Introduction to Short Selling by jonathanscott

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									Introduction to Short Selling


 Mohamed Abdel Salam
 Chairman of MCDR Company
 AMEDA 1st Leadership Forum
April 27- 29, 2009 in Alexandria


                                   1
              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.


                                                  2
      Why Introduce Short Selling?
 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

 Good for Custodians and Brokers
    More activity = more commissions and fees
    Traditionally, interest income –
       Customer cash deposits (for brokers)
       Customer lending – (for custodians)


                                                 3
            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
             Advantages of Short Selling




• Doubling the selling    • Interest income for Lenders
  volume. ( Borrowed      • All the rights and dividends
  securities )              reserved for the lenders
• Increase the revenues   • Flexibility in redemption
  (selling the borrowed
  securities )

                                                      5
                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
          Contracting & Creating the lending pool


                                       lending
                                           order       Custodian
                MCDR                                                       Sign
                                                                         agreement
               Company
                                                   Recording & Sending
           Creating the pool                          Lending order
                                                                                INVESTOR


           Short Selling
 Waiting list            The lending file                Broker

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
                Creating the waiting list of the lenders



                      Lending system lending                            Sign
                                                   Custodian          agreement
                          MCDR        order                          1
 Adding to
the waiting                                             3
    list
                                               Recording & Sending
                Yes    Reaching the               Lending order              INVESTOR
                      Max quantity of                                 2
                       Lending sec.

Adding to the
Main lending                                         Broker
     list               No



                                                                                  8
Shot Sell Pool
  Use the Pro-rata system
  to let lenders participate
       in every borrow
          transaction




                               Waiting List
     First in - First serve




                                              9
               The Borrowing stage
      MCDR                      Blocking
                              Order of the
    L & B system            Borrowing quant.

                  Lending
                                    2
                                               Broker   Borrowing   1
Borrower
  list              list                                  order
                                                        + Collateral
                                    3

                              Balance is not
           4
                            enough& Blocking
Quantity                      was cancelled
approved
  a sell
  order
  sent

         Stock
       Exchange

                                                                        10
                Redemption of Borrowed Shares



       MCDR

     L & B system
                           Transfer        Book    redemption Borrowed
                           Quantity   2   Keeper      order 1  Broker
Borrower         Lending
  list             list




            3
    Cash collateral




    Broker bank
                                                                11
        Selected Securities

 Same securities for Intra day trading and short selling

 Liquid securities

 Securities selected from EGX active list.

 Approved by CMA




                                                            12
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
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
                                                           Lenders
  Borrower



                 The names of the new buyers will
                 appear in the issuer books to give
                          them the rights

                                                        Issuers Company   14
New Buyers
  How MCDR will generate revenues to the lenders ?



           Collect collateral
              versus the              Invest the collateral
           borrowed shares
               for 125%                                       Bank

Borrower
                                30%               A revenues are generated


                                70%              Divide the
                                                 revenues

                    Lenders

                                                                         15
          Thank You


Website : www.mcdr.com.eg

                            16

								
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