FOREIGN EXCHANGE OPERATION MARKET

CODE OF CONDUCT

1. Background
The current foreign exchange market operation is guided by ‘’Inter-Bank Foreign

Exchange Market Operation Code of Conduct No. IBFEM Guide Line/001/01’’ which is

applicable to all authorized commercial banks that have engaged themselves in buying

and selling of foreign currency from the market. However, this code of conduct has not

been reviewed in response to the dynamic nature of forex market, economic & financial

changes and emerging risks. In addition, the code of conduct has focused only on

inter-bank forex market transaction but not applied to the retail forex market where a

significant amount of foreign currency is transacted and serves as the source of forex

liquidity to the inter-bank forex market. Moreover, it has been limited with a few

provisions compared to international standards and the practices of other African peer

countries such as Kenya, Tanzania, Ghana and Mauritius.

Hence, the existing forex market operation code of conduct has been revised and

aligned with 45 principles of the Global FX Code1 which are globally acceptable

standards and fosters good practice in the foreign exchange market and has been

adopted in 54 countries in Europe, Africa, Asia and the Americas. In Africa, Kenya and

Tanzania aligned their forex market code of conduct with 52 principles of the Global

FX Code while Ghana, South Africa, Mauritius and Angola have developed and partly

aligned with the Global FX Code to their forex market code of conduct.

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The Global FX Code has been generally organized in to six leading principles, consisting of a total of 55
principles. It is a set of guidelines to ensure a well-functioning foreign exchange market that is effective and
promotes market integrity. The Global FX Code is intended to foster a high standard of conduct and good
market practices, ensure equitable and healthy relationships between market participants and facilitate market
efficiency.

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The purpose of revising the existing forex market code of conduct is to holistically

strengthen and promote a well-functioning forex market that could respond to

emerging challenges; address the dynamic nature of the financial market and setting

standards to strengthen and promote the integrity of the forex market in Ethiopia.

1.1. Application
This code of conduct shall be applied to all foreign exchange market participants.

1.2. Interpretation
Applicable Law shall mean with respect to a market participant, the laws, rules, and

regulations applicable to it and the FX Market in which it does business.

Customer refers to a person or an organization having foreign currency earnings from

different foreign sources and also demanding foreign currency from market

participants to make different authorized/permitted foreign payments.

Counterpart refers a market participant requesting forex trading from other market

participants.

Foreign Exchange Market is a forex market where a spot foreign currency transaction

is conducted among authorized banks.

Market Color refers a view shared by market participants on the general state of, and

trends in, the market.

Market Participant shall mean authorized banks and licensed foreign exchange

bureaus.

National Bank refers the National Bank of Ethiopia (NBE).

Personnel refer to a person who conducts foreign currency transaction on behalf of a

market participant.

Retail foreign exchange market refers to a forex market where a spot foreign currency

transaction is conducted among market participants and their customers.

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Spot transaction means a currency transaction where settlement for both party is

made with in two working days (T + 2) after confirmation of transaction.

Wholesale foreign exchange market shall mean inter-bank foreign exchange market

where spot foreign exchange transactions are conducted among authorized banks.

1.3. Enforcement Mechanisms

The NBE may take appropriate enforcement and other administrative action including

monetary penalties in accordance with Article 26(1) of the National Bank of Ethiopia

Establishment Proclamation No. 591/2008 (as amended), against any market

participant that fails to comply with the standards set forth in this code of conduct.

1.4.Purpose
This code of conduct sets out the manner and the sprit in which forex business should

fairly be conducted in order that the foreign exchange market and its participants in

Ethiopia may enjoy a reputation through ensuring ethical behavior, effective

governance, robust dealing practice, risk management, accurate information sharing

and efficient confirmation and settlement processes of the forex market. This code of

conduct is therefore applied not only to personnel but also to the management of

market participants, together with relevant support staff and should be well understood

by each of them.

