Re-Introducing And Operationalizing Nigeria’s Flexible Exchange Rate Market

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An Address by Godwin I. Emefiele, Governor, Central Bank of Nigeria At the Unveiling of the Framework for Re-introduction of Managed Float Exchange Rate System 15th June 2016

Good afternoon ladies and gentlemen and welcome to the Central Bank of Nigeria (CBN). The Management of the Bank has called this Press Conference in response to one of the commitments contained in the Communiqué of the Monetary Policy Committee (MPC) of 24th May 2016. Having consulted widely and prepared carefully, the committee of Governors of the CBN is delighted to unveil to all stakeholders and the general public, the broad framework and guidelines of the Flexible Exchange Rate at the Inter-bank Market, which we alluded to at the end of that MPC Meeting. Before I proceed into the details of this new policy, please permit me to provide you with a brief context.

2. We all know by now that Nigeria has been dealing with the effects of three significant and simultaneous global shocks, which began around the third quarter of 2014. These include:
• The over 70 percent drop in the price of crude oil, which contributes the largest share of our Foreign Exchange Reserves;
• Global growth slowdown and geopolitical tensions along critical trading routes in the world; and
• Normalization of Monetary Policy by the United States’ Federal Reserve.
3. In view of these headwinds, the CBN witnessed a significant decline in our Foreign Exchange Reserves from about US$42.8 billion in January 2014 to about US$26.7 billion as of 10th June 2016. In terms of inflows, the Bank’s foreign exchange earnings have fallen from as high as US$3.2 billion monthly sometime in 2013 to current levels of below a billion dollars per month.

4. Despite these outcomes, the demand for foreign exchange has 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 stood at about N917.6 billion per month. Unfortunately, the interplay between reduced FX Supply highlighted above and rising FX demand accounted for a substantial drain on our foreign exchange reserves.

5. In order to avoid further depletion of the reserves, the CBN took a number of countervailing policy actions, anchored on the prioritization of the most critical needs for foreign exchange as well as maintaining stability in the exchange rate. Having allowed two adjustments from August 2014 to February 2015, which resulted in movement of the currency from N155/US$1 to N197/US$1, we decided to manage the Naira-Dollar Exchange Rate at about N197/US$1 over the last 16 months, and then provide the available but highly limited foreign exchange to meet the following needs:
• Matured Letters of Credit from Commercial Banks
• Importation of Raw Materials, Plants, and Equipment,
• Importation of Petroleum Products, and
• Payments for School Fees, BTA, PTA, and related expenses

6. Over these intervening period, we are happy to note that these policies have yielded some positive developments. In particular, we have managed to stabilize the exchange rate since February 2015, thereby creating certainty for both household and business decisions, and also underpinning the economic growth we recorded in 2015. We have largely eliminated speculators and rent-seekers from the Foreign Exchange Market. Our Reserves, despite having fallen, is still robust and is able to cover about 5 months of Nigeria’s imports as against the international benchmark of 3 months. Furthermore, the domestic production of goods restricted from the FX market has picked up considerably nationwide, thereby creating more jobs for many more Nigerians.

7. Despite these positive outcomes, the Central Bank of Nigeria has always maintained that it would continue to monitor situations on the ground and ensure that the Bank’s policies reflect these facts and developments rather than the sentiments of any groups or sectors. It is in light of this principle that we now believe that the time is right to restore the automatic adjustment mechanism of the exchange rate with the re-introduction of a flexible inter-bank exchange rate market. The workings of this market will be consistent with the Bank’s objectives of enhancing efficiency and facilitating a liquid and transparent Foreign Exchange Market.

