Nigeria’s banking regulator has imposed stricter technology guidelines in the Nigeria Foreign Exchange (FX) Code to reduce risks associated with electronic trading in the foreign exchange (fx) market.
The Central Bank of Nigeria (CBN) introduced the technology-specific risk guidelines under its Nigeria FX Code hopes to address the reliance on electronic systems in the foreign exchange market.
These guidelines, outlined in Principle 32 of the FX Code, require market participants, including banks and financial institutions, to put in place strong processes to manage risks tied to their technology, from software to hardware and trading platforms, according to the banking regulator.
To combat this, CBN says that “Market Participants involved in electronic trading should put in place appropriate and proportionate controls to reduce the likelihood of and mitigate any consequences of generating or acting upon electronic quotations that may result in erroneous transactions or market disruption such as off-market quotes or trades, fat finger errors, unintended or uncontrolled trading activity arising from technological failures, flaws in trading logic, and unexpected or extreme market conditions.”
CBN: We are responding to growing risks of electronic trading in Nigeria’s FX market
“Market participants should have processes in place to assign clear ownership of every system on which they rely, and changes should be approved according to internal policies,” the CBN said in the document released today.
“Any system should be thoroughly tested before release into production use, with an audit trail of all actions taken, saved and available for review. This should apply to the development, testing, deployment, and subsequent updates of trading systems and algorithms.”
According to the apex bank, “market Participants should also be aware of broader risks that may exist and affect their FX Market activity, such as risks related to cyber security.”
The CBN’s new rules are a response to the growing number of risks associated with electronic trading in Nigeria’s FX market. FX E-Trading platforms, or Foreign Exchange Electronic Trading platforms are online systems that allow users to buy, sell, and exchange currencies digitally.
Electronic platforms have streamlined currency trading but also introduced issues like “fat finger” errors—where traders accidentally input the wrong figures—algorithm failures, and technical glitches that lead to off-market quotes.
To combat this, CBN says that “Market Participants involved in electronic trading should put in place appropriate and proportionate controls to reduce the likelihood of and mitigate any consequences of generating or acting upon electronic quotations that may result in erroneous transactions or market disruption such as off-market quotes or trades, fat finger errors, unintended or uncontrolled trading activity arising from technological failures, flaws in trading logic, and unexpected or extreme market conditions.”
The guidelines recommend the use of throttling logic and circuit breakers, systems that limit transaction rates or stop trading when anomalies occur, thereby reducing the chance of market disruption.
“Market Participants should not knowingly generate or attempt to act upon quotations in a way that is beyond the technical capabilities of the recipient or inconsistent with advertised protocols. Excessive message rates that are known to approach or breach the limitations of the platform should be controlled, for instance via the application of throttling logic and/or circuit breakers. Any identified platform flaws or features that may risk its continued operation should be escalated appropriately,” the rules says.
“The inclusion of a third party into the electronic workflow between those participants generating and acting upon quotations does not remove either party’s obligations. Market Participants such as aggregators and multibank venues that may perform both the function of distributing and acting upon electronic quotations should abide by all relevant principles,” says the CBN.
These technology risk guidelines form part of the broader Nigeria Foreign Exchange (FX) Code, developed by the CBN to bolster integrity, liquidity, and fairness in Nigeria’s FX market. Drawing inspiration from the global FX Code, which is used in over 50 countries, the Nigerian version seeks to ensure that market participants operate within a framework that promotes best practices and transparency.
According to the CBN, the FX Code is aimed at creating a robust, liquid, and open market where participants can transact confidently. The code applies to banks and financial institutions licensed under the CBN Act of 2007 and the Bank and Other Financial Institutions Act (BOFIA) of 2020. All institutions involved in wholesale FX trading are required to comply with the code and submit a compliance report to the CBN by December 31, 2024.
The FX Code covers six key areas: ethics, governance, execution, information sharing, risk management, and settlement processes.
“Nigeria,” the CBN says, “pursues a floating exchange rate regime, and the value of the Nigeria naira (N) is determined by the market forces according to the demand and supply of foreign exchange. The FX Code has been developed to respond to emerging issues and address the dynamic nature of the financial markets and specifically address emerging challenges in the foreign exchange market.”
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