2. Ethics

2.1. Market participants should strive for the highest ethical standards

i. Market participants should conduct their activities ethically, transparently and

professionally to ensure fairness and integrity of the foreign exchange market.

ii. Market participants should act honestly and fairly in dealing with counterpart.

iii. Market participants should also act with integrity in all their forex dealings or

activities.

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2.2.Market participants should strive for the highest professional standards.

i. Market participants should share a common interest in maintaining the highest

degree of professionalism and the highest standards of business conduct in the

foreign exchange market. High standards of conduct are underpinned by:

a) having sufficient knowledge of, and complying with, applicable law;

b) having sufficient relevant experience, technical knowledge, and qualifications;

c) acting with competence and skill;

d) applying professional judgement in following the market participant’s

guidelines and operating procedures and

e) engaging in efforts to strive for the highest standards of professionalism in the

forex market.

ii. Market participants should ensure that their dealing personnel are adequately

qualified to deal with foreign exchange transactions.

2.3. Market participants should identify and address conflicts of interest

i. Market participants should:

a) Identify actual and potential conflicts of interest that may compromise or be

perceived to compromise the ethical or professional judgment of market

participants.

b) Eliminate these conflicts or, if this is not reasonably possible, effectively manage

them.

ii. Personnel should be aware of the potential for conflicts of interest to arise and

comply with their firm’s policies in these areas.

iii. Contexts in which conflicts may arise include, but are not limited to:

a) situations where personal or firm interests may conflict with those of a

customer or other market participant, or where such a conflict arises for the

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 market participant because the interests of one customer may conflict with

those of another;

b) personal relationships;

c) gifts and corporate entertainment; and

d) Personal Dealing.

iv. Market participants should put in place appropriate and effective arrangements

to eliminate or manage conflicts of interest. This could include:

a) segregation of duties and/or reporting lines;

b) establishing information barriers (for example, physical segregation of certain

departments and/or electronic segregation);

c) altering the duties of personnel when such duties are likely to give rise to

conflicts of interest;

d) providing training to relevant personnel to enable them to identify and handle

conflicts of interest;

e) establishing declaration policies and/or records for identified conflicts of

interest and personal relationships, as well as for gifts and corporate

entertainment received; and

f) having policies and controls on Personal Dealing.

v. Conclude that a specific conflict of interest cannot reasonably be avoided or

effectively managed (including by ceasing to undertake the relevant service or

activity), market participants should disclose sufficient details of the conflict to

enable the affected counterpart/customer to decide beforehand whether or not

they wish to proceed with the transaction.

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3. Governance
Market participants are expected to have a sound and effective governance framework

to provide for clear responsibility for and comprehensive oversight of their forex market

activity and to promote responsible engagement in the forex market.

3.1. The responsible body of market participant i.e. ultimately responsible for the

market participant’s forex business strategy and financial soundness, should

put in place adequate and effective structures and mechanisms to provide

for appropriate oversight, supervision and controls with regard to the market

participant’s forex market activity.

i. The responsible body of market participant should put in place:

a) an operational structure with clearly defined and transparent lines of

responsibility for the market participant’s FX market activity;

b) effective oversight of the market participant’s FX market activity based on

appropriate management information;

c) an environment that encourages effective challenge to senior management

charged with day-to-day responsibility for the market participant’s forex

market activity; and

d) Independent control functions and mechanisms to assess whether the market

participant’s forex market activities are conducted in a manner that reflects the

market participant’s operational risk and conduct requirements.

3.2. Market participants should embed a strong culture of ethical and

professional conduct with regard to their FX market activities.

i. Market participants should, among other things:

a) expect senior management to be highly visible to relevant personnel of the

market participant in articulating and modelling the desired practices,

values, and conduct;

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 b) take appropriate steps to promote and reinforce all relevant personnel’s

awareness and understanding of (1) the values and the ethical and conduct

standards that should be adhered to in their engagement in the FX Market;

and (2) Applicable Law that is relevant to them (see principle 6.2); and

c) make all relevant personnel (including senior management) aware that

disciplinary or other actions may result from unacceptable behaviors and

transgressions of the Market Participant’s policies.

