Mr. Stals discusses the transformation of the national payment and interbank settlement systems  (Central Bank Articles and Speeches, 1 Apr 98)
Central bank: sarb | Type: speech | Date: 1998-04-01

Mr.

Stals discusses the transformation of the national payment and interbank settlement systems Address by the Governor of the South African Reserve Bank Dr. Chris Stals, at the Fifteenth Payment Systems International Conference, Sun City, 1

## 1.

BackgroundThe political reforms in South Africa over the past five years opened up t for major changes in the South African financial sector.

With the removal of sanctions disinvestment campaigns and the withdrawal of foreign loan funds from South Africa challenge was extended to reintroduce the South African financial markets in the environment.

This reintegration took place at a time when the international mark changed drastically, and when the trend towards financial globalisation gained momentumDuring the past four years, many international financial institutions est themselves in South Africa to participate in the expansion of the South African markets there are about 25 foreign banks with established branches or subsidiaries, and abou representative offices operating in South Africa, competing with and supplementing the of about 40 local banks.

Many other international fund managers and financial brok entered the South African market.

Many South African banks and other financial institu the other hand, established themselves in other African countries and in the rest of thExplosive increases occurred in the volume of transactions in the South A financial markets.

Total turnover in the secondary bond market increased from R2,300 b 1995 to R4,600 billion in 1997.

The total value of shares traded on the Johannesbu Exchange increased from R63 billion in 1995 to R207 billion last year.

The averag turnover in the South African market for foreign exchange last year exceeded US $10 During the first three months of 1998, non-residents increased their holdings of Sout securities (shares and bonds) by about R17 billion.These greater volumes brought with them greater risk exposures, and theref need for more sophisticated and modern risk management procedures.

Financial regulati supervision in South Africa had to introduce internationally recognised princip procedures, e.g. the Basle Committee directives for bank regulation.

Modern electro processing and communication systems had to be introduced.

It also became necessa review the national payment, settlement and clearing system.Against this background, the South African Reserve Bank took the initiati April 1994, together with the banking industry, to reform the South African National System.

The problem was approached on an all-inclusive national level and a strate formulated to upgrade the existing South African payment system to comply with world standards.In May 1994, a strategy-formulation team, consisting of representatives Reserve Bank and the banking community, was established.

A collaborative consensus bui approach was adopted.

The Reserve Bank acted as facilitator, and it took the ta approximately 14 months to produce a first draft of a proposed strategy for the upgrad NPS.

This document was intensely discussed amongst the many stakeholders before it finally presented to the South African Council of Banks (COSAB), for approval.

The doc entitled the South African National Payment System:

Framework and Strategy, which become known as the blue book, is widely recognised as a product of the South African bindustry and its recommendations are accepted as the basis for the official strategy fo of the payment system.The National Payment System Framework and Strategy identified the lack of sophisticated electronic settlement process as a major shortcoming in the South African system.

To this end a strategy was formulated to introduce an online central bank s system that would enable banks to effect interbank fund transfers electronically and in when required.

## 2.

Development of a new electronic interbank settlement systemThe project to implement a new electronic interbank settlement system identified as the cornerstone for the introduction of a new national payment-pr infrastructure.

The South African Multiple Option Settlement (SAMOS) system, introduc 9 March 1998, was developed over a period of two years as a collaborative venture betw Reserve Bank, private banking institutions, and the technology suppliers.

The system u a new era in electronic payment and settlement in South Africa and will have a major i the future development of the national payment system.

Furthermore, the new syste already enabled the Reserve Bank to introduce new operational procedures for the execu monetary policy.

Under these new arrangements, banks now participate in a daily te system, based on repurchase agreements (repos), to obtain funds from or repay funds Reserve Bank.

To this end, the settlement system became a convenient vehicle to e market liquidity needs and to facilitate payment flows, resulting from repo transaction the Reserve Bank and the banks.

## 2.1 Features of the new settlement systemThe introduction of the new interbank settlement system represents a majo engineering

of the way in which banks exchange value amongst themselves.

It prov participating banks with a range of additional functions and business opportunities, in

## · Online real-time link between participating banksAll banks participating in the new system are linked to an online rea network provided by the Reserve Bank.

These banks are able to link to Reserve Bank service either directly or via Swift, the highly s international funds transfer mechanism.

The system enables banks exchange payment messages with the Reserve Bank and, through the Reserve Bank, between themselves.

## · Secure high value fund transfers between participating banksThe

SAMOS system processes all fund transfer messages received by th Reserve Bank.

SAMOS will eventually enable banks to effect their paymen in real time through a fully auditable and robust system.

The syste provide a highly secure vehicle for interbank payment flows and ensure authenticity and non-repudiation of all transactions.

All fund transfer final and irrevocable and processed successfully by the system.

This w accomplished by effecting payment transactions directly on the settle accounts of banks held in the Reserve Bank.

## · Settlement risk reduced by prefundingThe

risk of settlement failure by any individual participating bank is through application of the principle of prefunding.

A request to the sy transfer funds will therefore be carried out only if the bank issuing transfer instruction has sufficient funds in its settlement account; othe instruction will be rejected.

This implies that banks cannot build up exp one another within the system.

All funds transferred are irrevocable, underlying transactions can thus be finalised during the course of the b day, as and when the bank and the customer require.

