CBN restricts OMO auctions to banks, foreign investors

The Central Bank of Nigeria (CBN) has directed all banks to exclude individuals and local corporates from investing in Open Market Operations (OMO) auctions with effect from October 23, 2019.

In a circular signed by Director, Financial Markets Department, CBN, Angela Sere-Ejembi, and cited by Nairametrics, the banker insisted that participation of the financial institutions at the auction should be on proprietary and non-proprietary basis, without the participation of the investors mentioned above.

Good side of the directive: The development is expected drive foreign inflows by restricting individuals and local corporate, leaving only the banks and foreign investors to participate at the auction.

On the flip side: There are concerns by some experts that the direction of the apex regulator is still unclear.

For instance, Comercio Partners Limited explained that its concerns remains the seeming unclear direction of the CBN with regards to monetary policy.

It stated, “This is a follow up to the circular released last week warning banks that all demand at auctions must be effective and fully backed by appropriate funding after observing high levels of unfunded bids at the OMO auction. 

“Whether this is a move aimed at protecting the Naira, checking the excesses of banks or managing its OMO issuance cost, the move would certainly engender some level of uncertainty, which markets do not like.” 

Background: In a circular dated October 18, 2019, CBN had ordered lenders to ensure they have secured funding before bidding for short-term government securities.

What it means: The directive, which took effect October 21, 2019, requires that all demand at auctions be “fully backed by appropriate funding” as it has observed a high level of unfunded demand.

Non-compliance to the directive, CBN stated that the “sanctions could include cancelling bids.” 

Meanwhile, Bank of America Corp. attributed the recent slide in demand for Nigerian bonds to the slowdown in the global economy as well as weak sentiment toward emerging-market assets. The West African nation depends on inflows into debt securities that yield more than 14% to help support the Naira.

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