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Licensing Requirements: Securities brokers, Securities dealers, and Securities digital sub-brokers

In the ever-evolving realm of financial markets, regulatory frameworks serve as the bedrock of stability, transparency, and investor confidence. The Ethiopian Capital Market Authority (ECMA) stands at the forefront of ensuring the integrity and efficiency of Ethiopia's capital market through a series of directives governing the licensing and operations of securities brokers, dealers, and digital sub-brokers. In this comprehensive guide, we will look into the intricacies of these directives, elucidating their significance, requirements, and implications for market participants.

Eligibility Criteria for Licensing

At the heart of the ECMA directives lies the eligibility criteria for obtaining licenses as securities brokers, dealers, or digital sub-brokers. Central to this criterion is the mandate that only entities possessing a valid certificate of commercial registration and/or investment permit issued by the appropriate government organ are eligible to apply for such licenses. This prerequisite ensures that only legally recognized entities with a proven track record of compliance and legitimacy are permitted to engage in securities trading activities within Ethiopia's capital market.

Additional Licensing Requirements

Beyond the foundational eligibility criteria, the ECMA mandates additional requirements for applicants seeking licenses as securities brokers or dealers. Notably, prior to the pre-certification inspection, applicants may be required to furnish evidence of obtaining an Approval-in-Principle for trading membership from a recognized securities exchange or over-the-counter trading facility. This stipulation underscores the importance of active participation and regulatory compliance within the broader financial ecosystem.

For applicants eyeing licenses as digital sub-brokers, a distinct set of requirements comes into play. In addition to meeting the standard eligibility criteria, applicants must submit a comprehensive agreement with each sponsoring securities broker or dealer. This agreement encompasses crucial aspects such as the delineation of parties involved, covenants and obligations, termination procedures, client treatment protocols, commission sharing arrangements, and more. By ensuring clarity, transparency, and accountability in digital sub-broker relationships, this requirement lays the foundation for robust and sustainable market practices.

Authorized Activities

Having obtained the requisite licenses, securities brokers, dealers, and digital sub-brokers are entrusted with distinct sets of authorized activities within Ethiopia's capital market landscape.

Securities brokers are empowered to execute buy and sell orders on behalf of clients within licensed securities exchanges or over-the-counter trading facilities. This pivotal role not only facilitates market liquidity but also ensures efficient price discovery and fair market access for investors.

Similarly, securities dealers play a crucial role in the capital market ecosystem by engaging in proprietary trading and executing client orders within licensed exchanges or trading facilities. By leveraging their expertise and market insights, dealers contribute to market depth and efficiency while meeting the diverse trading needs of investors.

Digital sub-brokers, on the other hand, operate within a unique paradigm, providing digital channels for securities trading while relying on sponsoring brokers or dealers for execution. In addition to facilitating digital access to the capital market, digital sub-brokers may offer ancillary services as defined by the ECMA, thereby enhancing market accessibility and inclusivity.

Appointment of Representatives

To ensure professionalism, regulatory compliance, and accountability in client interactions and trading activities, both securities brokers and dealers are required to appoint licensed traders as representatives. These appointed representatives serve as the frontline ambassadors of regulatory standards, tasked with upholding the integrity and fairness of market operations.

Client Discretion and Protection

In line with the overarching goal of investor protection, stringent measures are in place to safeguard client interests within Ethiopia's capital market. Securities brokers and dealers are explicitly prohibited from exercising discretionary powers on client accounts without prior written authorization. Moreover, any actions taken must align with the documented investment objectives of clients, thereby mitigating the risk of unauthorized or detrimental trading activities.

Relinquishment Procedures

In the event of relinquishing a securities broker or dealer license, comprehensive procedures must be meticulously followed to ensure a seamless transition and minimal disruption to market participants. These procedures encompass a wide array of steps, including but not limited to, agreements with succeeding brokers, transfer of client accounts and assets, notification to regulatory authorities, and execution of pending client mandates. By adhering to these procedures, market participants uphold the principles of accountability, transparency, and client-centricity, thereby fostering trust and confidence in the capital market ecosystem.

Specific Provisions for Digital Sub-Brokers

Recognizing the unique operational dynamics of digital sub-brokers, the ECMA has instituted specific provisions to govern their activities and relationships within the broader market framework.

First and foremost, digital sub-brokers are required to appoint key representatives, including a Chief Compliance Officer, General Manager/Chief Executive Officer, and Chief Digital Officer or Chief Technology Officer. This organizational structure ensures robust governance, compliance, and technological prowess within digital sub-brokerage entities.

Moreover, client account opening procedures must adhere to stringent Know Your Customer (KYC) and Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) regulations, thereby mitigating the risk of illicit financial activities and enhancing market integrity.

Furthermore, digital sub-brokers are explicitly prohibited from directly keeping custody of client funds, thereby mitigating the risk of misappropriation or misuse. Instead, all client funds must be maintained in a joint client bank account, clearly delineated and bearing the names of both the sponsoring securities broker or dealer and the digital sub-broker.

In addition to these operational requirements, digital sub-brokers are mandated to implement robust internal policies and procedures to address technological risks that may arise in the course of their operations. By proactively identifying and mitigating such risks, digital sub-brokers uphold the principles of operational resilience and client protection within the digital landscape.

Importantly, joint liability arrangements between sponsoring securities brokers or dealers and digital sub-brokers underscore shared accountability for client protection and market integrity. This collective responsibility ensures that all stakeholders remain vigilant and committed to upholding the highest standards of ethical conduct and regulatory compliance.

Transparency and Client Awareness

In an era characterized by rapid technological advancements and digital innovation, transparency and client awareness are paramount. Digital sub-brokers must ensure that existing and potential clients are fully informed about the features, risks, responsibilities, obligations, and liabilities associated with the use of their infrastructure. This proactive communication fosters transparency, trust, and informed decision-making, thereby empowering investors to navigate the digital landscape with confidence and clarity.

Moreover, any advertisement or communication pertaining to the services or activities of a digital sub-broker must prominently highlight the sponsorship arrangement between the sponsoring securities broker or dealer and the digital sub-broker. This transparency ensures that investors are fully cognizant of the underlying relationships and affiliations that govern their digital trading experiences.

Conclusion

In conclusion, the directives issued by the Ethiopian Capital Market Authority represent a cornerstone of Ethiopia's capital market ecosystem, embodying principles of integrity, transparency, and investor protection. By delineating clear eligibility criteria, operational guidelines, and compliance requirements for securities brokers, dealers, and digital sub-brokers, these directives foster a fair, efficient, and resilient market environment.

Source: The Capital Market Service Providers Licensing andSupervision Directive No. 980/2024

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