Banks fail to meet Central Bank’s forex terms
The Central Bank of Nigeria (CBN) is set to cancel the Foreign Exchange Primary Dealers (FXPDs) status of some of the 15 FXPDs banks for recording low forex volumes of transactions against set guidelines. In a report by correspondence, Some of the FXDPs banks include FirstBank, Zenith Bank, United Bank for Africa (UBA), Access Bank, GTBank, Stanbic IBTC and Ecobank Nigeria.
The CBN appointed the FXDPs lenders to boost dollar liquidity in the forex market but their performance in achieving the set target has not met the CBN’s expectations, given the continued dollar scarcity and poor liquidity in the market.
The FXDPs lenders met a minimum of N400 billion in total foreign currency assets; minimum shareholders’ fund unimpaired by losses of at least N200 billion and minimum liquidity ratio of 40 per cent set by the regulator.
Besides, the lenders operating as FXPDs were expected to have strong forex trading capacity to deploy all FMDQ Thomson Reuters FX trading Systems or any other systems approved by the CBN.
The CBN expects FXPDs banks to act as professional counterparties and market participants in their overall conduct and support of market efficiency and liquidity. The participants are also required to resell a minimum of 70 per cent of any dollar uptake from the CBN in the inter-bank market on the day of purchase.
They are to participate in the market on a daily basis or such period as may be required by the CBN. “FXPDs that record low volumes of FX transactions with the CBN during the evaluation period, that repeatedly provide bids and offers that are not reasonably competitive, or that fail to provide useful market information and commentary, shall be deemed not to have met the expectations of the CBN,” the guidelines stipulated.
“Furthermore, while the main responsibilities of the FXDPs shall be to foster liquidity of forex purchases, CBN may trade on their offers. FXDPs that constantly give uncompetitive quotes risk the CBN trading on their offers. In such circumstances, the CBN may limit FXDP’s participation in any or all operations, approved products and may suspend or terminate the authorised dealer’s status of FXDP if it continues to fail to meet these aforementioned expectations,” it added.
But since the appointment of the FXDPs lenders in June, the CBN has consistently been intervening in the market, with little or no inputs from the lenders because of poor dollar liquidity. The CBN intervened via the Special Secondary Market Intervention Sales (SMIS) – Retail (End-users) and the Interbank FX market to clear a total forex backlog of $4.02 billion in the early days of the policy.
When contacted, CBN Acting Director, Corporate Communications, Isaac Okorafor, said the FXDPs policy is still in force. He said the apex bank, like every other participant, intervenes in the market only when the need arises.
But Currencies Analyst and Head Treasury at Ecobank Nigeria, Olakunle Ezun, said the CBN still remains the major supplier of dollar to the market despite the appointment of the FXDPs banks.
“So far, it appears the Central Bank of Nigeria (CBN) still remains the major supplier of dollars, with over 95 per cent of market volume. The CBN has supplied around $1 billion spot and $3.5 billion forward to Authorised Dealers (Banks) and direct to end-users since Monday, June 20 2016. Trading in the interbank foreign-exchange market is yet to pick up, partly because there is too little foreign-exchange liquidity in the market. The interbank average turnover is barely about $40 million a day, compared to weekly volumes of around $1 billion about three years ago,” he said.
Ezun admitted that forex liquidity remains a challenge despite CBN and FMDQ efforts to support interbank forex market with Forwards and Over-the-Counter (OTC) Forex Futures/Naira Settled Forwards transactions.
“The CBN’s ability to meet its matured obligations as at when due is not in doubt, but recent development as per frequency and volume of CBN’s forex sales to the Foreign Exchange Primary Dealers (FXPDs) have questioned CBN capacity to support the market as growing import and investment demand are not being settled,” Ezun added.
The guidelines insist the nature of the relationship with the FXPDs is primarily a counterparty relationship and require that the FXPDs qualified lenders register as authorized dealers designated to deal with the CBN on large trade sizes on a two-way dollar quote basis. They serve as the bulk traders dealing directly with the CBN on forex matters.
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