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Introduction to Short Selling

Misr For Central ,Clearing, Depository and Registry. Introduction to Short Selling. Mohamed Abdel Salam Chairman of MCDR Company AMEDA 1 st Leadership Forum April 27- 29, 2009 in Alexandria. Short Selling. A New Leveraged Vehicle for Securities Trading being Introduced in Egypt .

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Introduction to Short Selling

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  1. Misr For Central ,Clearing, Depository and Registry Introduction to Short Selling Mohamed Abdel Salam Chairman of MCDR Company AMEDA 1st Leadership Forum April 27- 29, 2009 in Alexandria

  2. Short Selling • A New Leveraged Vehicle for Securities Trading being Introduced in Egypt. • Definition of the system:The “Securities Lending System” is a fund holding balances of securities listed on the Stock Exchange and owned by an investor (lender)desiring to lend them , and an investor (borrower) desiring to borrow for sell.

  3. Why Introduce Short Selling? • Good for Custodians and Brokers • More activity = more commissions and fees • Traditionally, interest income – • Customer cash deposits (for brokers) • Customer lending – (for custodians) • Creates a “better” marketplace • More liquidity and smaller spreads • Good for Customers • Opportunity to profit when prices decline • Increased trading activity • Leverage • Flexibility • Interest income for Lenders

  4. Important definitions Borrowing Customer: is the Seller Customer in the operation subject-matter of lending against a securities borrowing contract. Borrower’s broker: the brokerage company authorized to practice the custodian activity which has executed, in its capacity as proxy of the Seller Customer in the transaction, the operation of selling borrowed securities. The Company: Misr for Central Clearing, Depository and Registry Company Lender: The investor owner of the securities registered under the loaning system. 4

  5. Doubling the selling volume. ( Borrowed securities ) Increase the revenues (selling the borrowed securities ) Interest income for Lenders All the rights and dividends reserved for the lenders Flexibility in redemption Advantages of Short Selling Lenders Borrower 5

  6. Cash Collateral Calculation of the amount of cash collateral shall be on the basis that the total cash collateral equals 125% of the market value of the borrowed securities as per the closing quotation on the settlement day 6

  7. Contracting & Creating the lending pool Custodian lending order MCDR Company Sign agreement Recording & Sending Lending order Sign agreement Creating the pool INVESTOR Short Selling Broker The lending file Waiting list xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx 7

  8. Creating the waiting list of the lenders Custodian Lending system MCDR lending order Sign agreement 1 Adding to the waiting list 3 Sign agreement Recording & Sending Lending order Yes Reaching the Max quantity of Lending sec. INVESTOR 2 Broker Adding to the Main lending list No 8

  9. Shot Sell Pool Use the Pro-rata system to let lenders participate in every borrow transaction Waiting List 75 % Available First in - First serve 25 % Reserve 9

  10. The Borrowing stage MCDR Blocking Order of the Borrowing quant. Broker L & B system Borrowing order + Collateral 2 1 Lending list Borrower list 3 Balance is not enough& Blocking was cancelled 4 Quantity approved a sell order sent Stock Exchange 10

  11. Redemption of Borrowed Shares MCDR Book Keeper Borrowed Broker L & B system Transfer Quantity redemption order 2 1 Lending list Borrower list 3 Cash collateral Broker bank 11

  12. Selected Securities • Same securities for Intra day trading and short selling • Liquid securities • Securities selected from EGX active list. • Approved by CMA

  13. The percentages used in the short sell system • 10% of the issued shares can be put in the pool from each company. • 5% the maximum the lender can put in the pool. • 2% the maximum the borrower can borrow from the pool. • 5% the maximum the broker can borrow to his clients from the pool. 13

  14. Who will compensate the Lenders with the rights given by the Issued companies ? The borrowers are the one who will compensate the lenders by the equivalent value of the rights The names of the new buyers will appear in the issuer books to give them the rights Lenders Borrower Issuers Company New Buyers 14

  15. How MCDR will generate revenues to the lenders ? Collect collateral versus the borrowed shares for 125% Invest the collateral Borrower A revenues are generated 30% Divide the revenues 70% Lenders Bank 15

  16. Misr For Central ,Clearing, Depository and Registry Thank You Website : www.mcdr.com.eg 16

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