KARACHI: The State Bank of Pakistan (SBP) has allowed development finance institutions (DFIs) to participate in open market operations (OMOs) to manage their liquidity.

Through this measure, DFIs can invest the excess cash and borrow the amount from the State Bank of Pakistan.

OMO – a monetary policy tool used by the SBP to inject or mop up funds based on liquidity needs, from the banking system through the purchase or sale of eligible securities.

In the event of OMO injections, the SBP lends funds to banks or primary dealers against eligible collateral to address the shortage of liquidity in the system. In OMO catch-up, the SBP sells VTTs to banks for funds to remove excess liquidity from the system.

Previously, only banks and primary dealers were allowed to participate in OMOs and DFIs were not eligible for OMOs.

On Tuesday, the State Bank amended its previous instructions, under which all scheduled banks and primary dealers are allowed to participate in OMOs in addition to allowing DFIs to participate in OMOs.

“Now, the SBP has decided to allow development finance institutions to participate in OMOs with a view to facilitating them in managing their liquidity,” said a circular issued on Tuesday.

Accordingly, DFIs would also be eligible to participate in OMOs in accordance with the instructions and procedure for OMOs under the terms and conditions of the SBP announced in the main OMO circular issued in July 2017.

With new guidelines, banks, DPs and DFIs are eligible counterparties for OMO transactions. For Bai Muajjal transactions, Islamic banks and specialized Islamic counters of conventional banks are eligible counterparties.

Industry sources said the move will help DFIs borrow from the SBP to meet their funding needs or store their excess cash for a short-term period.

As per SBP guidelines, Government of Pakistan Market Treasury Bills, Pakistan Investment Bonds and any other securities notified by the SBP are the eligible securities for OMOs. The SBP announces OMOs as and when market conditions require.

An eligible participant may submit up to three offers in a single OMO tenor. The minimum bid amount will be 100 million rupees and multiples of 50 million rupees. There are no restrictions on the SBP in terms of the duration of conventional OMOs. However, the SBP usually performs OMOs of shorter duration (eg, 7–14 days).

Copyright Business Recorder, 2022