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Executive Procedures and Rules for the Settlement Guarantee Fund (SGF)
Introduction
I. Definition and objective of the SGF:
• Definition
• Objective
• Role
• SGF management committee
• SGF management committee members
• Role of SGF management committee
• Risks covered by the SGF
• SGF finance resources
II. Legal and Accounting Procedures complementing the Function of the SGF:
• Contract
• Dispute settlement
• Preparing financial statements
• Investment of the SGF funds
III. SGF Capital:
• Determining amount of member contribution in the SGF capital
• Method of payment of member contribution in the SGF capital
• Calculating the SGF capital
• SGF Minimum capital
• Minimum member contribution in the SGF capital
• Rules and procedures for completing payment of member contribution
• Withdrawing, by a member, of the surplus in his contribution in the SGF
• Withdrawing, by a member, of his full contribution in the SGF
IV. Procedures and Method of Daily Work at SGF
• Using the SGF capital and deducting therefrom
• SD
• SD + 1
• SD + 2
• SD + n
• Rules and procedures of completing payment of member contribution
Introduction
Further to the development program adopted by the Capital Market Authority effective 1994, operation rules and procedures were developed for the SGF in accordance with the provisions of the CMA Decree No. 29 dated August 5th, 2004 and in pursuance of provisions of Article (18) of Law No. 93 of the year 2000 (amended by Law No. 143 of 2004).
I. Definition and objective of SGF
Definition of the SGF
A fund comprising all contributions of the SGF members. Settlement is performed against the accounts they have at the company and clearing banks whether for a third party or their accounts.
General definitions
“Member” means an SGF member.
“Committee” means the SGF management committee.
“CMA” means the Capital Market Authority.
“Misr for Clearing” means Misr for Central Clearing, Depository and Registry.
“CASE” means Cairo and Alexandria Securities Exchanges.
“Brokerage firm” means securities intermediary firm.
“SD” means the day designated for settlement.
“Risk rate” means the classification grade of a member in terms of his risk rate. It is calculated on the basis of his compliance with the provisions of the SGF in terms of the number of times he defaults on meeting his obligations during the period.
“Securities coverage” means that the SGF, on behalf of the seller, delivers or transfer sold securities.
“Monetary coverage” means that the SGF subrogates the purchaser regarding the payment of the purchase amount.
“Delay charges” is paid at the rate of 0.005 for each day of delay against the contribution or the non-performed obligation, whichever is less, and in the same currency of trade.
“Cost of borrowing from banks” is paid by the defaulting member at the rate of V% for each delay day within the limits of the commitment amount performed by the SGF on his behalf and in the same currency of trade.
“V%” means banks’ current lending rate in addition to any other encumbrances that may be engendered in this respect.
Objective of SGF
• Ensuring performance of settlement obligations resulting from transactions of trading listed securities. The SGF ensures that all trading transactions are settled on the Settlement Date.
• Increasing the volume of transactions in the securities market when market participants realize the positive role of the SGF in terms of achieving stability and control of transactions in this market.
• Promoting domestic and foreign investments to trade in the Egyptian capital market by ensuring that they get their rights at specified time frame.
SGF Role
• A positive role in ensuring settlement of all transactions of the SGF members at a specified time frame.
• Covering default risks of cash or securities resulting from SGF members’ failure to settle transactions involving listed securities.
• Promoting credibility and confidence in brokerage activity in the Egyptian securities market
• Following up on member companies on a daily basis to ensure that any problem that may cause non-performance of the settlement of transactions listed and implemented in the exchange is solved.
SGF Management Committee
The committee consists of seven members and has following role and powers:
Members of the committee
• Representative from the CMA
• Representative from CASE
• Two representatives from MCDR.
• Two representatives from the settlement members
• Two representatives from custodian banks
• The committee shall be chaired by one of the company’s representatives per a decision from the company’s management. The chairman shall call for committee meetings on a periodical or exceptional basis.
