August 27, 2026/Cordros Report
On August 12, 2026, the Central Bank of Nigeria (CBN) issued a circular revising its Discount Window and Open Market Operations (OMO) framework. The circular communicated the following operational changes: The CBN introduced three key changes: (1) reinstated Tenored Repo Operations with maturities of 4–90 days; (2) removed restrictions on Discount Window access linked to participation in the FX (NFEM) market; (3) removed restrictions on Discount window access linked to participation in government securities auctions; and (4) the opening of OMO primary and secondary market participation to all eligible investors. Meanwhile, the existing same-day restriction on OMO participation for institutions accessing the Discount Window remains in place.
From our assessment, the core target of all decisions is the sterilisation of domestic naira liquidity. As a result, the reopening of the OMO market to domestic investors is a market liberalization policy on its face, but a liquidity sterilisation measure in practice. In summary, we expect these decisions to result in systemic reconfiguration of Nigeria’s financial markets, including helping the CBN achieve its monetary policy objectives through more efficient transmission.
Background: Why these decisions and why now?
On 12 August, the Central Bank of Nigeria (CBN) issued new directives, marking what we believe to be the latest step in a gradual return to central banking orthodoxy. The circular represents an effort to restore conventional monetary instruments as the primary tools for more efficient monetary policy transmission. It sets out the following operational changes listed below.
The restrictions now being lifted were crisis-era tools which we believe were initially designed to curb arbitrage and speculative carry trades by preventing banks from using the CBN’s liquidity facilities to finance speculative foreign exchange (NFEM) purchases or aggressively bid for primary sovereign debt, while reinforcing overall banking discipline. While effective at containing speculative balance sheet leverage during periods of acute macroeconomic stress, these firewalls progressively evolved into structural bottlenecks that penalized routine market intermediation while also leaving banks exposed to end-of-day settlement shortfalls.
The case for recalibrating these rules is strengthened by the current liquidity and banking environment. On liquidity, despite sterilising c.NGN59.30 trillion in 2026YTD, the CBN’s 26 August OMO auction attracted NGN4.26 trillion in bids, highlighting the depth of available liquidity. At the same time, disinflation has progressed, with headline inflation easing to 15.43% y/y in July 2026, its second consecutive monthly decline and materially below the above 30.0% y/y readings recorded in 2024. Yet system liquidity remains structurally elevated, while pre-2027 election fiscal spending presents a potential headwind to the CBN’s liquidity sterilisation efforts.
On banking, rolling back these restrictions are now fortified by prudential guardrails that prevent a potential occurrence of currency and government securities speculation. Tapping central bank credit to speculate on foreign exchange is mitigated by stricter regulations, including the Net Open Position (NOP) limit, which caps long foreign-currency exposure at 0%. This prevents banks from retaining excess purchased USD on their balance sheets overnight, effectively requiring them to sell foreign currency to genuine end-users.
Separately, the subsequent introduction of the Electronic Foreign Exchange Matching System (EFEMS) strengthened oversight of FX transactions by improving real-time monitoring and ensuring greater transparency in the market. Simultaneously, leveraging the Discount Window to fund primary sovereign debt bids is constrained by mandatory collateral haircuts, which require banks to pledge a higher market value of unencumbered FGN bonds or Treasury bills than the cash they borrow. This asset encumbrance alongside high borrowing costs imposes a steep total cost which renders speculative leverage unprofitable.
What the Circular Changes
The circular reworks the CBN’s operating framework around a single core objective. It aims to widen access to the CBN’s market operations while retaining control over the levers that support monetary policy transmission. Based on the directives, the following changes take immediate effect.
Discount Window restrictions are selectively removed
Under the previous framework, access to the CBN’s Discount Window was restricted for banks that participated in the Nigerian Foreign Exchange Market (NFEM) or purchased government securities at primary auctions. The restriction on accessing the Discount Window on the same day as participating in OMO operations also applied.
The circular removes the restrictions, allowing banks to participate in these markets without losing same day access to the CBN’s liquidity facility. However, the restriction on using the Discount Window and participating in OMO auctions on the same day remains in place.
The distinction is important. Removing the NFEM and primary auction restrictions should improve market intermediation by allowing banks to participate more freely in the FX and government securities markets while retaining same day access to CBN liquidity when required. Retaining the OMO restriction, however, limits liquidity arbitrage by preventing banks from borrowing from the CBN’s Discount Window and using those funds to participate in an OMO auction on the same day. The CBN therefore removes restrictions that could impede market making while retaining the safeguard most directly relevant to its liquidity sterilisation operations.
