Florida University Southeast, School of Business Valuation and Capital Investment

Symbiosis ((Relationship ) in Regulation and Operation between ECMA and ESEX

(Paper # 36)

May 2024

Disclaimer: This document is intended solely to assist participants of the FUSE School of
Business Valuation course in grasping the high-level summary of the roles and
responsibilities for the various Service Providers outline by the Ethiopian Capital Market
Authority. It is not meant to replace or reinterpret the actual directive.
Introduction

The Ethiopian Capital Market Authority (ECMA) and the Ethiopian Securities Exchange
(ESEX) are pivotal organizations shaping the Ethiopian capital market landscape.
Through their roles and responsibilities, they provide guidance and establish
frameworks to facilitate market operations. This module aims to elucidate the symbiotic
relationship between these two entities, delving into their respective mandates,
published guidance documents, and collaborative efforts to foster market efficiency and
investor protection.

The symbiotic relationship between regulatory bodies and market operators is evident
in the way regulations are both shaped by and shaping market practices. Regulatory
bodies observe market behaviors and evolve their frameworks to address emerging
challenges and opportunities. Conversely, market operators provide feedback to
regulators, which can lead to adjustments in the regulatory approach to better suit the
practical realities of market operation.

The relationship between these two documents exemplifies a typical structure where a
regulatory body sets broad regulations and individual market operators (like the
securities exchange) implement specific operational guidelines that align with these
regulations. This structure ensures both high-level oversight and detailed operational
control, contributing to a robust and transparent capital market environment.

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This relationship ensures that the regulatory framework is not only top-down but also
informed by ground-level insights from market operations. It allows for a regulatory
environment that is both responsive and responsible, adjusting to new developments in
the market while maintaining strict standards for compliance and oversight. The
following section discusses the two guidance documents published by the two entities:

Draft Rulebook for the

Directive on the Public Offering and
Aspect Ethiopian Securities
Trading of Securities
Exchange
Establishes specific rules for
Provides regulations governing public
operations on the securities
offerings and trading of securities broadly
Purpose exchange including listing,
in the capital market, focusing on
trading, membership, and
registration, issuance, and disclosures.
dispute resolution.
Ethiopian Securities Exchange Ethiopian Capital Market Authority (ECMA)
Issuing Authority
(market operator). (regulatory body).
Rules specific to the Broad regulatory framework for securities
functioning and regulation of issuance and trading, including detailed
Primary Focus the securities exchange itself, provisions on prospectus requirements,
such as trading rules and securities registration, and ongoing
membership criteria. obligations of issuers.
Primarily members of the Issuers of securities, investment advisors,
Target Audience exchange and listed transaction advisors, and the public
companies. interested in securities offerings.
Detailed sections on the requirements for
Five volumes covering general
securities registration, offer of securities,
Key rules, membership rules, listing
ongoing disclosure obligations, trading
Sections/Provisions rules, trading rules, and
restrictions, and penalties for non-
disciplinary procedures.
compliance.
More focused on operational
More comprehensive in terms of regulatory
Regulatory specifics and internal
oversight of all aspects of securities public
Approach governance of the securities
offering and trading.
exchange.
Compliance and Specific to exchange Includes broader enforcement capabilities
Enforcement operations, detailing across the capital market, detailing
Florida University Southeast School of Business Valuation and Investment 3
 Draft Rulebook for the
Directive on the Public Offering and
Aspect Ethiopian Securities
Trading of Securities
Exchange
procedures for disciplinary penalties for non-compliance and
actions against members. misrepresentation in public offerings.

