Markets for trading financial instruments including money, bonds, stocks, and derivative are referred to as Financial Markets. Developed financial markets can play a key role of intermediating between the lenders (savers) and the borrowers (investors), reduce information asymmetries and allow central banks to implement and achieve objectives of monetary and exchange rate policies
1- It is mainly through money and foreign exchange market that SBP implements its monetary policy stance. To implement its monetary policy, SBP operationally focuses on controlling short-term interbank interest rate – overnight money market repo rate – through the use of various monetary policy tools (OMOs, Interest Rate Corridor, Reserve Requirements, FX Swaps, etc.). The short-term rates translate in to other longer-term market interest rates, such as KIBOR, that are used as benchmark for lending to businesses and households. In the transmission mechanism, efficient financial markets increase the efficiency and effectiveness of monetary policy transmission by reducing various uncertainties and improving translation of short-term interest rates to pricing of longer-term loans.
- Open Market Operation is a tool used by a Central Bank (or monetary authority) to inject or mop-up funds, based on the liquidity requirements, from the banking system via the purchase or sale of eligible securities.
- Operationally, in case of OMO (Injections), SBP lends funds to banks/PDs against eligible collateral to address liquidity shortage in the system. In OMO (Mop-up), SBP sells MTBs to banks against funds to remove surplus liquidity from the system.
- Eligible Collateral: For OMO (Injections) marketable government securities (i.e. MTBs and PIBs) are eligible securities. For OMO (Mop-up), SBP sells MTBs (on repo or outright basis) to banks for removing excess liquidity from the system. In case of Bai-Muajjal, a Shariah compliant tool for managing liquidity in the Islamic banking system, GOP Ijara Sukuk are eligible securities.
- Eligible counterparties: Banks and PDs are eligible counterparties to OMO transactions. For Bai Muajjal transactions, Islamic banks and specialized Islamic windows of conventional banks are eligible counterparties.
- Tenors: There is no restriction on SBP in terms of tenor of conventional OMOs. However, usually SBP conducts OMOs of shorter tenors (e.g. 7 to 14 days).
- SBP introduced OMOs for IBIs in October 2014. Under these OMOs, SBP can purchase GOP Ijara Sukuk (GIS) on deferred payment basis (Bai-Muajjal) for a tenor of up to 1 year and sell GIS on ready payment basis; using competitive bidding auction process. These OMOs provide SBP a tool to manage excess liquidity available with IBIs and improve effectiveness of monetary policy transmission in the absence of regular Sukuk issuances by the GOP.
- SBP Target Policy rate: SBP Target policy rate is a single policy rate that unambiguously signals SBP’s stance of monetary policy to achieve macro‐economic objectives with price stability. The SBP Policy Rate is set between the SBP standing facilities - Floor and Ceiling of the interest rate corridor. SBP aims at keeping the money market weighted average overnight repo rate close to the SBP Target rate using liquidity management tools, mainly OMOs and outright sale/purchase of government securities.
- Standing facilities aim to provide and absorb overnight liquidity, signal the general monetary policy stance and bound overnight market interest rates within the acceptable levels. Two standing facilities are available to eligible counterparties on their own initiative. These include SBP Reverse repo (Ceiling) facility and SBP Repo (Floor) facility. At present, the width of the Interest rate corridor, that is, the difference between the ceiling and the floor rate is 200bps
- Eligible Collateral: For SBP Reverse repo (Ceiling) facility, marketable government securities (i.e. MTBs and PIBs) are eligible securities. For SBP Repo (Floor) facility, SBP sells MTBs (under repo sale) to banks availing the facility to park excess liquidity with SBP.
- Eligible counterparties: Scheduled banks, PDs and DFIs are eligible counterparties to SBP Reverse repo (Ceiling) facility; however, only scheduled banks can access SBP Repo (Floor) facility.
-Standing Facilities process flow:
- SBP introduced an interest rate corridor in August 2009 with the objective of introducing the corridor was to minimize volatility in the short term interest rates to achieve the ultimate goal of maintaining price stability.
- Since the adoption of “Interest Rate Corridor” (IRC), volatility in the overnight money market repo rate has reduced.
- The structure of SBP’s Interest Rate Corridor (IRC) was revised in May 2015 to:
- Cash Reserve Requirement is a percentage of banks total liabilities or some subset thereof which banks are required to hold as reserves at the Central Bank.
- Under current regulations (Section 36 of SBP Act, 1956), all scheduled commercial banks, microfinance banks, Islamic banks and Islamic banking subsidiaries of the commercial banks are required to maintain a certain proportion of their liabilities in the form of cash with SBP.
- All banks (including Islamic Banks/Branches) have to maintain CRR at an average of 5.0% of total demand liabilities (including time deposits with tenor of less than 1 year) during the reserve maintenance period, however daily minimum requirement is 3.0%. Time liabilities (including time deposits with tenor of 1 year and above) are exempt from cash reserves.
- Bi-weekly average CRR for DFIs on their total DTL is 1%.
- Similarly, banks are required to maintain 5 percent as cash reserve and 15 percent as special cash reserves against foreign currency deposits.
- For the purpose of applicable DTL for CRR, Time and Demand Liabilities (TDL) as of close of business on Friday (first day of reserve maintenance period) is taken into account for determination of required CRR. If Friday is a holiday then TDL as of close of business on preceding working day is taken into account.
- It is also pertinent to mention that SBP does not remunerate required or excess reserves.
- SBP serves as an agent of Government of Pakistan for managing domestic public debt. SBP is responsible for conducting auctions of marketable government securities (MTBs, PIBs and GIS) and managing certain public debt data. SBP also regulates Primary Dealers of government securities.
