Monitoring and Surveillance
Maintaining Stability in Money and Foreign Exchange Markets
The Central Bank is responsible for maintaining stability in the money and foreign exchange markets
Inter-bank Call Money Market
The inter-bank call money market is predominantly an overnight market and serves commercial banks in meeting their immediate liquidity needs and reserve deficiencies. Hence, an important task of the call money market is to facilitate liquidity management in the inter-bank market.
Orderly and stable functioning of the inter-bank call money market is important to maintain the short term interest rates while minimising the liquidity risk in the banking system as a whole. Stability of the market is supported by the provision of standing deposit and standing lending facilities by the CBSL at its policy interest rates. Policy interest rates of the CBSL – i.e. the Standing Deposit Facility Rate (SDFR) and Standing Lending Facility Rate (SLFR), provide lower and upper bounds, respectively, for short-term interest rates, while forming standing rate corridor for the inter-bank call money market. Thus, the corridor limits the potential large fluctuations in the short-term interest rates in the market.
Changes in the CBSL’s policy interest rates have an immediate effect on interest rates in the inter-bank call money market. Changes in the call market rates could lead, within a very short period, to changes in other short-term money market interest rates, such as the yield on Treasury bills, commercial paper and the short-term lending rates of banks. These changes could, with a time lag, affect the medium-term lending and deposit rates of banks, and other lending institutions as well as other market yields. The inter-bank market rate makes frequent adjustment as per the liquidity in the banking system.
Frequent fluctuations of inter-bank call rates even within the boundaries of the standing rate corridor is not desirable as such changes could inflict larger volatility in other market rates/prices which uses interbank call rate as the benchmark. The CBSL generally prefers market liquidity to be at levels that facilitate minimal fluctuation in the overnight call market rate. Slight shortage in market liquidity generally makes it easier for the CBSL to steer the interest rates as the borrowing banks would have to borrow under the SLFR. Surplus liquidity will not require LCBs to stick to such conditions. The CBSL conducts its open-market operations by way of Repo/Reverse Repo and outright Sale/Purchase auctions for a determined amount, in order to inject or absorb market liquidity and thereby to reduce undesirable fluctuations in the inter-bank call money market rate. The magnitude of the CBSL intervention depends on the overall liquidity excess or shortfall, prevailing interest rate level as well as the macroeconomic environment of the country.
Inter-bank Call Money Market
||Average Weighted Call Money Rate Range
||Daily Average Transactions Volume (Rs. bn)
||7.61% – 9.84%
||5.72% - 7.68%
|2015 (Up to May)
||5.80% - 7.00%
Treasury Bill Market
The Treasury bill market is another segment of the Money Market. Treasury bills are highly liquid money market instruments that provide financial institutions with an alternate source of liquidity and investment. Furthermore, interest rate movements in the Treasury bill market provide a benchmark for the short-term credit market. Hence, changes in the volumes and rates in the Treasury bill market affect the cost, profitability and liquidity of financial institutions. Secondary market transactions in Treasury bills amounted to Rs. 1,547 billion for outright transactions and Rs. 13,514 billion for repurchase transactions at the end of December 2014. Treasury bills are also the main securities used as collateral by the Central Bank in the conduct of its open market operations.
Foreign Exchange Market
The domestic foreign exchange market in Sri Lanka is two- fold, namely, the client or retail market and the inter-bank or wholesale market. Retail market includes transactions involving individual or institutional customers while the inter-bank market is mainly organized among authorized dealers in forex exchange, which comprises all licensed commercial banks. The Inter-bank market helps to manage foreign exchange liquidity within the banking system through currency conversion.
There are two main functions in foreign exchange market, one is to convert currency of one country into a currency of another and second is to help minimize the risks arising from changes in the exchange rate through various derivative products. Above features of the foreign exchange market facilitate funding imports, converting export proceeds and other foreign currency transactions.
The main risk in the foreign exchange market is the volatility in the exchange rate, i.e., undue fluctuations in the rate at which one currency is converted in to another currency. If the volatility is excessive it would create instability in the foreign exchange market and thereby would affect the value of foreign currency assets and liabilities of individual institutions. There are derivative instruments available in the foreign exchange market such as swaps, options and forwards which help minimize the risk of exchange rate volatility.
