Market Rallies, Analysts Bullish as CBN Floats Naira – Thisday

Goddy Egene, Obinna Chima in Lagos and James Emejo in Abuja

In what has been hailed as a bold move by market analysts in Lagos, London and Johannesburg, the Central Bank of Nigeria (CBN) wednesday unveiled the new guidelines for the Nigeria Interbank Foreign Exchange (NIFEX) Market, allowing the exchange rate of the naira to be determined by the market forces of demand and supply, although the central bank would step in whenever appropriate.

Paring the losses it made since Friday last week, the Nigerian Stock Exchange All-Share Index (NSE-ASI) rose by 3.17 per cent yesterday to close at 27,891.96, up from 27,034.05 the previous day, while market capitalisation added N279 billion to close higher at N9.579 trillion.

The new guidelines came after weeks of consultations with stakeholders including the banks on the need for a more flexible forex market, to among other things, reduce pressure on the local currency and attract foreign investors.

Speaking to journalists at a press briefing in Abuja, CBN Governor, Mr. Godwin Emefiele, said the central bank had resolved to henceforth deal with FX Primary Dealers (FXPDs) under the new arrangement.

He also said the existing ban of 41 items from accessing forex from the official window would remain in place.
He said part of the objectives of the new framework, which included the introduction of the naira-settled Over-the-Counter (OTC) FX Futures trading, was to discourage people from front-loading or hoarding forex due to uncertainty.
He also assured the markets that the backlog of matured letters of credit would be cleared.

Confirming THISDAY’s exclusive report yesterday that the CBN would not create a “special” window for critical transactions, Emefiele said the new forex framework would allow the market to operate as a single market structure through the interbank/autonomous window, while the exchange rate would be purely market-driven using the Thomson-Reuters Order Matching System as well as the Conversational Dealing Book.

He said the CBN would however participate in the market through periodic interventions to either buy or sell forex as the need arises.

He said to improve the dynamics of the market, the central bank would further 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 quote basis.
The governor said the primary dealers would operate with other dealers in the interbank market, among other obligations that would be stipulated in the Foreign Exchange Primary Dealers (FXPD) guidelines.

However, he said selected FX Primary Dealers would be notified by Friday, June 17, 2016 on the new guidelines while all other non-primary dealers would remain valid and eligible to participate in the market.

He said interbank trading under the new guidelines would begin on Monday, June 20, 2016, while tenors and rates for the naira-settled OTC FX Futures would be announced on June 27, 2016.

According to Emefiele, “The big point here is that we’ve decided that the CBN will deal primarily with what we call the foreign exchange primary dealers. We will have non-primary dealers and primary dealers.

“The guidelines for the qualification for being a foreign exchange primary dealer would be on our website.
“There are a number of qualifications, either the size of the bank, or the size of forex transactions it had done before, the level of liquidity, the extent to which those banks have complied with CBN guidelines, regulations in the past and their level of preparedness in terms of being able to provide all the soft and hardware that is needed to operate in a very transparent manner that can handshake with the Thompson Reuters and FMDQ software – these will be the basis.”

He said: “But from what we see, we do not think there’ll be more than a maximum of eight or 10 primary dealers. What that means is that you have what we can call Grade A dealers and you have the Grade B dealers.
“But being a Grade A dealer doesn’t confer on you any special preference other than the fact that the size of trade that the CBN is willing to deal with you would be larger than the trade for those who are going to be dealing as non-primary dealers.

“And forex dealers themselves right now and even the banks understand what we mean by the size of trade, talking about an open transparent, two-way quote system, where I can close or they can close on themselves, or me on them, and their capacity to deliver anytime within the trading period is very important here.
“So that’s why we are trying to segment them in two parts.”

Emefiele said based on what the central bank had published, the level of trades as a primary dealer would be set at a minimum of $10 million.

“So what that means is not about talking about the standard trades of those days when a dealer said it’s about $100,000 and you say, I close on you for $100,000.

“Now, we are talking about a minimum of $10 million and to do that, you have to have strong capacity, you must have prepared yourselves, you have to be ready to play with the highest level of professionalism and transparency and nobody is going to take any nonsense from you if you decide to breach the regulations or guidelines.

“And that’s the reason I said we will expect those who are going to deal here to be people who can deliver on their words. They must be people who understand the implications for whatever decisions they take regarding the size, talking of the volume and the exchange rate they decide to quote.

“It’s intended to ensure that we don’t have speculators, we don’t have rent seekers who just want to come into the market, particularly the primary market to just come and start auctioning and staking on prices against each other for what I can call private benefits,” he clarified.

On steps being taken by the CBN to narrow the gap between the official and parallel market rates, the central bank governor said: “As long as there’s one window, whatever comes out at the end of the day as the marginal rate, that rate will be the rate that will be recognised officially by the world as the rate of the naira.

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