8. Although the detailed framework and operational guidelines of the market will be released to the public immediately after this Press Briefing, permit me to highlight its key aspects:

a. The market shall operate as a single market structure through the inter-bank/autonomous window;
b. The Exchange Rate would be purely market-driven using the Thomson-Reuters Order Matching System as well as the Conversational Dealing Book;
c. The CBN would participate in the Market through periodic interventions to either buy or sell FX as the need arises;

d. To improve the dynamics of the market, we will introduce FX Primary Dealers (FXPD) who would be registered by the CBN to deal directly with the Bank for large trade sizes on a two-way quotes basis;
e. 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) Guidelines, which would also be released immediately after this Press Briefing;

f. There shall be no predetermined spread on FX spot transactions executed through the CBN intervention with Primary Dealers, while all FX Spot purchased by Authorized Dealers are transferable in the inter-bank FX Market;
g. The Forty-One (41) items classified as “Not Valid for Foreign Exchange” as detailed in a previous CBN Circular shall remain inadmissible in the Nigerian FX market;

h. To enhance liquidity in the market, the CBN may also offer long-tenored FX Forwards of 6 to 12 months or any tenor to Authorized Dealers;

i. Sale of FX Forwards by Authorized Dealers to end-users must be trade-backed, with no predetermined spreads;

j. 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. This is an entirely new product in the Nigerian Foreign Exchange Market, which would help moderate volatility in the exchange rate by moving non-urgent FX demand from the Spot to the Futures market;

k. 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;

l. Proceeds of Foreign Investment Inflows and International Money Transfers shall be purchased by Authorized Dealers at the Daily Inter-Bank Rate; and

m. Non-oil exporters are now allowed unfettered access to their FX proceeds, which shall be sold in the Inter-bank market.

9. In terms of timelines, the Management of the Central Bank has agreed as follows:

a. The detailed operational guidelines for the Flexible Foreign Exchange Market will be released immediately after this Press Briefing;

b. The guidelines for the selection and operations of FX Primary Dealers would also be released immediately after this Press Briefing;

c. Selected FX Primary Dealers would be notified by Friday 17th June 2016. All other non-Primary Dealers would remain valid and eligible to participate in the market;

d. Inter-bank trading under the new guidelines will begin on Monday 20th June 2016; and
e. The tenors and rates for the OTC Naira-settled FX Futures will be announced on Monday 27th June 2016.

10. In closing, let me note that the Central Bank is strongly determined to make this market as transparent, liquid, and efficient as possible. Therefore, we would neither tolerate unscrupulous behaviour nor hesitate to bring serious sanctions on offenders. The CBN expects all authorized dealers particularly to display the highest level of professionalism. We expect them to understand the spirit and letter of this transition to a market based system. The CBN will not allow the system to be undermined by speculators and rent-seekers. Permit me to emphasize that any attempt to breach any aspect of this new framework will be heavily sanctioned by the CBN and this may indeed result in the suspension or withdrawal of the FX dealing license of an offending Authorized dealer.

11. 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.

Thank you all for listening.

 Revised Guidelines for The Operation Of The Nigerian Inter-Bank Foreign Exchange Market

1.0 Introduction

In line with the objectives of enhancing efficiency and facilitating a liquid and transparent, Foreign Exchange (FX) market, the Central Bank of Nigeria (CBN) hereby releases the revised guidelines on the operations of the Nigerian Inter-Bank FX market towards the liberalisation of the market.

2.0 Guidelines

The CBN shall operate a single market structure through the autonomous/inter-bank market i.e. the Inter-Bank Foreign Exchange Market with the CBN participating in the FX market through interventions (i.e. CBN Interventions) directly in the inter-bank market or through dynamic “Secondary Market Intervention Mechanisms”.
Furthermore, to promote the global competitiveness of the market, the inter-bank FX market will be supported by the introduction of additional risk management products offered by the CBN and Authorised Dealers to further deepen the FX market, boost liquidity and promote financial security in the market.

Additionally, to further improve the dynamics of the market, the CBN shall introduce FX Primary Dealers (FXPDs). These shall be registered Authorised Dealers designated to deal with the CBN on large trade sizes on a two-way quote basis. amongst other obligations as stated in the FXPD Guidelines – (Guidelines for Primary Dealership in FX Products). The FXPDs shall operate with other Authorised Dealers (non-FXPDs) in the Inter-bank market.