• The committee shall serve for a term of three years to be renewed for another period or periods.
• Committee members shall be selected through direct ballot to be administered by each entity (which has representatives in the committee) to its members, and under the supervision of the company. The CMA and CASE shall appoint their representatives in the committee.
• The CMA shall be notified of the names and experiences of the committee members within fifteen (15) days from the date their appointment decision is issued. It has the right to object to any of these members if their appointment, continuation thereof, will result in compromising the SGF or its members, or the capital market participants.
• The committee may invite experienced persons to attend its meeting without having a vote in its decision.
Role of the Committee
• Propose policies for investment of the SGF funds
• Propose development of operation procedures of the SGF to keep abreast with developments that occur in the securities market, or to address wrong practices by the SGF members
• Take actions against defaulting members
• Settle disputes that may arise among the SGF members
The proposals of the Committee shall be submitted to the company’s board of directors for consideration and action.
The Committee shall prepare a quarterly financial position statement to be submitted to the company’s board of directors, with a copy sent to the CMA.
Risks covered by SGF
• Failure of members to pay for purchased securities.
• Failure of members to deliver or transfer sold securities.
SGF finance resources
• Members’ contributions in the SGF capital.
• Delay charges collected from members who violate rules of the SGF.
• Returns from investment of the SGF capital.
• Returns from investment of delay charges.
• Profits generated from selling and purchasing of securities which are actually covered by the SGF and subsequent distribution of free securities or dividends of these securities (i.e. coupons).
II. Legal and Accounting Procedures Complementary to SGF Operation
• Contract between a member and Misr for Central Clearing, Depository and Registry
A contract is concluded between the member and MCDR indicating the rights and obligations of both the member and the fund, and the consequences of its violation, in addition to other issues related to clearing and settlement.
• Dispute settlement
The CMA shall settle disputes that arise among the Committee and the SGF members.
• Preparing SGF financial statements
Procedures and rules organizing investment of SGF revenues and funds
1. The company shall invest SGF funds in short term financial instruments or governmental securities.
2. At the end of each fiscal year, the proceeds shall be distributed to the SGF members’ accounts on a pro rata basis of each member’s cash contributions to the total contributions and in accordance with relevant decisions of the general assembly of the company while taking into consideration the obligations of the member resulting from defaulting on payment of amounts due to the SGF. No returns on value of a member risk rate shall be calculated or distributed.
3. In all cases, delay charges collected from members, or the returns from their investment, may not be distributed.
4. The SGF shall bear all expenses of its operation and management.
• Financial statements of the SGF shall be prepared separate from those of the MCDR.
• SGF accounts and data shall be reviewed and inspected annually by the SGF auditor who will be appointed by a decision from the general assembly of the company and to be selected from the register prepared by the CMA for that purpose.
• The fiscal year of the SGF shall commence and finish with the startup and end of the fiscal year of the company.
• The company shall charge a percentage of the total revenues of the SGF in return for its management in accordance with what the general assembly of the company decides in this regard.
III. SGF capital
Method of calculating contribution
1. A member’s contribution is determined as follows:
| a member’s contribution in the SGF= member’s contribution X SGF capital X Special risk rate |
2. The amount of a member’s contribution in the SGF shall be defined in accordance with his average daily transactions (average total sales and purchase transactions he has executed) over the last three months preceding the period for which the SGF capital is required to be defined and in proportion to total averages of daily transactions of all members during the same period. It shall be calculated as follows:
| A member’s average daily transactions = Total amount of sale and purchase transactions of the member for the period of three months / 2 X number of execution days by the member during the three months |
| A member’s contribution in SGF capital = Member’s average daily transactions / Total of members’ average daily transactions |
How SGF capital is calculated
The SGF capital is determined to cover two kinds of risks:
a. Risks of the market as a whole. This represents 35% for all members
b. Risks caused by the member himself
This is calculated as follows:
SGF capital = Member’s max average daily transactions during three months X Max number of settlement days X 35%
(risk rate) |
A member’s highest average daily transactions during the three months preceding the calculated period.