Key Takeaways

1. Purpose and Scope: The Draft Rulebook is primarily operational and specific to
the Ethiopian Securities Exchange, focusing on internal rules and member
conduct. In contrast, the Directive covers a wider scope, establishing the legal
framework for public offerings and securities trading across all markets within
Ethiopia.
2. Regulatory Framework: The Rulebook operates under the assumption that the
regulatory framework provided by ECMA is already in place, focusing instead on
the application of these regulations within the context of the exchange. The
Directive establishes this broader regulatory framework and outlines the
responsibilities of various market participants.
3. Enforcement and Compliance: Both documents address compliance and
enforcement but in different contexts. The Rulebook deals with compliance within
the exchange, whereas the Directive deals with compliance related to public
offerings and general market conduct.
4. Interrelation: The Rulebook is meant to align with the overarching regulations
set out by the Directive. It is assumed that actions on the exchange are not only
in compliance with internal rules but also adhere to the broader regulations set
by ECMA.
5. Investor Protection: Both documents prioritize investor protection, albeit in
different ways. The Rulebook ensures a fair and orderly trading environment on
the exchange, while the Directive provides the legal basis for securities offerings
and ensures full disclosure and fairness in market transactions.

The following section outline the summary of each directive:

Summary of the Ethiopian Stock Exchange Rulebook

The Ethiopian Securities Exchange (ESX) Rulebook, dated April 2024, is structured into
five volumes: General Rules (Volume A), Membership Rules (Volume B), Listings Rules
(Volume C), Trading Rules (Volume D), and Disciplinary Procedures and Dispute
Resolution Rules (Volume E). Below is a detailed summary of each volume, outlining the
key rules and regulations.
Florida University Southeast School of Business Valuation and Investment 4
Volume A: General Rules

Chapter 1: Title, Scope, and Definitions

• Short Title: Rulebook of the Ethiopian Securities Exchange, 2024.

• Scope: Applicable to all entities participating in the securities market.
• Definitions: Key terms used throughout the Rulebook.

Chapter 2: Rules Administration and Conventions

• Administration: ESX administers and ensures compliance with rules.

• Waivers/Variations: Conditions under which rules may be waived.
• Amendments: Procedures for rule amendments.
• Interpretation: Guidelines on interpreting rules.
• Language: Official language for communication and documentation.
• Conduct: General conduct, practice, and disclosure obligations.
• Identification: Guidelines for business documents.
• Liabilities: Limitations and indemnification clauses.

Chapter 3: Exchange and Transaction Fees

• Powers: ESX's authority to impose and review fees.

• Licensing Fees: Fees for licensing and participation.
• Brokerage Fees: Maximum brokerage fees and additional service charges.
• Transaction Fees: Transaction fees payable to ESX.

Administrative Sanctions

• Schedule of administrative sanctions for violations of general rules.

Volume B: Membership Rules

Part 1: Trading Members

• Categories: Different categories of trading members including brokers, dealers,

and investment banks.
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 • Admission: Procedures and requirements for admission to membership.
• Certification: Processes for certifying members to commence operations.

Chapter 2: Trading Member Admission Procedures

• Authority: ESX's authority to admit members.

• Application: Application process and requirements for membership.
• Certification: Certification procedures for operational commencement.

Chapter 3: Control, Ownership Structures, and Significant Influence

• Ownership: Guidelines on control and ownership structures.

• Significant Influence: Rules on significant influence over trading members.

Chapter 4: Capital and Financial Reporting

• Minimum Capital: Minimum capital requirements for trading members.

• Liquidity: Liquidity requirements.
• Reporting: Requirements for submission of financial reports.

Chapter 5: Management, Supervision, and Internal Controls

• Supervision: Requirements for internal controls and supervision.

• Compliance: Responsibilities of compliance officers and registered individuals.

Administrative Sanctions

• Schedule of sanctions for violations related to membership rules.

Volume C: Listings Rules

Part 1: General Provisions

• Purpose: To set out requirements for listing on ESX and ongoing obligations.
• Principles: General principles guiding the listing rules.

Part 2: Listing of Equity Shares

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 • Requirements: Conditions for listing equity shares on ESX.
• Main Board and Growth Board: Specific requirements for initial listings on the
Main Board and Growth Board.
• Supplementary Listing: Requirements for supplementary listings.

Part 3: Continuing Listing Obligations

• Disclosure: Obligations for information disclosure.

