Central Bank of Nigeria ( CBN) in collaboration with FMDQ, forex dealers recently activated On-system trading and also adopted a single market-driven rate. In this report AMAKA IFEAKANDU writes on the impact of the implementation in the market.
Central Bank of Nigeria in its commitment towards development of the foreign exchange (Forex) market and Nigerian financial system, has recently entered into collaboration with FMDQ Securities Exchange Limited and Forex authorised Dealers activated on- system trading and reporting of all FX transactions in the market on the FMDQ-advised FX trading system. They also adopted a single market driven rate in May 2021.
The nation’s forex market remains one of the largest and the most crucial segment of the Nigerian financial market with an average annual turnover of $45.85 billion over the last four years.
Operators said that despite the high market turnover, activities in the market remained constrained by limited transparency and volatile capital flows, leading to market fragmentation and multiple exchange rates, as activity levels fluctuated alternately between the formal and regulated market segments, and the unregulated (parallel) market. Consequently, the variance between the exchange rate of the Dollar/ Naira currency pair for Forex transactions executed through the formal and regulated markets and unregulated (parallel) market has continued to fluctuate, with a record high of N124.52 to a dollar in 2016, and parallel market reaching a record peak of N520.00 to a Dollar on February 22, 2017.
Previous initiatives to boost liquidity in forex market
But in a bid to restore confidence, enhance efficiency and boost liquidity in the Nigerian Forex market, several initiatives were launched in 2017 – with the CBN laudably introducing a special Forex window – the “Investors’ & Exporters’ Forex Window” (the I&E FX Window or the Window), which set out a single and autonomous Forex market structure for activities in the market, towards maintaining FX market stability, whilst attracting and retaining foreign capital into the economy; and FMDQ deploying a credible fixing to the Forex market – the Nigerian Autonomous Foreign Exchange Fixing (NAFEX) – representing Spot Forex market rates, supporting appropriate benchmarking and facilitation of derivatives activities, and serving as the reference rate for activities, all in the I&E Foreign exchange Market.
The benchmark, NAFEX, however, serves as a reference rate for other Forex market products, such as the CBN and FMDQ-launched Naira-settled OTC FX Futures, thereby proving an avenue for market participants to hedge foreign exchange rate risk. The success of the I&E Forex Market, supported by NAFEX, following the April 2017 launch, was substantiated by the significant increase in foreign capital inflows as at third quarter of 2017, providing the much-needed liquidity, which contributed to the immediate convergence of the rates in the I&E FX Market and the parallel market at N368.00 to a dollar by the end of June 2017, and was maintained until the occurrence of the pandemic, which caused reduced liquidity in the Forex market, thereby resulting in an increase in the spread to N29.45 to a dollar in March 2020 and N80 to Dollar by the end of last month.
New initiatives on- system trading/adoption of a single market driven rate
Interestingly, the CBN, in line with its desire for a more liquid market, in May 2021 took the remarkable step of increasing transparency by activating the on-system trading and reporting of forex transactions on the FMDQ-advised System. This move was supported by the adoption of NAFEX as the benchmark rate for the public sector foreign currency-denominated transactions, thereby actualising the long-desired hope of a single market-driven rate in the Nigerian forex market.
Reactions on the new forex initiative
In a statement signed by the Chief Executive Officer, FMDQ Group, Mr Bola Onadele Koko, affirmed that “FMDQ is excited at the introduction of market-building initiatives by the CBN to ensure the further development of the forex market, in recognition that a liquid, transparent and credible forx market is a major precursor for increased inflows into the Nigerian financial market.
He said that FMDQ remains committed to institutionalising structures – efficient processes, systems, etc., in collaboration withmarket stakeholders, to support initiatives towards delivering a thriving FX market that is well-positioned to support the Nigerian economy.”
While addressing the market, the CBN Governor, Mr Godwin I. Emefiele, emphasised the importance of a transparent and credible Forex market, and reiterated the CBN’s commitment to implementing market-enhancing initiatives required to inspire confidence towards sustaining and deepening the Nigerian Forex market.
Impact of the implementation of CBN market initiatives
The implementation of the aforementioned market initiatives according to the data for FMDW has shown a significant increase in the turnover recorded in the Forex market, from an average monthly turnover recorded in January to April 2021 at circa $1.30 billion, compared to May 2021 with $2.52 billion turnover recorded, whilst the number of executed trades rose from an average monthly number of 6,733 trades in January to April, to 6,949 trades in May.
FMDQ also said that the renewed confidence and depth in the Forex market will improve the attractiveness of the Nigerian market to foreign portfolio investors and also pave the way for the introduction of new derivatives products on FMDQ’s platform to support hedging of risk exposures by both local and foreign market stakeholders.
FDMQ collaborates with other stakeholders to develop capital market
As Africa’s first vertically integrated financial market infrastructure (FMI) group and a one-stop platform to commence and end all financial market transactions in a seamless, timely and cost-efficient manner, FMDQ Group remains positioned to collaboratively work with market stakeholders in developing the Nigerian markets through innovative and value-adding solutions. With its renewed aspiration as encapsulated in its mission to “collaborate to empower markets for economic progress towards delivering prosperity”, FMDQ Group, comprising FMDQ Exchange, FMDQ Clear Limited, FMDQ Depository Limited and FMDQ Private Markets Limited, having consolidated its activities into a fully diversified platform across multiple asset classes – fixed income, currencies, equities and derivatives markets – for execution, clearing and settlement of trades, amongst others – is strategically positioned to support the transformation of the Nigerian financial market to become globally competitive, operationally excellent, liquid, and diverse.