The product is multiplied by 4 (maximum SDs).
The product is multiplied by 35% (risk rate).
This is calculated as follows:
• A member’s average daily transactions during a period of three months = average sales and purchase transactions / a member’s number of execution days during this period
• SGF capital = maximum average daily transactions of a member X 4 X 35%.
SGF minimum capital
• In all cases, the SGF capital must not be less than the moving average of the previous four periods and must be rounded to the nearest million.
Member’s minimum contributions in SGF
A minimum contribution of any member shall not be less than L.E 10,000, or less than contribution of the member whose rank lies at the start of the ten in the finals one hundred of the order of members’ contribution, whichever is bigger. The SGF members against whom cease and desist orders have been issued shall, when they return to do their business, pay the same contribution as has been determined before the issuance of these orders and the contribution shall not be less than the minimum limit set for this period.
How to calculate a member’s risk rate for the period on the basis of which his contribution is calculated:
• The amount of the contribution increases in accordance with a member’s risk rate during the period on the basis of which his contribution is calculated.
• A member’s risk rate is calculated for the number of days he defaults on settlement according to the following table:
| Weighted relative significance of risk rate |
|
| SD |
2.5 point |
| SD + 1 |
5 point |
| SD + 2 |
10 point |
| SGF covers deficit |
20 point |
|
• SGF members are divided into different categories based on the risks of each one. This is done by adding up the points of each item of risks. The risk rate of each member is determined and added to his share in the capital of the SGF with the purpose of setting the value of his contribution. This is calculated as follows:
| Category |
Weighted level of risk rate
|
Risk rate
|
A
|
< = 30 points
|
One time |
B
|
> 30 points and <= 60 points
|
1.25 times
|
| C |
> 60 points and <= 90 points
|
C1.5 times
|
| D |
> 90 points |
D Twice |
Rules and procedures for completing payment of members’ contribution in SGF capital
The SGF capital and its members’ contributions are recalculated every three months. A member shall pay or complete the value of his contribution in the SGF within five workdays at most from the date of their notification if the recalculation of the SGF capital entails increasing the members’ contribution. In the case of failure to make payment during such period, a member shall pay a daily delay charge at the rate of 0.005 per each day of delay on a retrospective basis effective the day following day of notification. The delay charge shall continue to be charged until the contribution is paid or completed. MCDR shall take the necessary measures according to Article (23) of Law No. 93 of 2000.
How a member withdraws an amount in excess of his contribution in the SGF
• A SGF member may withdraw the amount in excess of his contribution during the current period provided that he fulfils all his obligations towards MCDR.
• The amount shall, within ten days from the SGF management receives a written application from the member requesting withdrawal from the SGF, be refunded within five workdays from the date of notification. In case no withdrawal request has been lodged during that period, this shall be considered as an implicit approval by the member to add that sum to the amount of his contribution for the new period.
Excess amount: the amount in excess of the member’s contribution for the current period.
How a member withdraws his full contribution in the SGF
• A member may withdraw the whole of his contribution in the SGF after ninety days from the expiry of his membership in MCDR for any reason.
• The SGF management shall refund a member’s contribution, or the amount in excess thereof upon a request made by the member to this effect and provided all his transactions are closed and obligations are satisfied towards the SGF and MCDR.
• However, a member shall remain liable to any claims related to his transactions even after getting back his merits. The company shall have the right of recourse to him pursuant to provisions of Article (33) of the Law on Capital Market.
IV. Executive procedures and rules for daily work at SGF
How to utilize and deduct from SGF capital:
The SGF capital shall be used only for settlement of rights and obligations arising from transactions involving listed securities. The SGF scope of work is defined by the following:
1. The SGF shall cover the value of purchased securities on behalf of the buyer if he fails to pay in full or in part the value of these transactions on the scheduled SD.
