By Eyitope Owolabi, Regional Lead, Institutional Client Group, RMB Nigeria
What makes the FX market truly efficient? The answer lies not only in addressing supply to meet demand, but also in ensuring all market participants have access to the right information. Without transparency, uncertainty grows, and trust erodes. That’s exactly what the Central Bank of Nigeria (CBN) is trying to fix.
The CBN formally launched the Nigeria Foreign Exchange (FX) Code, an adoption of the FX global code, to improve transparency and discipline in the market. As part of this, the CBN has outlined key principles aimed at fostering a fairer and more efficient market. What stood out at the signing ceremony, though, was that the CBN didn’t just introduce the FX Code for market participants. They also will be signing an internal version amongst themselves, reinforcing their commitment to accountability.
The goal of the FX Code is simple: ensure that exchange rates accurately reflect available information and that market participants adhere to acceptable standards of behaviour, making the market fairer and more efficient. But how exactly does this work in practice?
The Power of Information in Financial Markets
Economic principles like the Efficient Market Hypothesis tell us that when information is limited or unevenly distributed, financial transactions become riskier. In FX markets, information is arguably the most important input, as it serves as the foundation for decision-making, shaping liquidity, pricing, and overall market stability.
A major factor influencing market efficiency is the role of banks. For years, they have handled the majority of FX transactions, giving them a natural informational advantage. This isn’t inherently bad. It’s a natural outcome of their role in the system. But with great power comes great responsibility. The FX Code is designed to ensure that this advantage doesn’t lead to inefficiencies or unfair pricing. One key aspect of the Code is the information-sharing principle, ensuring standardized disclosures among banks to limit the ability of any player to manipulate market information or distorting exchange rates.
Why Trust Matters
Let’s strip away the complexities for a moment. FX transactions are, at their core, built on trust.
*“Financial transactions are always an act of faith guided by judgment.” – Todd Knoop*
If a seller isn’t confident in market conditions, they may hold back supply or raise their prices. This dynamic mirrors what happens in lending. When uncertainty is high, lenders charge more or refuse to lend at all. This gap highlights why there is a need for market-wide transparency. When information is scarce or unreliable, market participants become more cautious, pulling back on FX transactions. Where they do participate, they price in the risk, leading to higher rates. If they can’t adjust rates due to regulations, the market suffers from low liquidity, requiring CBN intervention. Persistent intervention, however, isn’t a long-term fix. Only a more transparent and structured system can create lasting stability.
The Role of EFEMS in Market Transparency
Recognizing these challenges, particularly since launching FX reforms over a year ago, the CBN introduced the Electronic Foreign Exchange Matching System (EFEMS) in December last year. Before EFEMS, market participants with superior liquidity information could set rates that didn’t reflect true market conditions, a classic case of adverse selection. EFEMS directly addresses this by enabling real-time order matching among banks, ensuring supply-demand data is openly available. The result has been a more competitive and transparent market. Since its launch, the USDNGN exchange rate has tightened by approximately 10%, from 1,600 range to 1500 levels as reflected in CBN’s daily exchange rate reports, available on its website.
The FX Code and EFEMS: Working Hand in Hand
However, technology alone doesn’t solve trust issues; people do. This is where the FX Code plays its role alongside EFEMS. While EFEMS provides transparency in pricing, the FX Code establishes ethical standards, making sure that transparency isn’t exploited for unfair advantage. Together, they establish a stronger foundation for price discovery and market fairness.The effectiveness of these systems depends on discipline. The CBN can introduce reforms, but without market participants embracing them, meaningful change won’t happen. This is also why it was important for banks, as primary players, to publicly commit to the FX Code at the launch ceremony. A key challenge, however, is the moral hazard problem, where market participants may fail to adhere to the Code in practice, and where risks are not always appropriately assessed and priced, leading to inefficiencies. Strict enforcement of the FX Code is critical to ensuring compliance and minimizing incentives for market participants to engage in adverse selection and unethical practices.
The Road Ahead
The FX Code and EFEMS mark a significant shift in Nigeria’s FX market. The CBN must remain proactive in enforcing compliance, while banks must fully commit to the practices outlined in the guidelines. For these initiatives to truly take hold, all market participants, both sell-side and buy-side, must actively align with the FX Code’s six core principles, which promote transparency, fairness, and ethical trading.
A well-regulated FX market does more than instil confidence; it reinforces Nigeria’s broader economic stability. As trust in the system grows, Nigeria becomes an even more attractive destination for capital inflows. Once the industry fully embraces this shift, we could see a foreign exchange market that is not only more transparent but also fundamentally more resilient. For businesses and investors, this translates into better access to FX at rates that genuinely reflect market conditions, ultimately fostering greater confidence in Nigeria’s financial markets and encouraging increased participation.
Eyitope is a Regional Lead within the Institutional Client Group at RMB & Head of GM Structured Sales for Nigeria
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