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Central Bank introduces new system of forex allocation

Sunday, April 6, 2014

The Central Bank on Tuesday implemented radical changes in the way that foreign currency is sold to the local financial system...but the news was announced in RBC Caribbean’s regional economic report. In what may be the most significant change in the allocation of foreign exchange since the “dirty” flotation of the TT dollar in April 1993, some 90 per cent of the injection of US dollars from the Central Bank will now be auctioned among 12 licensed foreign exchange dealers. Under the previous system, according to RBC Caribbean, roughly half would have been auctioned among commercial banks. The Central Bank introduced the system of competitive auctioning among authorised foreign exchange dealers in May­ 2012, which allowed commercial banks and other official dealers of foreign exchange to make bids for US dollars and other foreign currencies for the first time.

For close to two years, the auction system operated alongside the established system of foreign exchange allocation, which has been in place largely since the flotation of the TT dollar. 
According to the RBC economic report, there will now be no limit on the amount that can be allocated to any one bidder for those auctioned funds, while previously, those funds would have been allocated among commercial banks according to their market share. As before, the maximum price that one can bid, would be the current sell price. The remaining 10 per cent of the injection will be allocated equally among the 12 dealers at a price determined by the Central Bank, as opposed to the former allocation among commercial banks based on their market share. The Tier 1 system, where the US dollar supply from three large energy companies was previously allocated to commercial banks according to market share, will now function differently. The “originating” institution (the one to which the US dollars are sold by the energy company) will keep 25 per cent of these funds and the remaining 75 per cent will now be shared equally among the remaining 11 dealers.

The Central Bank has also announced that it will not support the Tier 2 arrangement going forward, where US dollars from several other energy companies and exporters would have been allocated among commercial banks, according to market share. In an interview with the Business Guardian in November 2012, Alister Noel, the Central Bank’s senior manager of operations, said under the previous system, the Central Bank intervened in the foreign exchange market by making a pre-determined allocation among the authorised dealers, which include commercial banks and cambios. The pre-determined allocation was based on, among other things, the market capitalisation of the institution and its share of the foreign exchange market. Between May 2012 and Tuesday, the Central Bank operated a two-pronged system: pre-determined allocation and competitive auction.  Asked whether the auction system would contribute to a depreciation in the US/TT exchange rate, Noel said: “Not at this time. It would not be because of the auction system because we would have kept certain things constant. What the auction system has done is compress the spreads on the banking side. “The changes in the selling price would not be because of the auction.”