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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