Transactions in the foreign exchange market are carried out on cash basis or Tom basis or spot basis or forward basis. Cash basis is for immediate delivery of purchases/sales of a foreign currency on the same day (Cash basis), the next business day (Tom basis) or within two business days (Spot basis). The forward basis is for the purchase/sale of a foreign currency at a price specified now with the delivery and settlement at some future date exceeding two business days. The domestic inter-bank foreign exchange transaction volumes in 2014 totaled to US dollars 15,477 million while the daily average transaction volume in 2014 was recorded as US dollars 64 million.
Sri Lanka has a floating exchange rate system since 2001 which allowed the independent adjustment of the exchange rate according to the market forces of demand and supply. However, there could be interventions in the market for the purpose of curbing excess volatility in the exchange rate. The CBSL prescribes maximum net open position (NOP) limits for LCBs and closely monitors the activities in the domestic foreign exchange market to ensure an orderly functioning of the market.
Overseeing the Payment and Settlement System
Payments and Settlements Systems (PSSs) enable the transfer of money in the accounts of financial institutions to settle financial obligations between individuals and institutions. PSSs in Sri Lanka have evolved gradually in both wholesale and retail areas as an outcome of the application of new technologies and efforts of participants to transform the payments systems landscape in line with the global developments in PSSs. The potential consequences of a disruption to operations of PSSs are substantial and widespread and could lead to systemic disruption and financial shock even beyond PSSs and participants of such PSSs, which could adversely affect the stability of the financial sector. Therefore, in order to maintain payment and settlement system stability to ensure financial system stability, CBSL strengthened the regulatory and supervisory framework to maintain secure, reliable and efficient PSSs in the country.
The CBSL performs three key roles in the PSSs namely,
1. regulation, supervision and monitoring of payments, clearing and settlements systems,
2. operating systemically important payment and settlement systems, and
3. formulating a national payment policy and facilitating the development of PSSs and related infrastructure.
• The Payment and Settlement Systems Act. No. 28 of 2005 (PSSA) provides for the regulation, supervision and monitoring of payments, clearing and settlement systems, the regulation of providers of money services and the electronic presentment of cheques in Sri Lanka.
Payment Card and Mobile Payment Systems Regulations No. 1 of 2013, which was issued under PSSA, provides for the regulations of issuers of payment cards, financial acquirers of payment cards, operators of customer account based mobile payment systems and operators of mobile phone based e-money systems.
LankaSettle - Real Time Gross Settlement(RTGS) System and LankaSecure
The CBSL operates LankaSettle System, the systemically important high value payment and securities settlement system. The LankaSettle System has three components i.e. the Real Time Gross Settlement (RTGS) System (which processes large value and time critical payment instructions), the LankaSecure System (Scripless Securities Settlement System) and Central Depository of Securities. The integration of the RTGS System and the LankaSecure System provides the most secured securities settlement mechanism based on Delivery versus Payment (DvP) for scripless securities transactions. Participants of the LankaSettle System, at the end of 2014 were the CBSL, 25 LCBs, 8 Non Bank Primary Dealers, the Employees’ Provident Fund (EPF) and the Central Depository System of the Colombo Stock Exchange (CSE). The LankaSettle and LankaSecure Systems are operated by the Payments and Settlements Department (PSD) and the Public Debt Department (PDD) of the CBSL, respectively.
Real Time Gross Settlement System
The RTGS System is an electronic fund settlement system which processes and settles each payment instruction individually and irrevocably on real time basis using funds in the participants’ Settlement Accounts in the RTGS System. The value of transactions settled in the RTGS System accounts for about 85 per cent of the non-cash payments in Sri Lanka. The majority of RTGS transactions are relating to: transactions in the inter bank call money market, Government securities markets, Open Market Operations, the Rupee leg of transactions in the foreign exchange market, urgent payments of customers and net obligations under the clearing systems operated by the LankaClear (Pvt) Ltd (LCPL), a company jointly owned by the CBSL and the LCBs.
As a measure of mitigating the settlement risk, the CBSL provides Intra-day Liquidity Facility (ILF) to participating LCBs and Primary Dealers (PDs), free of charge against collateral of scripless securities in the LankaSecure System. The average value of ILF granted by the CBSL per day during 2014 was Rs. 21.3 billion.
