Instruction No. 06 CREPMF/2021 on Minimum Share Capital and Prudential Standards for Approved Management and Intermediation Companies on the UMOA Regional Financial Market

WEST AFRICAN MONETARY UNION CREPMF REGIONAL COUNCIL FOR PUBLIC SAVINGS AND FINANCIAL MARKETS

INSTRUCTION NO. 06 CREPMF/2021

ON THE REQUIRED MINIMUM SHARE CAPITAL AND PRUDENTIAL STANDARDS FOR APPROVED MANAGEMENT AND INTERMEDIATION COMPANIES ON THE UMOA REGIONAL FINANCIAL MARKET

The Regional Council for Public Savings and Financial Markets,

Having regard to the Convention of 3 July 1996 establishing the Regional Council for Public Savings and Financial Markets, particularly its Annex on the composition, organization, functioning, and powers of the Regional Council for Public Savings and Financial Markets;

Having regard to General Regulation No. 001/97 of 28 November 1997 on the organization, functioning, and supervision of the UMOA regional financial market, as amended in Articles 37 and 136 by the UMOA Council of Ministers in its sessions of 27 March 1998 and 05 September 2005;

Having regard to Decision No. 004 of 29/04/2021/CM/UMOA of the UMOA Council of Ministers appointing the President of the Regional Council for Public Savings and Financial Markets;

Having regard to the Specific Accounting Rules applicable to approved participants on the regional financial market, particularly Articles 8.1.2, 8.3.2, and 8.4.2;

Having regard to the provisions of the Uniform Act relating to commercial companies and economic interest groups, particularly Articles 385, 414, and subsequent articles;

Having regard to the deliberations of the Regional Council in its 50th extraordinary session on 24 September 2021;

HEREBY DECIDES

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Instruction No. 06 CREPMF/2021

TITLE I: PRUDENTIAL FRAMEWORK

CHAPTER I: DEFINITIONS AND GENERAL PROVISIONS

Article 1: Definitions For the purposes of this Instruction, the following terms shall mean:

• AA-: First tier of High Quality ratings among those accepted by the Regional Council;
• A+: Last tier of Upper Medium Quality ratings among those accepted by the Regional Council;
• Assets in custody: Financial and monetary assets recorded in accounts with a Management and Intermediation Company for the benefit of clients;
• Financial assets: All securities or contracts issued or admitted on a financial market, which are capable of generating income or capital gains for their holder in exchange for a certain degree of risk;
• Liquid assets: Assets that can be easily converted into cash without losing, or with minimal loss, in value to cover the liquidity needs of a Management and Intermediation Company in the event of a liquidity crisis.
• High-quality liquid assets: Unencumbered liquid assets, not subject to significant valuation fluctuations, and mobilizable within 48 hours without risk of capital loss;
• Rating agency: An entity whose principal and regular activity consists of issuing credit ratings or assessments and recognized by the CREPMF and/or the BCEAO;
• Multilateral Development Banks (MDBs): Supranational institutions established by sovereign states that are their shareholders. Their mandates reflect the development assistance and cooperation policies established by these states;
• BBB-: First tier of Investment Grade or Lower Medium Quality ratings among those accepted by the Regional Council;
• BIS: Bank for International Settlements;
• Overhead costs (CS): Costs related to the normal operation of a Management and Intermediation Company as determined by a CREPMF Instruction;
• ECOWAS: Economic Community of West African States;
• Shareholder current account: Funds temporarily made available to a Management and Intermediation Company by its shareholders, representing loans and other amounts due (remuneration, dividend payments, reimbursement of expenses...);

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Instruction No. 06 CREPMF/2021