3.3. Market participants should have remuneration and promotion structures that

promote market practices and behaviors that are consistent with the forex

market participant’s ethical and professional conduct expectations

i. Market participant should not incentivize personnel to engage in inappropriate

behaviors or practices, or to take risks beyond the overall business risk

parameters of the market participant.

3.4. Market participants should have appropriate policies and procedures to

handle and respond to potentially improper practices and behaviors

effectively.

i. Market participants should maintain policies and procedures to:

a) Provide confidential channels for personnel or external parties to raise

concerns about potentially improper practices and behaviors. Specifically,

they should be clear with relevant personnel and external parties about where

and how to report concerns about potentially improper practices and

behaviors confidentially and without fear of reprisal or retribution.

b) Investigate and respond to such concern as appropriate.

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 ii. Market participants should be clear with relevant personnel and external parties

about where and how to report concerns about potentially improper practices

and behaviors confidentially and without fear of reprisal or retribution.

iii. Reports of potentially improper practices or behavior of the relevant personnel

should be investigated by independent unit. Such unit should possess sufficient

skills and experience—and be given the necessary resources and access—to

conduct the investigation.

iv. Market participant should complete the investigation and determine the

appropriate outcome within a reasonable time frame, taking into account the

nature and complexity of the matter in question.

v. The reports and results should be brought to the attention of the appropriate

individuals within the market participant, and if appropriate, to the National Bank.

4. Execution
Market participants should exercise care when negotiating and executing transactions

in order to promote a robust, fair, open, liquid, and appropriately transparent forex

market.

4.1. Market participants should handle orders fairly and with transparency in line

with the capacities in which they act

i. Market participants handling orders should:

a) have clear standards in place that strive for a fair and transparent outcome for

the counterpart/customers;

b) be truthful in their statements;

c) use clear and unambiguous language;

d) make clear the rate they are quoting are firm;

e) not enter into transactions with the intention of disrupting the market.

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 ii. Market participants should make counterparty/customer aware of such factors

as:

a) How orders are handled and transacted, including whether orders are

aggregated or time prioritized;

b) the various factors that may affect the execution policy, which would typically

include positioning, whether the market participant managing make

counterparty/customer orders is itself taking on the associated risk or not,

prevailing liquidity and market conditions, other make counterparty/customer

orders, and/or a trading strategy that may affect the execution policy.

4.2. Market participants should handle orders fairly, with transparency, and in a

manner consistent with the specific considerations relevant to different order

types.

i. Market participants should be aware that different order types may have specific

considerations for execution; and

ii. Market participants handling orders that have the potential to have sizable

market impact should do so with particular care and attention.

4.3. Market participants should not request transactions or provide prices with

the intent of disrupting market functioning or hindering the price discovery

process.

i. Market participants should not engage in trading strategies or quote prices with

the intent of hindering market functioning. Such strategies include:

a) those that may cause undue latency, artificial price movements, or delays in

other market participants’ transactions and result in a false impression of

market price, depth, or liquidity;

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 b) Collusive and/or manipulative practices that create a false sense of market

price, depth, or liquidity.

ii. Market participants providing quotations should always do so with a clear intent

to trade.

iii. Transactions should be conducted at prices or rates based on the prevailing

market conditions at the time of the transaction.

iv.Market participants handling counterpart/customer order may decline a

transaction when there are grounds to believe that the intent is to disrupt or distort

market functioning.

4.4. Market participants should identify and resolve trade discrepancies as soon

as practicable to contribute to a well-functioning forex market.

i. Market participants should have effective policies and procedures designed to

minimize the number of trade discrepancies arising from their forex market

activities and should manage such discrepancies promptly.

5. Information Sharing
Market participants are expected to be clear and accurate in their communications and

to protect confidential information to promote effective communication that supports

a robust, fair, open, liquid, and appropriately transparent forex market.

