CBK tightens forex rules for banks amid dollar woes
The new forex guidelines are aimed at improving transparency in the foreign currency market.
The Central Bank of Kenya (CBK) has tightened conditions for commercial banks by introducing fresh guidelines aimed at improving transparency in the foreign currency market.
In a big shift, the financial regulator has bestowed bigger responsibility on lenders that are expected to see more ethical and transparent transactions in the market amid public outcry on pricing and shortages of the US dollar.
“It will facilitate better functioning of the market, further reinforcing Kenya’s flexible exchange rate regime. The FX Code is intended to promote a robust, fair, liquid, open, and appropriately transparent market,” CBK said in its newly published Kenya Foreign Exchange Code (FX Code).
Kenya runs a flexible foreign exchange rate system where the value of the shilling is determined by market forces of demand and supply.
But a relentless biting shortage of the US currency — which has widened the spread between the official and open market rates — has however sparked fears of illegal practices in the forex market, thus prompting action by the CBK.
For instance, as at yesterday, the price of buying dollars in banking halls and forex bureaus stayed above a record Sh145 per unit compared to CBK’s indicative rate of Sh130.6, creating a black market gap for the US currency due to shortages.
“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” the regulator said.
“The ethical and professional behaviour of market participants underpins the fairness and integrity of the FX Market. The exercise of judgement is central to acting ethically and professionally, and market participants (meaning both firms and their personnel),” it added.
The rules
In a bid to restore order in the forex market, the CBK has now placed a bigger responsibility on banks to monitor all forex transactions and file quarterly compliance reports.
According to the new code, banks will be required to deploy experienced and qualified personnel with technical knowledge on forex trading.
The new CBK guidelines also prohibit bank personnel handling forex transactions from conflict situations such as receiving gifts and corporate entertainment offers.
“Market participants should put in place appropriate and effective arrangements to eliminate or manage conflicts of interest. This could include: establishing declaration policies and/or records for identified conflicts of interest and personal relationships, as well as for gifts and corporate entertainment received,” CBK said.
The new rules also require banks to establish special boards that will oversee their forex trade businesses.
“The board that is ultimately responsible for the market participant’s FX business strategy and financial soundness should put in place adequate and effective structures and mechanisms to provide for appropriate oversight, supervision, and controls with regard to the market participant’s FX market activity” the new CBK code stated.
CBK also now requires banks to develop remuneration and promotion structures which ensured practices and behaviours that are consistent with the firm’s ethical and professional conduct expectations.
“They should not incentivise personnel to engage in inappropriate behaviours or practices, or to take risks beyond the overall business risk parameters of the market participant” it said.
The new code also bans banks from engaging in trading strategies or quoting prices “with the intent of hindering market functioning or compromising market integrity”.
It says: “Such strategies include those that may cause undue latency, artificial price movements, or delays in other market participants’ transactions and result in a false impression of market price, depth, or liquidity. Such strategies also include collusive and/or manipulative practices, including but not limited to those in which a trader enters a bid or offer with the intent to cancel before execution and other practices that create a false sense of market price, depth, or liquidity”
