CAIRO: When securities regulators in the United States and the United Kingdom banned short-selling on a host of financial companies shortly after the demise of banking giant Lehman Brothers, some local press predicted the long-planned push to install the practice in the Cairo and Alexandria Stock Exchange (CASE) was done for. Word quickly spread that this was not the case. Even as the global credit crunch spooked foreign investors and sent Egyptian markets careening, executives at Misr for Central Clearing Depository and Registry (MCDR), a company founded to develop the CASE, were taking the first steps to get short-selling underway. It is often said by Egyptian officials and businessmen that local finance has been shielded from global chaos because it is still so young. Short-selling, which allows investors to profit off a share s decline, is only the second tool beyond simple buying and selling to be introduced by the Capital Markets Authority (CMA). Complex investment tools like derivatives, the intricate bundles of securities at the core of America s financial collapse, are still the stuff of a distant future. The more pressing issue for Egypt s capital markets, many brokers and analysts say, is that progress has not been fast enough. "Egypt is quite primitive in terms of the kind of services offered by the stock exchange, said Mohamed Radwan, a broker at Pharos Securities. There are not yet any futures, any options, any derivatives. Hence being an emerging market. During a span from 2005 to 2007, the CASE soared, sending the market into a state of "euphoria, Radwan said. Investors flush with fresh cash would have been eager to try new tools, he said. "The Capital Markets Authority, or the stock exchange, has been quite lazy and late in introducing these kinds of instruments, he said. Now if we introduce something, everybody's losing money, everybody's pessimistic. You're going to find resentment, whether it's good for the sector or not. The lures and pitfalls of new tools Most markets permit potentially toxic tools like derivatives and short-selling because they also carry many benefits. Short-sellers, who are generally better informed than average investors, can help expose fraud and push down overrated securities. They also add liquidity, especially in bullish times. For Egypt, another big sell is that adding more intricate tools yields a broader trading system and, accordingly, more brokerages, white-collar jobs, educated investors and fees to collect. Yet as the last few weeks have shown, there are some serious risks. In the US, unfettered derivatives-trading became so convoluted and ubiquitous that some executives admitted to allowing their firms to sink billions into them without fully comprehending them. Unscrupulous short-sellers can feed nasty rumors into a market, hoping to torpedo an essentially healthy firm s stock. To avoid this, exchange officials say they are taking a firm hand in regulating new tools. In its new short-selling system, for instance, MCDR takes securities from lenders - usually shareholders who are not looking to sell anytime soon, such as a company s founder - and puts the shares in a monitored pool. They loan these shares to borrowers, collect collateral, monitor the stock price, ensure dividends are transferred to the lender, and guarantee the lender s right to get the stock back at any time. The CASE also employs an uptick rule, whereby short-sellers can only sell short at a price higher than the last recorded price. The US put a similar rule in place in 1938, when short-selling was blamed for worsening the Great Depression, but removed it in 2007. Partly due to the heavy regulation, demand for short-selling in Egypt should be slight at first, said Tarek Ezzat Abdelbary, managing director of MCDR. Only three brokerages have so far taken the necessary certification courses. Foreigners and those who have invested in markets where short-selling is common should drive the first burst of demand, Radwan said. "But both are going to contribute a minute segment of the market here. It took a year for same-day trading to catch on, Abdelbary said. In its first year, no more than four companies used it, while over 45 use it now at a daily volume of LE 70 million or LE 80 million per day, he said. Short-selling should follow a similar path, he added. When it does, a possible issue rarely encountered in the West is that many interpretations of Islamic law ban short-selling as a form of speculation. This is noteworthy not only because Egypt is a relatively devout, majority-Muslim country, but because recent financial woes have prompted world leaders to call for new, moral financial systems, making ethical investing appear less like quixotic fancy and more like practical necessity. Is the future coming fast enough? Despite the battering the CASE took over the last two weeks, the exchange s underlying health is good and getting better, Abdelbary insists. We are doing great, he said, reeling off a list of supporting figures. The exchange now boasts 2 million investors, he said. Transparency and corporate governance requirements are becoming stricter for listed firms. The number of brokerage firms in Egypt has grown to 150, up from 79 two years ago. "Real financial companies like Naeem brokerage and EFG-Hermes are sprouting, and financial media is on the rise, he said. But the exchange is clearly still young. Between 60 and 65 percent of trading comes from individuals, said Radwan. "In a developed market, you tend to assume that institutions have the biggest stake, Radwan said. "Because we are still an emerging market, individuals like to do everything with their own hands. Margin lending, where investors borrow money to buy securities, is still only done in Egypt based on mutual consent between brokerages and investors, Radwan said. "I think the Central Bank should make a decree whereby anyone who invests gets a 50 percent margin, he said. "It needs to be more professional, rather than at the primitive phase that it is right now. What is important is that the CMA and other bodies continue to develop new tools for the Egyptian exchange, a task that could be much harder now that investors are growing skittish, Radwan said. You can't just set your target and just get laidback and chill out and wait until it approaches you, he said. When the exchange opened, everyone thought that Egypt was going to be the regional hub for investment, he said. "Now Dubai has taken its place.
