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| Monday, 20 September 2004 |
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Corporate customers keen on RTGS system by Rose Matilda Siriwardhana, How important is the RTGS System in the national payment and settlement system? The RTGS System has been used for settlement of transactions in all financial markets and the settlement of net clearing balances of retail level payment systems such as cheques and Sri Lanka Interbank Payment System (SLIPS). The rupee leg of forex market transactions too are settled in the RTGS System. More than three fourths of those non-cash payments of the country are settled in the RTGS System and accordingly has gained the position as the country's most important payment system. The average value of the payments settling in a payment system could be considered as an indicator of its usage. Though there is no minimum size restriction on RTGS payments, about 87 percent of transactions settled in the system during its first year of operations were large value transactions above Rs.1 million. The average value of a transaction was high as Rs.102 million. In addition, the total value of transactions settled in the system is another indicator of its usage. The total value of RTGS payments settled in a day in average was Rs.56 billion. The highest total value of transactions recorded in a day amounted to Rs.108 billion. During the first year of its operations, payment flows amounting to about Rs.13,250 billion settled through the RTGS System. This was roughly eight times higher than the gross domestic product in last year. The total transactions behind this value may be much larger as it settled net clearing obligations or claims of clearing systems of retail payment instruments. Corporate customers who are keen in managing their funds efficiently have moved to RTGS payments and have contributed to one third of the value of RTGS payments. Large value transactions which were sent through the SLIPS are now sent through the RTGS System. Typically, the number of transactions settled in a large value payment and settlement system is relatively small compared to a retail payment, clearing and settlement system. The average number of transactions settled per day during its first year of operations was 550 and the highest daily volume recorded was 810. Has the Delivery versus Payment mechanism benefited the payment and securities settlement system? The integration of the RTGS System with LankaSecure in February 2004 provided a unique single infrastructure to facilitate Delivery vs Payment (DvP) settlement of government securities transactions. To understand how this has benefited the payment and securities settlement system one has to understand payment and settlement system of government securities market which existed before the introduction of LankaSecure. At that time, those who wanted to buy, sell or repo a government security had to deliver duly endorsed scrip securities and receive the payment in the form of a cheque, SLIPS or RTGS payment. In this process, one counterparty had to always part with the security pending the underlying payment or make the payment pending the physical delivery of the certificates. The delay in receiving the underlying payments and manual handling of securities involves numerous risks. It exposes the participants to the replacement cost risk in the event of non-delivery of securities. On the other hand, in the case of banks which were affected by the payments that failed to settle, the ensuing deals entered into by them in anticipation of such funds would also be adversely affected. Today, with the introduction of the integrated RTGS and Scripless Securities Settlement System (collectively known as "LankaSettle"), the process of issuing and settlement of securities has changed considerably and physical securities do not play such an important role in the government securities market. Participants are now in a position to handle a large volume of transactions relating to government securities in the secondary market at a rapid speed as the ownership of a security can change several times within a day. The Delivery vs Payment mechanism which ensures simultaneous settlement of payment and securities has eliminated potential credit risk i.e. the risk of the counterparty to a deal being unable to settle the payment or deliver the securities. How will the RTGS expand its activities in the near future? The number of RTGS participants now stands at 33 and other financial institutions such as licensed specialized banks and insurance companies have shown an interest in joining as direct participants of the system. The Central Depository System (Pvt.) Ltd, which is a fully owned subsidiary of the Colombo Stock Exchange, will soon join LankaSettle paving the way for a further integration of the capital market. This integration will allow the Colombo Stock Exchange to move its settlement of payments in respect of equity and corporate trades done at the Colombo Stock Exchange from a commercial bank to the RTGS System reducing the risks inherited in the present settlement system. This integration of major financial markets has a huge potential for participants to manage efficiently not only their cash flows but also their investments. Participating financial institutions are well placed to take advantage of this potential. It is important to stress that the participants need to take this opportunity to reassess the procedure involved in their own as well as their customer payments and securities settlement and their ability to make required changes, in order to achieve the desired business benefits. Participating financial institutions as a community has a great responsibility to increase awareness of the benefits of the RTGS system and to extend its services to institutions which make large and time critical payments but which do not enjoy the privilege of being a participant of the RTGS System. Further the participants have an important role to play in developing the market by extending awareness in outstation areas to the grass root level to leap-frog the country's government securities market by enhancing the depth and breadth of the securities market and creating a new generation of investors in government securities. (Concluded) |
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