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CBN re-introduces Dutch Auction System

By Omoh Gabriel & Babajide Komolafe
LAGOS — THE Central Bank (CBN), said in a circular to all banks yesterday that it would lift foreign exchange controls for Nigerian buyers of U.S. dollars from Monday, following a decision by Governor

“The Central Bank of Nigeria hereby re-introduces the Wholesale Dutch Auction System with effect from Monday
“The Central Bank of Nigeria hereby re-introduces the Wholesale Dutch Auction System with effect from Monday

on Tuesday to liberalise the foreign exchange market.

The CBN had imposed forex restrictions in January following huge capital flight from the country and replaced the Wholesale Dutch Auction System (WDAS) to try and stem a sharp decline in the exchange rate of the naira.

“The Central Bank of Nigeria hereby re-introduces the Wholesale Dutch Auction System with effect from Monday,” said Batari Musa, Director, CBN Trade and Exchange Department.

This is in a bid to stimulate activities in the interbank and stabilise the foreign exchange market.” The CBN initially announced the lifting of forex controls on Tuesday after its first monetary policy meeting under Sanusi.

In the circular dated July 8, 2009 entitled: “Revised Guidelines for the Operation of the Foreign Exchange Market: Wholesale Dutch Auction System” the apex bank said “further to the circular Ref: TED/FEM/FPC/GEN/01/088 of May 22, 2009 on the above subject, the Central Bank of Nigeria hereby re-introduces the Wholesale Dutch Auction System (WDAS) with effect from Monday 13th July, 2009. This is in a bid to stimulate activities in the inter-bank and stabilize the Foreign Exchange Market.

“Consequently, the guidelines for operating the system are as follows: henceforth the Central Bank of Nigeria (CBN) shall intervene in the Foreign Exchange Market through the Wholesale Dutch Auction System. The CBN shall announce on Monday and Wednesday the amount on offer for each auction at 8.30am.

Under this system, Authorised Dealers shall submit their bids on Monday and Wednesday, duly signed by two authorised signatories for any particular auction session between 9.00am and 10.30 am on the day of the auction; and b submit bids for no more than three tranches per auction, while the Central Bank of Nigeria reserves the right to reject bids that are deemed to be unrealistic.

“The bids should be submitted via Reuters Dealing 3000 Xtra System to the Abuja dealing line. The minimum bid amount by an Authorized Dealer shall be $100,000.00 and the currencies of transaction shall be the Naira and the United States dollar.

“The CBN shall announce the result of each Auction by 1.00 pm on the day of auction. Successful bids shall be advised by 2.00 pm on auction day. Authorised Dealers shall ensure that they have adequate naira cover in their current accounts with the CBN.

The CBN shall promptly debit the current accounts of banks with the naira equivalent of the foreign exchange purchased, at their bid rates. The CBN shall deliver US Dollars sold to the banks to their CORRESPONDENT BANK ACCOUNT used for WDAS transactions.

“The Central Bank of Nigeria shall effect delivery of foreign exchange purchased by each Authorised Dealer within one business day (T+1) after the day of the auction result. A business day shall be defined as a day in which banking business is carried out in Nigeria.

Funds purchased from CBN at the Auction shall be used for eligible transactions only, subject to stipulated documentation requirements. Such funds shall be transferable in the inter-bank foreign exchange market.

“The CBN may also purchase foreign exchange from Authorised Dealers and other participants such as oil companies, etc at their offer rates. The CBN shall deliver the Naira cover for US Dollar bought from the banks to the banks’ Current Accounts at the CBN.

The banks shall deliver US Dollars sold to CBN to the CBN Special foreign Exchange Market FEM, Account with JP Morgan Chase, New York. The rate that clears the market shall be the prevailing exchange rate for the period. Authorised Dealers shall quote two-ways and display in their Banking Halls the buying and selling rates conspicuously.

The spread between the buying and selling rates shall not exceed 50 Kobo. The foreign exchange Net Open Position of banks has been increased from 2.5 per cent to 5.0 per cent of shareholders’ funds with effect from July 13, 2009.

“Contravention of any of the Foreign Exchange Market regulations shall attract appropriate sanctions as spelt out in the provisions of relevant laws and CBN guidelines. The provisions of this circular supersede the provisions of Sections 1 (a) and 4 of the circular on “Re: Guidelines for the operation of the foreign exchange Market: Retail Dutch Auction System (RDAS): Circular Ref: TED/FEM/FPC/GEN/01/088  of May 22, 2009.”

Lamido Sanusi won strong approval from foreign investors when he used his first policy meeting to unveil a root-and-branch reform of the country’s banking system. In its first monetary policy meeting under Sanusi, CBN on Tuesday slashed interest rates by 2 percentage points, lifted foreign exchange controls and guaranteed inter-bank transactions for the next nine months.

“There will be no half-measures when it comes to resolving Nigeria’s financial sector problems and supporting growth,” said Razia Khan, Standard Chartered’s head of Africa research. The steps taken on Tuesday, initiated by the new CBN governor who has promised to prioritise the cleanup of the financial sector, are the most promising yet.”

Markets did not immediately react to the news on Wednesday as traders digested the long list of changes. Lending rates have not really changed and the interbank rate is still where it was,” said Leke Sule, dealer at Fidelity Bank. “We think maybe tomorrow investors will begin to re-price risk, re-assess the yield curve and re-adjust.”

Sanusi, former Managing Director of Nigeria’s First Bank, said bold financial reforms were necessary to enable Central Bank impose effective monetary policy.


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