The RTGS System settled an average of 1,314 transactions per day in 2014, with a daily average turnover value of Rs. 246 billion.
LankaSecure - Scripless Securities Settlement System (SSSS) and Scripless Securities Depository System (SSDS)
The LankaSecure System comprises of the Scripless Securities Settlement System (SSSS) and Scripless Securities Depository System (SSDS). LankaSecure facilitates the issue of Government securities and Central Bank securities in electronic or scripless form and settlement of trades of such scripless securities on a Delivery versus Payment (DvP) basis. Accordingly, transactions are settled in the system if the participant who sells securities has sufficient eligible securities in his Securities Account in LankaSecure and the buying participant has sufficient funds in his Settlement Account in the RTGS System to pay for the transaction. All securities transactions settled in the system are irrevocable.
The SSDS is the title registry as well as the custodian for Government securities. The ownership of securities is recorded to the beneficiary level in the SSDS. The holders of scripless securities in the SSDS can obtain up to date details of their investments at any point of time through LankaSecureNet, an internet based facility.
During the first half of 2009, LankaSecure settled about 57 DvP transactions per day. The average number of Delivery Free transactions settled in the system amounted to 48 a day, while transactions relating to repositioning of securities accounted for about 1969 transactions per day.
Cheque Imaging and Truncation (CIT) System - Interbank Cheque Clearing
The CBSL provides facilities for the clearance of retail payments, such as cheques, bank drafts and off line fund transfers. In 2002, CBSL authorized LCPL, to provide cheque clearing facilities. The average number of cheques cleared by LCPL in 2014 was 198,561 cheques per day, while the average value of cheques cleared amounted to Rs. 32 billion per day. The total value of cheques cleared through the cheque clearing system represented 12 per cent of the total value on non cash payments.
In May 2006, LCPL introduced the Cheque Imaging and Truncation (CIT) System, which facilitates the electronic presentment of cheque images and clearance of cheques. The CIT system introduced a uniform cheque clearing time schedule of T+1 (where T is the day on which LCPL receives the cheque for clearing and 1 is the following business day) throughout the country, enabling LCBs to credit proceeds of cheques to their customers' accounts on the following business day. Under this system, dishonored/returned cheques have been replaced with a Cheque Return Notification (CRN). The net clearing balances under the CIT system are settled in the RTGS System at 8.30 a.m. while net balances of the Settlement Clearing of the CIT System (which handles CRNs) are settled in the RTGS System at 2.45 p.m. on each business day.
Technological improvements carried out to CIT System enabled LCPL to extend the cut-off time for accepting cheques for T+1 clearing and advance the inward return submission cut-off time thereby enhancing the efficiency of the CIT System. Accordingly, island-wide minimum cut-off time for collection of cheque deposits for T+1 clearing was extended to 3.00 p.m. while cut-off time for crediting proceeds of cleared cheques to the beneficiaries amounts was advanced to 2.30 p.m. with effect from December, 2013. Cheque Return percentage is around 4.0 per cent at the end 2014, maintaining a downward trend of cheque returns.
Sri Lanka Interbank Payment System
Sri Lanka Inter Bank Payment System (SLIPS) was introduced in 1993 by the CBSL, as an off line retail fund transfer system. With the establishment of LCPL, operations of SLIPS were handed over to LCPL in 2002. SLIPS handles pre -authorized small value bulk payments (direct credit and debit transfers). In 2010, SLIPS was upgraded with enhanced features and security to an on-line interbank payment system to facilitate settlement of transactions on T+0 basis in 2 processing cycles daily. Accordingly, SLIPS Transactions are cleared electronically on a multilateral net settlement basis and interbank net balances arising from SLIPS transactions are settled in the RTGS System in two cycles i.e. at 8.30 a.m. and 3.00 p.m. on each business day. During 2014, the daily average value of transactions cleared through SLIPS was 3.7 billion. At the end 2014, 35 financial institutions participated in the SLIPS either as a primary or secondary participant.
Rupee Draft Clearing System and US Dollar Cheque Clearing System
LCPL also operates a Rupee Draft Clearing System and US Dollar Cheque Clearing System. In the Rupee Draft Clearing System, cheques and drafts of foreign banks drawn on their 'nostro' accounts with Commercial Banks in Sri Lanka and in favour of customers of Commercial Banks in Sri Lanka are cleared manually by LCPL. The net clearing balances of this system are settled at the RTGS at 2.15 p.m. on each business day. The daily average value of cheques cleared by this system was Rs. 1.5 million in 2012.
