CBN’s FX Reform: What you need to know about EFEM
Frequently Asked Questions (FAQS) on the Electronic Foreign Exchange Matching System (EFEMS)
- What is the Electronic Foreign
Exchange Matching System
(EFEMS)?
EFEMS is an electronic platform
introduced by the Central Bank of
Nigeria (CBN) for conducting foreign
exchange (FX) transactions in the
Nigerian Foreign Exchange Market
(NFEM). It is designed to match buy and
sell orders automatically, enhancing
transparency and governance in FX
trading.
- When will EFEMS be
implemented?
EFEMS will be fully implemented in the
interbank foreign exchange market by
December 1, 2024. A two-week test
run will take place in November 2024
to ensure smooth integration and
operation.
3. What are the key benefits of
adopting EFEMS for Nigeria s FX
trade?
- EFEMS provides real-time pricing and
visibility of buy/sell orders, reducing
the opacity in the FX market. - Automated matching of orders
ensures that market participants
transact at the best available prices,
reducing price manipulation and
market distortions. - The system limits speculative trading
and reduces the volatility caused by
market distortions. - It enhances oversight, allowing better
regulation and monitoring of FX
activities. - Real-time data will be accessible to
the public, contributing to a more
informed and efficient market.
4. How will EFEMS work in the
Nigerian foreign exchange market?
Authorised Dealers will use EFEMS
to place buy and sell orders in real�time. The system will automatically
match corresponding orders based
on predetermined rules, ensuring
swift execution of transactions.
All transactions will be reflected
immediately in the system for market
participants and regulators.
5 What changes will EFEMS bring to
the current FX trading process?
EFEMS replaces the manual or less�automated trading processes with a streamlined, fully electronic system.
It introduces real-time transaction
visibility and ensures that all trades
are processed through a single,
regulated platform. This eliminates
inefficiencies and manual interventions
that may previously have led to market
distortions.
6. What impact will EFEMS have on
market rates?
EFEMS is expected to promote a
market-driven exchange rate. This
means rates will reflect actual market leading to a more efficient and stable pricing mechanism in the Nigerian FX market.
7. Will EFEMS affect speculative
activities in the FX market?
Yes, EFEMS is expected to reduce
speculative activities by ensuring that
all trades are conducted transparently
and in real-time. This minimizes the
opportunity for traders to exploit
market inefficiencies or create
artificial price movements.
8. Who will oversee and regulate
EFEMS?
The CBN, in collaboration with the
Financial Markets Dealers Association
(FMDA), will regulate the system. They
will publish guidelines, rules, and realtime data to ensure compliance with the Nigerian FX Code and the revised Market Operating Guidelines for the Nigeria Foreign Exchange Market.
9. How can Authorized Dealers
prepare for the adoption of
EFEMS?
Authorised Dealers are required
to ensure that all necessary
documentation, training, and system
integration efforts are completed
before the go-live date. Dealers
should familiarize themselves with
the Nigerian FX Code and the revised
guidelines to comply with regulatory
requirements.
10. What role will the public play in
the EFEMS framework?
The public will benefit from improved
transparency, as real-time market
prices and data will be accessible.
This allows market participants,
businesses, and individuals to make
more informed decisions when
engaging in foreign exchange
transactions.
11. How wilt EFEMS contribute to
Nigeria s FX market stability?
EFEMS will help eliminate speculative
activities and price manipulation. It
ensures that FX rates reflect actual
demand and supply conditions,
leading to improved market stability
and better regulation.
12. The FX market currently trades
on Refinitiv FXT. How will the
adoption of EFEMS affect that?
With the introduction of EFEMS.
Authorized Dealers (ADBs) will
transition from the current trading
platform (Refinitiv FXT) to EFEMS for
all interbank FX transactions. EFEMS
will become the central platform
for trade execution and matching,
ensuring all trades are conducted
under the CBN’s new governance
framework. However, the existing
platforms like Refinitiv FXT may still
serve as supplementary tools for
conversational dealings.
13. How will EFEMS promote price
discovery In the Nigerian FX market?
EFEMS will enhance price discovery by
providing real-time visibility into buy and
sell orders across the market, allowing
all participants to see the true demand
and supply for foreign exchange and
exchange rates reflecting actual market
conditions, rather than being influenced
by speculative behaviour or market
distortions.
14. What matching platform Is being
proposed: can this be communicated
to the market in writing?
The CBN is yet to announce the specific
platform selected for EFEMS. Platforms
such as Bloomberg, Refinitv and EBS all
offer matching solutions, but the final
decision would be communicated to the
market in writing.
15. Scope of trade to be dealt on the
EFEMS (all FX or Just Interbank)?
EFEMS is expected to cover all FX
transactions including interbank and
trades with clients.
16. Is there going to be a minimum
threshold in terms of notional trades,
if there is will that be for CBN to
decide or FMDA?
The FMDA and the CBN will collaborate
on setting appropriate threshold and
guidelines.
17. Are banks still allowed to voice
trade or close bilateral outside the
EFEMS platform?
No. all FX transactions, including
bilateral deals and clients’ trades must
be conducted through EFEMS. This is to
ensure market-driven pricing. Exceptions
(if, any) will be outlined in the system’s
operating guidelines.
18. What’s the contingency plan for
business continuity in the event of
EFEMs failure glitch? Can the market
fall back to usual conventional means
of closing trades?
A robust contingency plan will be in place in case of system failures. The market is still expected to maintain access to the conventional dealings as alternative options where there is need to do so. This will be with permission of the CBN.
19. CBN said they will publish real
time rates etc. on what platform
will those be published? Will the
published rate be considered as of
reference rates for the prevailing rate
of USDNGN? If so. any details on how
the CBN Intends on computing the
rate before they publish would be
beneficial?
Real-time rates and other key data
from EFEMS will be published on the
selected platform as well as the CBN
official websites and other financial
information services. The rates would
serve as reference rate for USDNGN
and the methodology for computing
and updating these rates will be
communicated to market participants.
Credit: The Explainer (NOA)