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An Analytical Review of the Nigerian Foreign Exchange Code: Enhancing Transparency and Market Efficiency -By Oyetola Muyiwa Atoyebi SAN, FCIArb. (U.K)

Contributor: Victor Atang

  1. Introduction

The Nigerian Foreign Exchange Market (NFEM) has long been a cornerstone of the nation’s economic framework, playing a critical role in facilitating international trade, managing currency flows, and stabilizing the national economy. In a bid to strengthen the integrity, transparency, and efficiency of this vital market, the Central Bank of Nigeria (CBN) recently introduced two transformative regulatory frameworks: the Nigerian Foreign Exchange Code[1] (“FX Code”) and the Electronic Foreign Exchange Matching System (EFEMS). These initiatives, though distinct in purpose, work synergistically to address systemic inefficiencies, mitigate unethical practices, and align the Nigerian Foreign Exchange Market (NFEM) with global best practices.[2]

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The Foreign EXchange Code serves as a robust regulatory framework designed to promote ethical conduct, sound governance, and comprehensive  risk management among market participants, while EFEMS leverages technology to enhance market transparency and efficiency.[3] Together, these frameworks mark a significant evolution in the structure and oversight of Nigeria’s foreign exchange market.

This article undertakes an analytical review of the FX Code, focusing on its principles, compliance requirements, and potential implications for market participants. It further examines how the FX Code integrates with EFEMS to foster a transparent and efficient foreign exchange market, ultimately contributing to the broader goal of economic stability and investor confidence in Nigeria. Through this analysis, the article highlights the strengths, challenges, and prospective outcomes of these regulatory reforms.

  1. Principles of the Foreign Exchange Code

Stirred by the Foreign Exchange Global Code (FEGC), the FX Code is tailored to address the peculiarities of Nigeria’s economic environment and FX trading landscape. Its principles encapsulate ethics, governance, transaction execution, risk management, information sharing, and transaction settlement, all aimed at fostering a well-regulated and internationally compliant market structure. They as follow:

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  1. Ethics

Ethical conduct constitutes the bedrock of the FX Code, emphasizing the necessity for honesty, integrity, and fairness among market participants. By mandating ethical behavior, the Code seeks to eliminate malpractices such as front-running, insider trading, and other exploitative behaviors that erode market confidence. Upholding ethical standards ensures that the NFEM operates as a trustworthy platform where participants engage in transactions underpinned by mutual respect and compliance with legal and regulatory frameworks. This ethical dimension is particularly critical given the volatility and susceptibility of the foreign exchange market to speculative and predatory practices.[4]

  1. Governance

The FX Code imposes stringent governance obligations on Authorised Dealers, mandating the establishment of robust institutional frameworks to oversee foreign exchange activities. These governance structures are designed to enhance accountability, deter conflicts of interest, and instill discipline within trading operations. Effective governance aligns with international benchmarks, thereby positioning Nigeria’s FX market as a credible participant in the global financial system.[5]

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  1. Ethics

Ethical conduct constitutes the bedrock of the FX Code, emphasizing the necessity for honesty, integrity, and fairness among market participants. By mandating ethical behavior, the Code seeks to eliminate malpractices such as front-running, insider trading, and other exploitative behaviors that erode market confidence. Upholding ethical standards ensures that the NFEM operates as a trustworthy platform where participants engage in transactions underpinned by mutual respect and compliance with legal and regulatory frameworks. This ethical dimension is particularly critical given the volatility and susceptibility of the foreign exchange market to speculative and predatory practices.[4]

  1. Governance

The FX Code imposes stringent governance obligations on Authorised Dealers, mandating the establishment of robust institutional frameworks to oversee foreign exchange activities. These governance structures are designed to enhance accountability, deter conflicts of interest, and instill discipline within trading operations. Effective governance aligns with international benchmarks, thereby positioning Nigeria’s FX market as a credible participant in the global financial system.[5]

  1. Execution of Transactions

Transparency and clarity in trade execution are pivotal under the FX Code. All FX transactions conducted via the Electronic Foreign Exchange Matching System (EFEMS) are required to adhere to predefined roles and responsibilities, ensuring accuracy and fairness. Standardizing transaction execution processes minimizes discrepancies, reduces transactional disputes, and instills confidence among market participants. This principle is particularly important for fostering a level playing field where all participants, regardless of their market power, engage on equitable terms.[6]

  1.  Risk Management and Compliance

Risk management forms a critical pillar of the FX Code, as the volatile nature of foreign exchange trading necessitates stringent measures to safeguard against operational, financial, and legal risks. Authorised Dealers are required to implement comprehensive risk assessment frameworks that enable the identification, monitoring, and mitigation of these risks. Additionally, compliance protocols are mandated to ensure adherence to domestic regulations and alignment with international norms. By embedding a culture of proactive risk management, the FX Code seeks to protect the NFEM from systemic disruptions and promote its long-term stability.[7]

  1. Information Sharing

The FX Code strikes a delicate balance between transparency and confidentiality in information sharing. While it promotes the dissemination of accurate and timely information to relevant stakeholders, it also safeguards sensitive data from misuse. Market participants are obligated to disclose information only within legally permissible limits, thereby upholding privacy while facilitating regulatory oversight. This principle is instrumental in fostering trust and accountability, as participants can engage in the market with the assurance that their proprietary information is not exposed to unauthorized access or exploitation.[8]