Tenored Repo Restores a two-way liquidity management tool
The second change reinstates the CBN’s ability to conduct repo operations with maturities of 4 to 90 days, allowing banks, at rates and volumes set by the CBN, to access short term liquidity by placing high quality assets with the apex bank as collateral. The significance lies in the direction and tenor of liquidity management. While policy operations in 2026 have been focused on liquidity withdrawal, the reintroduction of repo gives the CBN an explicit mechanism to inject term liquidity when required. This should allow the Bank to respond more precisely to temporary liquidity imbalances and smooth funding conditions across the curve, rather than relying primarily on shorter term liquidity facilities.
OMO participation is broadened to domestic non-bank investors
Under the previous framework, OMO auctions were only open to eligible institutional investors (deposit money banks) and Foreign Portfolio Investors (FPIs). The circular expands access to both the primary and secondary OMO markets to all (domestic) eligible investors, including individuals, corporates and non-bank financial institutions. These investors will continue to bid and settle through the DMBs, acting on their behalf.
The expansion broadens the pool of potential OMO demand while retaining the single bid auction format. The result is a broader investor base without a change in the CBN’s control over OMO supply or the auction framework. Price discovery therefore remains centralised even as participation expands. Overall, the timing of these measures provides an important signal about the CBN’s policy stance. In our view, these are not measures typically associated with a central bank responding to acute stress. Rather, they represent policy housekeeping undertaken from a position of relative control, with disinflation underway and the broader reform architecture already established. The CBN’s decision to refine its policy framework at this stage, rather than deploy these instruments in response to a crisis, suggests a transition from stabilisation to optimisation. The focus is increasingly on strengthening and fine-tuning the policy tools it is likely to rely on in the next phase of monetary management.
Impact Assessment
In the following sections we evaluate the circular’s implications across three core segments: (1) system liquidity, (2) OMO stop rates and secondary market yields, and (3) the FX market.
System Liquidity
The circular’s liquidity implications vary across the three measures, reflecting different transmission mechanisms. Firstly, broadened OMO participation primarily strengthens the CBN’s capacity to absorb structural excess liquidity. Secondly, tenored repo introduces a more flexible channel for injecting and fine-tuning liquidity. Lastly, the removal of Discount Window restrictions mainly improves banks’ access to liquidity backstops without materially altering system liquidity. The net effect should therefore be greater flexibility in managing both the level and timing of liquidity, rather than a uniform shift in its direction.
- Broadened OMO participation as an additional sterilisation channel: Prior to the restriction on OMO participation, average system liquidity between January 1, 2017 and October 23, 2019 stood at a net long position of NGN168.75 billion, compared with c.NGN4.22 trillion in 2026YTD. This substantially larger liquidity pool strengthens the case for broader OMO participation, giving the CBN greater capacity to absorb excess domestic liquidity through a wider investor base. More importantly, reopening OMO to domestic individuals, corporates and non-bank financial institutions allows the CBN to manage domestic liquidity while maintaining the elevated OMO yields required to attract and retain FPIs, which supports FX liquidity and exchange rate stability. The expanded investor base therefore allows the CBN to address both sides of the FX volatility equation – retaining foreign capital through competitive yields while absorbing domestic naira liquidity that could otherwise generate additional FX demand. This becomes particularly important given the NGN41.80 trillion of OMO maturities scheduled for the remainder of H2-26. Recycling a portion of these maturities through fresh OMO issuance to domestic investors could mitigate the liquidity injection from maturities while preserving the attractiveness of OMO to foreign investors. The extent of this sterilisation will ultimately depend on the volume, pricing and frequency of OMO issuance.
- Tenored repo as a liquidity injection tool: The reactivation of 4 to 90-day tenored repo operations provide the CBN with a more flexible mechanism for managing short to medium term liquidity. Unlike OMO issuances, which primarily absorbs liquidity, repo operations can inject liquidity against eligible bank assets when required, allowing the CBN to respond more precisely to temporary liquidity imbalances between OMO auctions. We therefore view repo primarily as a fine-tuning instrument, with the direction and scale of operations dependent on prevailing system liquidity. Its reactivation should improve the CBN’s ability to smooth short-tenor money market volatility without relying solely on outright OMO operations.
- The removal of the Discount Window restriction should have limited liquidity impact at current rates. Although banks can now access the discount window without the previous NFEM and primary securities restrictions, we do not expect this to materially increase bank participation in government securities auctions. First, the SLF rate of 27.0% (MPR + 50bps), which serves as an indicative borrowing cost under the broader discount window framework, remains relatively punitive. Second, current banking system liquidity provides banks with sufficient internal funding to participate in government securities auctions without relying heavily on CBN liquidity facilities. Finally, collateral haircuts as high as 20.0% remain a constraint on the effective funding value of pledged securities, limiting the attractiveness of the discount window as a source of auction financing. Historical usage suggests the restrictions did not materially limit banks’ reliance on the discount window. Average daily use of the SLF, a component of the overall discount window increased from NGN34.68 billion in the three years preceding the restrictions to NGN133.38 billion in the three years that followed, indicating that usage remained primarily driven by underlying liquidity needs. We therefore expect the removal of the restrictions to have a limited impact on structural system liquidity, with activity instead determined by the relative cost of CBN funding and prevailing liquidity conditions. In particular, recourse to the discount window should remain sensitive to the monetary policy rate and banking needs.
