Friday, October 4 2024 -In a significant move to reform the Nigerian Foreign Exchange Market (NFEM), the Central Bank of Nigeria (CBN) has announced the launch of the Electronic Foreign Exchange Matching System (EFEMS) for foreign exchange (FX) transactions.
This digital platform is expected to improve the
governance and transparency of the interbank FX market with full implementation
set for December 1, 2024.
In a circular addressed to Authorised Dealers on Thursday, Dr. Omolara O. Duke,
the Director of the CBN’s Financial Markets Department, outlined the details of
the system.
According to the circular, a two-week test run of the EFEMS
will be conducted in November 2024 before the official launch in December.
The test run aims to ensure that Authorised Dealers and
relevant market participants are familiar with the system and that all
technical aspects are fully integrated before going live.
Once operational, all FX transactions in the interbank market
will be conducted on this electronic system, which has been approved by the CBN.
Transactions will be reflected immediately in real time,
providing better transparency to market participants.
The system is also expected to reduce speculative activities
that often distort the market and give the CBN improved oversight to regulate
the market effectively.
The new EFEMS is poised to enhance the governance of the
Nigerian FX market as the CBN has framed EFEMS as a tool that will improve
transparency, thereby fostering a market-driven exchange rate.
In her statement, Dr. Duke emphasised the
system would “facilitate a market-driven exchange rate that will be
accessible to the public.”
By publishing real-time prices and buy/sell orders data, EFEMS will make it
easier for market participants, including businesses and individuals, to access
reliable information on FX rates. This development is expected to address the
lack of transparency that has plagued the FX market, leading to more informed
decision-making by market players. In addition, it will allow the CBN to have
an enhanced supervisory role, as the system will provide improved monitoring
capabilities.
The introduction of EFEMS comes as part of the CBN’s
broader effort to curb speculative activities that often distort the true value
of the Nigerian naira. Speculation in the FX market has led to significant
volatility, contributing to a widening gap between the official and parallel
market rates. By introducing a system that ensures real-time transparency, the
CBN hopes to limit the ability of speculators to manipulate market prices for
personal gain.
The EFEMS will also work toward eliminating market distortions by streamlining
the FX transaction process. As all transactions will be conducted
electronically, the risk of delays or discrepancies between quoted rates and
actual transaction prices will be significantly reduced.
In order to ensure a smooth rollout of the EFEMS, the CBN has partnered with
the Financial Markets Dealers Association (FMDA).
Together, they will publish the operating rules for the EFEMS, which will guide
the market participants in conducting FX transactions. In addition, the Nigerian
FX Code and revised Market Operating Guidelines for the NFEM will provide
further guidance to market participants, ensuring adherence to the highest
standards of practice.
The FMDA will also play a key role in ensuring that Authorised Dealers comply
with the operational requirements of the new system. This includes ensuring
that the necessary documentation, training, and system integrations are
completed ahead of the December 1st go-live date.
The CBN’s directive places significant responsibility on Authorised Dealers,
who are required to comply with all existing guidelines and regulations
governing the NFEM. As part of their obligations, they must ensure that their
systems are fully integrated with the EFEMS platform before the implementation
date.
Dealers are also mandated to complete training on the use of the EFEMS to
ensure that all market participants are well-prepared for the transition. This
move is critical in preventing any operational disruptions during the
switchover to the new system.
The introduction of EFEMS comes at a time when the Nigerian economy is facing
significant currency pressures due to external and internal factors. The CBN’s
initiative is expected to provide stability to the Nigerian naira by curbing
market speculation, which has contributed to exchange rate volatility.
With enhanced transparency and real-time access to FX market data, businesses
will be better equipped to plan and manage their foreign exchange needs,
reducing the uncertainty that has been a hallmark of the Nigerian FX market in
recent years. Furthermore, the public will have greater access to FX market
information, enabling individuals and businesses to make more informed
decisions.
By implementing EFEMS, the CBN aims to create a more efficient and transparent
market that aligns with global best practices. If successful, the system could
serve as a model for other emerging markets grappling with similar challenges
in their FX markets.
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