GLOBAL financial DEVELOPMENT REPORT 2013
Th e R o l e o f t h e S t a t e i n F i n a n c i a l I n f r a s t r u c t u r e
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Box 5.6 Reforming Large-Value Payment Systems to Mitigate Systemic Risk PAKISTAN The national payment system (NPS) in Pakistan has undergone major reforms during the past five years under the strong leadership of the State Bank of Pakistan (SBP). This has been a complex project comprising the modernization of the infrastructure for wholesale and retail payments, the modernization of the legal and regulatory framework for payment systems and instruments, and the introduction of innovative solutions in the provision of payment services for the underserved banking population. This box first describes the new features the SBP introduced in the large-value payment system as a result of the reform and then highlights various roles the SBP performs to ensure the smooth and secure functioning of the country’s national payment system. Launch of PRISM In July 2008, the SBP launched the Pakistan Real Time Interbank Settlement Mechanism (PRISM) to better cope with systemic risk associated with largevalue payment systems. PRISM is a real-time gross settlement (RTGS) system. Before the introduction of PRISM, financial market transactions and largevalue government payments used to be processed through checks and settled on a multilateral net basis once a day. In such a system, if multilateral credit exposures are not managed properly, the system’s participants can be exposed to considerable credit risk. The shift from end-of-day to intraday settlement and the gradual introduction of time-critical payments has considerably increased liquidity needs in PRISM. Opening balances and funds received from other participants during the operational day are the main sources of liquidity for participants in PRISM. In addition, the participants can use the cash reserve requirements and statutory liquidity requirements they hold in accounts with the SBP to make payments during the day in the RTGS system. These funds are available free of charge. Several mechanisms have been put in place to better manage liquidity risks in PRISM. The system offers centralized queuing whereby payments that cannot be settled immediately because of lack of sufficient funds in the settlement accounts of participants are placed in a central queue. A gridlock resolution mechanism is another tool used in the system to facilitate timely settlement of payments and
mitigate liquidity risk. In addition, PRISM generates and sends participants liquidity alerts, followed up by phone calls to the banks to arrange the required funds from the interbank market. In the second year of PRISM, the SBP introduced intraday liquidity facilities, a credit from the SBP to participants in PRISM for the settlement of payments. It is available only on a fully collateralized basis against approved government securities as specified by the SBP. As an operator of the large-value system, the SBP, during the reform process, paid increasing attention to the operational reliability and security of PRISM, fixing the security policies and operational procedures in a number of normative documents and instructions. Business continuity–related activities for PRISM have been established and documented as well. Procedures are in place for periodic backing-up and storing of data. A secondary processing site has been established, and full system recovery is expected in 30 minutes to four hours with no data loss. In addition, the SBP has developed requirements and recommendations for system participants to have in place the necessary business resumption and recovery tools. Various roles of the SBP Clearly, the SBP played a vital role in reforming the national payment system and continues to play various roles to support the system’s functioning. First, the SBP is the operator and owner of the RTGS system. It also operates the securities settlement system and the central depository for government securities (which is part of PRISM). Second, the SBP provides safe settlement assets for all interbank payments settled through the RTGS system by maintaining and managing settlement accounts for all participants in PRISM. Third, the SBP is responsible for the regulation and oversight of all recognized payment systems and payment instruments in the country. As part of its oversight role, the SBP has been working continuously to ensure that the overseen systems comply with international standards and best practices, such as the Committee on Payment and Settlement Systems’ “Core Principles for Systemically Important Payment Systems” and the Committee on Payment and Settlement Systems, and International Organization of Securities Commissions’ “Recommendations for Securities Settlement Systems.” In addition, the SBP supported the government in establishing the Pakistan Remittance Initiative, and played a (Box continues next page)