The US Dollar Draft Clearing System was launched by LCPL in 2002 and is a semi computerised clearing system for cheques and drafts denominated in US Dollars issued by LCBs in Sri Lanka and payable to Sri Lankan individuals and institutions, and issued by banks exchange houses abroad and drawn on LCBs in Sri Lanka. This system reduced the time lag for clearing and settlement of US Dollar cheques and drafts of aforementioned categories from 3 weeks to about 4 days and the clearing fees charged by banks significantly. The settlement of inter bank clearing balances of the US Dollar Cheque Clearing System takes place through the accounts of participants maintained in a LCBs. A daily average of 248 cheques worth of US$ 1,054,665 was cleared by the system in 2014.
Equities Trading System and Debt Securities Trading System
The Colombo Stock Exchange operates two on- line systems: i.e. the Automated Trading System (ATS) for real time trading of equity (shares) and the Debt Securities Trading System (DEX) for trading of beneficial interest of Government Securities and corporate debt securities. Stockbrokers licensed by the Securities Exchange Commission (SEC) perform as direct participants in the ATS and DEX. At the end of December 2014, there were 29 direct participants, 15 member firms and 14 trading members permitted to trade in the DEX system.
Common ATM Switch
Common ATM Switch (CAS), the first phase of the Common Card and Payment Switch, is operated by LCPL under a recommendation of the National Payments Council and the approval of the CBSL. ATM /Debit cardholders of the member banks of CAS are able to use any ATM terminal of such banks across the country for withdrawing money or inquiring account balances. CAS is linked to ATM switches of member banks to facilitate transaction switching from ATMs of CAS members. CAS started live operations on 23 July 2013 and as at end May 2015, there were eleven banks joined the CAS. The net clearing balances of CAS are settled in the RTGS System at 8.45 a.m. and 3.00 p.m. on each business day.
Payment Cards and Mobile Payment Systems
Payment Cards and Mobile Payment Systems Regulations No. 1 of 2013 (Regulation) provide CBSL with the necessary authority to regulate service providers of payment cards and mobile payment systems in Sri Lanka. As per the provisions of the Regulation, no person can engage in the business or function as a service provider of payment cards or mobile payment systems except under the authority and in accordance with the terms and conditions of a licence issued by the CBSL. Accordingly, at the end of May 2015, CBSL had 29 licences issued to institutions to function as card issuers and further 9 licenses issued to institutions to function as financial acquirers. In addition, licences were issued to 10 financial institutions and 2 mobile network operators to function as operators of customer account based mobile payment systems and operators of mobile phone based e-money systems, respectively.
Surveillance of Financial Conglomerates
The existence of large financial conglomerates, especially those that have banks as part of the conglomerate, is another area that has attracted increased supervisory concern in recent times. The regulation and supervision of such financial conglomerates is becoming increasingly more important and complex, due to the potential systemic risk that could arise from the interrelated nature of their activities. Large numbers of cross shareholdings, common directors and inter company transactions are areas that are of key interest in this regard, as it could result in conflicts of interests and abuse of power, which would not augur well for the stability of the financial system.
Since there are multiple regulators in the financial system, the supervision of conglomerates often falls under the purview of several regulators, requiring close co-operation and supervision.
Therefore, a Working Group of Regulators for Financial Conglomerates comprising of the Central Bank, the Insurance Board of Sri Lanka, the Securities and Exchange Commission of Sri Lanka, the Accounting and Auditing Standards Monitoring Board and the Department of Registrar of Companies has been established to monitor the systemic risk of conglomerates. The mandate of this working group includes identifying and defining financial conglomerates; identifying the functions of the separate regulators; assessing the systemic risk of such conglomerates by sharing necessary information among regulators, recommending a course of action for regulation and supervision of the respective institutions in a consolidated manner; and proposing necessary legal reforms to address the existing limitations relating to regulation and supervision of financial conglomerates.
Lender of Last Resort
In situations of emergency or imminent systemic banking or financial crisis, the Central Bank may provide loans against accepted collateral, to illiquid but solvent banking institutions. This facility is commonly known as the "lender of last resort facility".