Mr. Stals discusses the transformation of the national payment and
Address by the Governor of the South African Reserve Bank,
interbank settlement systems
Dr. Chris Stals, at the Fifteenth Payment Systems International Conference, Sun City, 1/4/98.
1. Background
The political reforms in South Africa over the past five years opened up the way
for major changes in the South African financial sector. With the removal of sanctions, boycotts,
disinvestment campaigns and the withdrawal of foreign loan funds from South Africa, the
challenge was extended to reintroduce the South African financial markets in the world
environment. This reintegration took place at a time when the international markets also
changed drastically, and when the trend towards financial globalisation gained momentum.
During the past four years, many international financial institutions established
themselves in South Africa to participate in the expansion of the South African markets. Today,
there are about 25 foreign banks with established branches or subsidiaries, and about 60 with
representative offices operating in South Africa, competing with and supplementing the activities
of about 40 local banks. Many other international fund managers and financial brokers also
entered the South African market. Many South African banks and other financial institutions, on
the other hand, established themselves in other African countries and in the rest of the world.
Explosive increases occurred in the volume of transactions in the South African
financial markets. Total turnover in the secondary bond market increased from R2,300 billion in
1995 to R4,600 billion in 1997. The total value of shares traded on the Johannesburg Stock
Exchange increased from R63 billion in 1995 to R207 billion last year. The average daily
turnover in the South African market for foreign exchange last year exceeded US $10 billion.
During the first three months of 1998, non-residents increased their holdings of South African
securities (shares and bonds) by about R17 billion.
These greater volumes brought with them greater risk exposures, and therefore a
need for more sophisticated and modern risk management procedures. Financial regulation and
supervision in South Africa had to introduce internationally recognised principles and
procedures, e.g. the Basle Committee directives for bank regulation. Modern electronic data
processing and communication systems had to be introduced. It also became necessary to
review the national payment, settlement and clearing system.
Against this background, the South African Reserve Bank took the initiative in
April 1994, together with the banking industry, to reform the South African National Payment
System. The problem was approached on an all-inclusive national level and a strategy was
formulated to upgrade the existing South African payment system to comply with world-best
standards.
In May 1994, a strategy-formulation team, consisting of representatives of the
Reserve Bank and the banking community, was established. A collaborative consensus building
approach was adopted. The Reserve Bank acted as facilitator, and it took the task force
approximately 14 months to produce a first draft of a proposed strategy for the upgrading of the
NPS. This document was intensely discussed amongst the many stakeholders before it was
finally presented to the South African Council of Banks (COSAB), for approval. The document,
entitled the South African National Payment System: Framework and Strategy, which has
become known as the blue book, is widely recognised as a product of the South African banking
industry and its recommendations are accepted as the basis for the official strategy for the reform
of the payment system.
The National Payment System Framework and Strategy identified the lack of a
sophisticated electronic settlement process as a major shortcoming in the South African payment
system. To this end a strategy was formulated to introduce an online central bank settlement
system that would enable banks to effect interbank fund transfers electronically and in real time,
when required.
2. Development of a new electronic interbank settlement system
The project to implement a new electronic interbank settlement system was
identified as the cornerstone for the introduction of a new national payment-processing
infrastructure. The South African Multiple Option Settlement (SAMOS) system, introduced on
9 March 1998, was developed over a period of two years as a collaborative venture between the
Reserve Bank, private banking institutions, and the technology suppliers. The system ushered in
a new era in electronic payment and settlement in South Africa and will have a major impact on
the future development of the national payment system. Furthermore, the new system has
already enabled the Reserve Bank to introduce new operational procedures for the execution of
monetary policy. Under these new arrangements, banks now participate in a daily tendering
system, based on repurchase agreements (repos), to obtain funds from or repay funds to the
Reserve Bank. To this end, the settlement system became a convenient vehicle to establish
market liquidity needs and to facilitate payment flows, resulting from repo transactions, between
the Reserve Bank and the banks.