- SBP aims to improve liquidity in the debt market of government securities by improving price discovery and diversifying investor base, and to channelize savings of the end investors directly to debt instruments by bringing more efficiency in banks’ intermediation process.
- Public debt markets are markets for raising funds for the government from local and foreign investors through debt instruments. In Pakistan, these include MTBs, PIBs, GIS, National savings instruments, Eurobonds, International Sukuk, etc.
- An efficient market of government securities allows better price discovery, enhances investors’ interest and reduces cost of borrowing for the government.
- MTBs: MTBs, also commonly known as ‘T-bills’, are short-term, highly liquid government securities issued in 3, 6 and 12 months tenors. The auctions of MTBs are conducted fortnightly (on Wednesdays). The auction and settlement dates, target amount and maturity amount are issued through pre-announced auction calendars.
- PIB: PIBs are medium-to-long term government securities issued in 3, 5, 10 and 20 years tenors. The auctions of PIBs are conducted on the basis of pre-announced auction calendars. The calendar provides the details of auction and settlement dates, target amount and maturity amount.
- GIS (FRR & VRR): GIS are Shariah compliant Islamic debt instruments currently issued in 3-year tenors. GIS may be issued on the basis of Variable Rate Rentals or Fixed Rate Rentals.
Details of government securities are available in Investor Guides:
MTB: http://www.sbp.org.pk/dmmd/Guidelines/MTB.pdf
PIB: http://www.sbp.org.pk/dmmd/Guidelines/PIB.pdf
GIS: http://www.sbp.org.pk/dmmd/Guidelines/Sukuk.pdf
- SBP conducts multiple-priced auctions of marketable government securities on behalf of GOP on the basis of a pre-announced auction calendar. The auction calendar is decided by the GOP and circulated by SBP to the market. MTB auctions are conducted on fortnightly basis, while PIB auctions are conducted on need basis. The auctions are conducted on Wednesdays and the settlement takes place at T+1 i.e. the following Thursday. Primary Dealers (PDs) of government securities are allowed to participate in the auctions of government securities.
- The auction calendar provides auction and settlement dates, maturing amount and auction target amount. The calendar is issued every month for the next three months on rolling basis on SBP website, Bloomberg and Reuters.
- The auction results cut-off yields/ accepted amounts are decided by the GOP and circulated to the market by SBP on the same day on which the auction is conducted.
List of PDs/PPDs/SPDs for FY 2023-24:
| Sr.# | Name |
|---|---|
| Primary Dealer | |
| 1 | Bank Al-Falah Limited |
| 2 | National Bank of Pakistan |
| 3 | Habib Bank Limited |
| 4 | Habib Metropolitan Bank Limited |
| 5 | United Bank Limited |
| 6 | The Bank of Punjab |
| 7 | MCB Bank Limited |
| 8 | Pak Oman Investment Company Limited |
| 9 | JS Bank Limited |
| 10 | Citi Bank - Pakistan |
| Special Purpose Primary Dealer | |
| 1 | Central Depository Company Limited |
| 2 | National Clearing Company Of Pakistan |
Since May 1999, Pakistan has been following a market-based flexible exchange rate system. Inter-bank rate applies to all foreign exchange receipts and payments both in the public and private sectors. Exchange rate is determined by the demand and supply conditions in the domestic interbank foreign exchange market.
– All foreign exchange requirements for all approved purposes, including imports, services and debt repayment are met by the authorized dealers that form the inter-bank market. The authorized dealers are not required to approach the SBP for release of foreign exchange for any purpose, nor are they required to surrender it to the SBP. Each authorized dealer is free to fix their own buying and selling rates. The SBP does not provide forward cover to the authorized dealers. However, authorized dealers may provide forward cover for exports, imports and other permitted transactions, in accordance with the conditions prevailing in the market.
Foreign Exchange Act 1947 authorizes State Bank of Pakistan to manage country’s foreign exchange reserves. As an agent to the Government, the Bank has been authorized to purchase and sale gold, silver or approved foreign exchange and transactions of Special Drawing Rights with the International Monetary Fund under sub-sections 13(a) and 13(f) of Section 17 of the State Bank of Pakistan Act, 1956.
– As the custodian of country’s external reserves, the State Bank is responsible for the management of the foreign exchange reserves and repayment of external debts. The reserves management task is being performed by an Investment Committee which, after taking into consideration the overall level of reserves, maturities and payment obligations, takes decision to make investment of surplus funds in such a manner that ensures prudent management of Foreign Exchange Reserves with core objective of; Safety, Liquidity and Optimum Return.
State Bank has allowed limited number of derivative products (swaps and options) to the derivative market participants with certain reporting and disclosure obligations and the market is used only for hedging purpose.
State Bank of Pakistan allows four types of derivative instruments namely:
“Authorized Derivatives Dealer (ADD)” are institutions that are licensed by SBP to undertake certain derivative transactions. There are currently the following 07 Authorized Derivative Dealers in Pakistan:
Non-Market Maker Financial Institutions are financial institutions that execute derivatives transactions with its customers with the intention to make a spread. It does not undertake any Market Making and covers the transaction on a back-to-back basis. There is currently only one NMI I.e. The Bank of Tokyo-Mitsubishi UFJ, Ltd. (FX Options Only)
Financial Derivatives Business Regulation is a framework formulated to permit, regulate, and supervise financial institutions entering into derivative transactions. Financial institutions are required to obtain approval from the State Bank of Pakistan before engaging in derivatives and would be subject to supervision and scrutiny from the State Bank of Pakistan as a supervisory authority.
The State Bank of Pakistan may suspend or withdraw the status of a Financial Institution as an NMI or an ADD to carry out Derivative Business if it finds that the financial institution is in violation of these regulations. The FDBR discusses the permissible derivative transactions for ADDs/NMIs.