2.1 Inter-bank Foreign Exchange Market

2.1.1 Participants in the inter-bank FX market shall include Authorised Dealers, Authorised Buyers, Oil Companies, Oil Service Companies, Exporters, End-users and any other entity the CBN may designate from time to time.

2.1.2 Authorised Dealers shall buy and sell FX among themselves on a two-way quote basis via the FMDQ Thomson Reuters FX Trading Systems (TRFXT-Conversational Dealing), or any other system approved by the CBN.

2.1.3 Authorised Dealers may offer one-way quotes (bid or offer) on all products and on request to other Authorised participants via the FMDQ Thomson Reuters FX Trading System (FMDQ TRFXT – Order Book System), or any other system approved by the CBN.

2.1.4 The maximum spread between the bid and offer rates in the inter-bank market shall be determined by FMDQ OTC Securities Exchange (FMDQ) via its market organisation activities with the Financial Market Dealers Association (FMDA).

2.1.5 Proceeds of Foreign Investment Inflows and International Money Transfers shall be purchased by Authorised Dealers at the inter-bank rate.

2.2 Hedging Products

2.2.1 To further deepen the FX market, in addition to the already approved hedging products referenced in the CBN “Guidelines for FX Derivatives and Modalities for CBN FX Forwards”, Authorised Dealers are now permitted to offer Naira-settled non-deliverable over-the-counter (OTC) FX Futures.

2.2.2 OTC FX Futures’ transactions shall be non-standardised with fixed tenors and bespoke maturity dates.
2.2.3 OTC FX Futures sold by Authorised Dealers to end-users must be backed by trade transactions (visible and invisible) or evidenced investments.

2.2.4 FMDQ will provide the appropriate benchmarks for the valuation and settlement of the OTC FX Futures and other FX derivatives.

2.2.5 FX OTC Futures and Forwards will count as part of the FX positions of Authorised Dealers.
2.2.6 To promote market liquidity, Authorised Dealers may apply FX Spot transactions to hedge Outright Forwards, OTC FX Futures and FX Options etc.

2.2.7 Settlement amounts on OTC FX Futures may be externalised for Foreign Portfolio Investors (FPIs) with Certificates of Capital Importation. Such settlement amounts shall be evidenced by an FMDQ OTC FX Futures Settlement Advice.

2.2.8 Furthermore, FMDQ will be developing detailed registration and operational regulation on FX Options and will drive, with the market, the development of other risk management products and attendant guidelines.

2.3 Foreign Currency Trading Position

2.3.1 Further to the CBN Circular Ref: TED/FEM/FPC/GEN/01/001 dated 12th January 2015, Authorised Dealers, (FXPDs and non-FXPDs) are hereby notified of a review in the daily Foreign Currency Trading Positions of banks.
Consequently, Authorised Dealers shall have maximum limits of +0.5%/-10% of their Shareholders’ Funds unimpaired by losses as Foreign Currency Trading Position Limits to support their obligations as liquidity providers at the close of each business day.

2.3.2 Where an Authorised Dealer requires a higher position limit to accommodate a customer trade, the Authorised Dealer shall contact the Director, Financial Markets Department. Where the request is assessed as valid, the Director shall communicate immediate approval by text or email to the Authorised Dealer. Thereafter, the Authorised Dealer must, with 24 hours, write to the Director, Financial Markets Department who will thereafter communicate an approval in writing. The Director, FMD shall exercise discretion on the duration of the temporary position limit depending on the estimated defeasance period of the transaction size.

2.3.3 Returns on the purchases and sales of FX shall be rendered daily to the CBN by Authorised Dealers.
2.3.4 Inter-bank funds shall NOT be sold to Bureaux-de-Change.

2.3.5 The forty-one (41) items classified as “Not Valid for Foreign Exchange” as detailed in the CBN Circular Ref: TED/FEM/FPC/GEN/01/010, remain inadmissible in the Nigerian FX market.

2.3.6 Applicable exchange rate for the purpose of import duty payments shall be the daily inter-bank FX closing rate as published on the CBN website.