Impact on OMO Stop Rates and Secondary Market YieldsThe initial market reaction to the circular was contained, with the 364-day NTB stop rate rising by 24bps to 17.59% at the August 12 NTB auction, suggesting some upward repricing of near-term rate expectations ahead of broadened OMO participation. The subsequent OMO auctions on the 13th and 26th August saw NGN9.19 trillion in bids for NGN1.60 trillion on offer (Bid-to-offer: 5.7x; 2026YTD average: 4.1x), with the CBN ultimately allotting NGN5.40 trillion (Bid-to-cover: 1.7x; 2026YTD average : 1.2x). While demand was significantly stronger than its 2026YTD average, the CBN’s allotment suggests that it remains focused on broadly matching maturities rather than fully accommodating demand. Precisely, NGN4.54 trillion of OMO bills matured since the release of the circular, implying a 118.9% sterilisation rate, in line with the 2026YTD average of 102.2%. The key question, therefore, is not the CBN’s willingness to absorb liquidity, but where it sets OMO stop rates going forward, as these will increasingly anchor pricing across the curve.
Historical pricing provides a useful, albeit imperfect, reference point. Before the suspension of domestic OMO participation, long-dated NTB stop rates typically cleared 10–20bps below comparable OMO rates. However, we do not expect the CBN to lower OMO stop rates sufficiently to recreate this historical spread. Instead, we expect the OMO–NTB auction spread to remain broadly around current levels, with the most recent auctions showing a spread of 250bps. Foreign investors have historically been important marginal price setters in the OMO market, with elevated yields supporting reinvestment of maturing foreign-held bills. The domestic-to-global yield differential should therefore remain an important consideration for the CBN, particularly with US and UK 10-year yields at 4.7% and 5.0%, respectively. The OMO spot rate-to-US 10-year spread has averaged approximately 16.7% in the past two years, providing a more relevant anchor for near-term OMO pricing.
This consideration is particularly important given that approximately NGN41.80 trillion of OMO bills mature over the remainder of H2-26, a significant portion of which is held by foreign investors. Maintaining sufficiently attractive OMO yields should help support reinvestment and mitigate the risk that maturity will translate into a sharp build-up in domestic liquidity. We therefore expect the CBN to continue to keep allotments materially below demand at subsequent auctions, with OMO stop rates to remain broadly anchored to prevailing domestic-to-global yield differentials, with a tolerance of approximately ±100bps around this level. This implies a clearing range of 19.5%–20.5% for the remainder of 2026. A more material decline in OMO stop rates is more likely to follow either a reduction in the MPR or easing global yields rather than result from the expansion of domestic participation alone.
Secondary market effects
Broadened domestic access to OMO securities should, over time, deepen secondary market activity as liquidity from individuals, corporates and non-bank institutions flows into existing OMO securities. In the near term, however, we expect this to trigger a shift in demand away from NTBs and FGN bonds, creating transitional repricing before OMO and NTB yields eventually converge. Since the circular was issued, average OMO yields have fallen 71bps to 20.7% while average NTB yields have expanded by 73bps 18.9%. More immediately, sizeable unmet demand at OMO auctions could spill into the secondary market, putting downward pressure on OMO yields and bringing them closer to prevailing 364-day NTB secondary market yields.
FX Stability to Remain Amid Increased Bank Participation
We do not believe that this circular directly alters FX market mechanics, but will affect the FX outlook through two channels. First, removing the NFEM-related Discount Window restriction eliminates a constraint that previously limited banks’ ability to combine active FX market participation with access to CBN liquidity. This should support more consistent bank participation in the FX market, though we expect the impact on the naira to be broadly neutral.
Second, and more importantly, maintaining sufficiently attractive OMO yields to retain foreign investors holding the NGN41.80 trillion of bills maturing in the remainder of H2-26 should sustain FX stability. A 19.5% –20.5% OMO clearing range, keeping the OMO-to-US 10-year spread broadly around its 2026 average of 15.7%, should encourage foreign reinvestment and reduce the risk of a sharp, maturity-driven increase in FX demand in H2-26.
Key Risks and Considerations
Pricing discipline risk: If the CBN prioritises cost-of-borrowing relief over rollover incentives and prices OMO materially lower, foreign reinvestment risk rises around H2-26 maturities, with negative implications for both yields and FX.
Reallocation volatility: The shift of secondary-market liquidity toward OMO paper could create short-term dislocation and reduced depth in NTB/bond secondary markets before convergence occurs.
Demand absorption assumption: The liquidity-based case for higher OMO participation rests on system liquidity remaining structurally ample; a sharp reversal in liquidity conditions, such as large FX interventions or CRR debits, would alter this.