New reforms are set to put the market on track for sustainable and long-term growth

Given the fallout from the revolution of 2011, the management of the Egyptian Exchange (EGX) focused heavily on short-term challenges and adjusting market operations in order to safeguard the exchange. T+0 settlement was suspended, which brought intraday trading to an end, the pre-trading mechanism used to quote stocks’ guide prices was halted and price fluctuation caps were introduced, acting as dampers to volatility by temporarily shutting down the exchange when they were exceeded.

However, by the second half of 2012 the Egyptian Financial Supervisory Authority (EFSA) and the EGX felt that the macro-economic backdrop had stabilised sufficiently for these measures to be rescinded, and since that time the EGX has largely turned its attention to the longer-term development of the exchange. Interested parties were also granted the opportunity to see just what the EGX’s future development might look like with the release of the “Egyptian Exchange Proposed Strategy 2013-2017”. The document maps out an ambitious plan to help buffer the capital markets from external pressures, as well as reverse the drop-off in investment levels precipitated by the cooling global economy.

Early Progress

It is one thing to formulate a development strategy, and quite another to implement it successfully. However, the bourse has already taken a number of significant steps along its new strategic route. The first objective of the strategy is to develop the EGX’s legislative infrastructure, currently built around the Capital Markets Law of 1992. To this end the EGX in cooperation with the EFSA is currently preparing a draft law that will address areas of legislative weakness, such as investor protection. The new law, according to the EGX, will be a flexible instrument, with much of the operational detail residing in the executive regulations that can be more easily adjusted by the supervisor and the exchange.

In the meantime, the exchange has sought to create a more favourable regulatory environment for investors and listed companies. In February 2014 the EFSA issued new regulations for listed companies that ended the obligation to seek permission from the regulator in order to split shares.

Neither will they be required in the future to call a general assembly prior to a making a capital increase – provided this action complies with previously established rules. The clear objective of these changes is to encourage investment and ease the regulatory burden on exchange participants.

Staying Up-To-Date

A second objective of the EGX concerns market development and updating the trading environment. This will involve, inter alia: the further development of exchange-traded funds (ETFs); the launch of a derivatives market, which is considered central to attracting investors in large numbers; activating rules for sukuks, or sharia-compliant bonds; implementing market maker rules, which are extant but remain dormant; enhancing the bond market, which is an essential pillar of any exchange; and developing the Nile Stock Exchange (NILEX).

Again, important steps have been recently taken towards meeting some of these objectives. In February 2014 the EGX launched a new Nile Index as a first step to boost liquidity in this section of the market. The new index uses similar methodology to the main index – market capitalisation adjusted by free float – but with a number of small differences. The most significant of these is that there is no fixed number of companies that constitute the index, with the constituents determined only by their ability to meet the established index criteria.

In March 2014 the EGX’s board of directors gave its approval to a new set of executive rules for ETFs, market makers and block deals and sent them to the EFSA for final approval. As for the debt market, a new bond trading platform, which has been a topic of discussion for around a decade, has recently emerged from its planning phase and is scheduled for implementation in 2014. Initially slated for launch in the first half of the year, negotiations with the Central Bank of Egypt concerning the amount of bonds that will be offered for trading on the bourse have pushed the anticipated implementation date back into the second half of 2014.

Responsibility

The EGX’s third strategic objective is to reinforce its role in the economic and social development of the country, expanding financing options and extending funds to key areas of the economy. To do this it intends to encourage more companies to stage initial public offerings (IPOs), which the bourse believes will enhance its development role, help to finance national projects by encouraging the issuance of sukuks and bonds, and propagate a culture of corporate social responsibility by encouraging listed companies to make a greater commitment to the concept of accountability.

Pursuing some of these aims, the EGX organised the first IPO conference to be held in Egypt in May 2014 as part of its drive to encourage more listings. The EGX IPO Summit also served as a useful platform to showcase new listing rules aimed at increasing the market’s depth and governance.

With relation to corporate governance, attention in 2014 has been directed towards the brokerage houses that act as an intermediary between investors and the bourse: a first draft of new membership rules that govern the interaction of brokerage firms with the EGX and its customers is currently being reviewed by stakeholders and other interested parties. The purpose of the new rules is to simplify the connection between the EGX and its members and enhance corporate governance, thereby establishing a greater degree of market protection for all participants.

Wider Reach

Encouraging investment and activity more broadly is a fourth objective for the exchange. In order to meet this goal the EGX intends to: resume its overseas promotional campaigns, which were put on hold during the political crisis; work with business associations, as well as commercial and industrial chambers to encourage more listings on the main board and the NILEX; launch campaigns aimed at domestic investors and encourage greater individual participation; establish an investor relations centre to enhance communication between EGX management and investors; and further develop FIX HUB, which is a recently launched order routing network that the EGX would like to see reactivated with more member firms and connected to foreign exchanges such as the Istanbul Stock Exchange and NYSE Euronext to increase market liquidity.

The EGX’s fifth objective is related to enhancing the technological backbone of the EGX by updating trading-related systems, increasing the availability of information and launching new indices – as seen with its recent efforts in relation to the NILEX.

Finally, the EGX intends to raise its profile, continue its efforts to secure dual-listing agreements with regional exchanges to attract more investment and increase market depth, and encourage global financial institutions to issue financial instruments focused on the Egyptian market – an area that it has already had some success in, such as with the Egypt Index ETF launched by Van Eck Global on the New York Stock Exchange in 2010 and the EGX 30 Index Certificates listed by Deutsche Bank on the Frankfurt and Stuttgart exchanges since 2006. In March 2014 the EGX inked a memorandum of understanding with the Khartoum Stock Exchange (KSE) which, as well as allowing the KSE to benefit from the EGX’s greater experience, will facilitate access by Sudanese investors to the Egyptian market through dual listings.

Sustainable Growth

New listing rules, which went into effect on February 1, 2014, reflect the conflict between the goals of expansion and governance. For example, in formulating related regulations the EGX has sought to incentivise companies to stage IPOs and list on the exchange by providing a greater degree of regulatory clarity, while ensuring that the long-term interests of the exchange are safeguarded.

The areas addressed by the new rules include minimum capital requirements, the minimum number of shareholders, a percentage free float requirement and a minimum number of shares to be listed. They also allow Egyptian firms to incorporate directly through an IPO to be listed – an issue that was not addressed in previous iterations – as well as permitting foreign ETFs to be listed for the first time. Finally, the disclosure requirements of listed entities have been widened and made more stringent.

Conscious of the bourse’s history, which has included an era of rapid expansion in listings that resulted in degraded governance, market volatility, insider trading and a culture of poor disclosure, the drive for reform has had to be balanced with caution. Having spent the first several years of this century implementing major regulatory reforms and overseeing the delisting of non-compliant firms, the EGX is determined to ensure that future additions to the bourse do not reduce the quality of the main board that it has carefully and diligently worked to establish.