2.4 CBN Interventions

2.4.1 Participation in the FX market by the CBN shall be via:

i. The Inter-Bank FX Market

ii. Secondary Market Intervention Sales (SMIS)
2.4.2 Intervention Through the Inter-Bank FX Market

i. The CBN reserves the right to intervene in the inter-bank market to either buy or sell FX Spot upon the receipt of valid two-way quotes on the standard amount as defined from time to time in the FXPD Guidelines.
ii. CBN may also intervene in the inter-bank market by placing orders for non-standard amounts in the FMDQ TRFXT – Order Book System., or any other system as approved by the CBN.

iii. There shall be no predetermined spread on FX Spot transactions executed through CBN intervention with the FXPDs.
iv. The CBN reserves the right to intervene in the inter-bank market to either buy or sell FX Forwards upon the receipt of valid two-way quotes on the standard amount as defined from time to time in the FXPD Guidelines.
v. To enhance liquidity, CBN shall also offer non-deliverable OTC FX Futures (bid or offer) daily on the FMDQ OTC FX Futures Trading & Reporting System.

vi. The OTC FX Futures shall be in non-standardised amounts and different fixed tenors which may be sold on any date thereby giving bespoke maturity dates.
vii. FXPDs may purchase OTC FX Futures for their own accounts or sell to other Authorised Dealers and end-users.
viii. There shall be no maximum spread on the sale of the Forwards and OTC FX Futures purchased from CBN by FXPDs to Authorised Dealers and end-users.

2.4.3 Secondary Market Intervention Sales (SMIS)

i. The CBN may, at its discretion, intervene in the FX market through the sale of FX to Authorised Dealers (wholesale) or to end-users through Authorised Dealers (retail) via a multiple-price book building process using the FMDQ-Thomson Reuters FX Auction Systems, or any other system approved by the CBN. All SMIS bids shall be submitted to the CBN through the FXPDs.
• SMIS – Wholesale:

o All FX Spot purchased by Authorised Dealers are transferable in the inter-bank FX market.

o CBN may offer long-tenored FX Forwards of 6 – 12 months or any tenor to Authorised Dealers.

o Sale of FX Forwards by Authorised Dealers to end-users must be trade-backed. There shall be no predetermined spread.

o FX Forwards purchased by Authorised Dealers are transferable in the inter-bank FX market.
• SMIS – Retail:

o All FX Spot purchased by Authorised Dealers for end-users shall be for eligible transactions only upon the provision of appropriate documentation.

o FX Spot sold to any particular end-user shall not exceed 1% of the overall available funds on offer at each SMIS session.

o CBN may offer FX Forwards to end-users through Authorised Dealers and may limit the amount sold to an individual end-user

o All FX Forwards sales to end-users must be trade-backed.
o There shall be no maximum spread on the sale of FX Forwards by Authorised Dealers to end-users.

3.0 Execution and Reporting
2.5 To ensure effective monitoring of the FX market, all Authorised Dealers and end-users are required to trade only on FMDQ-advised FX Trading System(s). All transactions not executed on the Trading Systems shall be voice reported on the Trading Systems.

2.6 All FX transactions by Authorised Dealers are to be reported to FMDQ via the FMDQ-advised FX Reporting System. CBN will be granted access to this system.

4.0 Sanctions

Authorised Dealers are enjoined to comply with the provisions of these Guidelines, failing which appropriate sanctions shall be imposed, including suspension of the FXPD, Authorised Representatives of the Authorised Dealer, suspension of Authorised Dealer from the FX market and/or withdrawal of the Authorised Dealership Licence.
For the avoidance of doubt, all Authorised Dealers are to refer policy issues in respect of which they are in doubt to the Director, Financial Markets Department, Central Bank of Nigeria for clarification.

5.0. Primacy of the Guidelines

These Guidelines supersede:

i. Circular Ref: TED/FEM/FPC/GEN/01/020 dates October 28, 2014 titled “Guidelines on the Operation of CBN Interventions in the Inter-Bank Market through the Two-Way Quote System”.
ii. All other prior Circulars and Guidelines on the subject matter.

