Forex problems: CBN re-introduces the retail Dutch Auction System
The Central Bank of Nigeria (CBN) is set to reintroduce the retail Dutch Auction System (rDAS) in response to the increasing demand for foreign exchange from end users within the country.
As stated in a circular released by the regulatory body, the retail Dutch Auction System (rDAS) is scheduled to commence on Wednesday, August 7th, with the objective of easing the mounting pressures in the foreign exchange market and stabilizing the exchange rate of the naira.
In light of this, the CBN has directed all dealer banks to compile a detailed and credible list of outstanding foreign exchange requests from their clients.
To be eligible for participation in the auction, prospective customers must have naira-backed accounts, which will facilitate immediate settlement upon the CBN’s confirmation of bid acceptance.
This detailed list should encompass essential information, including the customer’s name, address, contact information, Bank Verification Number (BVN), account number, Tax Identification Number (TIN), transaction type, Form A or Form M, and Letter of Credit (LC) Number.
The directive requires all authorized dealers to submit the necessary information via email to [email protected] by Tuesday, August 6, 2024, utilizing the specified template. Furthermore, it is reiterated that only naira-backed accounts will qualify for participation in the auction, ensuring prompt settlement following the CBN’s acceptance of bids.
“The CBN has noted growing unmet FX demand from end users with banks. This has continued to increase the demand pressure in the FX market with adverse impact of the exchange rate of the naira. “Authorised dealer banks therefore are to provide to the CBN, a legitimate list of all outstanding FX demand by end users.”
“The CBN will undertake a Retail Dutch Auction System (rDAS) to mitigate the demand for eligible transactions through authorised dealers on Wednesday, 07 August, 2024. Consequently, all authorised dealers are to provide the information above via email in the attached template to [email protected] on or before Tuesday, August 06. 2024. The account of prospective customer should be naira backed as a prerequisite to participate in the auction for immediate settlement upon confirmation of bid acceptance by the CBN.”
The retail Dutch Auction System
It is worth of note that the retail Dutch Auction system of forex allocation is not new in Nigeria. The Central bank had implemented this in 2024 when it issued a similar directive to banks and authorized dealers via its circular dated February 5, 2014
The Retail Dutch Auction System (RDAS) facilitates the direct sale of Foreign Exchange by the Central Bank of Nigeria (CBN) through banks to the ultimate users of the currency. This system operates exclusively on the genuine demand for foreign exchange expressed by these end users. Consequently, Authorized Dealers are permitted to submit bids for foreign exchange solely in accordance with the actual requests they have received from their clients. For instance, if an Authorized Dealer has confirmed dollar requests totaling $1 million from its Bureau de Change (BDC) and other end users, it is eligible to bid for that specific amount of $1 million in the CBN auction.
Wholesale Dutch Auction System (WDAS)
The retail Dutch Auction System (RDAS) is contrasted with the Wholesale Dutch Auction System (WDAS) which involves the CBN receiving bids from Authorised Dealers for the purchase of forex. These dealers, acting on behalf of BDCs and other end users of forex, submit bids to the CBN during an auction. Upon successful bids, they then proceed to sell the dollars to the BDCs and other end users. The WDAS was implemented on February 20, 2006. It is worth noting that under the WDAS, the bids submitted by the Authorised Dealers do not necessarily have to match the total request from their end users. For instance, an Authorised Dealer can buy $2 million from the CBN during an auction even if it only had confirmed requests for $1 million from its BDCs and other end users. As a Wholesale Dealer, it can sell the remaining $1 million in the interbank market as needed, without having to wait for another auction to place a bid.
