Analysts See Stronger Market As CBN Reviews OMO, Eases Liquidity Access

The Central Bank of Nigeria (CBN) last week reviewed its liquidity management framework, easing restrictions on banks’ access to the Standing Lending Facility (SLF), restoring tenored repurchase operations and opening the Open Market Operations (OMO) market to individuals, corporates and non-bank financial institutions.

The review, which took immediate effect, was designed to deepen Nigeria’s money and fixed-income markets, improve monetary policy transmission, and give financial institutions greater flexibility in managing liquidity.

The apex bank announced the changes in a circular titled “Review of Discount Window Restrictions and Open Market Operations Participation Framework”, following a review of developments in the foreign exchange, money and fixed income markets.

Under the new framework, restrictions on banks’ access to the Discount Window arising from participation in the Nigerian Foreign Exchange Market (NFEM) have been removed. The CBN also removed similar restrictions linked to participation in primary auctions of government securities.

However, the apex bank retained the restriction preventing institutions that access the Discount Window from participating in OMO auctions on the same day. The CBN also lifted the suspension of tenored repo operations, allowing it to conduct repurchase transactions across approved maturities ranging from four to 90 days.

Analysts at FBNQuest described the measures as positive for the financial markets, saying the reforms should improve market liquidity, strengthen monetary policy transmission, and deepen participation across the fixed-income market.

The most significant change, the analysts said, was the expansion of the OMO investor base, which would allow individuals, corporates and non-bank financial institutions to participate in the primary and secondary OMO markets through Deposit Money Banks (DMBs).

According to them, the move effectively expands the investor base for OMO instruments and could increase demand for short-dated securities, potentially putting downward pressure on OMO clearing yields over time.

However, they noted that the CBN would retain significant influence over yields because it would continue to determine the volume, tenor and frequency of OMO issuances based on prevailing liquidity conditions and monetary policy objectives. This broader access to OMO securities presents a major shift from the previous structure, which largely limited participation to banks and institutional investors.

Similarly, analysts at Cowry Asset Management described the measure as one of the most structurally significant elements of the circular, noting that individuals, corporates and non-bank financial institutions would now be able to compete for OMO securities alongside banks.

According to the analysts, a wider investor base could increase demand at OMO auctions and, all else equal, put downward pressure on stop rates as competition for allocations increases.

The development could also gradually reduce the domestic fixed income market’s dependence on a relatively narrow pool of investors, while providing individuals and corporates with another avenue for investing in naira-denominated government securities.

With the lifting of the restrictions, OMO has been formally accessible to clients through DMBs since last week for the first time since 2019, although the pace of uptake will depend on banks’ readiness to onboard and serve individual and corporate investors.

Beyond OMO, analysts said that the removal of Discount Window restrictions linked to foreign-exchange and government-securities transactions would reduce funding frictions for banks. Under the previous arrangement, participation in the NFEM or primary government securities auctions could affect a bank’s ability to access the Discount Window.

The new framework removes those restrictions, allowing banks to participate in these markets without losing access to the central bank’s liquidity facility. FBNQuest said this would give banks greater flexibility to manage temporary funding shortfalls and reduce the opportunity cost associated with accessing central bank liquidity.

Cowry also said the previous restrictions had created a degree of segmentation in liquidity management, with banks active in the forex market or primary auctions potentially being locked out of the Discount Window when they needed naira liquidity.

The research firm said the reforms should support smoother funding conditions around forex settlement cycles and government securities auctions, while potentially reducing banks’ reliance on more volatile short-term funding markets.

The restoration of tenored repo operations is another major component of the reforms, with the CBN saying it may now conduct repo transactions across tenors of four to 90 days to support effective liquidity management, improve money market functioning and enhance monetary policy implementation.

Analysts said the return of term repos would provide banks with an additional collateral-backed source of funding beyond overnight liquidity. FBNQuest said the facility would enhance liquidity management for bank treasury desks by providing greater flexibility in funding beyond the overnight market. It would also allow banks to better match the tenor of their assets and liabilities.

The firm said the availability of term repos would strengthen the CBN’s liquidity management framework by enabling more targeted liquidity injections, reducing volatility in money market rates, and improving monetary policy transmission across the money and fixed-income markets.

Cowry similarly said the reinstatement of four-to-90-day repos gives the CBN and banks a graduated, collateralised instrument between overnight SLF funding and longer-dated securities. The facility, it said, could help smooth liquidity swings associated with forex intervention, cash reserve debits, and government bond settlements.

The analysts also stressed that the reforms should not be interpreted as a shift towards monetary policy easing. Cowry described the circular as a constructive market-structure reform rather than a signal of monetary policy easing, noting that the changes were operational and liquidity-management measures rather than a decision on the Monetary Policy Rate.

“The reform should support greater money-market depth, improve liquidity-management flexibility and, over time, broaden the OMO investor base, potentially moderating OMO yields,” Cowry said, noting that the retention of the same day SLF and OMO exclusion showed that the CBN was still maintaining discipline around liquidity sterilisation.

The central bank also retained the existing single-bid auction format for OMO transactions and maintained full discretion over the volume, tenor, and frequency of OMO issuance. This means that although the pool of investors eligible to buy OMO securities has been significantly widened, the CBN will remain in control of how much liquidity it absorbs from the system and the maturity structure of the instruments it offers.

For investors, analysts said the immediate focus would be on upcoming OMO auctions to determine whether the broader participation would translate into stronger demand and lower stop rates. Cowry said investors should watch early auctions under the new framework for evidence of stronger bid cover and any softening in stop rates, while the CBN’s issuance calendar would remain a key determinant of liquidity and yields.

The reforms could also affect the attractiveness of Nigerian fixed-income assets to foreign portfolio investors. FBNQuest said broader domestic participation could gradually reduce the market’s dependence on offshore investors, but warned that the CBN would need to balance its objective of developing the domestic market against preserving the attractiveness of naira assets to foreign investors.

With increased demand potentially pushing yields lower, the challenge for the regulator will be to deepen participation without undermining the return profile that has helped attract investors to naira assets.

The analysts nevertheless viewed the reforms as structurally positive for Nigeria’s financial markets, with FBNQuest saying the measures would deepen market activity, improve liquidity and price discovery, and give the CBN greater flexibility to inject and withdraw liquidity in response to changing market conditions.

By widening access to OMO securities, restoring term repos and removing cross-market restrictions on Discount Window access, the apex bank is giving banks and other market participants more flexibility while retaining control over the key levers of liquidity management.

The success of the new framework, analysts said, would ultimately depend on how quickly investors embrace the expanded OMO market, how banks implement the new access arrangements and how the CBN calibrates its issuance and liquidity operations in the months ahead.