The Central Bank of Nigeria (CBN) is reintroducing the Wholesale Dutch Auction System (WDAS) to guide foreign exchange transactions in the country, effective next Monday.
The WDAS was operational in the market before it was suspended on January 19, this year, to pave the way for the Retail Dutch Auction System (RDAS).
The new regime was conveyed by the monetary authority to dealers and the general public yesterday through a circular entitled "Revised Guidelines for the Operations of the Foreign Exchange Market: Wholesale Dutch Auction System," dated July 8, with reference number TED/FEM/FPC/GEN/01/110 and signed by CBN's Ag. Director, Trade and Exchange Department, Batari Musa.
Under WDAS, banks buy foreign exchange for themselves and later sell to customers.
The system permits the dealers to buy as they have liquidity and to take positions in the market. But under RDAS, banks bid on behalf of their customers. The monetary authority normally investigates the bids to ensure they are genuine and conform to documentations and guidelines.
The apex bank stated that further to early circular Ref: TED/FEM/FPC/GEN/01/088 of May 22, 2009, it was reintroducing the WDAS to stimulate activities in the inter-bank and stabilise the foreign exchange market.
The CBN Governor, Sanusi Lamido Sanusi, had hinted last Tuesday at his maiden press briefing in Abuja, after the meeting of the Monetary Policy Committee (MPC) that the WDAS had become necessary "as recent measures to stabilise the Naira exchange rate have posted some positive outcomes."
He said the Naira exchange rate had stabilised at the RDAS in recent weeks, while in the other segments, the rates had appreciated, thereby narrowing the arbitrage opportunities.
The Naira traded N146 to one dollar at the official window yesterday and at the parallel market at N154 to a dollar. In March this year, the naira depreciated to as much as N159 to a dollar at the RDAS and N178 at the black market.
According to the guidelines for operating the new system, as outlined by the CBN, "the apex bank shall intervene in the market through the WDAS and shall announce the results on Mondays and Wednesdays."
It requested authorised dealers to submit their bids on Mondays and Wednesdays, and that the CBN reserves the right to reject bids that are deemed to be unrealistic.
"The minimum bid amount by an Authorised Dealer shall be $100,000 and the currencies of transaction shall be the Naira and the United States dollar. The CBN shall announce the result of each Auction by 1.00 pm on the day of auction and the successful bids shall be advised by 2.00 pm on auction day," it stated.
It stated further that Authorised Dealers shall ensure that they have adequate Naira cover in their current accounts with the CBN and that the monetary authority shall promptly debit the current accounts of banks with the Naira equivalent of the foreign exchange purchased at their bid rates.
The CBN stated that it shall effect delivery of foreign exchange purchased by each Authorised Dealer within one business day after the day of the auction result.
It also stated that funds purchased from CBN at the Auction shall be used for eligible transactions only.
But contrary to the position under RDAS, the CBN said such funds shall be transferable in the inter-bank foreign exchange market. It also stated that the CBN might purchase foreign exchange from Authorised Dealers and other participants such as oil companies, at their offer rates.
The Authorised Dealers are meant to quote two-ways and display in their banking halls the buying and selling rates conspicuously, while the spread between the buying and selling rates shall not exceed 50 kobo.
Former Governor of the CBN, Professor Chukwuma Soludo, whose administration adopted the RDAS system said it was to check the excesses of market players who engaged in speculation at the detriment of the local currency which was then suffering continuous depreciation.
The CBN, also, in furtherance of the market liberalisation, increased the foreign exchange Net Open Position (NOP) of banks from 2.5 per cent to 5.0 per cent of shareholders' funds with effect from July 13.
The NOP was reduced by the CBN at the height of forex controls to limit the foreign exchange liquidity position of the dealers.
The CBN spelt out sanctions for violating the market guidelines, which it stated are contained in the provisions of relevant laws and CBN guidelines.


What will be the effect of this on the naira fellow nairalanders?