• Corporate Responsibility: Directors' obligations and board meetings.
• Related Party Transactions: Rules on related party transactions.
• Suspension and Delisting: Conditions and procedures for suspension and
delisting.

Part 4: Listing of Fixed Income Securities

• Requirements: Conditions for listing corporate and government fixed income

securities.
• Post-listing: Continuing obligations post-listing.

Part 5: Listing of Exchange-Traded Funds (ETFs)

• Requirements: Conditions for listing ETFs.

• Offer Document: Contents required in an offer document for ETFs.
• Market Maker: Appointment and responsibilities of a market maker.

Part 6: Listing of Sharia Compliant Securities

• Sukuk: Requirements for listing Sukuk (Islamic bonds).

• Sharia Equity: Criteria for listing Sharia compliant equity securities.
• Compliance: Ongoing compliance with Sharia principles.

Administrative Sanctions

• Schedule of sanctions for violations related to listing rules.

Volume D: Trading Rules

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Part 1: General Trading Rules

• Trading Sessions: Rules for trading sessions and order entry.

• Price Variation: Minimum price variation and negotiated large volume deals.
• Trade Units: Unit of trading and price determination.

Part 2: Direct Electronic Access

• Infrastructure: Requirements for online trading portals.

• Security: Regular security assessments for trading portals.

Part 3: Trading Conduct

• Conduct: General conduct of trading members.

• Reporting: Duty to report to ESX.
• Market Manipulation: Prohibition of market manipulation and insider trading.
• Confidentiality: Obligations to maintain confidentiality.

Part 4: Settlement of Transactions

• Delivery: Delivery and settlement of securities.

• Verification: Procedures for verification of transfer and handling disputes.

Administrative Sanctions

• Schedule of sanctions for trading violations.

Volume E: Disciplinary Procedures and Dispute Resolution Rules

Part 1: Complaints Management and Disciplinary Procedures Against Trading

Members

• Complaints Management: Procedures for managing complaints.

• Disciplinary Actions: Actions taken by ESX against trading members.
• Business Conduct Panel: Role and procedures of the Business Conduct Panel.

Part 2: Other Complaints Management Procedures

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 • Complaints Against ESX: Submission and management of complaints against ESX.
• Mediation and Arbitration: Procedures for mediation and arbitration of disputes.

Part 3: Settlement of Civil Disputes

• Dispute Resolution: Procedures for resolving disputes between trading members

and with ESX.
• Mediation: ESX-coordinated mediation procedures.
• Arbitration: Guidelines for arbitration processes.

Administrative Sanctions

• Schedule of sanctions for violations related to disciplinary procedures and

dispute resolution.

This summary provides an overview of the Ethiopian Securities Exchange Rulebook,

highlighting the essential rules and regulations governing the operation, membership,
listing, trading, and disciplinary procedures within the securities market in Ethiopia.

Summary of the Directives for Licensing and Supervision of Capital Market Service
Providers (CMSPs) in Ethiopia

Preamble

The directives aim to establish a comprehensive regulatory framework for licensing and
supervising Capital Market Service Providers (CMSPs) in Ethiopia. The Ethiopian Capital
Market Authority (ECMA) is empowered to oversee the conduct of CMSPs, including
their officers and representatives, and to issue, modify, renew, suspend, or revoke
licenses. The directives are issued under the Capital Market Proclamation No.
1248/2021.

Table of Contents Overview

1. Preliminary

• Title, scope of application, and definitions.

2. Licensing of CMSPs
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 • Prohibition against unlicensed activities.
• Application requirements and specific licensing conditions.
• Fees, approval, and refusal of license applications.
• Timeline for processing applications.

3. General Obligations and Responsibilities

• Authorized activities, nominee accounts, and capital requirements.

• Governance, fit and proper criteria, and appointed representatives.
• Records maintenance, Know Your Customer (KYC) requirements, and
reporting obligations.

4. Enforcement and Sanctions

• Penalties, suspension, and revocation of licenses.

• Liability of appointed representatives and procedure for appealing
sanctions.