Please be guided.

Guidelines for Primary Dealership in Foreign Exchange Products

1.0 Introduction

In line with the Central Bank of Nigeria’s (CBN’s) mandate to foster depth, stability and liquidity in the Nigerian Foreign Exchange (FX) market, CBN has the responsibility to enhance the transparency, efficiency and effectiveness of the market. One of such efforts is to deepen the inter-bank FX market by establishing an institutional framework for Primary Dealership in FX products. A vibrant Primary Dealership system will not only deepen the inter-bank FX market, but will also enhance liquidity management.

The Foreign Exchange Primary Dealers (FXPDs) system is one whereby interested Authorized Dealers are accorded access to transact FX products directly with the CBN. The main objectives for the establishment of Primary Dealership in FX products are:

i. To achieve exchange rate management policy objectives

ii. To improve the effectiveness of CBN FX market intervention activities

iii. To enhance market liquidity

These Guidelines set the requirements, responsibilities and minimum standards for FXPDs. Each FXPD must continuously meet the Standards set out in the Guidelines and such other Standards, Rules and Regulation as may be prescribed by the CBN from time to time. The CBN hereby emphasizes that the nature of its relationship with the FXPDs is primarily a counterparty relationship.

Based on the foregoing, market stakeholders are reminded that the designation of an entity as an FXPD by the CBN shall in no way constitute a public endorsement of the superior financial soundness of that entity over non-FXPDs by the CBN, nor should such designation be viewed as a replacement for prudent counterparty risk management and due diligence.

2.0 Appointment of FX Primary Dealers

The CBN shall evaluate and approve the application of an Authorized Dealer as an FXPD based on meeting at least 2 of the following 3 Quantitative Criteria as of 31st May 2016:

2.1 Minimum Shareholders Fund Unimpaired by losses of at least 200.00 billion;

2.2 Minimum of N400.00 billion in Total Foreign Currency Assets; and

2.3 Minimum Liquidity Ratio of 40 percent.

In addition, FXPDs shall be evaluated on the following Qualitative Criteria:

2.4 Strong FX trading capacity (qualified and experienced FX dealers, strong sales teams, and wide distribution networks).

2.5 Deployment of all FMDQ Thomson Reuters FX Trading Systems or any other Systems approved by the CBN.
2.6 Dealing Room Standards and a Dealing Room supported by independent market risk management, back-offices and effective disaster recovery plan.

2.7 Active participation in the inter-bank FX market as evidenced by the FMDQ OTC Markets – Dealing Member (Banks) Turnover Ranking.

2.8 Adequate computerisation of its FX trading, reporting and settlement processes, with complete systems installation capacity to accommodate:

2.8.1 FMDQ Thomson Reuters FX Trading Systems (Trading, Auction, Relationship Trading and Surveillance Systems).
2.8.2 Communications equipment (including voice logging devices) for maintaining interface with other FXPDs, non-FXPDs, customers and the CBN.

2.8.3 Any other System approved by the CBN.
CBN reserves the right to review these qualifying criteria for the appointment of an FXPD at any time.

3.0 Expression of Interest (EOI)

3.1 Authorized Dealers intending to be FXPDs shall each submit an EOI letter to the Financial Markets Department of the CBN.

3.2 An application for FXPD Registration shall be accompanied by a letter of undertaking to discharge its FXPD responsibilities diligently and abide by the guidelines, rules and regulations of FX Primary Dealership, code of conduct, and all other post-registration requirements that may be required by the Bank from time to time.

3.3 FXPD Registration shall be valid for a period of one (1) year and renewal is subject to meeting the necessary criteria as determined from the annual CBN FXPD Registration Evaluation exercise.

3.4 Registered FXPDs shall not be required to represent an EOI at renewal. However, interested non-FXPDs who meet the necessary requirements and wish to become FXPDs shall submit an EOI and letter of undertaking during the annual evaluation period.

