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FMDQ revises how forex rates will be computed at I&E window

FMDQ

FMDQ Holdings Plc

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.

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.

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