The Central Bank of Nigeria (CBN) has announced new guidelines for the Nigeria Foreign Exchange Market (NFEM), bringing significant changes aimed at improving transparency, access, and regulation. These updates, issued in a circular dated November 29, 2024, are part of broader efforts to address inefficiencies in the FX market and stabilize the naira.
Key Highlights of the Reforms
1. Licensed BDCs Reinstated
– Licensed Bureaux de Change (BDCs) are now allowed to purchase foreign exchange directly from Authorized Dealers, subject to a monthly cap.
– This change aims to improve retail access to FX for individuals and small businesses.
– All BDC transactions must comply with licensing terms and be reported in real-time.
2. Consolidation of FX Windows – The CBN has unified all FX market windows, including the Investors & Exporters (I&E) Window, SME Window, and Invisible Window, into a single framework.
– This move simplifies operations and ensures better price discovery for market participants.
3. Centralized Pricing Through EFEMS
– All FX transactions will now be priced using the Electronic Foreign Exchange Matching System (EFEMS).
– The system will publish daily FX rates for public access, ensuring transparency and reducing rate manipulation.
4. Stricter Reporting and Compliance
– Authorized Dealers must report FX transactions to the CBN within 10 minutes using an API-based system.
– BDCs and banks are required to submit daily activity reports and adhere to real-time monitoring standards.
– Participants must comply with the Nigerian FX Code of Ethics, with annual attestations from executives to confirm adherence.
5. Formalized Interbank Trading
– Interbank FX trades must occur on the EFEMS platform to ensure transparency and liquidity.
– Dealers are required to provide two-way quotes and comply with risk management practices.
Implications for Market Participants
– Businesses and Individuals: Retail FX users are expected to benefit from improved access through BDCs. Centralized pricing will also ensure fairer rates. However, the stricter compliance requirements may limit the activities of unlicensed intermediaries.
– Authorized Dealers and BDCs: Participants must upgrade their processes to align with the new reporting and compliance standards. The mandatory ethics attestation underscores the CBN’s commitment to accountability.
– Economy: The unified market structure is designed to enhance investor confidence and attract foreign inflows. However, its success depends on enforcement and FX liquidity management.
CBN Governor Olayemi Cardoso highlighted the benefits of the electronic FX matching system during the Bankers’ Committee Annual Dinner on November 29, 2024. He emphasized that the system would align the naira’s exchange rate with its true market value, improve price discovery, and enhance overall market stability.
“The FX matching system allows us to monitor the market effectively and intervene when necessary. This step will significantly improve transparency and provide a more accurate reflection of the naira’s value,” Cardoso stated.
The reforms reflect the CBN’s push for a more robust and efficient FX market. While these measures could strengthen the naira and attract foreign investments, consistent enforcement and liquidity management will be critical to achieving the desired outcomes.
For more details, download the full guidelines on the NFEM.
