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CBN Tightens Noose Against Naira Depreciation

By on March 26, 2011

The Central Bank of Nigeria (CBN) Wednesday  adopted new measures aimed at protecting the naira, Nigeria’s local currency against exchange rate risk exposure with the implementation of Wholesale Dutch Auction System Forwards (WDAS-FWD).

The regulator disclosed this in a circular titled: “Guideline for the Operation of the Foreign Exchange Market: Wholesale Dutch Auction System Forwards (WDAS-FWD),” signed by the Director, Financial Markets Department, CBN, Mr. O.F.Owolabi and made available on its website.

The banking watchdog explained that the move was consistent with its objectives of enhancing efficiency in the forex market and deepening trading liquidity and risk management in the market.

However, report from the bi-weekly regulated auction held yesterday showed that dollar demand rose remarkably to 12-month high yesterday as a total demand of $584 million was put up by the 23 banks that participated in the auction, whereas the CBN offered only $400 million.

The total demand represented a significant increase by $116 million, compared with the total demand of $468 million recorded on Monday. The naira fell slightly by 8 kobo at the auction as it dropped by 8 kobo to N151.34/$1 as against the N151.26/$1 it stood on Monday.

The new guideline explained:  “The CBN’s objective for boosting trading liquidity in the forwards market is to offer risk management support to the exchange rate risk exposures of the end-users. The CBN shall offer to authorised Dealers short-tenored FX forwards of 1, 2 and 3 months through the WDAS-FWD.The CBN shall announce on Wednesdays the specific maturity dates for each tenor being auctioned alongside the WDAS-SPT notice by 8:30am on the auction days through the Reuters Dealing 3000 Xtra system.

“The CBN may state the amounts on offer in the notice. Copies of the announcement shall also be published on the CBN website and may be obtained at the CBN head office in Abuja. Therefore, all the forex forward purchases by the Authorised Dealers from the CBN must be trade-backed. Authorised Dealers are therefore expected to evidence the existence of the trade transactions before bidding for forex forward purchases from the CBN on behalf of their customers.”

A forward transaction is a binding agreement by two parties where one commits to buy and another commits to sell a predefined amount of a currency for settlement on a future date at a pre-agreed exchange rate.

The CBN explained that the forward rate is neither an estimation nor forecast of its spot in the future, but that it is computed mathematically factoring in other variables. It added that the forward rate is not an estimation of future exchange rate, saying that it simply means that “Naira interest rates are higher than US dollar interest rates. It is a mathematical expression.”

According to the apex bank: “The Authorised Dealers shall submit their bids stating the forward points (i.e. forward rates minus the spot rate) and not forward rates, duly signed by two authorised signatories for any particular auction session between 2:00pm and 3:00pm on the day of auction. The relevant spot rate shall be the weighted average rate of successful bids of the just concluded WDAS-SPT of that day.

“The minimum bid amount by an Authorised Dealer for each tenor offered shall be $500,000.00 (five hundred thousand dollars) and the currencies of transaction shall be the Nigerian Naira (NGN) and United States dollar (USD).”

It also warned that authorised dealers are only allowed to sell the forwards bought from the CBN only as forwards to their customers, adding that dollar purchased from the WDAS-FWD must be utilised by the end-user that purchased the forwards within five business days after settlement.

Source : Thisday