Pakistan
Real Time
Interbank
Settlement
Mechanism:
An
Overview
RTGS Project
Management Office
State Bank of Pakistan
Pakistan Real Time Interbank Settlement Mechanism
The development of PRISM (Pakistan Real time Interbank Settlement
Mechanism) system started as a response to the growing awareness of the
need for sound risk management in settlement of large-value funds transfers
in Pakistan. PRISM systems operated by State Bank of Pakistan offers a
powerful mechanism for limiting settlement and systemic risks in the
interbank settlement process by providing settlement on Gross Basis and in
Real Time. In addition, PRISM also contributes to the reduction of settlement
risk in securities transactions by providing a basis for delivery-
versuspayment (DVP) mechanisms.
PRISM Participation: Participation in PRISM System is based on SBP’s
approval which after assessing the institutions financial standing and based
on a pre defined risk management criteria approves an institutions request
for Participation in PRISM System.
PRISM Components: PRISM System comprises of two major applications
i.e. RTS/X and Depo/X. RTS/X is funds transfer application operated
thorough software installed by SBP at Participant’s premises. Depo/X is
securities settlement web based application and is connected in Real Time
with RTS/X applications to ensure transaction in DvP basis.
Risks Handling in PRISM System:
The payments of interbank financial transactions are prone to Settlement risk
which refers to the risk that the completion or settlement of the interbank
funds transfer system as a whole, will not take place as expected. Settlement
risk comprises both credit and liquidity risks. Two major sources of these
risks are (a) a time-lag between the execution of the transaction and its final
completion and (b) a time-lag between the completion of the two legs of the
transaction (i.e. any lag between payment leg and delivery leg). Within
large-value funds transfer systems the first type of lag, which takes the form
of a settlement lag between the initiation of payment messages and their
final settlement, can be a major source of settlement risk. Settlement lags
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Pakistan Real Time Interbank Settlement Mechanism
create the possibility that sending banks could fail in the meantime or at
least not be able to settle their obligations when due. PRISM System however
offers the mechanism to settle transactions in Real Time throughout the day
therefore significantly reducing the time lag unlike the settlement system
where transactions are settled at the end of the day.
The second type of lag, sometimes referred to as asynchronous settlement,
is the largest source of principal risk in the settlement of securities
transactions, or, more generally, in exchange-for-value systems. This is the
risk that the seller of an asset could deliver but not receive payment or that
the buyer of an asset could make payment but not receive delivery, which
could entail a loss equal to the full principal value of the assets involved.
PRISM System however offer settlement of securities transactions on DVP
basis, which ensures that the delivery of securities occurs if and only if
payment occurs, thus providing a mechanism for eliminating such principal
risk.
Main features of PRISM System:
Real Time Gross Settlement
PRISM System is gross settlement system in which both processing and final
settlement of funds transfer instructions takes place continuously (i.e. in real
time). As it is a gross settlement system, transfers are settled individually,
that is, without netting debits against credits. As it is a real-time settlement
system, the system effects final settlement continuously rather than
periodically at pre-specified times provided that a sending bank has sufficient
covering balances or credit. Moreover, this settlement process is based on
the real-time transfer of central bank (i.e. State Bank of Pakistan) money.
Payment processing: Main features of payment processing in PRISM
System are as follows:
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Pakistan Real Time Interbank Settlement Mechanism
1. Queuing: PRISM System temporarily keeps the transfer orders in its
central processor (centrally located queues) if the covering funds are not
sufficient for settlement. In this case, the pending transfer’s instructions
are queued and are released for settlement when covering funds become
available on the basis of FIFO plus Priority principal. The management of
queues can be carried out by banks individually or /and State Bank.
2. Priority: Participant in PRISM system can assign different priorities to
their payments based on criticality of the payment. Priorities ranging from
10 to 99 can be assigned to payments by the PRISM Participants. For
details please see PRISM Operating Rules.
3. Gridlock: PRISM system is also equipped with the Gridlock resolutions
mechanism which when activated by SBP can offset large number of
transactions on individual basis by reprioritizing payments in queue using
different algorithms.
ILF (Intraday Liquidity Facility): ILF is an intraday liquidity facility offered
to facilitate settlement. ILF is a fully collateralized liquidity facility extended
against approved government securities. For details please see PRISM
Operating Rules.
Retail Clearing Settlement: Multilateral Net Settlement Batches (MNSB)
for retail clearing prepared by NIFT is also settled in PRISM System.
Currently PRISM System settles three clearing batches (Normal, Intercity,
Same day) and one Return Batch (Same day Returns). Participants are
required to ensure Clearing Settlement within time limits imposed by SBP
from time to time.
Intraday Finality: Payments once settled in PRISM System are final and
final irrevocable. Finality of payments settle in PRISM System is protected
under Payment Systems & Electronic Funds Transfer Act 2007.
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Pakistan Real Time Interbank Settlement Mechanism
Message flow structures: Arrangements for routing payment messages in
the PRISM System is based on a so-called V-shaped message flow structure.
In this structure the full message with all the information about the payment
(including, for example, the details of the beneficiary) is initially passed to
the State Bank and is sent to the receiving bank only after the transfer has
been settled by the central bank.
Connectivity: There are only two possible ways of connecting any number
of participants in PRISM System i.e. wired and wireless. SBP is using both the
medium of communication for connecting the participant banks with SBP i.e.
the domestic private leased data circuit system and in parallel, radio
frequency bridged links in a licensed frequency spectrum except for those
banks whose treasuries are situated outside the metropolitan area of Karachi
which have been connected to SBP through point-to-point links. In order to
ensure operational and security management, monitoring as well as support
to all PRISM participants, the topology has been selected as to be stab, and
as a way forward this entire setup is managed through state-of-the-art
technology tools to achieve optimum business availability targets complying
with the adopted standards of IT management.
Cryptography: The confidentiality and integrity of information in the PRISM
system are ensured by securing transmission, delivery, and message storage
by validating messages and using state of the art 128K cryptographic
facilities.
Disaster Recovery: To overcome operational availability risks, a disaster
recovery site exclusively for the PRISM system has been made available
which synchronizes in real time with the primary PRISM site. A service
bureau also functions in SBP to facilitate as part of BCP.
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