FMDQ Securities Exchange Limited (FMDQ Exchange), a leading platform for trading and reporting of financial markets in Nigeria, has announced revisions to the computation methodologies of its foreign exchange (FX) rate-fixing products, effective from Wednesday, July 5, 2023.
The revisions are aimed at aligning the FX rate fixing products with the global trend of using transaction-based models instead of contribution-based models, as well as the ongoing reforms in the Nigerian FX market initiated by the Central Bank of Nigeria (CBN).
In plain terms, it is part of the FMDQ’s initiative to promote price discovery in the forex market, which is still in its infancy in terms of market-driven exchange rate policy.
What the press release is saying
According to a market notice issued by FMDQ Exchange, the Nigerian Autonomous Foreign Exchange Rate Fixing (NAFEX) and the Investors’ and Exporters,’ (I&E) FX Window Spot Rates will now be calculated using actual FX market transaction data, rather than indicative quotes from market participants.
Previously, rates were decided by quotes submitted by traders rather than real deals.
The indicative quotation approach is vulnerable to manipulation since it may not fully reflect the actual price at which a trade was completed.
The notice also urged Dealing Members (Banks) to execute and report their FX market transactions accurately and promptly on the FMDQ-designated FX Trading System during trading hours, to ensure the representativeness and integrity of the FX rate fixing products.
What this means – The transactions-based model in forex refers to a way of determining foreign exchange rates based on actual market transactions.
- In this context, it indicates that the Nigerian Autonomous Foreign Exchange Rate Fixing (NAFEX) and I&E FX Window Spot Rates will be determined from actual transactions in the foreign exchange market.
- Instead of relying exclusively on indicative quotations or predictions made by market players, the rates under the transactions-based model will be calculated based on the actual prices at which currencies are bought and sold in the market.
- This method seeks to provide a more accurate and trustworthy representation of current exchange rates.
- Because the rates are based on actual transactions conducted by market participants rather than subjective assessments, it allows for a more direct and objective assessment of market conditions.
These changes are anticipated to have an immediate influence on how foreign exchange currency rates are established.
Because it is based on actual deals, the actual forex rates paid fully reflect reality when employing a transaction-based method.
When traders realize that the closing rates are not simply rates but are based on actual trades, the effect of demand and supply on prices will also aid price discovery.
