Egypt: FRA to launch futures contracts trading in derivatives market

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The Financial Regulatory Authority (FRA) announced that it will allow trading in futures contracts in the derivatives market, as part of the strategy of the Egyptian Exchange (EGX) to activate this market. Futures contracts are agreements to buy or sell an asset at a future date and price.

Mohamed Farid, the FRA Chairperson, said in a workshop for journalists that the derivatives market includes three types of contracts: futures, forwards, and options. He said that the FRA will start with standard futures contracts, which will be issued and traded on the EGX.

He added that the main challenge for launching this market is the establishment of a clearing company for futures contracts, which the EGX has recently set up under the name “Taswyat”. He said that the settlement of futures contracts will be in cash, not in assets.

The EGX has completed the procedures for establishing “Taswyat Clearing Services Company” with a capital of EGP 100m, to handle the clearing and settlement operations for contracts traded on the futures exchanges.

Farid also said that another challenge is to determine the characteristics of the contracts, such as the multiplier value, which is the factor by which the index value is multiplied to obtain the contract value. He said that the EGX is conducting surveys to assess the investors’ needs and preferences for the contracts.

He explained that the nominal value of the contract is the product of the quantity of the asset and the future price and that the FRA will collect a guarantee from the seller and buyer at a rate that will be determined later. He said that the losses and gains in futures contracts will be settled daily by the clearing company.

He said that the guarantee percentage is determined according to the confidence level of the buyer and seller in the contract and that the clearing company may request to increase the financial position if the guarantee value is exhausted. He said that the higher the confidence in the contract, the higher the guarantee value.

He pointed out that the derivatives market will be open to both financial institutions and individuals, and that it will offer more opportunities and benefits for the investors. He warned that ignoring the problem today will lead to a tragedy tomorrow.

FRA explains how futures contracts work in derivatives market

The FRA has provided more details on how futures contracts will work in the derivatives market, which is expected to be launched soon. Futures contracts are agreements to buy or sell an asset at a future date and price, and they are binding for both parties.

According to Farid, the futures contracts will require a financial guarantee from the seller and the buyer, which will be a percentage of the value of the asset. The asset value will depend on four elements: the asset type, the maturity date, the quantity, and the future price.

Farid said that there will be settlement members, who are essential for the futures market, and that four institutions have applied to be settlement members. He said that the settlement members must have financial solvency to ensure the execution of the contracts. He also said that there would be a clearing company, which would be responsible for settling the contracts and enforcing them in case of default. He said that a fund would be launched to guarantee the settlements.

Farid stressed that the Egyptian Exchange (EGX) and the clearing company will not interfere in the over-the-counter contracts, which are non-standard contracts that are not traded on the EGX and are executed directly between the parties.

He said that the futures contracts can be used for hedging or investment purposes, depending on the expectations of the market movements. He also explained that options contracts are another type of derivative, which gives the buyer the right, but not the obligation, to buy or sell an asset at a specific price and time.

Ahmed El-Sheikh, the EGX Chairperson, said that the initial stage of the derivatives market will involve futures contracts denominated in Egyptian pounds and that futures contracts denominated in US dollars may be introduced later.