Monetary policy lending operations: SBP unveils collateral, counterparty eligibility framework

KARACHI: The State Bank of Pakistan (SBP) on Thursday issued a framework for collateral & counterparty eligibility for monetary policy lending operations and Modaraba Based Financing Facilities aimed to further strengthen risk mitigation measures.

Based on duration and volatility estimates, SBP will apply the haircuts on the market value of government securities (determined using the applicable benchmark, ie, PKRV or PKFRV or PKISRV) offered as collateral for availing financing under its monetary policy lending operations or Financing Facilities including OMO-Injections and Ceiling Facility.

For the past one-year Sukuk were being issued in the Pakistan Stock Exchange and these securities were not being accepted for the Monetary Policy Lending Operations and Modaraba Based Financing Facilities. This framework will set the valuation of these Sukuks for the Monetary Policy Lending Operations and Modaraba Based Financing Facilities.

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Applicable haircut on up to 3-months Maturity (Residual) Buckets will be 0.2 percent, 3–6-month Maturity (Residual) Buckets 0.4 percent, 6 to 9 months at 0.6 percent, 9-month to one year 1 percent, 1–3 years 2 percent, 3–5 years 3.5 percent, 5-7 years a haircut of 5 percent, 7–10 years 7 percent and a haircut of 10 percent will be applicable on Maturity (Residual) Buckets of above 10-year.

In addition, Floating Rate instruments with quarterly coupon/rental will be subject to haircut of up to 3-month maturity bucket. Floating Rate instruments with semiannual coupon/rental will be subject to haircut of 3 to 6-month maturity bucket.

The SBP has issued a counterparty eligibility criteria for the purpose of extending financing under its Monetary Policy Lending Operations or Financing Facilities (OMO-Injections and Ceiling Facility).

As counterparty eligibility criteria the institution must be a regulated entity of the SBP and the institution must maintain a Current Account with SBP–BSC. The institution shall be a part of Pakistan Real Time Interbank Settlement Mechanism (PRISM).

Institutions compliant with all of the requirements will be classified into three groups including “Regular Participants,” “Watchlist Participants,” and “Ineligible Institutions.” Each category has distinct criteria and implications for participation in SBP’s lending operations and financing facilities.

Institutions that meet the minimum solvency and liquidity requirements set by SBP will be classified as “Regular Participants.” These institutions must fulfill the following conditions: Solvency Requirements: The Minimum Capital Adequacy Ratio (MCR), Capital Adequacy Ratio (CAR), and Leverage Ratio as prescribed by the SBP.

Liquidity Requirements: Institutions must meet the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR) as per the SBP guidelines. These institutions will continue to have full access to the SBP’s financial facilities without restrictions.

Institutions that fail to comply with the solvency and liquidity requirements will be placed on the “Watchlist.”

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