5. Voluntary Exit from the Market

• Procedures and obligations after exit.

6. Specific Rules for Different CMSPs

• Securities Brokers, Dealers, Investment Banks, Advisers, Robo Advisers, and

others.
• Additional licensing requirements and authorized activities.

7. Investment Banks and Other Specific Providers

• Eligibility, additional requirements, and authorized activities.

8. Custodians, Market Makers, and Credit Rating Agencies

• Licensing requirements and specific rules for operations.

9. Collective Investment Scheme Operators and Crowdfunding Intermediaries

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 • Licensing and operational guidelines.

10. Portfolio Managers and Appraisal Firms

• Licensing, activities, and governance requirements.

11. Appointed Representatives

• Licensing, renewal, and change of employment conditions.

12. Schedules

• Minimum capital requirements, corporate governance guidelines,

competency framework, code of conduct, and penalties.

Detailed Sections

Section I: Preliminary

• Defines the scope of the directive and key terms.

• Applies to all CMSPs including brokers, dealers, investment banks, and more.

Section II: Licensing of CMSPs

• Prohibition: Unlicensed capital market activities are prohibited.

• Application Requirements: Detailed requirements for business organizations
and individuals, including incorporation documents, financial statements,
business plans, and evidence of minimum capital.
• Specific Licensing Requirements: Additional conditions for various business
forms and exemptions for applicants already licensed by the National Bank of
Ethiopia.
• Fees: Non-refundable application and licensing fees, with conditions for potential
refunds.
• Approval and Refusal: Conditions under which the ECMA may approve or refuse
a license, including criteria for termination of incomplete applications.
• Timeline: Specific timelines for processing applications and conducting pre-
certification inspections.

Section III: General Obligations and Responsibilities

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 • Activities: CMSPs are restricted to authorized activities.
• Nominee Accounts: Only certain CMSPs can operate nominee accounts with
specific internal controls.
• Capital Requirement: Adequate financial resources and fidelity guarantees are
mandatory.
• Governance: Requirements for boards of directors, chief compliance officers, and
fit and proper criteria for personnel.
• Records: Detailed record-keeping and KYC requirements.
• Reporting: Obligations to report violations, financial statements, and client
transactions to the ECMA.

Section IV: Enforcement and Sanctions

• Penalties: Range of sanctions for misconduct, including warnings, fines, and

license revocation.
• Suspension: Conditions for suspending licenses, with notification and client
communication requirements.
• Liability: Responsibilities of appointed representatives and the procedure for
appealing sanctions.

Section V: Voluntary Exit from the Market

• Exit Procedures: Conditions and obligations for CMSPs voluntarily exiting the
market, including client notifications and records management.

Section VI: Specific Rules for Different CMSPs

• Eligibility and Licensing: Additional requirements for various CMSPs like

securities brokers, dealers, and investment banks.
• Authorized Activities: Specific activities each type of CMSP is permitted to
engage in.

Section VII: Investment Banks and Other Specific Providers

• Licensing and Activities: Requirements for investment banks, including

underwriting and advisory services.

Section VIII: Custodians, Market Makers, and Credit Rating Agencies

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 • Licensing and Operations: Detailed rules for custodians, market makers, and
credit rating agencies.

Section IX: Collective Investment Scheme Operators and Crowdfunding

Intermediaries

• Licensing and Operations: Guidelines for operators of collective investment

schemes and crowdfunding intermediaries.

Section X: Portfolio Managers and Appraisal Firms

• Licensing and Activities: Specific requirements for portfolio managers and

appraisal firms.

Section XI: Appointed Representatives

• Licensing and Renewal: Procedures for licensing, renewing, and changing

employment of appointed representatives.

Section XII: Schedules

• Minimum Capital Requirements: Detailed capital requirements for CMSPs.

• Corporate Governance: Guidelines on governance structures and oversight.
• Competency Framework: Standards for competencies required by CMSPs.
• Code of Conduct: Ethical guidelines and standards of professional conduct.
• Penalties and Fines: Specific penalties for various offences.

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