4.0 Responsibilities of the FXPD

On an ongoing basis, the CBN shall expect FXPDs to act as professional counterparties and market participants in their overall conduct and support of market efficiency and liquidity. Key FXPD responsibilities shall include:
4.1 Provision of two-way quotes for advised standard amounts and bid-ask spreads on FX Spot, Forwards, FX Swaps and Naira-settled OTC FX Futures to the CBN as follows:
Product Standard Size ($’mm)
Spot 10.0
Forwards 5.0
FX Swaps 5.0
OTC FX Futures 5.0

The applicable bid-ask spreads shall be agreed between the CBN and FXPDs periodically.

4.2 Active participation in CBN’s interventions in the foreign exchange market.

4.3 Provision of two-way quotes to other FXPDs thereby facilitating price discovery and developing liquidity in the FX market. The standard amounts and spreads of quotes between FXPDs will be as agreed between FMDQ and FMDA . FXPDs will quote to non-FXPDs on a two-way quote basis on the standard amounts and bid-offer spreads agreed by all Authorized Dealers.

4.4 Provision of market information and analysis helpful in the formulation and implementation of foreign exchange policy to the CBN Director, Financial Markets Department.

4.5 FXPDs shall be required to resell a minimum of 70% of any uptake from the CBN in the inter-bank market on the day of purchase.

5.0 FXPD Market Operations

5.1 FXPDs shall be expected to perform their duties during agreed market trading hours, currently 9am to 2pm.

5.2 FXPDs shall not be compelled to trade with the CBN, FXPDs and non-FXPDs outside of the trading hours. Any trades done outside of the trading hours have to be agreed bilaterally, and recorded on the FMDQ Thomson Reuters FX Trading Systems or any other Systems approved by the CBN.

5.3 All Transactions, both during and off trading, must be conducted on the FMDQ Thomson Reuters FX Trading Systems or any other Systems approved by the CBN.

6.0 FXPDs’ Performance Evaluation

6.1 In its evaluation of FXPDs’ performance, the CBN shall assess the quality of the FXPDs’ participation, and the quality of the market information they provide to the CBN.

6.2 The CBN shall expect the FXPDs to participate in the market on a daily basis or such period as the CBN may require. 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. Furthermore, while the main responsibilities of the FXPD shall be to foster liquidity of FX from purchases, the CBN may trade on their offers. FXPDs that constantly give uncompetitive quotes risk the CBN trading on their offers. In such circumstances, the CBN may limit an FXPD’s participation in any or all operations, approved products and may suspend or terminate the Authorized Dealer’s status as an FXPD if it continues to fail to meet these aforementioned expectations.
6.3 Consequently, FXPDs’ performance evaluation shall be carried out on a points-based system, which shall be communicated in due course.

6.4 The CBN shall also conduct half-yearly evaluations which shall be disseminated to FXPDs strictly as feedback on their performance.

7.0 Risk Management Standards

7.1 Market

7.1.1 FXPDs shall have a maximum limit of +0.5%/-10% of their Shareholders’ Funds unimpaired by losses as Foreign Currency Trading Position Limits. Where an FXPD requires a higher position limit to accommodate a customer trade, the FXPD shall contact the Director, Financial Markets Department. Where the request is assessed as valid, the Director shall communicate immediate approval by text or email to the FXPD. Thereafter, the FXPD must, with 24 hours, write to the Director, Financial Markets Department who will thereafter communicate an approval in writing. The Director, FMD shall exercise discretion on the duration of the temporary position limit depending on the estimated defeasance period of the transaction size. The CBN reserves the right to amend these limits from time to time as its discretion.

7.2 Operational

7.2.1 FXPDs must have a robust business continuity plan and be able to interface with the CBN from an alternate location (Contingency Dealing Room) in the case of a disaster. FXPDs’ disaster recovery capabilities, as reflected in their business continuity plans and are routinely tested, should ensure continuous participation in CBN’s FX trading operations (including trading, clearing and settling) in the event of a wide-scale disruption in the FXPD’s primary place of business.

