Capital Market
FX Code Revolution: Nigeria’s Equity Market on the verge of Transformation
The Central Bank of Nigeria (CBN) has announced that the forensic verification of the $7 billion foreign exchange (FX) backlog is nearing completion.
This significant development is part of the CBN’s ongoing efforts to enhance transparency, ethical conduct, and governance in Nigeria’s FX market.
Background and Importance: The FX backlog issue has been a major concern for the Nigerian economy, affecting multinational businesses and investors who have been unable to repatriate their funds. The backlog, which stood at $7 billion, has been a source of frustration for many stakeholders. The CBN’s commitment to resolving this issue is seen as a crucial step towards restoring confidence in the Nigerian FX market.
Forensic Verification Process: The forensic verification process, initiated by the CBN, has been thorough and meticulous. According to CBN Governor Olayemi Cardoso, the process uncovered a high level of unethical practices that had contributed to the backlog. “We also looked at the unverified ones, and I believe that we are at the final stages of separating what qualifies as fully verified, and we will surely be paying out those money that have been verified by the forensic auditors,” Cardoso stated.
The verification process has been lengthy, taking over a year to complete. This delay was primarily due to the discovery of multiple irregularities and unethical practices. However, the CBN has emphasized that the newly launched FX code will strengthen the Nigerian foreign exchange market and prevent a repeat of such scenarios.
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Impact on the Market: The completion of the forensic verification process is expected to have a positive impact on the Nigerian FX market. The clearance of the backlog will enable multinational businesses and investors to repatriate their funds, thereby boosting investor confidence. “We are going to ensure that we do what we need to do to strengthen our market and create a better trust in what you investors naturally desire and deserve,” Cardoso added.
The CBN’s efforts to address the FX backlog are part of a broader strategy to stabilize the Nigerian economy. The introduction of the Nigeria FX Code, which outlines principles of good practice, is aimed at ensuring a robust, fair, and transparent FX market. The code applies to authorized dealers licensed under the CBN Act 2007, the Bank and Other Financial Institutions Act 2020, and other institutions engaged in wholesale FX business.
Compliance and Enforcement: To ensure strict adherence to the FX Code, the CBN has mandated market participants to perform a self-assessment and submit a compliance report detailing their adherence to the code. This report must be endorsed by the participant’s board of directors and include an implementation plan to address any compliance gaps. Institutions are also required to provide extracts of the relevant board meeting minutes to demonstrate oversight.
Beyond the initial submission deadline, quarterly compliance reports must be filed with the CBN’s Financial Markets Department (FMD). These reports are due within 14 days of the end of each quarter, with the first report expected by March 31, 2025.
The CBN has outlined enforcement mechanisms, including monetary penalties, as provided under the CBN Act 2007 and the Bank and Other Financial Institutions Act 2020. Non-compliant participants may face administrative sanctions, further underscoring the importance of adhering to the FX Code.
Principles of the FX Code: The Nigeria FX Code is modeled on the Global FX Code, incorporating global best practices while addressing the unique dynamics of Nigeria’s FX market. The code is built around six key principles:
Ethics: Participants must maintain high ethical standards and professionalism.
Governance: Institutions should establish sound governance frameworks for oversight of FX activities.
Execution: Transactions must be handled with care to promote a fair and transparent market.
Information Sharing: Confidentiality and accuracy in communication are paramount.
Risk Management and Compliance: Robust frameworks should be in place to identify and manage risks.
Confirmation and Settlement: Efficient post-trade processes are essential to ensure smooth transactions.
Strengthening Market Integrity: The CBN’s directive highlights its commitment to promoting a more resilient and transparent FX market. The FX Code aims to foster confidence among market participants, ensuring that transactions reflect competitive pricing and align with global behavioral standards. Market participants are urged to align their operations with the principles outlined in the FX Code to avoid penalties and support the overall stability of Nigeria’s FX market.