•  FX rate to be purely market-driven
  •  Automatic adjustment mechanism of the exchange rate begins Monday
  • To operate as single market through the interbank

Governor of Central Bank of Nigeria, CBN, Godwin Emefiele yesterday introduce a market driven system of foreign exchange trading in an effort to meet up with the ever increasing foreign exchange demands in the face of scarce foreign reserve the country has been grappling with in the last one year.
Speaking during a press briefing in Abuja to unveil the policy, Emefiele disclosed that under the new era, the exchange rate would be purely market-driven using the Thomson-Reuters Order Matching System as well as the Conversational Dealing Book.
Thomson Reuters is a market system that enables more customers to be served and trade more effectively, through powerful e-commerce tools for price making, price distribution, auto-hedging and aggregation.
It provides efficient end-to-end trade workflows with straight-through processing, settlement and regulatory support.
The CBN governor stated that the need for the policy became imperative given the continued depletion of the Nigerian foreign reserve as a result of the fluctuating price of crude oil in the international market.
“In order to avoid further depletion of the reserves, the CBN took a number of countervailing policy actions anchored on the prioritisation of the most critical needs for foreign exchange as well as maintaining stability in the exchange rate,” Emefiele noted.
He added that CBN witnessed a significant decline in the nation’s Foreign Exchange Reserves from about US$42.8 billion in January 2014 to about US$26.7 billion as at June 10, 2016.
In terms of inflows, the bank’s foreign exchange earnings have fallen from about US$3.2 billion monthly to current level of below a billion dollars per month.
He, however, stated that despite these outcomes, the demand for foreign exchange had risen significantly.
“For example, in 2005 when we had oil prices at about US$50 per barrel for an extended period of time, our average import bill was N148.3 billion per month.
“In stark contrast, our average import bill for 2015 was about N917.6 billion per month. Unfortunately, the interplay between reduced FX Supply and rising FX demand accounted for a substantial reduction in our foreign exchange reserves.”
Stating the breakdown of the policy, Emefiele explained that the market would operate as a single market structure through the inter-bank/autonomous window; that 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 foreign exchange Primary Dealers would be registered 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. The primary dealers are required to provide a minimum of $10m dollars for them to qualify.”
He also noted that there would be no predetermined spread on foreign exchange spot transactions executed through the CBN intervention with primary dealers while all foreign exchange spot purchased by authorised dealers were transferable in the inter-bank foreign exchange market.
To enhance liquidity in the market, the CBN may also offer long-tenured foreign exchange forwards of six to 12 months or any tenor to authorised dealers; sale of foreign exchange forwards by authorised dealers to end-users must be trade-backed, with no predetermined spreads.
Also, the CBN shall introduce non-deliverable over-the-counter OTC Naira-settled Futures, with daily rates on the CBN-approved FMDQ Trading and Reporting System.
Emefiel said that the OTC Naira-settled Futures is an entirely new product in the Nigerian Foreign Exchange Market, which would help moderate volatility in the exchange rate by moving non-urgent foreign exchange 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.
He said that proceeds of Foreign Investment Inflows and International Money Transfers shall be purchased by authorised dealers at the Daily Inter-Bank Rate while non-oil exporters are now allowed unfettered access to their FX proceeds, which shall be sold in the Inter-bank market.
Speaking on the time line, the CBN boss said that the selected foreign exchange primary dealers would be notified by Friday, June 17, 2016. All other non-primary dealers would remain valid and eligible to participate in the market while inter-bank trading under the new guidelines will begin on Monday 20th June 2016. Also, the tenors and rates for the OTC Naira-settled FX Futures will be announced on Monday June 27, 2016.
While urging participants to play by the rule, Emefiele emphasize that attempts to breach any aspect of the new framework will be sanctioned by the CBN. According to him such sanction may result in the suspension or withdrawal of the foreign exchange dealing license of an offending Authorized dealer.
“I therefore urge market participants to assist us in ensuring that this new system enables the CBN to pursue its mandate in a more effective and efficient manner, which guarantees preservation of our scarce commonwealth, stability of our financial system, and growth of our economy to the benefit of all Nigerians.”
It would be recalled that the broad framework and guidelines of the Flexible Exchange Rate Inter-bank Market, was alluded to at the end of the last Monetary Policy Committee MPC Meeting in May 23-24 2016.