Forex dealers meet order-based demand at interbank

As foreign exchange (FX) demand focus shifts to the interbank market, authorised dealers assure that there is no reason for panic as there is enough dollar liquidity to meet order-based demand.

They say anybody in need of forex for genuine international business transaction will be provided enough money to run his business as long as it is order-based demand.

The Central Bank of Nigeria (CBN) recently terminated its bi-weekly foreign exchange auctions, closing the Retail Dutch Auction System (RDAS) for a managed floating exchange rate regime that will be determined at the interbank.

Ahead of the apex bank’s decision, David Adepoju, President, Financial Markets Dealers Association (FMDA) said, there had been no cases of unmet dollar demand, adding that the CBN has always been the biggest player in the FX market.

The apex bank has put a stake in the market to clear the doubts. On any particular day, there is customer demand and sales. The market which is now an order-based two-way quote takes care of this.

“The CBN is creating stability in the FX market. Our market has been evolving and will continue to evolve”, said Adepoju, who is also the head of financial markets at Standard Chartered Bank Nigeria Limited.

Read also: Naira slides N4.00k at parallel, N2.51k at inter-bank amid uncertainty

As a result of recent developments in the Nigerian FX market, FMDQ and the authorised dealers in the interbank market saw the need to introduce measures to rescue market volatility. This led to the introduction of the Order-Based Two-Way Quote (OB2WQ) FX Market which comprises Price-Based 2WQ and Order-Based 2WQ.

The Price-Based 2WQ is a “Quote-driven” market where prices are determined from quotations made by market authorised dealers; while Order-Based 2WQ is a market where the bid-ask spread is determined by orders made by customers to authorised dealers.  In this market, price is derived from the process of matching customers’ demands with supply.

Before the CBN closed the Retail Dutch Auction System, Jibril Aku, vice chairman, Financial Market Dealers Quotations (FMDQ) noted that there were huge bubbles in the FX market which were sparked by speculative demand, round tripping, rent seeking, spurious demand and inefficient use of scarce foreign exchange reserves, which contributed in front-loading the FX market.

“At the bankers committee meeting, what we agreed on was that the CBN should come in and reassure the market that there is enough liquidity to meet up demand. What we have seen is that there is no increase in demand. Our stand is that people must stop heating up the FX market.

“Today, the interbank market is essentially order-based. We want to make sure that the legitimate orders are met in the market,” said Aku, who is also the Managing Director of Ecobank Nigeria Limited.

The CBN had conducted a daily Special Intervention to clear the accumulated customers’ demands in the inter-bank market, totalling about $401 million at $/N198.50. The apex bank intervened with the following conditions: Funds obtained at the Special Intervention cannot be sold to another Authorised Dealer in the inter-bank market. It must be sold strictly to customers for eligible transaction and it must be utilised within 72hours. CBN will ensure that all participating authorised dealers meet all prudential requirements.

Segun Agbaje, managing director/CEO, Guaranty Trust Bank plc said that when the FX market was heated up, it was not in anybody’s interest.

Agbaje said speculation in the FX market had a ‘pyramid effect’ adding that it only succeeded in putting the whole FX market in danger.

“Bids must be supported by effective demand. What we all want as FX rate is stability. It is not the job of banks to sit in the FX dealing room and create a pyramid. There is actually no reason for any sensible bank to buy the dollar at N200. Whom will the bank sell it to?”

Agbaje insisted that all selling and buying in the FX market define the liquidity. “There will always be liquidity in the FX market. What we don’t want is pyramid issue. The CBN will continue its intermediation role.”

The CBN continuously tried to defend the local currency at the detriment of depleting foreign reserves. Agbaje asked, “Why do we believe that it is only foreign reserves that are being affected? The country runs a tight monetary policy and it means we also need enough naira to chase FX. The question is how much naira do we have to chase FX.”

Bola Onadele, managing director/chief executive officer, FMDQ OTC plc said that in the Price-Based 2WQ, standard Bid-Offer spread was N0.10k and Standard volume was $500,000; while in the Order-Based 2WQ, there was no standard bid-offer spreads and there was no standard bid-offer volume (solely based on customers’ demands).

Onadele also insisted that there was enough liquidity at the interbank FX market to meet up orders in the two-way quote market.

He further noted that the CBN would advise its Bid and Offer rates daily in the mornings between 9.00am and 9.30am. Inter-bank OB2WQ would be in operation daily. Authorised dealers would communicate the clearing rate to their customers daily and only include names of customers that were not satisfied in the inter-bank market on the Order List. Authorised dealers would forward these unmet demands to the director, Financial Markets Department (DFMD) by 2:00pm daily.

“The CBN will clear all unmet demand daily at its earlier communicated offer rate. CBN can also buy from authorised dealers with surplus dollar positions. Authorised dealers’ operating accounts must be fully funded for the naira equivalent of the total customers’ orders submitted on the same day as the transaction will be effected on T+ 0 bases. Funds purchased from the CBN will be sold at N0.10k spread to customers”, he added.

For price discovery and transparency, authorised dealers in the interbank FX market are required to: report and confirm all voice trades on Thomson Reuters Dealing 3000 upon consummation, to provide the necessary input into the Thomson Reuters ‘NGN=DMT’ price discovery screen and the Deal Tracker Analyser on a real time basis, and ensure that all FX trades are confirmed within three (3) minutes of execution.

Analysts at FBN Capital who described CBN recent closure of RDAS as ‘a bold but necessary step’ said the central bank was minimising its role as the “prime” market maker.

“The move is a necessary one towards ensuring that the naira stabilises and reflects demand and supply dynamics, and should assist in improving market depth and efficiency. It effectively closes the arbitrage opportunity for round-tripping, speculative demand, rent-seeking and spurious demand.

“The markets had been expecting some kind of adjustment to the FX rate (discounting the CBN’s regular insistence that the naira was appropriately priced), although the exact timing was difficult to call. As long as the CBN continues to intervene to meet genuine/legitimate demand as it stressed, the interbank rate should hold at current levels, even with the expected spill-over demand from the RDAS,” FBN Capital analysts said.

Iheanyi Nwachukwu