Fixed Income

CBN, FMDQ, Banks Partnership Sees 92.31% FX Market Turnover Boost In May

The management of FMDQ Securities Exchange Limited (FMDQ), on Monday, said Nigeria’s Foreign Exchange (FX) its collaboration with the Central Bank of Nigeria (CBN) and FX Authorised Dealers (banks) has enhanced transparency of the nation’s foreign exchange (FX) market.

This, the FMDQ said has resulted in the activation of an on-system trading and reporting of all FX transactions in the market on the FMDQ-advised FX Trading System, while also adopting a single market-driven rate in May 2021, as part of the apex bank’s commitment to towards developing the market.

The implementation of these market initiatives, Bola Onadele.Koko, chief executive of FMDQ Group said, has seen a significant increase in the turnover recorded in the FX market, from an average of about $1.3bn from January to April, to $2.5bn turnover recorded in May 2021.

Besides this 92.31% growth in value within the period, he said “the number of executed trades rose from an average monthly number of 6,733 trades in January to April, to 6,949 trades in May.”

According to a statement by the FMDQ, Nigeria’s FX market has recorded an average annual turnover of US$45.85bn over the last four years, making it one of the largest, and perhaps, the most crucial segment of the nation’s financial market.

The statement raised hopes that the improved transparency would lead to an even higher market turnover and drop in volatile capital flows, unlike in the past when there was market fragmentation and multiple exchange rates. Such fragmentation, it noted, saw a fluctuation in activity levels alternately between the formal and regulated market segments, and the unregulated (parallel) market.

The apex bank had in line with its desire for a more liquid market, increased transparency by activating the on-system trading and reporting of FX transactions on the FMDQ-advised System. This move was supported by the adoption of NAFEX as the benchmark rate for the public sector foreign currency-denominated transactions, thereby actualising the long-desired hope of a single market-driven rate in the Nigerian FX market.

Onadele.Koko expressed happiness “at the introduction of market-building initiatives by the CBN to ensure the further development of the FX market, in recognition that a liquid, transparent and credible FX market is a major precursor for increased inflows into the Nigerian financial market.

“FMDQ remains committed to institutionalising structures – efficient processes, systems, etc., in collaboration with market stakeholders, to support initiatives towards delivering a thriving FX market that is well-positioned to support the Nigerian economy.” Furthermore, whilst addressing the market, the CBN Governor, Mr Godwin I. Emefiele, emphasised the importance of a transparent and credible FX market, and reiterated the CBN’s commitment to implementing market-enhancing initiatives required to inspire confidence towards sustaining and deepening the Nigerian FX market..

“The renewed confidence and depth in the FX market will improve the attractiveness of the Nigerian market to foreign portfolio investors and also pave the way for the introduction of new derivatives products on FMDQ’s platform to support hedging of risk exposures by both local and foreign market stakeholders,” he added.

In a bid to restore confidence, enhance efficiency and boost liquidity in the Nigerian FX market, the FMDQ statement recalled several initiatives launched in 2017 – with the CBN introducing a special FX window – the “Investors’ & Exporters’ FX Window” (the I&E FX Window or the Window).

This set out a single and autonomous FX market structure for activities in the market, towards maintaining FX market stability, whilst attracting and retaining foreign capital into the economy. The FMDQ also deployed a credible fixing to the FX market – the Nigerian Autonomous Foreign Exchange Fixing (NAFEX) – representing Spot FX market rates, supporting appropriate benchmarking and facilitation of derivatives activities, and serving as the reference rate for activities, all in the I&E FX Market.

The benchmark, NAFEX, it stressed, also serves as a reference rate for other FX market products, such as the CBN and FMDQ-launched Naira-settled OTC FX Futures, thereby proving an avenue for market participants to hedge foreign exchange rate risk.

The success of the I&E FX Market, supported by NAFEX, following the April 2017 launch, was substantiated by the significant increase in foreign capital inflows as at Q3 2017, providing the much-needed liquidity, which contributed to the immediate convergence of the rates in the I&E FX Market and the parallel market at US$/₦368.00 by the end of June 2017, and was maintained until the occurrence of the pandemic, which caused reduced liquidity in the FX market, thereby resulting in an increase in the spread to US$/₦29.45 in March 2020 and US$/₦80 by the end of last month.

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