7.2.2 The CBN expects FXPDs to maintain a robust compliance programme, including procedures to identify and mitigate legal, regulatory, financial, and reputational risks. Such program should include compliance officers dedicated to the business lines relevant to the FXPD functions.

7.2.3 The CBN will not designate as FXPD, any Authorized Dealer that is, or recently (within the last year) has been subject to financial market-related litigation or regulatory action or investigation that the CBN determines material or otherwise relevant to the potential FXPD. In making such determination, the CBN will consider, among other things, whether and how any such matters have been resolved or addressed and the Authorized Dealer’s history of such matters. In addition, with regard to registered FXPDs, the CBN may limit access to any or all operations, and may suspend or terminate the FXPD status of an Authorized Dealer, at anytime deems necessary, if it becomes the subject of, or is involved with, regulatory or legal proceedings that, in the judgment of the CBN, unfavourably impacts the FXPD relationship.

8.0 Reporting Obligations

8.1 FXPDs shall maintain such accounting and other records of their respective activities in the inter-bank FX markets as set forth by the CBN and other relevant regulatory authorities from time to time and render returns of trades executed with the CBN to the Bank.

8.2 All FXPDs shall submit a weekly report of FX transactions undertaken by them in the format advised by the CBN.

8.3 FXPDs shall advise CBN the Authorized Dealers for which they do not have PSR lines for and state the reasons why

9.0 Confidentiality
FXPDs shall treat all non-public information received from the CBN and, in particular, information relating to transactions and outstanding positions with the highest degree of confidentiality. FXPDs shall not share this confidential information with any third party unless required to do so by applicable law or a court order.

10.0 Sanctions for Non-Compliance
The CBN may take action against any FXPD that fails to comply with the standards set forth in these Guidelines. Such action will vary depending upon the type of non-compliance, but may range, for instance, from fines, suspension from any or all FX operations for a period of time to termination as an FXPD.

11.0 Resignation of an FXPD
An Authorized Dealer may resign from its status as an FXPD upon provision of thirty (30) days’ written notice of resignation to the CBN, specifying the effective date of the resignation, provided that the proposed effective date shall not fall within six (6) months of the start of its term as an FXPD.
Any Authorized Dealer that resigns from its registration as an FXPD shall be eligible to reapply only during the next annual CBN FXPD Registration Evaluation exercise and such application shall be treated as fresh.

12.0 Amendments to the Framework
The CBN may amend these Guidelines from time to time.

How The CBN Naira-Settled OTC FX Futures Market will Work
The proposed Naira-settled OTC FX Futures are Non-Deliverable Forwards. (i.e. a contract where parties agree to an exchange rate for a predetermined date in the future, without the obligation to deliver the underlying US Dollar (notional amount) on the maturity date i.e. the settlement date). On the maturity date, it will be assumed that both parties would have transacted at the Spot FX market rate. The party that would have suffered a loss with the Spot FX rate will be paid a settlement amount in Naira. This ensures that both parties enjoy the rate that had been guaranteed to each other through the OTC FX Futures.

Settlement Amount = (Difference between the Agreed Rate and Spot Rate on the Maturity Date) x Notional Contract Sum

The Spot FX Rate will be the FMDQ Spot FX Rate Benchmark – Nigerian Inter-Bank Foreign Exchange Fixing (NIFEX ) which is an independent fixing of the inter-bank FX market. The OTC FX Futures contract is an effective exchange rate management tool supported by a transparent price driven two-way quote (2WQ) market. The CBN will kick off the market by acting as the seller of OTC FX Futures contracts for defined tenors i.e. 1M, 2M, 3M, 6M, 9M, 12M, 18M and 24M. The USD/NGN OTC FX Futures contracts will provide the CBN the opportunity to kick-start the liquidity of risk management products available to end-users in the FMDQ OTC Markets. The contracts will assist the CBN in managing the volatility in the Spot FX market thereby promoting stability and entrenching confidence in the FX market.

All OTC FX Futures contracts will be trade-backed. Visible, invisible and investments qualify for OTC FX Futures.

