The Bank of Ghana (BOG) recently held Foreign Exchange (FX) forward rates auction has been oversubscribed by forex licensed dealing banks. The BOG went beyond its FX auction target of USD 25 million, to accept a bid amounting to USD 50 million.
At the auction on 10th August 2021, out of 127 bids submitted by the authorised banks, only 71 bids representing about 55.91% of the total bids were accepted by the Bank of Ghana. In total, bids volume amounting to USD 94 million was submitted, out of which USD 50 million representing 53.19% of the total FX forward rates auction bid amount was accepted.
In addition, the FX forward rates auction recorded some levels of invalid bids which amounted to a volume of USD 7.25 million which represents 7.71% of the total volume of bids received.
“The multiple-price forward FX auction aims to improve price discovery, deepen the FX market, and reduce uncertainty about future availability of FX to meet the needs of banks’ clients. This is expected to ease pressure on the spot market and minimise front-loading of forex purchases by economic agents and thus reducing the pressure on the spot market”.
Bank of Ghana
The FX forward rate auction is conducted by authorised officials of the Bank of Ghana. Prior to the auction, the proposed date and time is published on the website of BOG, and on the BOG page on the Reuters Terminal. This is to notify and remind participants of the upcoming auction. Only Authorized Licensed Foreign Exchange dealing banks are permitted to participate in the bidding process.
“Forward FX contracts exist in the following tenors: 7, 15, 30, 45, 60 and 75-day in addition to foreign currency swaps. At the operational level, bids are accepted from agents through their respective commercial banks across the available tenors in accordance with market rules published by Bank of Ghana”.
Bank of Ghana
The bidding process
Following the publication of the auction date and time, authorized banks who wish to participate, are expected to tend in their bids to a designated approved email of the BOG. Once bids have been submitted, alterations are not permitted.
Additionally, the banks are permitted to submit a maximum of three (3) bids per each tenor in the auction, quoting their desired amount at a freely determined exchange rate as per the quotation convention provided.
Also, the minimum bid volume of USD 500,000 in multiples of USD 250,000 is expected to be quoted in figures. The maximum bid size of a single bid shall not exceed ten percent (10%) of the announced auction target. The cumulative volume of all bids from any single bank shall not exceed twenty percent (20%) of the announced target for the auction.
Furthermore, bids with incomplete or missing information or submitted after deadline shall not be accepted. Bids exceeding the maximum single bid amount or lower than the minimum bid amount shall not be accepted. BOG reserves the right to reject the bid placed at the lowest exchange rate in the case of a sell-auction and highest exchange rate in the case of a buy auction if bids of any bank exceed the cumulative volume limit.
Allocation of auction funds
“Successful bids are notified, and the Cedi equivalent of the FX demanded are debited from the commercial banks’ operational accounts with a guarantee to settle the FX component at an agreed date in line with standard settlement rules”.
Bank of Ghana
Meanwhile, it has not been made public why the BOG decided to accept 100% more bids against the proposed amount of USD 25 million for the auction. This decision went against the allocation methodology for FX auctions which indicates that, “the auction amount to be accepted should be close to the announced volume, probable variance of not more than ±10 percent of auction target”.
The decision by the BOG to accept the FX auction bid of USD 50 million, against its proposed target of USD 25 million, may be due to increase in international trade activities. Demand for foreign currency is on the rise, and the BOG must equip the banks to be able to meet the transactional needs of their customers.
Furthermore, this move by the BOG will help to ease the pressure on spot market activities with the banks, hence aiding to stabilize the cedi in the long run. And will also help businesses to plan and hedge their business transactions.
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