*Closing In On Dealers Manipulating FX Market Using NOP
The Central Bank of Nigeria (CBN) has imposed limits on how much banks can hold in foreign currencies, through a circular on Wednesday, expressing concern about the growth of forex exposures on their balance sheets following the naira’s tumble against the US dollar
Nigeria’s naira dropped to a record low against the dollar on the official market on Tuesday, FMDQ Exchange data showed on Wednesday, slipping below rates on the unofficial parallel market in intra-day trades.
The naira fell as low as 1,531 to the dollar during trading on Tuesday, FMDQ data showed, compared with 1,460 naira quoted on the parallel market. The currency later closed at 1,482.57 naira on the official market, according to FMDQ.
On Wednesday the currency eased on the forwards market, with traders quoting the dollar as low as 1,650 in a year’s time.
This is even as the apex bank has warned authorized dealers against transaction manipulation in the foreign exchange (FX) market, warning that such actions will attract sanctions.
A statement by the Director, Financial Market Department, Aliyu Ashiru, said CBN investigations have revealed cases of underreporting of transaction rates and fixed income transactions.
The statement reads in part: “All Authorised Dealers are reminded that the Central Bank of Nigeria (CBN) has permitted financial market transactions to be conducted on a ‘willing buyer, willing seller’ basis, and therefore expects prices to be quoted and displayed transparently.
“The attention of the CBN has been drawn to the practice of authorized dealers (and their customers) in reporting inaccurate and misleading information on transactions concluded in the financial market. Ongoing investigations have revealed instances of underreporting of transaction rates and practice of second cheques on foreign exchange and fixed income transactions.
“Deliberate attempts to create price distortion by reporting false transaction details amounts to market manipulation which will not be tolerated and henceforth face sanctions.”
Despite the warning, the naira sustained its slide at the FX market, trading around N1,500 to $1.
But, feeling undeterred, CBN has introduced a limit on lenders’ net open positions of 20% of shareholders’ funds for short positions and a zero limit for long positions and ordered banks to harmonise reporting, according to a circular released on Wednesday.
Previously, lenders were not allowed to have open positions on the dollar, meaning they could not buy foreign exchange on their own account from the market or speculate on the value of the currency.
The regulator noted that excess net open dollar positions on banks’ balance sheets have incentivized lenders to hold foreign currency, thereby exposing them to currency and other risks.
Banks are now required to bring their exposures within the set limits immediately or face sanctions, including suspension from the currency market.
Before Nigeria’s currency woes, lenders could use their open net positions on foreign currency to finance short-term trade lines without resorting to the central bank for bidding. This effectively lets banks “make the market” for dollars and provide two-way quotes for buying and selling the currency, creating a fully functioning forex market.
The central bank stated that lenders will be required to have liquid foreign assets to cover maturing foreign currency obligations and asked banks to also have a foreign exchange contingency funding arrangement with other institutions.
Banks will require approval for the early repayment of their Eurobonds, where such redemption clauses are applicable.
In fact as early as January 28, 2015, through a circular
BSD/DIR/GEN/LAB/08/006 to all bank signed by the then director of banking supervision, ‘Tokunbo Martins (MRS.)warned banks to commence computing the NOP on a daily basis and forward same to it for scrutiny.
Part of the circular titled, Daily Rendition Of Net Open Position read:
“Please recall that the Central Bank of Nigeria issued a circular dated October
24, 2014 and referenced BSD/DIR/GEN/LAB/07/037, titled “Prudential Regulation
for the Management of Foreign Exchange Risks of Banks”.
The regulation provides among others that the Net Open Position (NOP) of
foreign currency assets and liabilities (on and off-balance sheet) of a bank
should not exceed 20% of its shareholders’ funds unimpaired by losses. In this
regard, banks were required to compute the NOP on a monthly basis using the
Gross Aggregate method.
However, the CBN has considered it necessary that banks should henceforth
compute the NOP on a daily basis and forward same to
This circular takes immediate effect.
Please be guided accordingly.”
But metrobusinessnews.com (MBN) checks reveal that the circular and many others had been observed rather in breach than compliance, due to what some analysts regard as ‘supervisory laxity and knowledge gap’ on the part of regulators.
Besides, they argued that CBN had compromised on so many important issues in the past so much so that some chief executives of some banks then had controlling influence on some past CBN governors.
It was even alleged in the past that some agencies like the Nigerian Accounting Standards Board and the Financial Reporting Council, who were supposed to scrutinize the banks’ Annual Report became lame duck for some obvious reasons.
The ugly and worrisome trend became obvious in the recent past, particularly in the last decade that ‘hell was let lose’ so much that the regulator abandoned its core responsibilities for mundane issues as involving itself in loan disbursements and bogus intervention programs and even supervising farmlands.