Shortselling rules are finally here, but trading isn’t

Short selling finally has a framework and a path to implementation. The Financial Regulatory Authority (FRA) issued a new rulebook (pdf) for short selling yesterday, five months after the regulator first laid out the rules in March. Brokerages already approved for short selling get one month from the decision’s effective date to have the tech ready, which could point to the rollout in late September, by our math. The decision will be published within days and is set to take effect the day after.

We were already waiting: Earlier this month, EGX Chairman Omar Radwan told us short selling would launch before the end of the month, with the final system tests already underway. The FRA first floated short selling in 2019, licensing 51 brokerages — including EFG Hermes, CI Capital, Prime Holdings, HC Securities, Cairo Capital Securities, Shuaa Securities, Arqaam, Arab African International Securities, and Premiere Securities — and promising trial runs, but the rollout never materialized.

What changes mechanically

Shareholders of an EGX-listed company can collectively lend out up to 40% of the company’s freefloat, up from the 25% ceiling set in March. No more than 5% of that freefloat can sit in direct contracts arranged between a brokerage, a lender (shareholder), and a borrower (short seller). These are transactions for which the brokerage is responsible, rather than routing through Misr for Central Clearing, Depository, and Registry’s (MCDR) lending system. Meanwhile, no single client can borrow more than 2% of a company’s freefloat, including related parties. The new decision does not restate the March framework’s separate 5% cap on a lender and its related group.

How the caps stack up: Consider a company with 1 bn freefloating shares. The lending pool tops out at 400 mn shares under the 40% ceiling (up from 250 mn under the March rules). Of that, 50 mn shares at most can be lent through direct broker-arranged contracts, and any one short seller stays limited to 20 mn shares, or 2%.

Short sellers can’t pile onto a falling stock. The sale price of borrowed shares has to be above the last traded price or equal to it, provided the last price move was upward. This is an uptick-style rule engineered to stop borrowed stock from being dumped into a decline. “This isn’t naked short selling,” Radwan said. Shares need to be sourced and recorded through MCDR’s system, with a 50% cash margin posted before they can be sold. So you can’t short a stock you haven’t actually borrowed, which makes willing lenders central to whether the market gets off the ground.

Sweetening the terms for lenders: MCDR will invest the short-sale proceeds in fixed-income instruments, with lenders getting that return on top of their lending rate once the position closes. That tackles the incentive problem. Radwan told us that getting asset owners to actually lend their shares has been one of the main hurdles. Under the new setup, lenders get an extra return on the sale proceeds, while borrowers get more choice over who they borrow from and only pay for as long as they keep the position open.

Brokerages need fewer hands on deck: Instead of the three certified experts required under the March rules, firms can run the desk with one experienced employee meeting the conditions set out in the decision.

The appetite question

The timing lines up with a new class of investor built to use exactly this kind of capacity. Just last week, the FRA cleared the way for Egypt’s first hedge funds, allowing fund managers to establish new hedge funds or convert existing funds into them. These funds may use leverage, derivatives, and shortselling strategies that can depend on access to borrowed stock.

The move is set to give Egypt’s still-thin derivatives market another push. EGX30 futures launched in March, and CIB and TMG single-stock contracts followed in June, but volumes have stayed low. Al Ahly Pharos’ Hany Genena cited restrictive fund mandates on leveraged instruments as one factor, alongside other market-structure constraints, rather than a lack of appetite.

But a stronger shortselling framework does not necessarily mean immediate demand. Shortselling demand shows up mainly in sustained downtrends, when declines run longer than rallies, Tycoon Securities’ Sameh Gharib tells EnterpriseAM. In the current market uptrend, most investors are buying and holding or trading around existing positions, so utilization would stay light even with a wider ceiling. “Even if activated today, utilization would remain relatively limited compared to a bear market,” he says.

What’s still missing

Only a subset of EGX-listed stocks will be eligible for short selling. The EGX still needs to set the eligibility criteria for stocks that can be made available for lending, subject to FRA approval, which leaves the practical reach of the higher ceiling an open question until that list exists. The plumbing isn’t finished — MCDR still has to write the technical procedures and get the FRA chairman’s sign-off, coordinate with the EGX on systems, and build the automated link between the trading system and the central lending system.

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