Arab Finance: The Financial Regulatory Authority (FRA) has issued a model contract governing transactions between brokerage firms and clients borrowing securities for short selling, advancing preparations for the mechanism’s official rollout, as per a statement.

Issued by Islam Azzam, Chairman of the FRA, under Decision No. 3350 of 2026, the template builds on the regulatory framework established by the FRA’s Board of Directors through Decision No. 155 of 2026. It defines both parties’ rights, obligations, and procedural responsibilities, including requirements for managing collateral, disclosing costs, and closing open positions.

The contract follows consultations with market participants to draw on brokerage firms’ experience and identify practical implementation requirements. The FRA said this dialogue aims to develop enforceable rules that facilitate transactions while managing risks and protecting all parties.

Azzam explained that consultations are continuing as the FRA completes the remaining regulatory provisions and operational guidance. Meanwhile, the central securities lending system developed and managed by Egypt-based central depository Misr for Central Clearing, Depository and Registry (MCDR) is undergoing live testing.

The tests aim to ensure real-time integration between MCDR and brokerage firms and document every stage of the process. Through the system, borrowers will be able to review all available lending offers and select those matching their investment objectives, while lenders will be able to view competing offers registered on the platform.

Under the mechanism, investors borrow securities from shareholders willing to lend them, then sell those securities in anticipation of a price decline. Transactions are executed through licensed brokerage firms under agreements with borrowing clients, using securities available through the central lending system.

If prices fall, borrowers can repurchase the securities at a lower price and return them to the lender, earning the difference after borrowing costs. If prices rise and borrowers repurchase the securities to limit their losses, borrowing costs add to those losses.

In either case, the FRA explained, lenders receive a return approximating the risk-free rate, alongside an additional lending return and the other benefits associated with owning the shares.

Azzam said the model contract seeks to simplify procedures and improve transparency by establishing a consistent contractual basis for brokerage firms and borrowers. It also clarifies responsibilities for monitoring collateral and open positions, including how firms must respond when collateral loses value or borrowed securities are returned late.

Before a borrowing transaction is executed, the client must provide collateral at the levels specified in the contract’s annex, subject to the FRA’s minimum requirements. Brokerage firms must place cash collateral in a separate account dedicated exclusively to securities borrowing for short selling.

Firms must revalue borrowed securities using the prevailing intraday closing price during the trading session and monitor total collateral relative to the value of those securities. The ratio must comply with the contract’s annex and remain within the regulatory limits.

Cash collateral must be invested throughout the lending period in instruments specified by the FRA. Brokerage firms must disclose the instruments used and the actual returns generated, then credit those returns to the client’s account upon receipt or according to the agreed terms.

The template also requires firms to disclose every expense, commission, and other monetary charge deducted from the client, together with the basis for its calculation. Subsequent changes to commissions or expenses require the client’s explicit consent.

Borrowers retain the right to issue buy and sell orders for the borrowed securities and to close their positions fully or partially during the borrowing period, subject to the contract’s provisions.

If securities are not returned by the agreed deadline, the brokerage firm must purchase the securities needed to fulfill the obligation, observing the applicable settlement timelines.

The contract also addresses position closures when a security becomes ineligible for short selling or when regulatory decisions or approvals concern acquisitions, mergers, tender offers, corporate spin-offs, liquidations, or other events designated by the FRA.

To help clients understand the mechanism, brokerage firms must provide a detailed guide covering its core terms, procedures, benefits, and risks. The guide must be updated whenever the governing regulations change and delivered to clients at least annually and after every update.

The contract must also contain a declaration confirming that the borrowing client is the original owner and sole beneficiary of the account and that their funds come from legitimate sources. Clients must supply the required information and documentation under Anti-Money Laundering Law No. 80 of 2002 and regulatory decisions governing anti-money laundering and counter-terrorism financing in nonbank financial activities.

Azzam emphasized that licensed brokerage firms must protect the confidentiality of clients’ data, documents, and transactions. Disclosure to third parties requires prior written consent and must remain within its scope, except where information must be submitted to the FRA or disclosed under a court order in accordance with the relevant legislation.