CBN unveils flexible forex market

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The Central Bank of Nigeria (CBN) on Wednesday released the much awaited guidelines and operational details of the flexible exchange rate regime promised by the Federal Government.
Under the new flexible exchange rate market initiative, the CBN has pegged the minimum amount primary dealers are required to trade in at a minimum of $10 million.

Addressing journalists in Abuja on Wednesday, the CBN Governor, Mr. Godwin Emefiele, said “there is one window and that is what it will be as long as there is one window. Whatever comes out at the end of the day as the marginal rate will be the rate that is recognized officially by the world about the rate for Nigeria Naira. I do not expect that another rate will be recognized in the market.”

He gave the highlights of the framework and operational guidelines of the flexible exchange rate to include: The market shall operate as a single market structure through the inter-bank/ autonomous window; The Exchange Rate would be purely market-driven using the Thomson-Reuters Order Matching System as well as the Conversational Dealing Book; The CBN would participate in the Market through periodic interventions to either buy or sell FX as the need arises; To improve the dynamics of the market, we will introduce FX Primary Dealers (FXPD) who would be registered by the CBN to deal directly with the Bank for large trade sizes on a two-way quotes basis; These Primary Dealers shall operate with other dealers in the Inter-bank market, amongst other obligations that will be stipulated in the Foreign Exchange.

Primary Dealers (FXPD) Guidelines, which would also be released immediately after this Press Briefing.

Other features of the flexible exchange rate initiative Emefiele said include that :there shall be no predetermined spread on FX spot transactions executed through the CBN intervention with Primary Dealers, while all FX Spot purchased by Authorized Dealers are transferable in the inter-bank FX Market; The Forty-One (41) items classified as “Not Valid for Foreign Exchange” as detailed in a previous CBN Circular shall remain inadmissible in the Nigerian FX market; To enhance liquidity in the market, the CBN may also offer long-tenored FX Forwards of 6 to 12 months or any tenor to Authorized Dealers; Sale of FX Forwards by Authorized Dealers to end-users must be trade-backed, with no predetermined spreads.

The CBN, he added: “Shall introduce non-deliverable over-the-counter (OTC) Naira-settled Futures, with daily rates on the CBN-approved FMDQ Trading and Reporting System. This is an entirely new product in the Nigerian Foreign Exchange Market, which would help moderate volatility in the exchange rate by moving non-urgent FX demand from the Spot to the Futures market; The OTC FX Futures shall be in non-standardized amounts and different fixed tenors, which may be sold on any dates thereby ensuring bespoke maturity dates; Proceeds of Foreign Investment Inflows and International Money Transfers shall be purchased by Authorized Dealers at the Daily Inter-Bank Rate; and Non-oil exporters are now allowed unfettered access to their FX proceeds, which shall be sold in the Inter-bank market.”

In terms of timelines, the Management of the Central Bank, Emefiele said has agreed that: The detailed operational guidelines for the Flexible Foreign Exchange Market will be released immediately after this Press Briefing; The guidelines for the selection and operations of FX Primary Dealers would also be released immediately after this Press Briefing; Selected FX Primary Dealers would be notified by Friday 17th June 2016. All other non-Primary Dealers would remain valid and eligible to participate in the market; Inter-bank trading under the new guidelines will begin on Monday 20th June 2016; and the tenors and rates for the OTC Naira-settled FX Futures will be announced on Monday 27th June 2016.

The Central Bank, the Governor said: “is strongly determined to make this market as transparent, liquid, and efficient as possible. Therefore, we would neither tolerate unscrupulous behaviour nor hesitate to bring serious sanctions on offenders.”

He also warned that “the CBN will not allow the system to be undermined by speculators and rent-seeker, any attempt to breach any aspect of this new framework will be heavily sanctioned by the CBN and this may indeed result in the suspension or withdrawal of the FX dealing license of an offending Authorized dealer.”

Speaking on the preparedness of the CBN to measure to forex demand pressures, the CBN Governor stated that the country’s “reserves, despite having fallen, is still robust and is able to cover about five months of Nigeria’s imports as against the international benchmark of three months. Furthermore, the domestic production of items restricted from the FX market is picking up nationwide, thereby creating more jobs for many more Nigerians.”

