UAE Central Bank to launch new overnight deposit facility

'This new facility will support banks operating in the UAE in proactively managing their day-to-day liquidity'

  
Vehicles stop at a red light in front of the main branch of UAE Central Bank in Abu Dhabi, January 29, 2013. Image used for illustrative purpose

Vehicles stop at a red light in front of the main branch of UAE Central Bank in Abu Dhabi, January 29, 2013. Image used for illustrative purpose

REUTERS/Ben Job

The UAE Central Bank said on Monday it would introduce a new overnight deposit facility as of July 12 to enable conventional banks operating in the UAE to deposit their surplus liquidity at the apex bank on an overnight basis.

In a statement, the CBUAE said the introduction of the Overnight Deposit Facility (ODF) is the first step towards implementation of the new "Dirham Monetary Framework" announced earlier this year.

"The ODF shall be the prime facility for managing surplus liquidity in the UAE banking sector prior to the launch of the Monetary Bills Programme and shall replace issuance of one-week Certificate of Deposits," the banking regulator said.

The proposed Monetary Bills Programme is aimed at draining surplus liquidity using government securities or central bank bills.

Abdulhamid Saeed, Governor of the CBUAE, said the introduction of the new facility is a reflection of the CBUAE's continuous efforts to achieve the objectives of its monetary policy and to foster money market developments in the UAE. "This new facility will support banks operating in the UAE in proactively managing their day-to-day liquidity and help in aligning overnight money market rates with the Base Rate in normal market conditions."

With the introduction of ODF, the general stance of the CBUAE's monetary policy shall be signalled through the interest rate of the ODF, which becomes the main policy rate of the CBUAE and will be referred to as the base rate. "Accordingly, the CBUAE expects that overnight money market rates should hover around the Base Rate under normal markets conditions."

The base rate, which will be anchored to the US Federal Reserve's Interest on Excess Reserves (IOER), should also provide the effective interest rate floor for overnight money market rates, the apex bank said.

The CBUAE said it would also be providing a variant facility of the ODF to cater for licensed financial institutions that carry on all or part of their activities and business in accordance with the provisions of Shariah rules. "Until this facility becomes operational, the CBUAE will continue to offer to these institutions the one-week commodity Murabaha-based Islamic Certificate of Deposits, which will be breakable on a daily basis."

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