In light of ongoing challenges in the Nigerian foreign exchange market, including recent distortions driven by speculators and illicit traders, the need for a robust regulatory framework has become increasingly urgent. In view of this, the Central Bank of Nigeria has introduced the Nigeria Foreign Exchange Code, effective October 14, 2024, to enhance the integrity and operational efficiency of the Nigerian Foreign Exchange Market. This comprehensive framework establishes robust guidelines for licensed banks and financial institutions, including Bureau de Change operators, International Money Transfer Operators, FinTechs and others organisations engaged in wholesale foreign exchange transactions. The FX Code aligns with the principles set forth in the FX Global Code maintained by the Global Foreign Exchange Committee and aims to promote ethical conduct and best practices within Nigeria's foreign exchange landscape.
At the core of the FX Code are six key principles: Ethics; Governance; Execution; Information Sharing; Risk Management and Compliance; and Confirmation and Settlement Processes. These principles not only ensure high standards of ethical conduct and operational excellence but also allow for a transparent, competitive, and fair market environment. The focus of this newsletter is to examine the compliance requirements outlined in the FX Code, emphasizing its six key principles.
Compliance Requirements Under the FX Code
To ensure that Market Participants align with the FX Code, several compliance requirements have been established. These requirements are designed to promote accountability, transparency, and adherence to high ethical standards in the foreign exchange market. The key compliance obligations include:
- Self-Assessment and Reporting: Market Participants are required to conduct a thorough self-assessment of their adherence to the FX Code and submit a detailed compliance report to CBN by December 31, 2024. This assessment must evaluate their current practices against the standards set forth in the FX Code. This report should highlight their level of compliance, strengths and identify any areas requiring improvement.
- Implementation Plan: Alongside the self-assessment, each Market Participant is required to submit to CBN by December 31, 2024, a compliance implementation plan that has been approved by its Board of Directors. This plan should detail the strategies and steps the institution will take to achieve full compliance with the FX Code.
- Quarterly Reporting Mechanisms: Following the initial compliance assessments and plans, Market Participants must also provide ongoing updates to the CBN. They are obligated to submit quarterly reports on their level of compliance to the Financial Markets Department of CBN within 14 days after the end of each calendar quarter. This process ensures continuous monitoring and reinforces the commitment to uphold the principles of the FX Code.
- Other Compliance Requirements: In addition to the primary obligations outlined above, Market Participants are expected to adhere to several other compliance requirements, including but not limited to:
- Training and Awareness: Conduct regular training sessions for employees to ensure their understanding of the FX Code and its principles.
- Internal Controls: Establish robust internal control mechanisms to continuously monitor adherence to the FX Code and detect potential violations.
- Record Keeping: Maintain accurate and comprehensive records of all transactions, communications, and compliance activities to demonstrate adherence during audits
- Risk Management Framework: Implement a framework to identify, assess, and mitigate risks associated with FX activities, including monitoring market conditions and counterparty exposure.
- Governance Structures: Establish clear governance structures outlining roles and responsibilities related to compliance, including appointing compliance officers and ensuring Board oversight. - Enforcement of the FX Code: Please note that the FX Code provides that CBN may take appropriate enforcement and other administrative action including monetary penalties as provided for under the CBN Act 2007 and Banks and Other Financial Institution Act 2020 against any Market Participant for failure to comply with the FX Code.
Conclusion
The introduction of the Nigeria Foreign Exchange Code marks a significant milestone in the ongoing effort to stabilize and enhance the Nigerian Foreign Exchange Market. It is important for all Market Participants to familiarize themselves with the provisions of the FX Code and actively work towards meeting its compliance requirements.
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