Handling Confidential Information

5.1. Market participants should clearly and effectively identify and appropriately

limit access to confidential information.

i. Market participants should identify confidential information. Confidential

information includes the followings:

a) Forex Trading Information: This can take various forms, including information

relating to the past, present, and future trading activity or positions of the market

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 participant, as well as related information that is sensitive and is received or

produced in the course of such activity.

b) Designated Confidential Information: Market participants may agree to a

higher standard of non-disclosure with respect to confidential, proprietary, and

other information, which may be formalized in a written non-disclosure or a

similar confidentiality agreement.

ii. Identification of confidential information should be in line with any legal or

contractual restrictions to which the market participant may be subject.

5.2.Market participants should not disclose confidential information to external

parties, except under specific circumstances.

i. Market participants should disclose confidential information only under certain

circumstances. These may include, but are not limited to, disclosure:

a) with the consent of the counterpart/customers;

b) required to be publicly disclosed under Applicable Law, or as otherwise

requested by the National Bank;

c) as requested by the National Bank acting for policy purposes; and

d) to advisors or consultants on the condition that they protect the confidential

information in the same manner as the market participant that is disclosing the

confidential information to such advisors or consultants.

ii. Market participants may actively choose to share their own prior positions and/or

trading activity so long as that information does not reveal any other counterpart’s

/customer’s confidential information and the information is not shared in order to

disrupt market function or hinder the price discovery process, or in furtherance of

other manipulative or collusive practices.

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iii. When determining whether to release confidential information, market participants

should take into account Applicable Law, as well as any agreed-to restrictions that

may limit the release.

Communications
5.3.Market participants should communicate in a manner that is clear, accurate,

professional, and not misleading.

i. Communications should be easily understood by their intended recipient.

Therefore, market participants should use terminology and language that is

appropriate for the audience and should avoid using ambiguous terms. To support

the accuracy and integrity of information, market participants should:

a) attribute information derived from a third party to that third party (for example,

a news service);

b) identify opinions clearly as opinions;

c) not communicate false information;

d) exercise judgement when discussing rumors that may be driving price

movements, identify rumors as rumors, and not spread or start rumors with the

intention of moving markets or deceiving other market participants; and

e) Not provide misleading information in order to protect confidential information.

ii. Market participants should be mindful that communications by personnel reflect

on the firm they represent as well as the industry more broadly.

5.4. Market participants should communicate market color appropriately and

without compromising confidential information.

i. Market color is the collaborative effort to better understand the market.

ii. The timely dissemination of market color between market participants can

contribute to an efficient, open, and transparent FX market through the exchange

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 of information on the general state of the market, views, and anonymized and

aggregated flow information.

iii. Market participants should give clear guidance to personnel on how to

appropriately share market color. In particular, communications should be

restricted to information that is effectively aggregated and anonymized.

5.5. Market participants should provide personnel with clear guidance on

approved modes and channels of communication.

i. Market participants should communicate with counterpart/customer through

approved methods of communication that allow for traceability, auditing, record

keeping, and access control.

ii. Standards of information security should apply regardless of the specific mode of

communication in use.

iii. Market participants should maintain a list of approved modes of communication

and it is recommended that communication channels on sales and trading desks

be recorded, particularly when being used to transact or share market color.

iv. Market participants should give consideration, under exceptional circumstances

(for example, in an emergency and for business continuity purposes), to allowing

the use of unrecorded lines but should provide guidance to personnel regarding

any permitted use of such unrecorded lines or devices.

6. Risk Management and Compliance

i. Market participants are expected to promote and maintain a robust control and

compliance environment to effectively identify, manage, and report on the risks

associated with their engagement in the FX market.

ii. Appropriate risk management, compliance, and review structures should be in

place to manage and mitigate the risks that arise from a counterpart’s/customer’s

activities in the FX market.

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 iii. Periodic independent reviews of risk and compliance controls should also be

undertaken, including a review of the qualitative and quantitative assumptions

within the risk management system.

6.1. Market participants should have frameworks for risk management and

compliance.

