CBN directs banks to sell dollars, unveils new FX guidelines

The Central Bank of Nigeria (CBN) has released new measures for financial institutions to manage foreign exchange (FX) risks, directing banks to sell dollars to prevent losses.

The guidelines, published on CBN’s website on Wednesday, address the net open position (NOP) limits of banks on foreign currency assets and liabilities.

NOP limits set the maximum amounts for the single and total instrument exposure for all asset classes on forex.

A bank which holds NOP (whether long or short) in foreign currencies is exposed to the risk that exchange rates may move against it.

The open positions may be either trading positions or, simply exposures caused by the bank’s overall assets and liabilities.

In the new guidelines, the CBN said the NOP limit of the overall foreign currency assets and liabilities of banks shall not exceed “20% short or 0% long of shareholders’ funds”.

The apex bank said the move was due to concerns over the growth in foreign currency exposures of banks through their NOPs.

This, the regulator said, has created an incentive for banks to hold excess long foreign currency positions, which “exposes banks to foreign exchange and other risks”.

“Therefore, to ensure that these risks are well managed and avoid losses that could pose material systemic challenges, the Net Open Position (NOP) limit of the overall foreign currency assets and liabilities taking into cognizance both those on and off-balance sheet should not exceed 20% short or 0% long of shareholders’ funds unimpaired by losses using the Gross Aggregate Method,” the regulator said.

“Banks whose current NOP exceed 20% short and 0% long of their shareholders’ funds unimpaired by losses are required to bring them to prudential limit by February 1, 2024.

“Banks are required to compute their daily and monthly NOP and Foreign currency trading position (FCTP) using the attached templates.

“Banks are also required to have adequate stock of high-quality liquid foreign assets, i.e. cash and government securities in each significant currency to cover their maturing foreign currency obligations. In addition, banks should have in place a foreign exchange contingency funding arrangement with other financial institutions.”

‘NONCOMPLIANCE WILL BE PENALISED’

The CBN also directed banks to borrow and lend “in the same currency (natural hedging)” to avoid currency mismatch associated with foreign currency risk.

The apex bank also said the basis of the interest rate for borrowing should be the same as that of lending

“There should be no mismatch in floating and fixed interest rates, to mitigate basis risk associated with foreign borrowing interest rate risk,” the CBN added.

“With respect to Eurobonds, any clause of early redemption should be at the instance of the issuer and approval obtained from the CBN in this regard, even if the bond does not qualify as tier 2 capital.

“All banks are required to adopt adequate treasury and risk management systems to provide oversight of all foreign exchange exposures and ensure accurate reporting on a timely basis.

“Banks are expected to bring all their exposures within the set limits immediately and ensure that all returns submitted to the CBN provide a accurate reflection of their balance sheets.”

The CBN warned that non-compliance with the NOP limit will result in “immediate sanction and/or the suspension from participation in the foreign exchange market.”