• Blocked shareholder current account: A shareholder current account subject to a duly formalized blocking agreement covering a period of at least one year;
• Prudential declaration: A statement presenting prudential standards, prepared in accordance with the models defined by this Instruction;
• Interim prudential declaration: A prudential declaration prepared for the first half of the calendar year;
• Management: De jure and de facto management. De jure management includes, in particular, persons who are members of the executive body, any person holding the title of director, the person in charge of agencies or representative offices or branches, the provisional administrator, and the liquidator. De facto management refers to persons who exercise power in the management of the Management and Intermediation Company without holding a corporate office. The exercise of this power may be evidenced by delegation acts or any other justification deemed relevant by the Regional Council;
• FGD: Deposit Guarantee Fund in the UMOA;
• IMF: International Monetary Fund;
• Equity: Shareholders' equity increased by other equity instruments, particularly participatory securities, convertible bond issuances, and conditional advances;
• Core business software: Any IT solution operated by the Management and Intermediation Company that has a direct link to its regulated activities. This includes, in particular, accounting, trading, and custody software;
• Significant change in activities: Any strategic change impacting at least 10% of the Management and Intermediation Company's revenue distribution over three (03) financial years;
• UN: United Nations;
• Firm commitment: A contract under which one or more MICs agree to purchase securities issued by an entity before they are offered to other investors, with a view to reselling them to the public;
• Liquidity ratio: The portion of Net Regulatory Equity placed conservatively in high-quality liquid instruments as defined in Article 8 of said Instruction;
• Management and Intermediation Company (MIC): Any financial institution that has been granted the status of Management and Intermediation Company, by approval of the Regional Council for Public Savings and Financial Markets, in accordance with the provisions of the General Regulation on the organization, functioning, and supervision of the UMOA regional financial market;
• Market Central Structures: The Regional Securities Exchange and the Central Depository / Settlement Bank;

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Instruction No. 06 CREPMF/2021

• Control System: The set of rules, methods, and control measures governing the organizational and operational structure, as well as the reporting and control process, of a Management and Intermediation Company;
• WAEMU: West African Economic and Monetary Union;
• UMOA: West African Monetary Union;
• Union: West African Economic and Monetary Union or West African Monetary Union;
• AU: African Union. Terms not defined in this Instruction or its Annexes shall have their usual meaning.

Article 2: Purpose This Instruction aims to establish:

1. the minimum share capital and prudential rules applicable to Management and Intermediation Companies (MICs) approved on the UMOA regional financial market;
2. the composition of high-quality liquid assets eligible for the liquidity ratio of MICs approved on the UMOA regional financial market;
3. the procedures for reporting, to the Regional Council by MICs approved on the UMOA regional financial market, the prudential standards applicable to them.

Article 3: Scope of Application This Instruction applies to all MICs approved on the UMOA regional financial market, as well as companies applying for this status.

CHAPTER II: MINIMUM SHARE CAPITAL AND REGULATORY EQUITY

Article 4: Minimum share capital A Management and Intermediation Company must have a minimum share capital of One billion (1,000,000,000) FCFA. The minimum share capital must be fully paid up prior to the approval of the Management and Intermediation Company by the Regional Council.

Article 5: Equity Throughout its existence, the equity of a Management and Intermediation Company may not fall below the minimum share capital defined in Article 4 above.

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Instruction No. 06 CREPMF/2021

If, due to losses recognized in the consolidated annual financial statements, equity falls below the minimum share capital, the Management and Intermediation Company is required, no later than at the close of the financial year in which the losses were recognized, to restore equity to a value at least equal to the minimum share capital. The Regional Council may, however, set different equity thresholds depending on the individual situation of each Management and Intermediation Company and the risk profile undertaken.

Article 6: Net Regulatory Equity Net regulatory equity consists of the sum of the following elements: a) Paid-up share capital consisting of ordinary shares; b) Premiums related to the issuance of shares referred to in point (a) above, including merger premiums and contribution premiums; c) Legal, statutory, or contractual reserves, regulated and discretionary; d) Retained earnings (credit balance); e) Unallocated interim or year-end profit limited to the net amount after deducting foreseeable costs and dividends; f) Blocked accounts of shareholders or partners; g) Revaluation reserves; h) Regulated provisions. The following elements are fully deducted from equity: a) Retained earnings (debit balance): this element records cumulative losses from previous years allocated by the Ordinary General Meeting; b) Unallocated interim or year-end loss not carried forward to retained earnings by the Ordinary General Meeting called to approve the accounts of said financial year; c) Net intangible fixed assets after depreciation and provisions, excluding core business software; d) Participations or shares held in the capital of other approved participants, net of impairment provisions, excluding participations held in Market Central Structures; e) Cross-holdings or shares held in the capital of the approved participant's shareholder companies, net of impairment provisions; f) Loans to management.

