How ECEA Work

Ethiopian Commodity Exchange Authority: Profile

(Regulatory System and Mechanisms)

1          Introduction

Ethiopia embarked and introduced a commodity exchange system in 2008. The aim of establishing the exchange is to transform the country‘s agriculture into market-oriented production system, to promote participation of small scale farmers and in general to bring efficient, orderly and market integration for agricultural commodity markets. This can be considered as a major effort taken by the government to develop a modern marketing system in the country. Accordingly, ECX has put in place a system that brings buyers and sellers together to trade based on warehouse receipts, up-to-date and reliable market information, assured quality, delivery and payments. ECX is regulated and governed by rules and regulations, has members to trade on open outcry or electronic trading platform on standardized contracts. It is a commodity exchange that provides market integrity, enhances market efficiency, ensures market transparency and allows risk management.

The Ethiopia Commodity Exchange (ECX) is an organized spot exchange market, where trading activity is on sample basis with immediate effect for making and taking physical delivery. In this spot exchange market, trading of standardized contracts for some of the main products of the country such as coffee, sesame, white pea bean, maize, wheat, red kidney bean and Mung bean were taken and is being place. The trading operation of bid and ask offers were conducted and price is determined on the basis of open outcry system on trading floors up to 2016. Currently, the exchange has embarked, since July 2015, an electronic trading system for all exchange traded commodities.

The institutional arrangement of the exchange system was outlined in the outset which includes the internal and external (independent) regulatory system and institutions. The system works in tripod system in which the exchange itself, exchange actors association as self regulated organization and, on the other hand, the Ethiopian Commodity Exchange Organization as an independent regulator entity.

2          Establishment of the Regulator (ECEA)

The ECEA has been established in 2008 along with the establishment of the exchange by the government with legal proclamation. The Authority, as exchange regulator has a double responsibility. The first one is to ensure the safety and soundness of the commodity exchange system. This encompasses four elements:

  • Market integrity regulation: to ensure that the prices on the exchange properly reflect the supply and demand conditions of the underlying physical (or asset) markets.
  • Prudential regulation: to ensure that commodity exchanges and the other parties that form part of the exchange system (brokers, clearing banks, etc.) are financially sound and able to meet their market obligations. This includes capital rules, internal controls, qualifications of key staff, inspections, etc. The regulatory process should also provide the regulator with information necessary to identify potential problems early on.
  • Business conduct regulations: to protect consumers, especially retail clients. This includes risk disclosures, staff training requirements, etc.
  • Market stability protection: ensuring that commodity exchanges and related parties do not cause a systemic risk for the rest of the economy.

Secondly, the ECEA has to foster the growth and development of commodity exchanges, including by promoting innovation, permitting new markets to develop, and ensuring and balancing the interests of the exchanges and all market participants. This requires the regulator to be responsive, and its regulation has to be appropriate (the regulator needs to offer value for money).

With the development aspect of modernizing the exchange system, the exchange has now moved floor trading floor to electronic trading system. Moreover, the institutionalization of the organized spot market is a now planning to step ahead to making a move to the phase of the trading system into a viable forward/futures market, which is expected to be so in the medium period.

3          Purpose – The Overall Objectives of ECEA

The general objective of the Authority shall be to ensure the development of an efficient modern trading system, and to regulate and control the secure, transparent and stable functioning of a Commodity Exchange and to protect the rights and benefits of sellers, buyers, intermediaries and the general public. Its specific objectives are to:

  1. promote responsible innovation, access to market information by all market participants and fair competition among markets and market participants;
  2. deter and prevent price manipulation or any other disruption of market integrity;
  3. ensure the financial integrity of all transactions subject to this proclamation and the avoidance of systemic risk; and
  4. protect all market participants from fraudulent or other abusive trading practices and misuse of customer assets

    Market Regulatory System and Mechanisms

    4.1       Overall Market Regulation Framework

    Three Tier Systems

    ECEA: Regulatory System, Structure and Operation

    4.2   The Regulatory Institutional Arrangement

    The FDRE Ministry of Trade and Industry

    • Has the power to draw policy and regulations
    • Has the power to give directives on trading system like forward/future trading
    • Has the power to issue trade licenses
    • Governs the Exchange and the exchange is directly accountable to the ministry of trade

    The Authority

    • The Authority is independent
    • Has the power to issue directives (with consultation with the ministry)
    • Has the power to take administrative measures (Tribunal measures)
    • Report to the Ministry of Trade

    6.2.2    The Authority’s Organizational Structure

    The Authority is managed by

    1. an Exchange Authority Board;
    2. a Director General appointed by the Government;

    The Authority’s organizational structure is built by

    1       Core Market Regulatory and Development Departments of

    • Market Surveillance, Exchange Actors’ Oversight, and Enforcement Divisions
    • Economic Analysis Directorate
    • Education and Communication Directorate

    2       Legal and Advisory Directorate

    3       Administrative Tribunal (Independent but adjoined with the Authority for administrative purpose)

    4       Administration, Audit and Strategic Planning Divisions and Departments

    Power and Duties of Director General

    1. The Director General is the chief executive officer of the Authority and directs and administers the operational activities of the Authority, including but not limited to:
    2. Exchange Actors and Clearing Oversight;
    3. Market Surveillance and Oversight;
    4. Enforcement; and
    5. Economic Analysis.
    6. The Director General:
    7. employ and administer the employees of the Authority, in accordance with federal civil service laws;
    8. prepare the annual work program and budget of the Authority, and implement same, upon approval by the Board;
    9. effect expenditure in accordance with the budget approved for the Authority;
    10. represent the Authority in all its dealings with third parties; and
    11. Submit reports on the activities of the Authority.

