With $17bn Net Reserves, CBN’s Audited Account Shows $13.8bn Exposure to JP Morgan, Goldman Sachs, FX Forwards

*Introduces framework for in-country FX transfers to remove barriers

James Emejo in Abuja

The Central Bank of Nigeria (CBN) is indebted to JP Morgan and Goldman Sachs to the tune of $7.5 billion, according to the apex bank’s 2022 financial statement.
This is coming on the heels of the introduction of draft operational rules and regulations for in-country clearing and settlement of foreign currency (FCY) fund transfers among Nigerian banks by the apex bank to enable faster, cheaper, and more transparent FX transfers.

The debt includes $7 billion to JP Morgan and $500 million to Goldman Sachs under a classified securities lending.
This is in addition to a $6.3 billion exposure to foreign currency forwards.
This was contained in the CBN Consolidated and Separate Financial Statements for the Year Ended December 31, 2022, which was posted on its website.
This came as the President, Association of Capital Market Academics of Nigeria, Prof. Uche Uwaleke, commended the present management of the CBN for publishing the financial reports of the bank after so many years.

He said the move will go a long way in boosting the confidence of investors in the Nigerian economy.
According to the financial statement, “The Group entered into a securities lending agreement with Goldman Sachs and J.P. Morgan and, as part of the agreement, the Group pledged its holdings on foreign securities in return for cash.

The securities lending forms part of the CBN’s total external reserves of about N14.3 trillion or $29 billion, using the official exchange rate of N494/$1 as at 2022.
However, the CBN also owes another N3.15 trillion ($6.3 billion) in foreign currency forward which are forex obligations it needs to make to foreign investors.
Other aspects of the external reserves indicated time deposits and money placements of N4.6 trillion, Other foreign securities N5.8 trillion, Current accounts with foreign Banks (GS and JPM) N3.34 trillion, Domiciliary accounts 294.8 billion and Sundry currencies and travellers’ cheques N199.8 billion.

According to the CBN accounts, the total of about N14.4 trillion or $29 billion, as well as the N578.6 billion ($1.1 billion) held in Gold Bullion Reserves brought the grand total to about $30.1 billion.
Nonetheless, with the about $30.1 billion in foreign reserves, the bank’s exposures to both JP Morgan and Goldman Sachs may have reduced its net reserve to about $17 billion.

Uwaleke, however, told THISDAY, “It has brought to the fore the true picture of the country’s external reserves being managed by the CBN.
“It is now beyond speculation that much of the reserves are encumbered by Securities lending and derivatives contracts entered into by the CBN.
“Much as these contracts are legitimate, the resulting obligations from them put to question the justification for entering into these contracts in the first place and whether adequate safeguards were put in place at the time of entering into these contracts.”

He adds, “Securities lending is the process of loaning securities to another party which effectively transfers ownership to the other party expected to provide collateral for them. In this instance, both JP Morgan and Goldman Sachs were said to have provided cash in return.
“By implication, the current liquid external reserves of about $33 billion does not reflect the true liquidity position of reserves, as a significant proportion has been tied down by these contracts.
“Little wonder the CBN’s ability to intervene in the forex market has been hampered.
“Following this disclosure, the current volatility in the forex market may linger for quite some time, except the reserves witness substantial accretion from crude oil sales proceeds.”

The CBN had on Thursday, released its audited financial statements for 2016-2022, amid an ongoing investigation of its operations.
The apex bank said the financial statements of the last seven years — posted on its website — had been approved by its board in accordance with the provisions of the CBN Act of 2007.  It showed that the CBN recorded a profit of N65.63 billion in 2022 — more than double the figure it reported a year earlier (N31.04 billion).

In the period under review, CBN (the Group) recorded a profit of N103.85 billion. The Group refers to CBN and its subsidiaries, including the Nigerian Security Printing & Minting Plc (MINT), Nigerian Electricity Supply Industry Stabilisation Strategy Limited (NESI SS Ltd), among others.

CBN Introduces Framework for In-country FX Transfers to Remove Barriers

The CBN yesterday unveiled draft operational rules and regulations for in-country clearing and settlement of foreign currency (FCY) fund transfers among Nigerian banks.
The move seeks to enable faster, cheaper, and more transparent FCY transfers and to create an efficient and safe operation of FCY transfers amongst Nigerian banks, and improve the efficiency of the in-country FCY transfers, leading to greater confidence in the payment system.

The central bank said the settlement of clearing balances shall be accorded the highest priority for settlement under the new regime.
The CBN said the regulation provides measures that would address some of the challenges facing the current system for switching FCY transfers among Nigerian banks including high cost associated with correspondent banking services, delay and inefficiencies with processing foreign remittances for third party including IMTOs.

The bank also said the move was in exercise of the powers conferred on it under the Sections 2(d), 33 (1)(b) and 47(2) of the CBN Act 2007 to promote sound financial system in Nigeria, issue guidelines, facilitate the development of an efficient and effective payments system in Nigeria, and prescribe rules and regulations for the efficient operation of the clearing and settlement system.

The CBN, however, warned participants to adhere strictly to the bank’s policy on dollarisation, as this is mandatory for FCY transfers.
The apex bank further pointed out that the provisions of all existing guidelines, circulars and directives on the operations of domiciliary account and FCY transactions shall apply to in-country FCY switching service.
Under the regulation, if participant does not have sufficient fund in its settlement account during the settlement of net clearing position, the CBN shall have recourse to the bank’s collateral to settle the participant’s clearing debit.

Where a participant neither has sufficient funds nor sufficient collateral the CBN shall act as lender of last resort at a fee plus penalty.
Also, each participant shall open a US Dollar account with CBN for the purpose of settlement of its In-Country FCY funds transfers, and each participant shall be responsible for ensuring that its USD account with CBN is funded, for the purpose of pre-authorised debits and settlement of net debit positions from in-country FCY clearing system among other requirements.

The guidelines read, “A member bank shall be suspended from participation, for persistent failure to settle (three times in a week) its settlement obligations from in-country FCY funds transfers. Warning shall be sent to a participant for each failure.
“Failure to provide the requisite infrastructure to enable electronic exchange of eligible payment instrument. Failure to maintain adequate collateral as prescribed by the CBN, from time to time.

“When the bank is suspended by the Management of the CBN in the interest of the system for any other reason not aforementioned. Every suspension shall last until such a time reinstatement is approved by the CBN.”
Essentially, parties to FCY funds transfer, clearing and settlement in Nigeria shall include but not limited to the CBN, Nigeria Inter-Bank Settlement System PLC (NIBSS), Authorized Dealer Banks, International Money Transfer Operators (IMTOs), Customers of ADBs and any other institution as may be approved by CBN.