What CBN’s Redefined “Two Way Quotes” Actually Means
Last week, the Central Bank of Nigeria, introduced restrictions within the Nigerian Foreign Exchange (FX) Market; in reaction to the recent volatility. The CBN indicated the need to temporarily redefine the standards by which the market operates. The response by the CBN was to reinvent the Two-way quotes market (2WQAQ) into an order-based two-way quote (QB2WAQ) forex market. The QB2WAQ FX market of the price-based market of the FMDQ OTC Plc, which is the platform for trading of fixed income securities and currencies, is assumed will check market volatility.
Two-way Quotes are the type of quotes that gives both the bid and the ask price of a security, informing would-be traders of the current price at which they could buy or sell the security. The two-way quote also shows the spread between the bid and the ask, giving traders an idea of the current liquidity in the security (a smaller spread indicates more liquidity). On the other hand, One-Way quotes, refer to a market system where Dealing Members (DMs) can only quote a firm price on either the bid or the ask side. This can be caused by temporary market inefficiencies or by regulatory controls, as can be found in some foreign countries. A one-way market also can be created when there are only buyers, or only sellers, interested in a particular currency at a specific point in time.
The new bid-based market will have the bid-ask spread determined by orders made by customers to authorised dealers. The market price is mainly derived from the process of matching customers’ demands with supply. Under this market, there are no standard bid-offer spreads and no standard bid-offer volumes. The volumes are based solely on customers’ demands. DMs will be mandated to sell funds purchased from customers (example oil companies) to other customers of their institution, that require forex and to other banks in the inter-bank market who must be buying to satisfy a customer’s forex demand.
Also, DMs will not be allowed to trade between themselves, outside customer demands and such funds cannot be resold to other Dms. All surplus funds not taken up by the customers and other banks to the Central Bank of Nigeria (CBN) at the prevailing CBN bid rate in order to comply with their Net Open.
The CBN also stipulates that all DMs are to provide documentary evidence of the orders made by their customers, utilise funds within 72 hours of the receipt of the funds purchased.