6.1.1. The common components of these two frameworks may include:

i. Effective oversight by the responsible body or individual(s) including support for the

stature and independence of risk management and compliance. In particular:

a) The responsible body or individual(s) should make strategic decisions on the risk

appetite of the FX business.

b) The responsible body or individual(s) should be responsible for the establishment,

communication, enforcement, and regular review of a risk management and

compliance framework that clearly specifies authorities, limits, and policies.

c) Risks should be managed prudently and responsibly in accordance with

established principles of risk management and Applicable Law.

ii. The provision of concise, timely, accurate, and understandable risk and compliance

related information to the senior body or individual(s).

iii. The appropriate segregation of duties and independent reporting lines, including

the segregation of trading from risk management and compliance and from deal

processing, accounting, and settlement.

iv. Adequate resources and employees with clearly specified roles, responsibilities,

and authority, including appropriate access to information and systems. These

personnel should have appropriate knowledge, experience, and training.

6.2. Market participants should familiarize themselves with, and abide by,

Applicable Law that are relevant to their FX Market activities and should have

an appropriate compliance framework in place.

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 i. An effective compliance framework should provide independent oversight and

control and could comprise, but is not limited to:

a) identification of Applicable Law that apply to their FX Market activities;

b) appropriate processes designed to prevent and detect abusive, collusive, or

manipulative practices, fraud, and financial crime, and to mitigate material risk

that could arise in the general conduct of the FX market activities;

c) capturing and retaining adequate records to enable effective monitoring of

compliance with Applicable Law;

d) Well-defined escalation procedures for issues identified.

ii. The periodic review and assessment of compliance functions and controls,

including mechanisms to alert senior management about material gaps or failures

in such functions and controls.

6.3. Market participants should maintain an appropriate risk management

framework with systems and internal controls to identify and manage the FX

risks they face.

i. Effective risk management starts with the identification and understanding by

market participants of the various types of risks to which they are exposed and

typically involves the establishment of risk limits and monitoring mechanisms, as

well as the adoption of risk-mitigating and other prudent practices. An effective

risk management framework could comprise, but is not limited to:

a) an appropriate and well-documented approval process for setting of risk limits;

b) a comprehensive and well-documented strategy for the identification,

measurement, aggregation, and monitoring of risks across the FX business;

c) documented policies, procedures, and controls, which are periodically

reviewed and tested, to manage and mitigate risks;

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 d) the clear communication of risk management policies and controls within the

institution to promote awareness and compliance, as well as processes and

programs to facilitate understanding of such policies and controls by

personnel;

e) information systems to facilitate the effective monitoring and timely reporting

of risks;

f) robust incident management, including appropriate escalation, mitigating

actions, and lessons learned;

g) sound accounting policies and practices encompassing prudent and

consistent valuation methods and procedures; and

h) an appropriately robust risk control self-assessment process that includes

processes to remediate identified gaps or weaknesses.

6.4.Market participants should have practices in place to limit, monitor, and

control the risks related to their FX market trading activity.

i. These practices could comprise, but are not limited to:

a) The regular monitoring of trading activities, including the identification and

internal escalation, as appropriate, of failed, cancelled, or erroneous trades.

b) Automated or manual monitoring systems to detect actual or attempted market

misconduct and market manipulation;

c) Verification of the valuations used for risk management and accounting purposes,

conducted by personnel independent of the business unit that owns the risk;

d) Independent reporting on a regular and timely basis of risk positions and trader

profit/loss statements to the relevant risk management function or senior

management, as appropriate, including a review of exceptional deviations of

profit/loss from expected levels;

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 e) Transactions should be promptly and accurately captured so that risk positions

can be calculated in an accurate and timely manner for monitoring purposes;

f) Regular reconciliations of front, middle, and back office systems, with differences

identified and their resolution tracked by personnel independent of the business

unit;

g) Timely reporting to a senior body or individual(s) when risk limits have been

breached, including follow-up action to bring exposures within limits, and any

appropriate measures to prevent a recurrence;

h) Appropriate controls around proper order and quote submission. These controls

should be designed to prevent the entry or transmission of erroneous orders or

quotes that exceed pre-set size and price parameters as well as financial exposure

thresholds.

ii. Market participants should be aware of the risks associated with reliance on a single

source of liquidity and incorporate contingency plans as appropriate.

