Brook Taye (PhD), director general of the Ethiopian Capital Market Authority, has taken a step forward in establishing a regulatory foundation for the country's nascent capital market. Last week, his Authority introduced a comprehensive directive on licensing, operation, and supervision of securities exchanges, which he hoped would boost prospective investors' confidence and ensure market stability.

Last week's directive requires substantial financial commitment for exchange offices, with a paid-up capital of half a billion dollars. These offices are also demanded to maintain 20pc liquidity to cover operational costs, capital expenditures, and market risk exposure for up to a year. According to Brook, robust capital requirements are necessary due to the high investments needed in technology, infrastructure, and human resources.

"The regulatory framework has been developed based on international benchmarks to meet global standards," he said. "We expect the exchange team to come having fulfilled the requirements."

Licenses are categorised into securities exchange, derivatives, and over-the-counter (OTC) trading markets, each requiring a separate license. After a complete application is submitted, a 60-day window will determine if an exchange is granted a license to operate one or more types of markets under the Authority's regulation. Licensed exchanges are required to establish a comprehensive risk management framework.

The Director General stated the importance of building a robust financial infrastructure and addressing systemic risks to develop public trust through rigorous compliance and transparency.

"Investors have to be protected," he said, stressing the Authority's commitment to safeguarding investor interests.

Licensed securities exchanges are prohibited from executing orders against their capital or trading on their platforms. The law permits outsourcing certain services to third parties, excluding critical functions, provided the Exchange's accountability, management mandate, risk management, and service quality are not compromised. Recognised as self-regulatory organisations, exchanges must comply with the Authority's requirements.

Exchanges are required to be incorporated as share companies and meet specific operating requirements. The directive includes provisions for suspending and revoking licenses for breaches of contractual obligations, transgressions, or failure to fulfil duties the law requires. They will have to submit regular risk management and financial reports to the Authority, headquartered on Churchill Avenue. The directive also sets stringent criteria for selecting the board of directors and the CEO, focusing on academic qualifications, reputation, and experience to perform in the capital market.

The Ethiopian Securities Exchange (ESX) began its capital-raising activities last year, attracting interest from the private sector, including commercial banks and insurance companies. The seven-member board of directors, chaired by Hilaway Tadesse, now senior advisor to the Central Bank Governor Mamo Mehiretu, includes people like Eleni Gebremedhin (PhD), a founding and former CEO of Ethiopian Commodities Exchange (ECX), Zemedeneh Negatu, and Fikadu Petros. The ESX exceeded its initial capital requirement, raising a subscribed capital of 1.51 billion Br and a paid-up capital of 800 million Br.

State-owned enterprises that command the commanding heights of the economy, including Ethio telecom, Ethiopian Shipping & Logistics (ESL), and Ethiopian Insurance Corporation (EIC), as well as Birhana Selam Printing Enterprise (ESPE), are preparing for listing. Tilahun Kassahun (PhD), CEO of the Exchange, expects the domestic financial sector to play a crucial role.