The launch of Electronic Foreign Exchange Matching System (EFEMS) by the Central Bank of Nigeria (CBN) has propelled the naira to significant gains, with rates strengthening to N1,587.29 to the dollar in the official market, and N1,640 at the parallel market.
The Electronic Foreign Exchange Matching System was launched by the CBN on December 1 and has commenced operations on Monday, since when there has been appreciation in the value of the naira since its inception.
The platform had also been commended by analysts as a pivotal tool in eliminating distortions and bringing greater efficiency to Nigeria’s volatile foreign exchange market.
A breakdown of the movements at the parallel market this week showed that it began registering gains on Tuesday, trading at N1,720/$1 from a stagnant rate of N1,745/$1, which had persisted for over a month.
On Wednesday, the naira appreciated sharply to N1,670/$1and further strengthened to N1,640/$1 on Thursday.
On the official market, CBN quotes for the Nigerian Foreign Exchange Market (NFEM) showed the average rates starting at N1,662.77 on Monday, improving to N1,644.78 on Tuesday, and further to N1,613.86 on Wednesday, before hitting N1,587.29 on Thursday.
In a circular announcing the EFEMS platform, the CBN detailed that it facilitates spot foreign exchange transactions between the naira and the U.S. dollar. The platform, operated through Bloomberg’s BMatch system, requires a minimum trade value of $100,000, with incremental trade sizes of $50,000.
The apex bank stated that the platform seamlessly integrated with banks’ middle and back-office systems, and it generated consolidated trade statistics that were accessible to the market, according to Bloomberg.
The platform is accessible to all CBN-licensed dealer banks, the central bank said.
In a circular signed by the Director of Currency Operations, CBN, Omolara Duke, it was indicated that authorised dealers would subsequently conduct all foreign exchange transactions in the interbank FX market on the Electronic Foreign Exchange Matching system approved by the apex bank, where transactions would be reflected immediately.
“The CBN will publish real-time prices and buy/sell orders data from the system, and in collaboration with the Financial Market Dealers Association, publish the rules for the EFEMs. The Nigerian FX Code and revised Market Operating Guidelines for the Nigeria Foreign Exchange Market will also guide market participants,” the circular added.
In the revised guidelines, the CBN said, “The pricing of foreign exchange transactions in the NFEM shall be undertaken on the Electronic Foreign Exchange Matching System. FX market statistics including the daily transactional rates of all qualifying transactions on NFEM will be publicly available to guide market participants on the CBN website. b) All customer transactions conducted outside the EFEMS shall be guided by the prevailing NFEM rate at the time of execution.
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“Authorised Dealers are required to adopt a transparent pricing framework for customer foreign exchange transactions as described in the Nigeria FX Code and may be requested by the CBN to provide information on their pricing methodology. c) Negotiation of exchange rates with customers outside of the foreign exchange market is prohibited. All customer transactions must be concluded with an entity duly licensed to participate in the foreign exchange market (subject to the provisions of the license category).”
According to CBN, EFEMS is a critical tool for reducing counterparty risks and ensuring market discipline.
Trades conducted on the platform are binding, with participants required to set credit and settlement limits to avoid exceeding thresholds.
Governor of CBN, Mr. Olayemi Cardoso, speaking at the Chartered Institute of Bankers (CIBN) 59th annual bankers’ dinner in Lagos, recently, stated that EFEMS was a transformative step towards market transparency and price discovery.
The circular further stated that the new system would enhance transparency and governance and facilitate a market-driven exchange rate that would be accessible to the public.
This development is expected to reduce speculative activities, eliminate market distortions, and give the CBN improved oversight capabilities to regulate the market effectively.
He said, “The unification of the exchange rate is a pivotal reform, but it marks just the beginning. On the 2nd of December 2024, the foreign exchange market will begin trading on the electronic FX matching system to further enhance transparency, restore confidence, and attract new investments.
“Coupled with an improved framework for deploying products targeting the Nigerian diaspora and efforts to establish a well-functioning FX market, we anticipate increased diaspora and foreign investments over the next 12 months, building a more resilient and liquid FX market.”
Cardoso said over the past year, CBN had undertaken critical reforms to unify Nigeria’s exchange rate, eliminating distortions and restoring transparency.
He also addressed misconceptions about the FX market, emphasising the role of EFEMS in countering panic-driven distortions.
He said, “It is vital to address the disinformation circulating about a supposed demand-supply gap in the FX market, which is fuelling unnecessary panic.
“The current USD exchange rate reflects the price that the most desperate buyers are willing to pay, and this does not represent the true market value of the naira.
“The introduction of the electronic matching system will correct these distortions by enhancing the price discovery process. Additionally, it will significantly boost the central bank’s oversight and intervention capabilities, ensuring a more stable and transparent foreign exchange market.”
