Over the years, the Nigerian Foreign Exchange market has remained a bee hive of activities where different currency pairs, stocks, bonds, and other securities are traded. It is a multi-faceted ecosystem with various players from the apex bank; Central Bank of Nigeria, to commercial banks, local investors, government, and individuals. From its early days of strict regulations to the more liberalized system we see today, the market has come a long way. To ensure fairness and conformity to best practices in the market, the Nigerian government through the Central Bank of Nigeria heralded a new set of guidelines to boost the integrity of the market which is essential for entrepreneurs and individual and business people navigating the market. By staying informed about policy changes, market participants can make informed decisions, mitigate risks, and capitalize on opportunities presented by the evolving regulatory landscape.
In this article, we will be taking a cursory look at key features, highlights, and policy aims of the Nigeria FX Code.
WHAT IS THE CBN GUIDELINE ON FOREIGN EXCHANGE 2025 ABOUT?
The Guideline formally known as the Nigeria Foreign Exchange Code (FX Code) was launched on the 28th of January, 2025, and designed to govern market participants i.e authorized dealers and financial institutions allowed to trade the exchange market under the CBN Act 2007 and the BOFIA Act, in the wholesale foreign market. Primarily, the Code aims to have a robust, fair, and transparent market where market participants can confidently transact at competitive prices in the market in a manner that is in line with acceptable global behavioural standards and best practices. The code is anchored on six leading principles: ethics, governance, execution, information sharing, risk management and compliance, and confirmation and settlement processes. It is modeled after the Global FX Code that guides leading jurisdictions. A few of the principles obtained from the Global FX Code and best practices have been reflected in the 2025 guideline.
We will consider key features highlighted in the Code.
KEY FEATURES OF THE GUIDELINE
- Introduction of the Electronic Foreign Exchange Matching System (EFEMS)The EFEMS introduced in December 2024, serves as a centralized platform for all FX transactions. It ensures real-time pricing, and transparency and reduces speculative activities. Authorized dealers must conduct all FX transactions through the system
- Consolidation of FX market Windows: The CBN has unified all FX market windows (e.g investors & exporters window, SME window) into a single framework. This consolidation simplifies operations, improves price discovery and ensures better access to FX for legitimate needs.
- Stricter Compliance and Reporting Requirements: Market participants must adhere to rigorous reporting standards including real time transaction reporting via API-based systems. Bureaux de Change (BDCs) are required to submit daily activity real-time reporting to enhance oversight.
- Non-compliance with the Code may result in monetary fines and other sanctions provided by CBN Act and BOFIA.
- Inclusion of Bureaux de Change (BDCs): Licensed BDCs are now allowed to buy FX directly from authorized dealers subject to a monthly cap set by the CBN.
- Alignment with Global Best Practices: The Code aligns with international standards such as the Global FX Code.
- Enhanced Governance and Ethical Standards: The Code emphasizes the need for market participants to establish robust governance frameworks, avoid conflict of interest, and uphold the highest ethical standards.
- Establishment of a Compliance Department with the CBN that will be operational by the end of February 2025. This department will monitor adherence to the Code and ensure market participants conform to best practices
SUMMARY OF ITS PRINCIPLES
Principle on Ethics: This CBN guideline on foreign exchange 2025, requires that market participants act honestly, fairly, and professionally towards market participants and clients. They are to avoid and confront questionable practices and behaviours. Banks, senior and frontline management as well as personnel are to maintain high standards of behaviour by promoting ethical values and behaviour within the organization and the wider foreign exchange market, support the practice of ethical values with the bank’s culture, apply judgment when facing ethical questions, seek advice where appropriate respectively. Also, market participants are to share a common interest in maintaining the highest degree of professionalism by having sufficient knowledge of applicable laws as well as complying with these laws, guidelines, and circulars. They are required to have relevant knowledge, technical know-how, and qualifications. In addition, this principle requires that Banks should have personnel who are appropriately trained with the necessary experience to discharge employment duties professionally.
Principle on Governance: Market Participants are expected to have a sound and effective governance framework to provide for clear responsibility for and comprehensive oversight of their FX market activity and to promote responsible engagement in the FX market. Appropriate governance structures should be in place to promote and support the principles set out in the Code. The precise structure adopted should be concerned with the size and complexity of the Market Participant’s FX market activities, and the nature of the Market Participant’s engagement in the FX Market, taking into account Applicable Law, Guidelines, and Circulars.
Here, the Market Participant is ultimately responsible for their business strategy and financial soundness and should put in place adequate and effective structures and mechanisms to provide for appropriate oversight, supervision, and controls concerning the Market Participant’s FX market activity. In implementing the above, consideration should be given to the types of activities that the Market Participant engages in, including where the Market Participant engages in the provision or usage of electronic trading systems.
Principle on Execution: All market participants regardless of their role in the execution of transactions should exercise care when negotiating and executing transactions to promote a robust and transparent FX market. They are to communicate their roles and capacities in managing orders or executing transactions.
Principle on Information Sharing: Market participants are to communicate clearly and accurately and to protect confidential information for effective communication that will promote a robust, fair, and transparent FX market.
Principle on Risk Management and Compliance: The CBN guideline on foreign exchange 2025 requires market participants to promote and maintain a robust control and compliance environment to effectively identify, manage, and report on the risks associated with their engagement in the market. It further identified key risk types namely; credit/counterparty risk, market risk, operational risk, technology risk, settlement, compliance risk, and legal risk. It states practical ways and processes to identify, address, and manage these risks arising in relation to the FX activities of market participants.
Principle on Confirmation and Settlement:
Here, market participants are expected to put in place efficient and risk-mitigating post-trade processes to promote smooth and timely settlement of transactions in the market. This principle outlines systems and processes surrounding the confirmation and settlement of FX trades. The Code requires market participants to confirm trades at the most after 10 minutes securely and efficiently.
CONCLUSION:
The Foreign Exchange market is widely known for its volatility and exposure to risk, illegal activities, and an easy channel for money laundering. The establishment of the CBN Guideline on Foreign Exchange is a step in the right direction to promote a robust, open, and transparent foreign exchange market for authorized dealers and licensed financial institutions.
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