## · Collateral managed dynamicallyThe system operates on the principle of full collateralisation of all intra Banks

can reserve financial instruments to be used as collateral shoul require additional funding during the day.

These instruments have to electronic form, that is immobilised at either the Central Depository (CD the Financial Instrument Register (FIR) of the Reserve Bank.

Should a ban have sufficient funds in its settlement account to carry out a fund-transfe the system will automatically determine whether the bank has any finan instruments available to be pledged as collateral for a Reserve Bank loan. is the case, the system will automatically raise a loan of the required against this collateral and transfer the funds necessary to process the fun instruction from the bank's loan account (or marginal lending facility) settlement account.

The SAMOS system will now be able to effect the transf funds to the receiving bank's settlement account.

This process will be co without any manual intervention.

The borrowing bank can revert to the next tender opportunity to redeem the out-standing amount on its marginal len facility.The introduction of the new system will have a significant impact on pay clearing and settlement transactions in South Africa.

Numerous changes already been made to existing practices, processes, arrangements and agree and many will be made during the further implementation phases of the sys Banks, clearing houses, other payment system intermediaries and corpor customers of banks will need to modify and enhance their systems if they wi obtain maximum benefits from the new payment processing architecture.

## 2.2 The implementation scheduleThe system will be implemented in a number of phases.

The following dates h been set for the implementation of major milestones:DatePhase9/3/98Introduction of electronic end-of-day settlement through SAMOSThe SAMOS system and the interbank settlement network SARBLINK to facilitate the end-of-day settlement process were activated as from 9 March Although the system is now fully functional and the banks are able to tr funds during the day, settlement finality as at this stage is only achieved

## 9/3/98 to3/10/98The banks will use the system during this interim period to monitor their l requirements for a trial period prior to the introduction of intraday final will also be able to bring their back-office systems in line with SAMOS in to enable them to capitalise on the opportunities provided by the new set options.

## 5/10/98 Introduction of immediate intraday finalityThe switch to intraday finality will mean that all settlement instructions by the SAMOS system will become final and irrevocable as and when they a received, if processed successfully.

The main implication of this step wil banks would need to monitor their positions in the SAMOS system carefully ensure at all times that they have sufficient funds or financial ins available to process their settlement instructions.

## To be

decidedMove of the end-of-day settlement process to same day To bring the So African settlement practices in line with international best practice the of-day settlement process needs to be effected on a same day basis.

The d this change will be negotiated with the banks taking due consideration impact this would have on their customers and operations.

## 2.3 Impact on the financial systemThe new settlement arrangements and the SAMOS system have placed the South African

settlement practices on par with international best practice and presented challenges and opportunities to the banking and non-banking sector.

Major changes inclu

## · Increased participationIn line with the philosophy of the new NPS, the interbank settlement s has been opened to enable more participation.

All registered South Af banks are eligible to participate in SAMOS.

The number of participa banks in the settlement process has already increased from 11 banks in t system to 21 banks in the new system.

The number of participants will probably increase significantly over the next few months.

## · Exposures monitored in real timeA participating bank can monitor its balances in the SAMOS system in r time.

In other words, the effect of any payments made or received b participant will immediately be reflected on the banks' position monito bank will thus be fully informed at all times of the position in its s account, intraday-loan account and the utilisation of collateral providof each day.

For the time being, end-of-day positions will still be settl morning of the next day.Determining the liquidity impact of real time gross settlementReserve Bank will be able to monitor the positions of all participating and the system as a whole.- Early warning signals of potential systemic crisisVarious system indicators will enable the Reserve Bank to ascertain whe any particular bank is experiencing difficulty in meeting its pay commitments.

This will enable the Reserve Bank to take pro-active step address a potential systemic crisis before it destabilises the payment s

## · Synchronisation of payment and deliveryThe fact that the SAMOS system will eventually provide intraday finalit settlement between banks will enable the financial markets to intro-duc practice

of delivery against payment.

The finality of payment achi through SAMOS can be synchronised with the delivery of immobilised scri thereby providing safe and secure financial market transactions.

## · Customer-to-customer funds transfers in real timeFinally,

the implementation of the SAMOS system and the interbank settlement network provides a key building block in the enhancement of payment services and products available to business and the general pu The new technological architecture introduced provides a vital link could enable the interlinking of payment networks and services on a nat basis in future, thereby creating endless permutations of payment servic products.

The opportunity for banks and non-banks to co-operate a collaborate in order to exploit the potential of SAMOS introduces a new the provision of payment products and services in South Africa.

## 3.

Payment system of the futureThe key to establishing the envisaged architecture was to create a highly and efficient settlement network between the Reserve Bank and banks.

The settlement n as introduced enables banks to transfer funds to one another, through their accoun Reserve Bank, in real time.

It can also be used to expand the national payments infrast interlinking the payment networks of banking institutions to the settlement network.

T enable corporate customers of banks, for example, retailers, to link their networks to payment infrastructure.

Other institutions such as the Post Office or any other entity provide payment services to the public could, through the intermediation of a bank, technological infrastructure to the national network.

This could theoretically allow a the public frequenting a point-of-sale device of a payment-service provider to transfer make payments to any other authorised participant who has access to the infrastructure.The introduction at a later stage of such an integrated payments network represent a major step towards safe and secure payments for the broad public and would the further modernisation of the financial system in South Africa.