What Will The New Reuters-Based Interbank Platform Do Differently?

In late 2019, Monetary Policy Committee (MPC) member Eddie Cross announced that an electronic trading platform for the interbank market was in the works.

Though the system was supposed to be effected a week after his announcement in November, it’s only being put into effect now with the joint press conference held by the RBZ and the Ministry of Finance bringing with it revelations of the new system and what local authorities hope to achieve by adopting the Reuters-based electronic forex trading platform.

Why adopt the Reuters electronic forex trading platform?

The press statement issued out by the RBZ & Ministry of Finance suggests this platform will improve transparency. According to officials, this lack of transparency is what has fuelled the black market for cash (formally known as the parallel market):

Zimbabwe has had no transparent and effective foreign exchange trading platform for a long time. Consequently, official rates have not been effectively determined, while a thriving parallel market has developed.

To correct this anomaly, an electronic forex trading platform based on the Reuters system is being immediately put in place. This platform will allow foreign exchange to be traded freely amongst the banks and permit a true market exchange rate to be determined.

The last sentence of this statement is important because this is the second time the RBZ has acknowledged that the “official” exchange rate is not the true reflection.

The first time they acknowledged this was when they introduced the interbank market and got rid of the 1:1 rhetoric. Unfortunately, even then the Interbank Market still overestimated and is currently overestimating the value of the Zimbabwean dollar.

Now that the RBZ has admitted that once again the official rates are not a true reflection of the currency’s value will they allow the true value to be reflected on this system? Time will tell.

Who will operate on the new electronic forex trading system

At its inception the new trading system will incorporate Banks which as mentioned before will trade amongst each other; Bureau De Changes “through their authorised dealers”; and the RBZ which will “provide liquidity when to stabilise the exchange rate, where necessary”.

The Authorised Dealers for Bureau De Changes (BDCs) will be banks who will charge the BDCs for transactions they carry out on their behalf.

The RBZ will monitor the daily FX exchange rates and “intervene when necessary”. The nature of this intervention is yet to be seen but it will determine the success of this system.

Why? Well, the RBZ and the finance ministry declared that the “banks will be the market makers”. If the RBZ’s intervention is of the kind that makes them market makers then the electronic trading platform misses its fundamental purpose. Based on what we’ve seen in the past I wouldn’t be shocked if the RBZ intervention is more of an impediment than a benefit.

Outside of intervention, the RBZ will also:

• release forex onto the interbank market as they already do;
• maintain a fully operational Reuters trading desk to monitor and influence bids/offers;
• liberalise the use of free funds for importation of goods and services (as is being done with fuel imports);
• release surplus funds beyond what is required for servicing essential debts and other priority govt uses into the interbank market on a daily basis;
• provide the Ministry of Finance and MPC with data on daily/weekly FX inflows and estimated amounts available for release into the interbank market;
• will work with small banks who do not have significant exporter clients to access FX from the interbank

Has this system been deployed elsewhere and what was the purpose?

The Reuters trading platform is deployed for a number of different use cases and the only similar example we came across of the system being deployed by banks was in 2006 when five Chinese banks signed on to the Reuters 3000 Dealing trading platform -which is no longer in use now but served a similar purpose to what the RBZ is trying to do with the Interbank.

The Chinese bank’s intentions for signing up on the trading platform, however, were more single-minded than the intention of the RBZ & local financial institutions. They intended to improve liquidity:

We are now able to access a large number of counterparties, giving us a much greater pool of liquidity. Reuters Dealing service is a great help as our trading volume in G7 currencies has increased tremendously following China’s economic and trade growth.

Zhang Wei Zhong – Chief Dealer, Bank of Communications in Shanghai

First and foremost, the RBZ has championed this platform as one that will improve transparency and “to permit a true market exchange rate” which one can argue will lead to an improvement of liquidity on the interbank market.

A good call

As I was researching for this article I came across an excerpt from ZimBollar that touched on the interbank a few months after its inception and attempted to explain why the Interbank market was failing abysmally at its purpose:

In an unconventional fashion we will use a scripture reference from the word of God in Mark 3 v 27- “No Man can enter into a strong man’s house and spoil his goods except he will first bind the strong man.”

The STRONG MAN in the context of Zimbabwe’s Currency crisis is the Forex Alternative Market. When the IB Market was introduced on 22 Feb 2019, the RTGS/USD rate was at $3.85. Whatever interventions we would make were supposed to match(BIND) the Alt Market (STRONGMAN).

To completely eliminate the Alt Market the IB Market needed to set the initial price above the $3.85 obtaining on the 22 Feb 2019 instead of a starting rate of $2.5. This would have incentivised USD Holders to use official channels and improve forex supply.

Instead of allocating forex seed capital to kickstart the IB Mkt, the RBZ should simply have genuinely liberalised the market and allow Banks to match whatever the IB Market was offering. Seed capital should have been introduced later to improve forex supplies and sustain the mkt

ZimBollar

The last paragraph in that quote is the most important. The Interbank was put on crutches because of the intervention of the RBZ and whilst the RBZ is now suggesting that the banks will determine the market rate from henceforth, only time will tell if the central bank won’t intervene in that process.