Naira-settled OTC FX Futures Contracts Trade Flow
FMDQ will act as the ‘OTC FX Futures Exchange’ and its appointed agent, the Nigeria Inter-Bank Settlement System PLC (NIBSS) will clear the inter-bank OTC FX Futures i.e. collect initial and variation margins and settle the party to compensate on the maturity date.

Benefits of the Naira-settled OTC FX Futures

• The introduction of the OTC FX Futures market will encourage end-users to spread out their demand for Spot FX deals as they are now able to lock down the exchange rates for future FX requirements. This has the potential to eradicate the constant frontloading of FX requirements and minimize the disequilibrium in the Spot FX market. End-users will make better judgement as to the timing of accessing the Spot FX market.

• The availability of the OTC FX Futures will improve the business planning practice of end-users and FX sellers, as the future exchange rate is guaranteed through the OTC FX Futures.

• An end-user (buyer of USD) may consider it wiser to delay the purchase of its USD requirement in the Spot FX market if the Spot FX rate is higher than the OTC FX Futures rate of a particular tenor. The end-user will borrow USD or obtain trade finance and simultaneously hedge its exchange rate exposure with an attractive OTC FX Futures sold by the CBN. At maturity of the OTC FX Futures contract, the end-user will access the Spot FX market.

• The OTC FX Futures will be used to attract significant capital flows to the Nigerian fixed income and equity markets as returns can now be enhanced as FX exposures are hedged. Foreign Portfolio Investors (FPIs) will be able to use the OTC FX Futures for capital protection.

• The envisaged increase of supply of US Dollars due to the OTC FX Futures offered by the CBN in the Spot FX market will cause the Spot FX rate to moderate.

• OTC FX Futures which are non-deliverable are ideal for FPIs and even Foreign Direct Investors (FDIs). OTC FX Futures can be used when the investor wants to hedge the exchange rate risk without interest in buying outright Forwards which will necessitate liquidation of its investment to pay for outright Forwards.

• Banks will increase the liquidity in the OTC FX Futures market (by selling OTC FX Futures) if $/ Spot FX rate starts dropping. This may cause the Spot FX rate to drop further.

Settlement Analysis for Naira-settled OTC FX Futures Contracts

Day 1: June 15, 2016 – Bank A buys a 3-month OTC FX Futures contract from the CBN on the FMDQ OTC FX Futures Trading & Reporting System with the following details:

• Buyer: Bank A
• Seller: CBN
• Notional amount: $1,000,000.00
• OTC FX Futures Rate: $/N260.00
• Benchmark: NIFEX
• Maturity Date: September 14, 2016
• Initial Margin: 5% (payable by both parties)
• Maintenance Margin: 60% of initial margin
• Settlement Currency: Naira
The OTC FX Futures contract will be valued on a daily basis against the NIFEX to determine payment of variation margin amount.

Maturity Day: September 14, 2016 – NIFEX is $/N270.00
It is assumed that Bank A would have transacted (bought USD in the Spot FX market) at $/N270.00 which is higher than the OTC FX Futures contract rate of $/N260.00.
The Clearing House, NIBSS, will pay Bank A 10,000,000.00 (i.e. 10.00 [270.00-260.00] per USD) thereby bringing Bank A’s effective rate to $/N260.00 (270.00 assumed paid in buying USD less 10.00 received on the OTC FX Futures) which is the OTC FX Futures rate.
CBN is assumed to have transacted (sold USD in the Spot FX market) at $/N270.00 which is higher than the OTC FX Futures contract rate of $/260.00.
The Clearing House, NIBSS, will take 10,000,000.00 (i.e. 10.00 per USD) from the Margin Account of the CBN thereby bringing CBN’s effective rate to $/N260.00 (270.00 assumed received in selling USD less 10.00 paid out on the OTC FX Futures) which is the OTC FX Futures rate.
Both parties end up with $/N260.00 as the effective rate. This is the rate they guaranteed each other.
If NIFEX had been $/N250.00 on maturity date, Bank A would pay CBN N10.00 per USD.