The Central Bank of Kenya (CBK) has ushered in a new era in the formal interbank forex market by slashing the minimum trade amount from $250,000 (Sh39.3 million) to $100,000 (Sh15.7 million).

This move follows the introduction of the Electronic Matching Systems (EMS), an innovative electronic trading platform designed to enhance supply and price discovery within the forex market.

In a groundbreaking circular, the CBK revealed that EMS would eliminate the previous spread of 20 cents between bids and asks, granting market participants the freedom to negotiate rates based on the principles of supply and demand.

This marks a significant departure from the 2015 CBK directive, which set the minimum trade limit at $500,000 (Sh78.7 million) and introduced the aforementioned spread.

The EMS rules explicitly state, "Minimum tradable amount in EMS will be $100,000 with additional lot sizes of $50,000. System Participants may transact amounts outside the minimum tradable amount via Request for Quote [a direct trading line]."

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The circular also empowers market participants to engage in foreign exchange transactions with clients and among themselves at freely negotiated rates, emphasizing the importance of adjusting quotes for prudent forex risk management within established prudential limits.

The inception of the electronic platform emerges as an important reform identified by the CBK in response to the challenges faced by the interbank forex market, nearly leading to its collapse.

The ensuing shortage of dollar supply gave rise to a parallel foreign exchange market rate. Banks had previously expressed concerns over the regulator's stringent oversight of trades exceeding allowable spread limits and the official exchange rate.

All licensed commercial banks in Kenya have now gained admission as system participants in the EMS, with non-banking entities also eligible upon application to the CBK.

Participants will use the platform to place purchase or sell orders, with the anonymity of quotes maintained until trades are matched for settlement.

To ensure liquidity and fair pricing, the CBK has designated the ten leading commercial banks in foreign exchange trading as market makers for the platform.

These market makers, including Absa Bank Kenya, Citibank Kenya, DTB, Equity Group, and I&M Bank, are expected to continuously provide two-way quotes in the EMS for the minimum tradable amount.

Other banks can also contribute two-way quotes at their discretion, contributing to a more dynamic and competitive market landscape.

The launch of EMS marks a significant step forward in reshaping the forex market, fostering transparency, and addressing the challenges that had previously plagued interbank trading.

Market participants can now look forward to a more flexible and efficient trading environment, thanks to the CBK's forward-thinking initiatives.