    6.3       Functions and Operational Tools of Regulatory Divisions/Directorates

    6.3.1    Exchange Actors’ Oversight

    The department’s main focus are

    1          Prudential regulation

    • Net worth criteria for exchanges;
    • Coordination with other financial regulators to ensure bans on improper brokers are enforced across financial markets;
    • Introduction of a settlement guarantee fund.

    2          Client protection

    • Scrutinize the manner in which the exchange handles the analysis of detailed trade data;
    • Oversee handling by exchange of the customer complaint process;
    • Introduction of a customer protection fund;
    • Work with other authorities to combat bucket shops.

    3          Protecting the stability of the financial system

    • Understand clearing arrangements, and properly supervise the exchange’s clearinghouse;
    • Coordinate market stability protection measures with the Central Bank;
    • Coordinate with foreign regulators.

    Oversight Functions

    1. Traders’ registrations
    2. Licensing and approval
    3. Customers/clients’ protection
    4. Traders conduct monitoring
    5. Traders skill development

    Oversight tools

    1. Trade report
    2. Financial integrity reporting
    3. Auditing and monitoring
    4. Surprise office visits

    6.3.2    Market Surveillance

    1          Functions

    In general, the department’s focus is to ensure that markets efficiently perform the twin economic functions of:

    • Ensuring market integrity
      • Scrutinize contract proposals made by exchanges to ensure they are sufficiently safe from manipulation attempts;
      • Continuously analyze markets and prices, and in case of problems, instruct exchange to intervene when the exchange fails to do so;
      • Work with exchange to ensure a level playing field.
    • Policing and investigation of market manipulation and trade mal practices
    • Ensuring price discovery, fair trade and competition
    • Price risk management
    • Warehouse regulation

    2          Surveillance tools

    • Policing: day to day market follow up
    • Market daily report: Online and after trade
    • Reviewing major traders’ market data
    • Investigative reporting
    • Rule Enforcement and Compliance reports
    • Complaints and informants

    6.2.3.3 Enforcement

    The department has two sections s

    1. Investigation team leader
    2. Prosecution team leader

    The Functions are

    • Investigate acts, practices and conduct which is violation of concerning the regulation of a commodity exchange or related business.
    • Institute the cases before the administrative tribunal according to the investigation report.
    • Appeal an adverse decision of the administrative tribunal and answering brief up on any other appeal brief.
    • Follow up the decision of administrative tribunal
    1. The department, in adjudicating cases falling under its jurisdiction, have the power to:
    2. summon and enforce the attendance of any person and examine him under oath;
    3. require the discovery and production of any document;
    4. receive evidence on affidavits;
    5. requisition any public record or copy thereof from any office; and
    6. take administrative sanctions;
    7. When any criminal offence related to the operation of a Commodity Exchange comes before the Authority, the department shall forward the case to the appropriate judicial body.
    8. If the department, after causing an inquiry to be made, that any person has violated, or is likely to violate any provisions or any directives, the department will pass an order enjoining such person from committing such violations.

    3.2       Tools

    • Complaints and informants
    • Surveillance and oversight reports
    • Individual and institutional legal sues

    6.2.3.4 Administrative Tribunal

    The function of the Administrative Tribunal established by the Authority to determine whether violations have been committed and set and impose appropriate administrative measures as outlined by the proclamation of the Authority and its directives.

    6.2.3.5 Economic Analysis

    The department’s focus is to understand the operation and functions of the commodity exchange and trading system; the operation and optimality of the market regulations, identify and study the operational, economic and policy bottlenecks and issues to forward possible and alternative options and policy measures.

    • Pre-empt policy issues by undertaking and publicizing well-designed studies on potentially unpopular price movements.
    • Interact with other government departments to develop new laws and to ensure rules and regulations are harmonized in a manner favorable to exchanges

     

     

    6.2.3.6 Education and Communications

    Promote the modern marketing system and educate the public and trading community on the principles and working of the exchange system. Enhance the visibility of the operation and functions of the regulatory Authority and create and strengthen cooperation among stakeholders.

    7          Issues and Challenges

    • Strengthening of and Autonomy for the Regulator
    • Staff Professional Development on Regulatory Skills
    • Creating and building electronic trading regulatory software infrastructure and personnel development
    • Improvement in competencies and transparency on commodity grading, quality issues, and trading mechanisms
    • Research and Development in Commodity Market Governance and Structural Issues
    • Sensitization of policy makers, opinion makers with respect to the benefits of futures trading system.