2. The SGF shall deliver or transfer sold securities on behalf of the seller if he fails to deliver or transfer the same on the scheduled SD, and if the lending system fails to settle the transaction.
3. The SGF shall cover the obligation of the defaulting member on his behalf on the scheduled SD even if the amounts paid by the SGF on behalf of the member exceed the value of his contribution in the SGF capital.
4. Any amounts paid by the SGF on behalf of the member and any amounts charged to him as delay charge shall be deducted from his contribution in the SGF. The member shall pay or complete the contribution within two working days from the settlement date.
5. The SGF may borrow from banks to fulfill settlement obligations on behalf of defaulting members. Each member shall bear the cost of his share in these loans.
Deducting from members’ contributions in SGF
Upon completion of settlement, the SGF Management shall start with settling all outstanding transactions due to failure on the member part to settle the same whether they are monetary transactions (for which he did not pay in cash) or securities transactions (where he failed to deliver or transfer sold securities). The following shall be done:
On SD:
At 9:00 am, the SGF management shall, by deducting from the value of a defaulting member’s contribution in the SGF, cover his obligations if that member did not perform his monetary obligations. The SGF shall have the right to dispose of the securities for its own good. If the member does not deliver the securities, and if the system for lending securities does not lend the same, the value of these transactions shall be deducted from the member’s contribution and shall come under account of purchase of undelivered securities. The value of such undelivered transactions shall be deducted from the account of the purchasing member to ensure the seriousness of the execution of the purchase transaction. The defaulting member shall bear the differences in the prices of securities.
The defaulting member shall be notified of the following:
• The SGF has subrogated him regarding the fulfillment of the resultant monetary/ securities obligations due from him, which he has not settled by meeting his obligations.
• The value of these obligations has been deducted from the amount of his contribution in the SGF capital
• The SGF grants the defaulting member a grace period of two workdays starting from the SD to meet the settlement obligations. If the defaulting member fails to meet the settlement obligations, the SGF shall, in accordance with the method determined by the committee, order one of the brokerage firms to start, effective the day following the two-day grace period, executing the sale of purchase of the securities subject of the obligation for the interest of the SGF.
• Calculation of the delay charges at the rate of 0.005 of the value of the obligation, or the value of the member’s contribution in the SGF capital, whichever is less.
• The cost of borrowing from banks an amount equal to the obligation amount, which has been paid by the SGF when it subrogated the member towards fulfilling the obligation.
• The defaulting member shall be notified and requested to fulfill the obligations arising from monetary transactions he failed to make payment of or securities transactions in which he did not deliver the securities to date, pay delay charges imposed on the value or such obligations, and pay costs of borrowing from banks
• The weighted factor of relative significance of the established risk rate for non-compliance of members on that day (2.5 points) shall be calculated
• The CMA shall be notified of the value of the outstanding obligations of all defaulting members arising from their inability to pay or to deliver or transfer the securities to date so that the CMA takes actions it deems appropriate.
• MCDR shall warn the defaulting member requiring him to fulfill his monetary/ securities obligations
• MCDR shall take necessary actions against the defaulting member in accordance with Article (23) of Law No. 93 of 2000.
SD + 1
At 9:00 am, the SGF management shall do the following:
• The SGF shall notify the defaulting member requiring him to meet the obligations of the monetary or securities transactions which he failed to pay or deliver to date, pay delay charges imposed on these obligations as well as cost of bank loans.
• The SGF shall determine a grace period for the defaulting member to fulfill the monetary/ securities obligation (1 work day).
• The CMA shall be notified of the value of the outstanding obligations of all defaulting members arising from their inability to pay or to deliver or transfer the securities to date, so that the CMA takes the actions it deems appropriate.
• The weighted factor of relative significance of the established risk rate for non-compliance of members on that day (5 points) shall be calculated.