Answering questions from journalists on the development, the CBN Governor noted that “the CBN will deal primarily with foreign exchange primary dealers, there will be primary and non-primary dealers, the guidelines for qualification for being foreign exchange primary dealer will be on our website but there will be a number of qualifications either the size of the bank, the size of foreign exchange transaction it has handled before, the level of liquidity, the extent to which those banks have complied with central bank guidelines and regulations, the level of preparedness in terms of being able to deploy the software needed in a very transparent manner that will hand-shake with the Thomas Reuters and FMDQ software, those will be the bases.”

With regards to the number of primary dealers, Emefiele revealed that “we do not think from what we see, that there will be maximally eight or ten primary dealers. What that means is that we have what we call grade A dealers and grade B dealers.”

“By being a grade A dealer, primary dealer does not confer on you any special preference other than the fact that the size of the trade the CBN will be willing to deal with you will be larger than those of non-primary dealers. Foreign exchange dealers and banks know what we mean by trade we are talking of an open, transparent, two way quote system, I can close or they can close on themselves and their capacity to deliver at any time within the trading period is very important here that is why we are trying to separate them into two parts,” he said.

From what will be published, Emefiele stated that “the level of trade for a primary dealer will be a minimum of $10 million so what that means is that to do that you have to have a the capacity, must have prepared yourself, you have to be ready to play at the highest level of transparency and nobody is ready to take any nonsense from you if you decide to breach the regulations.”

These new sets of forex dealers he said “will be people who can deliver on their words and they must be people who can face the implications of whatever they do regarding the size, volume and exchange rate they decide to quote, we have decided to ensure that we don’t have speculators, we don’t have rent seekers who just want to come to primary market to just auction and stacking of prices against each other.”

The OTC/FX Futures market he explained: “is an innovation which we have introduced to moderate volatility in the foreign exchange market, it is a situation where we make it easy for you as a businessman to plan your business, and the rate at which you want to do your business. You do not have to fear about what happened to the price of crude oil today that you are afraid that you will not be able to source your dollar in the next three to seven months anymore.”

According to the CBN Governor, “once you have locked yourself onto a price you go and do your business if the rate you locked your deal in the futures market is N260 and in three months time the market is doing say N270 at that time, that N10 gap, the CBN will give you the Naira equivalent of that gap such that you are not seen to be losing money by waiting for the next two to three months to procure your foreign exchange.”

What that does, he said, is that the CBN wants to “see how that shifts your demand from the spot to the time you need it not that you need dollar in the next three, six to nine months you begin to ask you dollar on the spot thereby putting pressure on the demand for dollar.”

The CBN, he said: “will be engaging more and more with the banks and those primary and non-primary forex dealers on how this will work, but we are determined to ensure that this works and I am very optimistic that this will work. I know a couple of people, particularly those with matured Letters of Credit who expect that they want to buy their foreign exchange what happens is that all backlog transactions will be taken to the market for clearance, the CBN today has the foreign reserve of close to about $26.5 billion to $26.7 billion, this is certainly substantially higher than any pent-up demand that is in the market and we are making efforts to improve on the supply of foreign exchange in the market.”

Emefiele expressed optimism “that the steps we have taken today will further deepen the market and also help get foreign exchange into the market. We are very hopeful this will work, the CBN is working to improve the level of supply on its own into the market so those demands will be met at the market so there is no need for anybody to rush into the market because you may find yourself losing money, if you rush into the market and take some emergency decisions, that will hurt you, your profit, hurt your balance sheet and ultimately if you have taken a bank loan your interest targets on your bank loans.”

He urged operators “to be careful that is the reason we have provided opportunities for you to go to the futures, don’t worry just take it easy if your not too sure, go to the futures you will find a deal, all the banks will provide you with futures rate for two to nine months or even one year, they will provide it, so with that you are able to go about your business without necessarily bothering and we have committed ourselves to a level of guaranteeing you. It’s like a debt, if the rate that you get eventually on the day of your futures maturing higher than the deal day, we will pay you the difference but if the rate on that day is lower than the rate on the deal day, then you will pay us. We are just trying to say be calm don’t worry everything is well.”

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