CBN to engage with JPMorgan as FMDA meets on FX markets

The Central Bank of Nigeria (CBN) will engage with JPMorgan to ensure that Nigerian bonds remain on its Emerging Markets bond index (GBI –EM) as a result of the recent negative watch placed on them by the New York based global financial services firm.

“We will be engaging the JPMorgan team to provide our numbers on FX liquidity,” said CBN Governor Godwin Emefiele, at a press conference held at the end of the Monetary Policy Committee meeting, in Abuja.

“We are committed to remaining on the index and know the adverse impact exclusion from the index will have on the country,” Emefiele said.

Nigeria accounts for 1.8 percent of the $287 billion linked to the GBI – EM.

Business- Day gathered that domestic FX turnover was around $300 – 500 mn a day when the foreign exchange trading position for banks was 1 percent of shareholder funds.

“It then collapsed to $20 – 30 mn, but seems to have picked up slightly in recent days to around $60 mn,” Samir Gadio, Head of Africa Strategy and FICC Research at Standard Chartered Bank, told Business – Day in a response to questions.

Meanwhile the Financial Markets Dealers Association (FMDA) of Nigeria called a “closed door” meeting yesterday morning in Lagos to discuss liquidity in the FX and bond market.

Sources present at the meeting told Businessday the group would engage with the CBN and other stakeholders to ensure liquidity returns fully to FX trading and that Nigerian bonds remain on the JPMorgan index.

J.P Morgan said in a January 16, 2015 notice that they would monitor developments in the Nigerian spot FX and local Treasury bond markets and if liquidity improves and investors are able to transact with minimal hurdles, Nigeria will be removed from the Index Watch Negative.

Read also: More FX inflow expected in financial markets on CBN policies

A source at the Debt Management Office (DMO ) told Business- Day on Monday that all stakeholders remain committed to an active domestic foreign exchange and FGN bond markets and are therefore, optimistic that the  bonds will not only be removed from the Negative Watch List, but remain in the index.

“This Negative Watch placed by the J.P on the six (6) FGN Bonds in the Index does not in any way affect the quality of our bonds. They remain a high grade investment instrument backed by the full faith and credit of the Federal Government of Nigeria,” the DMO source said.

JPMorgan based its decision to place Nigerian bonds on negative watch on two circulars released in Dec 2014 by the Central Bank of Nigeria (CBN).

These circulars were the Foreign Exchange Trading Position of Banks at the close of each Business Day (TED/FEM/FPC/GEN/01/026) & the Utilization of Funds Purchased From the interbank Foreign Exchange Market (TED/FEM/FPC/GEN/01/028).

As a result of these rules, the FX market effectively stopped trading on a two way quote basis, which led to incoherent price discovery process for the exchange rate, making it very difficult for Banks to fulfil large Client orders.

Traders also said that based on the 48 hour deadline for the utilization of funds purchased at the interbank market by Banks/customers, banks could no longer engage in Forward Exchange Contracts, which settles and are utilized outside of spot.

However, on 12 January 2015m, the CBN issued circular TED/FEM/FPC/GEN/01/001 clarifying and reviewing some of the provisions of its December 2014 circulars.

The new circular revised the Daily Foreign Currency Trading positions from Zero percent to 0.1 percent of shareholders funds unimpaired by losses and increased the timeline for utilization of funds to 72 hours.

The utilization deadline has been moved so that rather than commencing from the date of purchase it now commences from the value date.

“This effectively removes all barriers to trading Forwards, Swaps and other derivative products and we consider it a positive change,” Stanbic IBTC Bank said in a note to its customers dated January 15.

The FX market has resumed trading on a two way quote basis, traders tell Business – Day.

Nigerian bonds were included in the JPMorgan global emerging market (EM) bond index in October 2012.

The yields on the benchmark 16.39 percent bonds maturing January 2022 increased 15 basis points to 15.64 percent according to Tuesday’s prices on the FMDQ. Analysts say the yields on Nigerian bonds (one of the highest in the EM index space) are an incentive for offshore investors playing the carry trade to return to the market.

“This is certainly a good opportunity for local pension funds and onshore institutional investors to accumulate bonds,” Gadio said.