• MCDR shall warn the defaulting member requiring him to fulfill his monetary/ securities obligations.
• MCDR shall take necessary remedies against the defaulting member in accordance with Article (23) of Law No. 93 of 2000.
SD + 2
At 9:00 am, the SGF management shall do the following:
• The SGF shall notify the defaulting member requiring him to meet the obligations of the monetary or securities transactions which he failed to pay or deliver to date, pay delay charges imposed on these obligations as well as cost of borrowing from banks.
• The CMA shall be notified of the value of the outstanding obligations of all defaulting members arising from their inability to pay or to deliver or transfer the securities to date, so that the CMA takes actions it deems appropriate.
• The weighted factor of relative significance of the established risk rate for non-compliance of members on that day shall be calculated (10 points).
• MCDR shall take necessary remedies against the defaulting member in accordance with Article (23) of Law No. 93 of 2000.
SD + 2
At 11:00 am, the SGF shall do the following:
• The SGF shall issue an order to sell the securities which the defaulting member has not paid their value, or a purchase order for transactions where he has not delivered or transferred their securities until 11:00 am.
• The weighted factor of relative significance of the established risk rate for non-compliance of members on that day shall be calculated (20 points).
• The CMA shall be notified of the value of the outstanding obligations of all defaulting members arising from their inability to pay or to deliver or transfer the securities to date, so that the CMA takes actions it deems appropriate.
• MCDR shall take necessary actions against the defaulting member in accordance with Article (23) of Law No. 93 of 2000.
SD + N
• The brokerage firm designated for executing the sale or the purchase order shall notify the SGF of the execution of the order.
• The SGF shall refund the value of sold securities to the contribution of the member and the portion of the contribution which needs to be supplemented.
• The SGF management shall inform the member who defaulted on payment or who did not deliver or transfer the securities about the execution order and requiring him to pay in full amounts of loss resulting from change in the price of securities and the delay charges to be paid to the SGF, in addition to settlement differences, value of commissions, and payment of cost of bank loans that must be paid.
• MCDR shall take necessary actions against the defaulting member in accordance with Article (23) of Law No. 93 of 2000.
• When the SGF steps in to subrogate the seller who did not deliver or transfer the sold securities though it, the SGF shall initiate purchase procedures. In case of inability of executing the purchase within the five workdays for absence of this security in the trading market, the CMA and the Exchange shall be notified to consider taking necessary procedures to cancel the transaction.
Rules and procedures for completing members’ contribution in SGF capital
When a member’s contribution falls short due to deduction made by the SGF for any of the following reasons:
1. Covering, on behalf of the member, the obligations consequent to monetary/ securities transactions which he failed to make payment of or deliver the securities as scheduled;
2. Payment of the delay charges imposed on the member; or
3. When the system for lending securities deducts from the contribution of the member in the SGF capital because he borrowed securities and failed to deliver or transfer, as scheduled, the securities which have been executed through that system, or because there is a deficit in his cash balance at the clearing bank through which the purchase transactions are settled.
The following procedures shall be taken:
a. Each member shall complete his contribution within two workdays at most from the settlement date.
b. The member shall pay daily delay charges at the rate of 0.005 of the value of the contribution or the unpaid obligation, whichever is less, for each delay day starting from the settlement date. The payment shall be in the same currency of the trading transaction and shall continue until the contribution is completed.
c. The member shall pay the cost of bank loans at the annual rate of V% for each delay day starting from the settlement date and to the extent of the obligation that the SGF made payment of on behalf of the member. The payment shall be in the same currency of the trading transaction.
d. MCDR shall take necessary actions against the defaulting member in accordance with Article (23) of Law No. 93 of 2000.
e. This shall be made without prejudice to the measures taken by the CMA as stipulated in Item (2) of Article (18) in Law No. 93 of 2000 and its amendment by Law No. 143 of 2004.
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