Apr 2017 Financial News

Bank of Jamaica preparing for new FX auction system

Apr 13, 2017

The Bank of Jamaica (BOJ) announced on Tuesday April 11 that it is developing plans to buy and sell its foreign exchange from and to authorised dealers (ADs) and cambios by competitive auction.

Promising that the competitive auctions will create “a level playing field for all participants, provide transparency and efficient price discovery and protect the public purse,” the BOJ said the new system will be introduced gradually.

Currently the BOJ purchases foreign exchange via three channels: its regular surrender arrangements, the public sector entity (PSE) facility, plus occasional purchases from individual institutions.

Under the surrender facility, BOJ requires that ADs and cambios sell an agreed proportion of their purchases from clients to the central bank. The purchase of these funds by the Bank is settled on the same day, at the previous day’s WASR (weighted average selling rate).

In the proposed competitive buying auction, the Bank buys foreign exchange first from bidders who offer to sell at the lowest price. In a competitive selling auction, the Bank sells foreign exchange first to bidders who offer to buy at the highest price.

Introduction of a multiple-price foreign exchange auction, the central bank said, would see the central bank, for its operations in both buying and selling, “regularly and predictably allowing the market to do so competitively, with a few rules and restrictions to ensure orderly and equitable trading.”

Auctions are intended to enable market-based price signals and provide a more transparent process for transactions, it was noted.

The BOJ said implementation will occur in a context of ongoing consultation with market stakeholders and technical advice from the International Monetary Fund.

According to the central bank, “competitive auctions should correct some of the weaknesses in Bank of Jamaica’s current foreign exchange trading practices by introducing more informed and market-friendly protocols to govern its interactions with ADs and cambios.”

The BOJ asserted, “These plans are not a return to the FX auction system of the 1980s, which was about allocating scarce foreign currency and which centralised all foreign exchange trading at BOJ.

“Thanks to sustained economic stability and an ongoing economic reform programme with continued fiscal discipline and consolidation, Bank of Jamaica now has the opportunity to concentrate more closely on upgrading elements of its monetary policy operations. One such area is its interaction with the foreign exchange market,” the central bank said.

The financial overseer noted that it already operates auctions — for deposit-taking institutions that borrow Jamaica dollars in a weekly auction in the domestic money market and regular auctions of one-year certificates of deposit.

Also, on behalf of the Government of Jamaica, the Bank conducts monthly auctions of Treasury Bills. Modern foreign exchange auctions are also successfully being used by central banks in several other countries, such as Mexico, Colombia and Turkey.

The BOJ gave the assurance that individuals and businesses will not be directly affected by this planned change.

It was noted, “When the central bank introduces foreign exchange auctions in Jamaica, the transition will only affect the way in which BOJ interacts with the ADs and cambios.

“This means that the new operational approach will not in any way change the manner or freedom in which the public currently buys or sells foreign exchange from or to their bankers or cambios. There will be no changes to the public’s ability to convert, spend or save its foreign exchange as and where it sees fit,” the BOJ said.

Source:
BY AVIA COLLINDER
collindera@jamaicaobserver.com
Business reporter
Jamiaca Observer
Thursday April 13, 2017 

http://www.jamaicaobserver.com/business/Bank-of-Jamaica-preparing-for-new-FX-auction-system_95503