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Instruction No. 06 CREPMF/2021

Article 7: Calculation of required net regulatory equity MICs must at all times hold Net Regulatory Equity (NRE) whose minimum amount is defined as the highest of the following amounts: a) The required minimum share capital; b) The sum of:

• 25% of fixed overhead costs (CS) measured based on the previous financial year,
• 0.04% of the amount of assets in custody for third parties recorded at the close of the previous financial year,
• 0.05% of the amount of primary market placements measured based on the previous financial year,
• 0.05% of the amount of firm commitments measured based on the previous financial year, and
• 0.5% of the net inventory value of UCITS for which the MIC acts as depositary, recorded at the close of the previous financial year. The calculation method for overhead costs, which correspond to costs not directly linked to activity volume, is defined in the prudential declaration model Form Mod-200 in the annex. Independent of advertising fees recharged to clients in the context of market operations, external services included in the calculation of overhead costs must comprise promotion expenses directly borne by the MIC corresponding to at least 5% of the previous year's revenue or the projected revenue for the first year of operation. If the CREPMF considers that a MIC's activities have undergone a significant change, it may require the MIC to be subject to a different net regulatory equity requirement as referred to in this Article. For companies applying for MIC status, fixed overhead costs (CS) are measured based on projections for the first year of operation.

Article 8: Obligation to inform CREPMF Management and Intermediation Companies must inform the Regional Council as soon as they become aware that they no longer meet the Net Regulatory Equity requirements applicable under Article 7. When a MIC finds that its equity is below the amount required in the first paragraph of Article 7, it must inform the CREPMF on the first business day following this finding and regularize its situation within a timeframe set by a Circular of the Regional Council, if the imbalance results from operations. Otherwise, the company must regularize its situation no later than at the close of the financial year following the one in which the standard was no longer met.

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Instruction No. 06 CREPMF/2021

CHAPTER III: LIQUIDITY AND INVESTMENT OF EQUITY

Article 9: Investment of equity The MIC must place its Net Regulatory Equity corresponding to at least 25% of fixed overhead costs (CS) measured based on the previous year's financial year, conservatively, in high-quality liquid instruments, unencumbered, not subject to significant valuation fluctuations, and mobilizable within 48 hours without risk of capital loss. This ratio is defined as the liquidity ratio. It verifies the adequacy of liquid and mobilizable Net Regulatory Equity by conducting a daily revaluation at market prices or by reference to a liquid and representative market. In periods of stress leading to temporary non-compliance with the liquidity ratio stated in the first paragraph of this Article, the MIC must inform the CREPMF on the following business day. The total amount of facilities (including signature commitments) that a MIC may grant to persons participating in its management, administration, governance, control, or operation must not exceed 20% of its Net Regulatory Equity. Furthermore, each facility must be secured by guarantees covering the entire exposure. Persons participating in management, administration, governance, control, or operation also include, on a consolidated basis, all subsidiaries of the MIC, affiliated companies, and any party (including its special purpose vehicles) over which the MIC exercises control.

Article 10: Risk diversification in the investment of NRE The MIC must monitor the valuation of net positions taken on different securities issued by the same issuer or by several issuers belonging to the same group to ensure that none exceeds 15% of the placements made under the net regulatory equity requirements applied under Article 7. This percentage is raised to 25% for securities issued or guaranteed by UMOA member states.

Article 11: Risk coverage: Authorized leverage The MIC's proprietary trading operations may be financed up to a maximum of one times the total net regulatory equity as defined in Article 6, which corresponds to a leverage value equal to 1 (one).

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Instruction No. 06 CREPMF/2021

CHAPTER IV: COMPOSITION OF LIQUID ASSETS

Article 12: Components of liquid assets High-quality liquid assets eligible for the liquidity ratio are classified into Level 1 liquid assets and Level 2 liquid assets.

Article 13: Level 1 liquid assets Level 1 liquid assets consist of the market value of the following assets to which no haircut is applied: a) The cash holdings of the Management and Intermediation Company; b) Securities of UMOA member states and their subdivisions denominated and financed in FCFA; c) Securities issued or guaranteed by states, central banks, WAEMU, ECOWAS, AU, UMOA FGD, UN, BIS, IMF, EU, and Multilateral Development Banks (MDBs), meeting the following conditions:

• traded on significant, deep, and active spot or repurchase markets, characterized by a low level of concentration;
• proven to constitute a reliable source of liquidity on markets (cash sale or repurchase), even during periods of stress; d) Bank deposits and negotiable certificates of deposit with a maturity of less than 366 days; e) Confirmed but unutilized credit lines available to the MIC.

Article 14: Level 2 liquid assets Level 2 assets may not represent more than 40% of the total liquid assets held and comprise two categories. Level 2A assets consist of the market value of the following assets: a) Corporate debt securities rated at least AA- for the long term by a rating agency meeting the following conditions:

• traded on significant, deep, and active spot or repurchase markets, characterized by a low level of concentration;
• proven to constitute a reliable source of liquidity on markets (cash sale or repurchase), even during periods of stress; b) Corporate debt securities listed on the BRVM and guaranteed by a guarantor recognized by the CREPMF.

