Balancing Power: An Insight into Ethiopia's Financial SROs

Self-Regulatory Organizations (SROs) play a crucial role in the financial markets by establishing and enforcing rules and standards for their members. The governance structure of an SRO is a critical aspect of its operations, ensuring that it functions effectively and maintains the highest standards of integrity. This article delves into the governance structure of SROs, with a particular focus on the directives for the recognition of SROs in Ethiopia.

SROs are entities that have the power to create and enforce industry regulations and standards independently. They are typically industry associations that seek to protect the interests of their members, the industry, and its consumers. In the context of financial markets, SROs can include exchanges, central securities depositories, and securities clearing companies.

In Ethiopia, the recognition of SROs is governed by the Capital Market Proclamation No. 1248/2021. No entity can operate as an SRO in Ethiopia unless it has been duly recognized by the Ethiopia Capital Market Authority (ECMA). The ECMA is empowered to delegate some of its functions to an SRO, regulate and sanction an SRO and/or its personnel, and withdraw the recognition and license of an SRO.

The governance structure of an SRO is a critical aspect of its operations. The board of directors, or its equivalent, of an SRO should consist of a mix of independent directors and industry professionals. Independent directors should make up at least one-third of the board. The chairman of the board should be an independent person. This structure ensures a balance of power and prevents conflicts of interest.

An entity can only be recognized as an SRO if it satisfies the ECMA that it has the financial capacity and administrative resources necessary to carry out its functions. This includes dealing with a breach of the law or of any other applicable guidelines. The ECMA considers the operational and other risks to which the SRO is exposed, the amount and composition of the SRO's capital, and the amount and composition of the SRO's other financial resources.

Every SRO should ensure that persons charged with the responsibility of managing and overseeing its governance and administrative affairs have sufficient skills and experience. A person should not be appointed as a senior personnel without the prior written notification to the Authority.

SROs are obligated to adhere to the principles of fairness and confidentiality when exercising their powers and delegated responsibilities. They must admit only licensed Capital Market Service Providers (CMSPs) as members and have a fair and transparent procedure for admitting members. Prioritizing investor protection, promoting market integrity, reducing systemic risk, and striving for the development of the capital market ecosystem are also among their obligations.

The ECMA may delegate any of its powers and duties to an SRO. When delegating, the Authority specifies the conditions for delegation, including the function or power delegated, the extent of disciplinary powers delegated, the scope of sanctions that may be imposed, and the manner in which an SRO shall submit a periodical report to the Authority.

The document also outlines the penalties and sanctions that can be imposed on SROs, but these are not detailed in the sections provided. It can be assumed that these penalties and sanctions are in place to ensure that SROs adhere to their obligations and properly exercise their powers and duties.

In conclusion, the governance structure of SROs is designed to ensure that these organizations operate in a manner that promotes market integrity, protects investors, and contributes to the development of the capital market ecosystem. The ECMA plays a crucial role in overseeing the operations of SROs, ensuring that they have the necessary resources to carry out their functions, and holding them accountable when they fail to meet their obligations.