” though he stopped short of giving a date.

IN CONTEXT- The FRA issued its short-selling rulebook in August, following board approval earlier that month. Licensed brokerages were given a month from the rules taking effect to get their systems ready, pointing to a late-September launch that never materialized. Testing ran past that deadline: MCDR was still trialing the central lending pool in September, with an early-November rollout in its sights, and the FRA said on 13 October that live testing with brokerages was underway. The EGX has drawn the eligible universe from the EGX30, with 30 constituents and the EGX30 ETF cleared for lending from September.

Short selling is also the last piece of a broader push to give investors more ways to trade on the EGX. The exchange launched index futures in March and single-stock futures on CIB and TMG in June, after securing its futures exchange license in January. A new hedge fund rulebook also took effect in September, allowing funds to short stocks, trade derivatives, and borrow to invest. Short selling itself is older than all of that on paper: the mechanism has technically been allowed since 2019, when the FRA licensed some 51 brokerages to offer it.

Why it matters: The regulatory side is nearly done, and what’s left is technical and behavioral. The FRA statement says activation still waits on the live MCDR link-up with brokerages — getting the mechanism to trade at all then hinges on whether shareholders will lend. That supply question is the same one that sank the 2019 attempt. EGX Chairman Omar Radwan told us in August that “one of the main deterrents was the lack of incentives for asset owners to lend their shares.”

The new framework tries to fix that by having MCDR invest the proceeds from short sales in fixed-income instruments, with lenders earning that return on top of the lending fee once the position closes. They also keep their dividend and subscription entitlements while their shares are out on loan.