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Instruction No. 06 CREPMF/2021

Level 2B liquid assets, which may not represent more than 15% of the liquid assets held, consist of the market value of the following assets: a) Debt securities of non-financial entities rated between BBB- and A+ for the long term by a recognized rating agency, meeting the following conditions:

• traded on significant, deep, and active spot or repurchase markets, characterized by a low level of concentration;
• proven to constitute a reliable source of liquidity on markets (cash sale or repurchase), even during periods of stress;
• not issued by a financial sector company nor by an entity affiliated with a financial sector establishment; b) Corporate debt securities listed on the BRVM; c) Ordinary shares of companies traded on the BRVM; d) Shares or units of Collective Investment Schemes in Securities (CIS).

TITLE II: CONTROL SYSTEM AND PRUDENTIAL DECLARATIONS

CHAPTER V: CONTROL SYSTEM

Article 15: Establishment of a control system Any Management and Intermediation Company approved by the CREPMF is required to establish a governance framework and organization that ensure sound, efficient, and prudent management of the company. It must adopt a control system described in an internal control charter that specifies the means and organization intended to ensure the reliability of its functioning and the integrity of the information on which said control system relies.

Article 16: Organization of the control system The corporate governance of MICs integrates a Control System adapted to the nature of the risks of the activities they exercise and based on the responsibility of management bodies, the separation of functions, the prevention of conflicts of interest, and the compliance of operations with legislative and regulatory provisions. A CREPMF Instruction defines the operating rules of the control system. Compliance with the requirements defined in this framework must be subject to regular control to ensure they are respected and integrated into the work programs of the relevant units.

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Instruction No. 06 CREPMF/2021

CHAPTER VI: PRUDENTIAL DECLARATION STATEMENTS AND MODELS

Article 17: Prudential declaration statements Approved Management and Intermediation Companies must transmit to the Regional Council the following interim and annual prudential declarations, according to the models attached to this Instruction:

• Form Mod-100 - Calculation of Net Regulatory Equity;
• Form Mod-200 - Calculation of overhead costs;
• Form Mod-300 - Equity requirements;
• Form Mod-400 - Composition of liquid assets;
• Form Mod-500 - Coverage of overhead costs;
• Form Mod-600 - Leverage ratio;
• Form Mod-700 - Exposure limit.

Article 18: Interim prudential declarations Management and Intermediation Companies must communicate to the Regional Council, no later than one (1) month after the end of the first half-year, the interim prudential declarations defined in Article 17 of this Instruction, certified by their Statutory Auditors.

Article 19: Annual prudential declarations Management and Intermediation Companies must communicate to the General Secretariat of the Regional Council, no later than one (1) month after the end of the year, the provisional annual prudential declarations defined in Article 17 of this Instruction. Management and Intermediation Companies must communicate to the Regional Council, no later than one (1) month after the closing of the accounts for the previous financial year, the annual prudential declarations defined in Article 17 of this Instruction, certified by their Statutory Auditors.

CHAPTER VII: PENALTIES AND SANCTIONS

Article 20: Penalties Failure to transmit prudential declarations shall result in the application of a penalty. The rate of this penalty is set at thirty thousand (30,000) FCFA per day of delay in transmitting the declaration statement to the General Secretariat of the Regional Council. Beyond ninety (90) calendar days of delay, the MIC is subject to sanctions, in accordance with the regulatory provisions in force on the UMOA regional financial market.

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Instruction No. 06 CREPMF/2021

Article 21: Sanctions Any breach of prudential rules, not regularized within a period of six (06) months from the date of its discovery, is subject to financial, administrative, and disciplinary sanctions, up to and including the withdrawal of approval.

TITLE III: TRANSITIONAL AND FINAL PROVISIONS

CHAPTER VIII: TRANSITIONAL PROVISIONS

Article 22: Transitional provisions MICs approved before the effective date of this Instruction have a maximum period of one (01) year from its entry into force to comply with the provisions of this Instruction. New actors applying for approval to exercise the activity of an MIC must comply with it from the effective date of this Instruction.

CHAPTER IX: FINAL PROVISIONS

Article 23: Publication and entry into force This Instruction, which repeals all prior contrary provisions, shall take effect as of 1 January 2022. It shall be published wherever necessary.

Done in Abidjan, on 08 NOV 2021

For the Regional Council, The President Badanam PATOKI

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Instruction No. 06 CREPMF/2021

ANNEX: PRUDENTIAL DECLARATION MODELS

Form Mod-100 - CALCULATION OF NET REGULATORY EQUITY In thousands of FCFA

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