  1. Transaction Confirmation and Settlement

Efficient confirmation and settlement of transactions are integral to the Foreign Exchange Code’s framework. By mandating standardized procedures for documenting and finalizing trades, the Code minimizes disputes and operational bottlenecks. Proper transaction settlement not only ensures accuracy but also contributes to market stability by fostering seamless trading activities. This principle is particularly significant in an era where technological advancements like EFEMS are redefining the speed and scale of FX operations.[9]

  1. Implications of the Foreign Exchange Code in Nigeria

The implementation of the Foreign Exchange Code, alongside the Electronic Foreign Exchange Matching System (EFEMS), is poised to significantly reshape the operations of the Nigerian Foreign Exchange Market (NFEM) while advancing broader economic objectives. The dual frameworks collectively enhance market transparency by offering real-time data and instituting stringent ethical guidelines, thereby mitigating speculative practices and fostering a more reliable trading environment. Moreover, EFEMS introduces a streamlined and technologically advanced system for trade execution, ensuring accountability and integrity in alignment with the FX Code’s governance principles. This integration promotes operational efficiency, reduces transactional discrepancies, and sets a benchmark for transparency in foreign exchange transactions.[10

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These reforms also hold the potential to bolster investor confidence in the NFEM, aligning the market with global best practices and creating a more attractive climate for both domestic and international investments. However, their adoption comes with challenges, particularly for Authorised Dealers, who must incur costs for system integration, staff training, and ongoing compliance reporting. While these initial expenses may present hurdles, they are justifiable investments given the long-term benefits of a more stable, transparent, and efficient FX market, ultimately contributing to Nigeria’s economic resilience and fostering sustainable growth.[11]

  1. Compliance Requirements for Market Participants

The Foreign Exchange Code outlines a phased compliance timeline to ensure a seamless transition for Authorised Dealers:[12]

  1. Initial Adoption (October 14, 2024)

Authorised Dealers must align their operations with the FX Code’s standards, particularly in ethics, governance, and  risk management. This phase serves as a foundation for their transition to EFEMS.

  1. Self-Assessment and Reporting (December 31, 2024)

By the end of 2024, Authorised Dealers must conduct self-assessments to evaluate their adherence to the FX Code. These assessments must be documented in compliance reports and submitted to the CBN, along with a Board-approved compliance plan.

  1. Quarterly Compliance Reporting (From January 2025)

Starting in 2025, Authorised Dealers are required to submit quarterly compliance reports to the CBN, ensuring ongoing adherence to the FX 

  1. Integration of the FX Code with EFEMS

The FX Code and EFEMS are mutually reinforcing frameworks, designed to work in tandem to modernize and stabilize the NFEM. While EFEMS provides the technological infrastructure for transparent and efficient trade execution, the FX Code ensures that market participants adhere to ethical and operational standards during these transactions through the following means;[13]

  1. Real-Time Data and Transparency

EFEMS offers real-time matching of buy and sell orders, as well as real-time data on FX rates and trade volumes. The FX Code complements this by mandating that all transactions processed through EFEMS are executed ethically and transparently, ensuring that the technological advancements of EFEMS are not undermined by unethical practices.

  1. Enhanced Oversight

Through EFEMS, the CBN gains a comprehensive view of all FX transactions, allowing for closer monitoring of market activities. The FX Code ensures that this oversight is supported by ethical and governance standards, creating a robust framework for reducing market distortions and speculative activities.

  1. Preparation and Testing

The test run of EFEMS in November 2024 serves as a practical opportunity for Authorised Dealers to integrate the FX Code’s principles into their operations. This ensures that by the time EFEMS goes live on December 1, 2024, market participants are fully equipped to operate within the dual frameworks.

Conclusion

The principles of the Foreign Exchange Code collectively establish a robust foundation for a transparent, ethical, and efficient Nigerian foreign exchange market. By addressing core areas such as governance, execution, and risk management, the Code aligns the Nigerian Foreign Exchange Market with international best practices while catering to the unique dynamics of Nigeria’s economic environment. These principles are instrumental in fostering investor confidence, enhancing regulatory compliance, and promoting economic stability, making the FX Code a vital component of Nigeria’s financial reforms.

Snippet: The principles of the Foreign Exchange Code collectively establish a robust foundation for a transparent, ethical, and efficient Nigerian foreign exchange market.

Keywords: Foreign, Exchange, Code, Ethical, Central Bank of Nigeria, Market, Over-sight, Principles, Compliance, Financial, Economic.

  1. Pursuant to the CBN Act 2007 and BOFIA Act 2020. ↑
  2. Section 1, page 3 of the Code. ↑
  3. Ibid ↑
  4. Principle 1 of the Foreign EXchange Code ↑
  5. M. Ejelonu & D. Akinsanya, “A Review of the Nigerian Foreign Exchange Code” (SPA AJibade & CO: 2024) Available @ https://www.mondaq.com/nigeria/financial-services/1537288/a-review-of-the-nigeria-foreign-exchange-code accessed 24th November, 2024. ↑
  6. Ibid ↑
  7. PerchstoneandGraeys, “Enhancing Nigeria’s Foreign Exchange Market: Key Insights on the new Efems and” https://perchstoneandgraeys.com/publication/enhancing-nigerias-fx-market-key-insights-on-thenew-efems-and-fx-code/ accessed 23rd November, 2024. ↑
  8. Ibid ↑
  9. Ibid ↑
  10. Klasha Business, “Nigeria’s new foreign exchange policy and its effect on global businesses” (Klasha 2023) Available @ https://www.klasha.com/blog/nigeria-s-new-foreign-exchange-policy-and-its-effect-on-global-businesses accessed 24th November, 2024. ↑
  11. Ibid ↑
  12. Supra Ejelonu5 ↑
  13. Ibid ↑

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