Over time, the country’s financial landscape has witnessed tremendous growth and transformation. Amidst the laudable growth and transformation, numerous risks and weaknesses have been exposed. As a result, the Central Bank of Kenya (CBK) which holds a regulatory and supervisory role over the country’s foreign exchange business, has developed a Foreign Exchange Code as a regulatory document to guide the response to these weaknesses and risks.

Kenya’s Foreign Exchange Code, released on March 22, 2023, and takes effect March 23, 2023, draws largely from the Global Foreign Exchange Code (Global Code) and has been tailored to respond to the Kenyan context and terrain. This FX Code sets out standards which aim to holistically strengthen and promote the integrity and effective functioning of the wholesale foreign exchange (FX) market in Kenya. Additionally, it aims to ensure and facilitate the sound and better functioning of the market, as a  way of further strengthening Kenya’s flexible exchange rate regime.

The main intention behind the formulation and eventual implementation of this FX Code is to promote a robust, fair, liquid, open, and appropriately transparent market for a diverse set of Market Participants. These market participants, supported by resilient infrastructure, are then able to, confidently and effectively, transact at competitive prices that reflect available market information whilst also conforming to accepted global standards, especially behaviour and best practices.

This code will be applicable to Market Participants. The CBK contends that Market Participants are banks who are licensed as per Section 3 of the Banking Act Cap 488 Laws of Kenya and are involved in the wholesale foreign exchange business in Kenya as part of their licensed business.

Fundamentally, the FX Code is premised around six leading principles, as listed below. As a precursor, it is fundamental to note that under each of the principles below, are sub-principles which outline with clarity the obligations on each Market Participant.

• Ethics: Market Participants are expected to behave in an ethical and professional manner to promote the fairness and integrity of the FX Market.
• Governance: Market Participants are expected to have a sound and effective governance framework to provide for clear responsibility for and comprehensive oversight of their FX Market activity and to promote responsible engagement in the FX Market.
• Execution: Market Participants are expected to exercise care when negotiating and executing transactions to promote a robust, fair, open, liquid, and appropriately transparent FX Market.
•  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 FX Market.
• Risk Management and Compliance: 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.
• Confirmation and Settlement Processes: 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.

Aside from the principles above, Market Participants need to appreciate the following: –

• In compliance with the FX Code, Market Participants will be required to conduct a self-assessment and submit to the CBK a report on the institution’s level of compliance with the FX Code by April 30, 2023. All Market Participants will thereafter be required to submit to CBK a detailed compliance implementation plan that is approved by its Board by June 30, 2023.
• It is anticipated that The FX Code should be fully implemented, and each Market Participant be in full compliance by December 31, 2023.
• Market Participants will be required to submit a quarterly report to CBK, on the level of compliance to the FX Code within 14 days after the end of every calendar quarter, with the first report due by July 14, 2023.
• CBK may take appropriate enforcement and other administrative action including monetary penalties as provided for under the Banking Act against any Market Participant for failure to comply with the FX Code.

While adequate effort has been put to formulate this code, and it remains the hope of the regulator that it will conclusively address the various aspects of conduct and market practice, it is possibly not exhaustive. For instance, market participants who are not banks such as forex bureaus, are not anticipated within the code. Nonetheless, the code remains a step in the right direction, and will undoubtedly ensure that the foreign exchange market is properly insulated and ensure continued financial stability.