By Emele Onu with agency reports, 05.26.2010
The Central Bank of Nigeria (CBN) may reduce its euro holdings in the nation’s foreign reserves as a cushion against the depreciation of that currency.
This development came hours before the Financial Services Regulation Coordina-ting Committee (FSRCC) – a committee of all the regulators in the financial services sector, barred bank shares for margin trading.Bloomberg news quoted CBN’s Director, Reserves Management Department Lamido Yuguda as having said in Abidjan, Cote d’Ivoire, that the CBN might reduce the amount of euros it holds in its reserves if the European currency’s decline continues.
Foreign exchange reserves (also called Forex reserves or FX reserves) in a strict sense are foreign currency deposits and bonds held by central banks and monetary authorities.The euro has slumped 8.1 per cent against the dollar since the beginning of this month as concerns mount that Greece’s debt crisis may spread to other nations in the euro zone.
The statement credited to Yuguda, ahead of the African Development Bank’s annual general meeting (AGM) in Abidjan is seen by observers as a bold move by the apex bank to preserve the value of the country’s reserves and eliminate losses.The CBN holds 15 per cent of its foreign currency reserves in euros and almost 80 per cent in dollars.Yuguda said: “We have about 15 per cent of euro in our portfolio and that’s enough to make us concerned.”
He added: “We don’t change because of short-term developments, if there are long- term concerns then we’ll change it.”Nigeria’s external reserves dropped to $39.80 billion last weekend from $40.30 billion at the end of April, according to data posted on the CBN website.The reserves were said to be at $43.57 billion during the same period last year and ended 2009 at $42.40 billion.
However, according to CBN, the reserves would be sufficient to finance more than 17 months of import bills.Yuguda was also quoted by Bloomberg as having said the CBN was considering setting the minimum of reserves it holds at the equivalent of 12 months of import requirements, compared with six months currently, to cushion the economy if there is further crises.
Meanwhile, the FSRCC, which comprises the CBN, the Securities and Exchange Commission (SEC), the Nigeria Deposit Insurance Corporation (NDIC), the National Insurance Commission (NAICON), has bared bank shares for margin trading. Margin loan means borrowing money from a financial institution to buy a stock and using existing investments as security.
Most of the banks in the country were highly exposed to the stock market through margin loans - said to be in the region of almost N1 trillion and have paid dearly by way of making provisions for such loans, which was partly responsible for the crash of the stock market in 2008.According to a statement signed by CBN’s Head of Corporate Communications Mohammed Abdullahi yesterday, the FSRCC, at a meeting of representatives of all member agencies, directed that “bank shares shall not be used in margin trading”.
The committee said it took the decision to avert a repeat of the abuse and sharp practices that bedevilled margin trading in the run up to the collapse of the capital market.However, the FSRCC clarified that the shares of banks would continue to be used as collateral for bank lending. It added that the restriction placed on bank shares are only in respect of margin trading.The committee disclosed that a comprehensive guideline on margin trading is to be issued in due course and full compliance expected on or before September 1, this year.
It stated that the FSRCC put banks aggregate exposure to margin lending at a maximum of 10 per cent of total loans and advances.The committee pointed out that banks with exposure in excess of the 10 per cent limit are required to submit to the CBN a clear plan of how they intend to wind down their exposure in compliance with the prudential limit. “Operators who are interested in margin trading are also required to build capacity for margin trading and in this regard are to put in place adequate technology and expertise that will facilitate on-line real-time trading, market surveillance and prompt rendition of regulatory reports.
“Operators are required to open dedicated margin trading account and are to observe at all times a maintenance margin limit of 120 per cent. They are equally expected to put in place robust framework for margin trading which should include definition of margin and internal rules and procedure for trading, consistent with regulatory requirements,” said the FRSCC.
The financial services sector regulatory body mandated banks interested in margin trading to appoint margin compliance officers while all other operators interested in margin trading are to apply to SEC for re-certification.“Banks and other financial institutions under the purview of the CBN are to apply to the CBN for such recertification,” it said.