Nigeria: CBN Seeks Stakeholder Input on New FX Regulation Code

In a continued effort to stabilize the naira and strengthen Nigeria’s foreign exchange market, the Central Bank of Nigeria (CBN) has issued a draft of the ‘Nigeria Foreign Exchange Code Book: Draft Exposure’ to authorized foreign exchange dealers. The dealers have been invited to provide feedback on the draft by October 18, 2024.

Dr. Omolara Duke, Director of the CBN’s Financial Markets Department, highlighted the purpose of the new FX code in a circular. According to her, the code is designed to enhance price discovery, ethical conduct, market discipline, and transparency within Nigeria’s foreign exchange market.

“The CBN has developed the Nigerian Foreign Exchange Code Book (FX Code Book) to set standards for transactions in the Nigerian FX market. This initiative continues our efforts to promote integrity and efficient functioning within the foreign exchange market,” Duke stated.

The apex bank acknowledged that, while the Nigerian financial landscape has undergone significant positive transformations, there have also been weaknesses and emerging risks that need to be addressed.

The newly proposed FX code aims to standardize practices, ensuring the integrity and effective operation of the wholesale foreign exchange market in Nigeria. The code is also intended to enhance market transparency, reinforce Nigeria’s flexible exchange rate regime, and promote a robust, fair, liquid, and open market environment.

“These standards apply to banks licensed by the CBN under the CBN Act 2007 and the Banks and Other Financial Institutions Act (BOFIA) 2020, which engage in wholesale foreign exchange business as part of their licensed activities,” the document explained.

The FX Code is built around six core principles: ethics, execution, information sharing, governance, risk management and compliance, and confirmation and settlement processes.

Ethical Conduct:

Market participants are expected to maintain high ethical standards and professional behavior to uphold fairness and integrity in the FX market. Clear governance structures should be in place to ensure responsible oversight of FX market activities.

Execution:

Participants must exercise diligence during the negotiation and execution of FX transactions, promoting a market that is fair, transparent, and liquid. Accurate and clear communication, along with the protection of confidential information, is crucial for maintaining a transparent and effective market.

Governance, Risk Management, and Compliance:

Participants are required to uphold a robust risk management and compliance framework. This framework should identify, manage, and report on risks associated with FX market activities to maintain the integrity of market operations.

Confirmation and Settlement Processes:

The code mandates efficient, transparent, and risk-mitigating post-trade processes to ensure smooth and timely settlement of FX transactions. Market participants are also required to have comprehensive business continuity plans (BCPs) in place to respond to market disruptions or significant events that could affect trading platforms or critical services.

Business Continuity Plans (BCPs):

Participants should have contingency plans in place for handling disruptions, including loss of access to trading platforms or large-scale disasters. These plans must cover data storage, emergency procedures, and scenarios where FX fixes are unavailable. Regular reviews of such plans are also essential to ensure they remain effective.

Know Your Customer (KYC) and AML/CFT Compliance:

The FX Code emphasizes the importance of conducting thorough ‘Know Your Customer’ (KYC) checks to ensure transactions are not used for illicit activities, such as money laundering or terrorism financing. Market participants should comply with national anti-money laundering (AML) and counter-terrorism financing (CFT) laws and have internal procedures for reporting suspicious activities to the appropriate authorities.

The code also underscores the need for ongoing training to help staff stay updated on emerging money laundering tactics and compliance requirements. Trading access must be restricted to authorized personnel only, ensuring secure and compliant operations.

The CBN hopes that the introduction of this code will foster greater transparency, ethics, and risk management across Nigeria’s FX market, ultimately contributing to the stability of the naira and the broader financial system.