6.5. Market participants should have processes in place to independently review

the effectiveness of and adherence to the risk management and compliance

functions.

i. Independent review should be performed regularly, with any review findings recorded

and corrective action tracked.

ii. All material risk related to FX market activities should be covered, using an

appropriate assessment methodology.

iii. A review team should be given the necessary mandate and support, including

adequate personnel with requisite experience or expertise.

iv. Findings should be reported to an appropriately senior level for review and follow-

up.

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Market participants should take into account the following risks related to their FX

market activity.

Credit/Counterparty Risk

6.6. Market participants should have adequate processes to manage counterparty

credit risk exposure, including where appropriate, through the use of

appropriate netting and collateral arrangements, such as legally enforceable

master netting agreements and credit support arrangements.

Market Risk

6.7. Market participants should have processes to measure, monitor, report, and

manage market risk in an accurate and timely way.

6.8. Market participants should have independent processes in place to mark-to-

market trading positions to measure the size of their profit and loss and the

market risk arising from trading positions.

Operational Risk

6.9. Market participants should have appropriate processes in place to identify

and manage operational risks that may arise from human error, inadequate or

failed systems or processes, or external events.

6.10. Market participants should have business continuity plans in place that are

appropriate to the nature, scale, and complexity of their FX business and that

can be implemented quickly and effectively in the event of large-scale

disasters, loss of access to significant trading platforms, settlement, or other

critical services, or other market disruptions.

Technology Risk

6.11. Market participants should have in place processes to address potential

adverse outcomes arising from the use of or reliance on technological

systems (hardware and software).

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Settlement Risk

6.12. Market participants should reduce their Settlement Risk as much as

practicable, including by settling FX transactions through services that

provide payment-versus-payment settlement where available.

Compliance Risk

6.13. Market participants should keep a timely, consistent, and accurate record of

their market activity to facilitate appropriate levels of transparency and

auditability and have processes in place designed to prevent unauthorized

transactions.

6.14. Market participants should perform “Know-Your-Customer” (KYC) checks

on their counterparties to ascertain that their transactions are not used to

facilitate money laundering, terrorist financing, or other criminal activities.

6.15. Market participants should have in place reasonable policies and procedures

(or governance and controls) such that trading access, either direct or

indirect, is limited to authorized personnel only.

6.16. Market participants should generate a timely and accurate record of

transactions undertaken to enable effective monitoring and auditability.

Legal Risk

6.17. Market participants should have processes in place to identify and manage

legal risks arising in relation to their FX Market activities.

7. Confirmation and Settlement

Market participants are expected to put in place robust, efficient, transparent, and risk-

mitigating post-trade processes to promote the predictable, smooth, and timely

settlement of transactions in the FX market.

Overarching Principles

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7.1. Market participants should establish consistency between their operating

practices & documentation and legal risk.

i. Operating practices (including processes for confirming and settling trades)

should be consistent with legal and other documentation.

7.2. Market participants should institute a robust framework for monitoring and

managing capacity in both normal and peak conditions.

i. Market participants should have sufficient technical and operational capability to

support end-to-end FX processing in both normal and peak market conditions

without undue impact on the processing timeline.

ii. Market participants should have defined mechanisms in place to respond to

extreme changes in demand, as required and on a timely basis. Furthermore,

clearly defined and documented capacity and performance management

processes should be in place and reviewed regularly, including with external

vendors.

7.3. Market participants should implement straight-through automatic

transmission of trade data from their front office systems to their operations

systems.

i. Trade data should be facilitated by means of secure interfaces where the

transmitted trade data cannot be changed or deleted during transmission.

ii. When trade data cannot be transmitted automatically from the front office to the

operations system, adequate controls should be in place so that trade data are

captured completely and accurately in the operations system.

7.4. Market participants should conduct any novation, amendments, and/or

cancellations of transactions in a carefully controlled manner.

