Clearly, if analysts had known that the Electronic Foreign Exchange Matching System (EFEMS) for foreign exchange transactions launched by the Central Bank of Nigeria (CBN), last Monday, would have such an immediate impact on the value of the naira, they would have paid a lot more attention when the apex bank first announced in early in October, this year, that it planned to launch and implement the EFEMS not later than December, 1 2024.
Speculation
In the statement dated October 2, announcing the planned introduction of the EFEMS, the CBN had said there would be a two-week test run of the platform in the month of November.
The statement said authorised dealers would subsequently conduct all foreign exchange transactions in the interbank Fx market on the EFEMS, adding that the new system was expected to enhance governance, transparency and facilitate a market-driven exchange rate that would be accessible to the public.
“This development is expected to reduce speculative activities, eliminate market distortions and give the CBN improved oversight capabilities to effectively regulate the market.
“The CBN will publish real time prices and buy/sell orders data from the system, and in collaboration with the Financial Markets Dealers Association (FMDA), publish the rules for the EFEMS,” the statement said.
It noted that the Nigerian FX Code and revised Market Operating Guidelines for the Nigeria Foreign Exchange Market (NFEM) would also provide guidance to market participants.
“Authorised Dealers are therefore required to comply with extant guidelines and regulations governing the Nigeria foreign exchange market, and ensure that all necessary documentation, training, and systems integrations are concluded ahead of the go live date,” it said.
Initial guidelines
On November 27, the CBN released guidelines for the EFEMS, pegging the minimum foreign exchange trade on the platform at $100,000, with an incremental clip sizes of $50,000, and directing authorised dealers to deploy the Bloomberg BMatch as the EFEMS for their trading activities in the forex market from December 2nd, 2024.
“The Bloomberg BMatch platform will enhance the integrity and operational efficiency of the FX market by providing transparent and automated matching of trades leading to market efficiency and greater price discovery,” the apex bank said.
Revised guidelines
Interestingly, on November 29, the CBN issued another circular related to the commencement of the EFEMS titled, “Revised guidelines for the Nigeria Foreign Exchange Market (NFEM),” which it said, superseded all previous key forex policy documents, such as the circular on the establishment of the Investors and Exporters’ (I&E) forex window in 2017, the operational changes to the forex market that it announced on June 14 last year and the revised guidelines for the operation of the Nigerian Interbank Forex market.
Specifically, the new guidelines restricted all transactions in the NFEM to only authorised dealers and prohibited dealings with unlicensed with unlicensed intermediaries.
Also, the guidelines stated that licensed Bureaux de Change (BDCs) were permitted to buy forex from authorised dealers subject to the aggregate monthly cap stipulated by the CBN.
Furthermore, according to the guidelines, all market participants were expected to adhere to the highest code of ethics and professional conduct in the NFEM in line with the Nigerian FX Code.
Under the new rules, Bank boards, CEOs, and Chief Compliance Officers are also required to annually attest to their compliance with the Nigerian FX code.
Another highlight of the revised guidelines is that Market Makers will be designated in the interbank market that will be required to mandatorily provide daily two-way quotes in standard amounts and spreads.
“All interbank transactions are expected to be concluded on the EFEMS for full transparency and in line with the EFEMS rules and the Nigerian FX Code as published by the CBN,” the guidelines stated. Given the foregoing, it is obvious that the regulator put in a lot of ef
Analysts pointed out that many speculators had hoarded dollars for months in anticipation of the naira’s continuous depreciation, but became scared and started dumping the greenback when the local currency started appreciating
fort into ensuring that the implementation of the EFMS went ahead as planned.
Cardoso’s speech
Indeed, in his address at the Chartered Institute of Bankers (CIBN) annual bankers’ dinner in Lagos on November 29, CBN Governor, Mr. Olayemi Cardoso, stated that EFEMS was a transformative step towards market transparency and price discovery.
He said: “The unification of the exchange rate is a pivotal reform, but it marks just the beginning. On the 2nd of December 2024, the foreign exchange market will begin trading on the electronic FX matching system to further enhance transparency, restore confidence, and attract new investments.
“Coupled with an improved framework for deploying products targeting the Nigerian diaspora and efforts to establish a well-functioning FX market, we anticipate increased diaspora and foreign investments over the next 12 months, building a more resilient and liquid FX market.”
He also addressed misconceptions about the FX market, stress – ing the role of EFEMS in tackling panic-driven distortions.
Cardoso said: “It is vital to address the disinformation circulating about a supposed demand-supply gap in the FX market, which is fuelling unnecessary panic.
“The current USD exchange rate reflects the price that the most desperate buyers are willing to pay, and this does not represent the true market value of the naira. “The introduction of the electronic matching system will correct these distortions by enhancing the price discovery process.
Additionally, it will significantly boost the central bank’s oversight and intervention capabilities, ensuring a more stable and transparent foreign exchange market.”
Naira appreciation
The CBN Governor appears to have been proven right as the EFEMS, within a week of its implementation, is already yielding the desired result.
Reason: between Monday last week when it was launched and Friday, the naira has made significant gains, strengthening to N1,533.7600 to the dollar on the official market and N1,570/$1 on the parallel market.
A breakdown of numbers on NFEM showed the average rates starting at N1,662.77 per dollar on Monday; appreciating to N1,644.78/$1 on Tuesday; N1,613.86 per dollar on Wednesday; N1,587.29/$1 on Thursday and N1,533.7600 per dollar on Friday.
Similarly, on the parallel market, the naira appreciated from N1,745/$1 on Monday to N1,720/$1 on Tuesday, N1,670/$1 on Wednesday, N1,640/$1 on Thursday and N1,570/$1 on Friday.
Commenting on the naira’s appreciation since the launch of the EFEMS, analysts at Nairametrics, in a report over the weekend, attributed it to how the platform works.
According to them, the first week of the implementation of the EFEMS indicates that the forex market is experiencing more supply than demand.
They said: “The new system also mandates a minimum trade value of $100,000 for all interbank FX transactions, which seems to have curtailed speculative activities in the market. “Another plausible reason is the format (Quoting System) for placing orders and pricing the exchange rate.
Unlike the previous opaque system, forex dealers informed Nairametrics that the current system is order-based, similar to the way stocks are traded on the NGX.
“For example, bids (buying requests) are displayed on the system along with their bid prices, while offers (selling requests) are also shown with their corresponding prices. This makes it easier to determine how much forex is available in the market and the prevailing prices.”
However, the analysts also said that their findings suggest that some forex traders are keeping away from the market for now, because, according to them, they need more time to study how the EFEMS works.
Speculators panic
Furthermore, they said that their research shows that panic selling of dollars by speculators is another key reason for the appreciation of the naira last week, adding that that many forex suppliers were in a hurry to dump dollar, “as no one wanted to hold on to a currency rapidly losing value against the naira”.
They analysts pointed out that many speculators had hoarded dollars for months in anticipation of the naira’s continuous depreciation, but became scared and started dumping the greenback when the local currency started appreciating following the launch of the EFEMS.
However, the analysts note that it is not unusual at this time of the year, when Nigerians in the diaspora usually return home for the Christmas holidays there to be increased supply of dollars in the forex market.
Conclusion
Although the consensus in financial circles, over the weekend, is that the launch of the EFEMS is showing great potential in helping to ensure exchange rate stability and bolster the naira, analysts caution that a much longer period than one week is needed to assess whether the platform will yield the expected results or not.
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