Forex traders hit by new CBK rules on currency exchange
Posted Wednesday, January 2 2013 at 18:41
- The guidelines put a ban on speculative trading and require that all forex trades should be supported by an underlying commercial activity.
- The rules also ban dealers from conducting two or more concurrent transactions that are likely to influence the exchange rate.
- They could curb banks’ ability to profit from volatility of the shilling, a practice commonly termed as margin trading.
Foreign currency exchange trading was hit by uncertainty Wednesday following the coming into effect of new rules seeking to curb speculative trading of the shilling.
Forex dealers were forced to seek the Central Bank of Kenya (CBK’s) interpretation of new rules that took effect on January 1 amid fears that they would impact negatively on forex exchange earnings that have become a lucrative source of non-interest income for the lenders.
The guidelines put a ban on speculative trading and require that all forex trades should be supported by an underlying commercial activity.
The rules also ban dealers from conducting two or more concurrent transactions that are likely to influence the exchange rate.
In fear of being in breach of the regulations, the dealers through their association, sought a clarification on the practices that are considered to constitute market manipulation.
"Discussions with Central Bank are ongoing for clarifications on the way forward," said Grace Newa, the Vice-chair of Forex Dealers Association.
The regulator describes market manipulation as insider dealing and deliberate attempt to interfere with the market’s free and fair operations. Such deliberate attempts include making false impression of active forex trading and carrying out fictitious deals that influence the prevailing exchange rate.
The dealers are said to be particularly concerned about the regulator’s interpretation of the market manipulation clause that is based on CBK’s conviction that the traders’ activities played a role in the rapid depreciation of the shilling to a record low of 107 units to the dollar in October 2011.
Market sources pointed out that the traders were concerned on what constituted commercial activity in trading and how to handle two huge concurrent transactions that were likely to impact on the exchange rates.
“To the greatest extent possible, all foreign exchange transactions should be supported by an underlying commercial activity,” reads part of the CBK guidelines.
The new rules could curb banks’ ability to profit from volatility of the shilling, a practice commonly termed as margin trading. The rules could also have an impact on the liquidity of the shilling.
The Kenya Bankers Association however said that its members were ready to implement the necessary changes, most of which address issues of corporate governance, capital adequacy, reporting procedures and consumer protection.
“We participated in the formulation process; we looked at the draft guidelines and gave our input part of which was for CBK to stagger the implementation of some clauses such as the capital adequacy and the regulator accepted so we are good to go,” said Habil Olaka the CEO of Kenya Bankers Association.
Banks have 18 months to raise their capital ratios so as to ensure they hold a safety buffer above the current minimum statutory ratios. They also have a year to change their board compositions to install independent non-executive directors as chairmen.