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 i. Processes for novating, amending, or cancelling transactions should be clearly

defined and should provide for the maintenance of appropriate segregation

between operations and sales and trading personnel.

ii. Reporting on amendments and cancellations should be made available to

management in these areas on a regular basis.

Confirmation Process
7.5. Market participants should confirm trades as soon as practicable, and in a

secure and efficient manner.

i. Market participants should confirm forex trades as soon as practicable after

execution, amendment, or cancellation.

ii. Market participants should implement operating practices that segregate

responsibility for trade confirmation from trade execution.

iii. Confirmations should be transmitted in a secure manner whenever possible, and

electronic and automated confirmations are encouraged.

iv. When available, standardized message types and industry-agreed templates

should be used.

v. Open communication methods such as e-mail can significantly increase the risk

of fraudulent correspondence or disclosure of confidential information to

unauthorized parties. If confirmations are communicated via open

communication methods, those methods should comply with information security

standards.

7.6. Market participants should review, affirm, and allocate block transactions as

soon as practicable.

i. Block transaction details should be reviewed and affirmed as soon as practicable

following execution.

ii. Investment managers or others acting as Agent on behalf of multiple

counterparties may undertake block transactions that are subsequently allocated

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 to specific underlying counterparties. Each underlying counterparty in a block

transaction should be an approved and existing counterparty of the dealer-

counterparty prior to allocation.

7.7. Market participants should identify and resolve confirmation and settlement

discrepancies as soon as practicable.

i. Market participants that identify discrepancies between received confirmations or

alleged trades and their own trade records should investigate internally and inform

their counterpart with the aim to resolve such discrepancies as soon as practicable.

ii. Escalation procedures should be established to resolve any unconfirmed or

disputed terms as a matter of urgency, and processes should be in place to detect

and report adverse trends that emerge in the discrepancies.

iii. Escalation procedures should also include notification to trading and other

relevant internal parties so that they know which counterparties may have

practices that do not align with best practices regarding confirmation of trades.

iv. The responsible body should receive regular information on the number and

latency of unconfirmed deals so that they can evaluate the level of operational

risk being introduced by maintaining dealing relationships with their firms’

counterparties.

7.8. Market participants should be aware of the particular confirmation and

processing features specific to life cycle events of each FX product.

i. Market participants should:

a) Establish clear policies and procedures for the confirmation, exercise, and

settlement of all FX products in which they transact, including those with

unique features.

b) Where applicable, familiarize personnel responsible for operations with the

additional terms and conditions associated with various FX products and the

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 protocols and processes around life cycle events in order to reduce

operational risk.

c) Also be fully versed in the appropriate terminology, contract provisions, and

market practices associated with FX products.

Netting and Settlement Processes

7.9. Market participants should properly measure, monitor and control their

settlement risk equivalently to other counterpart of similar size and duration.

i. Where settlement amounts are to be netted, the initial confirmation of trades to be

netted should be performed as it would be for any other forex transaction.

ii. All initial trades should be confirmed before they are included in a netting

calculation.

iii. To avoid underestimating the size and duration of exposures, Market participants

should recognize that Settlement Risk exposure to their counterpart begins when

a payment order on the currency it sold can no longer be recalled or cancelled

with certainty, which may be before the settlement date.

7.10. Market participants should utilize standing settlement instructions (SSIs).

i. SSIs should be in placed

a) Where practicable, for counterparties with whom market participant has a trading

relationship;

b) Securely stored and provided to all relevant settlement systems so as to facilitate

straight-through processing;

c) Set up with a defined start date and captured and amended (including audit trail

recording) with the appropriate approvals, such as review by at least two

individuals;

d) Settled in accordance with the SSIs in force on the value date.

7.11. Market participants should request direct payments.

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i. Market participants should request direct payments when conducting forex

transactions and recognize that Third-Party Payments may significantly increase

operational risk and potentially expose all parties involved to money laundering or

other fraudulent activity.

Account Reconciliation Processes

7.12. Market participants should perform timely account reconciliation processes.

i. Market participants should conduct a regular reconciliation process to reconcile

expected cash flows against actual cash flows on a timely basis.

ii. Reconciliations should be carried out by personnel who are not involved in

processing transactions that would affect the balances of accounts held with

correspondent banks.

iii. Escalation procedures should be in place and initiated to deal with any

unreconciled cash flows and/or unsettled trades.

7.13. Market participants should identify settlement discrepancies and submit

compensation claims in a timely manner.

i. Market participants should establish procedures for detecting non-receipt of

payments, late receipt of payments, incorrect amounts, duplicate payments, and

stray payments and for notifying appropriate parties of these occurrences.

ii. Escalation procedures should be in place for liaising with counterparties that fail

to make payments and more broadly for the resolution of any disputes.

iii. Escalation should also be aligned to the commercial risk resulting from fails and

disputes.

iv. Market participants that have failed to make a payment on a value date or

received a payment in error (for example, a stray payment or duplicate payment)

should arrange for proper value to be applied or pay compensation costs in a

timely manner.

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v. All instances of non-receipt of payment should be reported immediately to the

counter party’s operations and/or trading units.

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Appendix 1: The Relationship between NBE Forex Market Code of

Conduct and Global FX Code

The Global FX Code is organized into six pillars which consist of a total of 55 principles.

The revised FX market code of conduct has adopted 45 principles of the global FX

code while excluding 10 principles of the global FX code by considering the

development, nature and size of the Ethiopian FX market. For this reason, numbering

of the principles in this code of conduct is not aligned with numbering of the principles

in the Global FX Code. The rationales behind for excluding 10 principles of the global

FX code are briefly explained as follow.

Global FX Statement of Global FX Code Reason for Exclusion of Global
Code Principles FX Code form Ethiopia FX
Principles Market Code of Conduct
Principle 8 Market participants should be Principal-agent model is not a
clear about the capacities in practice in the current Ethiopia
which they act. FX market.
Principle 11 A market participant should only Principal-agent model is not a
Pre-Hedge Client orders when practice in the current Ethiopia
acting as a principal, and should FX market.
do so fairly and with transparency.
Principle 13 Market participants should This is not practical in
understand how reference prices, Ethiopian FX market. This is
including highs and lows, are applied when brokerages are
established in Connection with one actor of the FX market.
their transactions and/or orders.
Principle 14 The Mark Up applied to Client Principal-agent model is not a
transactions by Market practice in the current Ethiopia
Participants acting as Principal FX market.
should be fair and reasonable.
Principle 16 Market participants acting as This is not practical in
Voice Brokers should only employ Ethiopian FX market.
name switching where there is

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 Global FX Statement of Global FX Code Reason for Exclusion of Global
Code Principles FX Code form Ethiopia FX
Principles Market Code of Conduct
insufficient credit between parties
to the transaction.
Principle 17 Market participants employing last This is not practical in Ethiopian
look should be transparent FX market. It is a practice
regarding its use and provide utilized in Electronic Trading
appropriate disclosures to clients. Activities whereby a Market
Participant receiving a trade
request has a final opportunity
to accept or reject the request
against its quoted price.
Principle 18 Market participants providing This is not practical in
algorithmic trading or aggregation Ethiopian FX market.
services to clients should provide
adequate disclosure regarding
how they operate.
Principle 41 Prime brokerage participants This is not practical in
should strive to monitor and Ethiopian FX market.
control trading permissions and
credit provision in Real Time at all
stages of transactions in a manner
consistent with the profile of their
activity in the market to reduce
risk to all parties.
Principle 44 Market participants are This is not applicable currently.
encouraged to implement
straight-through automatic
transmission of trade data from
their front office systems to their
operations systems.

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 Global FX Statement of Global FX Code Reason for Exclusion of Global
Code Principles FX Code form Ethiopia FX
Principles Market Code of Conduct
Principle 53 Market participants should have This is not practical in
adequate systems in place to Ethiopian FX market.
allow them to project, monitor,
and manage their intraday and
end-of-day funding requirements
to reduce potential complications
during the settlement process.

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