2.1 Features of the new settlement system
The introduction of the new interbank settlement system represents a major
reengineering of the way in which banks exchange value amongst themselves. It provides
participating banks with a range of additional functions and business opportunities, including:
• Online real-time link between participating banks
All banks participating in the new system are linked to an online real-time
network provided by the Reserve Bank. These banks are able to link to the
Reserve Bank service either directly or via Swift, the highly secure
international funds transfer mechanism. The system enables banks to
exchange payment messages with the Reserve Bank and, through the Reserve
Bank, between themselves.
• Secure high value fund transfers between participating banks
The SAMOS system processes all fund transfer messages received by the
Reserve Bank. SAMOS will eventually enable banks to effect their payments
in real time through a fully auditable and robust system. The system will
provide a highly secure vehicle for interbank payment flows and ensure the
authenticity and non-repudiation of all transactions. All fund transfers will be
final and irrevocable and processed successfully by the system. This will be
accomplished by effecting payment transactions directly on the settlement
accounts of banks held in the Reserve Bank.
• Settlement risk reduced by prefunding
The risk of settlement failure by any individual participating bank is avoided
through application of the principle of prefunding. A request to the system to
transfer funds will therefore be carried out only if the bank issuing the fund
transfer instruction has sufficient funds in its settlement account; otherwise, the
instruction will be rejected. This implies that banks cannot build up exposures to
one another within the system. All funds transferred are irrevocable, and the
underlying transactions can thus be finalised during the course of the business
day, as and when the bank and the customer require.
• Collateral managed dynamically
The system operates on the principle of full collateralisation of all intraday loans.
Banks can reserve financial instruments to be used as collateral should they
require additional funding during the day. These instruments have to be in
electronic form, that is immobilised at either the Central Depository (CD) or in
the Financial Instrument Register (FIR) of the Reserve Bank. Should a bank not
have sufficient funds in its settlement account to carry out a fund-transfer request,
the system will automatically determine whether the bank has any financial
instruments available to be pledged as collateral for a Reserve Bank loan. If this
is the case, the system will automatically raise a loan of the required amount
against this collateral and transfer the funds necessary to process the fund-transfer
instruction from the bank's loan account (or marginal lending facility) into its
settlement account. The SAMOS system will now be able to effect the transfer of
funds to the receiving bank's settlement account. This process will be completed
without any manual intervention. The borrowing bank can revert to the next repo
tender opportunity to redeem the out-standing amount on its marginal lending
facility.
The introduction of the new system will have a significant impact on payment,
clearing and settlement transactions in South Africa. Numerous changes have
already been made to existing practices, processes, arrangements and agreements
and many will be made during the further implementation phases of the system.
Banks, clearing houses, other payment system intermediaries and corporate
customers of banks will need to modify and enhance their systems if they wish to
obtain maximum benefits from the new payment processing architecture.
2.2 The implementation schedule
The system will be implemented in a number of phases. The following dates have
been set for the implementation of major milestones:
Date Phase
9/3/98 Introduction of electronic end-of-day settlement through SAMOS
The SAMOS system and the interbank settlement network SARBLINK to
facilitate the end-of-day settlement process were activated as from 9 March 1998.
Although the system is now fully functional and the banks are able to transfer
funds during the day, settlement finality as at this stage is only achieved at the end
of each day. For the time being, end-of-day positions will still be settled in the
morning of the next day.
9/3/98 to Determining the liquidity impact of real time gross settlement
3/10/98
The banks will use the system during this interim period to monitor their liquidity
requirements for a trial period prior to the introduction of intraday finality. Banks
will also be able to bring their back-office systems in line with SAMOS in order
to enable them to capitalise on the opportunities provided by the new settlement
options.
5/10/98 Introduction of immediate intraday finality
The switch to intraday finality will mean that all settlement instructions received
by the SAMOS system will become final and irrevocable as and when they are
received, if processed successfully. The main implication of this step will be that
banks would need to monitor their positions in the SAMOS system carefully and
ensure at all times that they have sufficient funds or financial instruments
available to process their settlement instructions.
To be decided
Move of the end-of-day settlement process to same day To bring the South
African settlement practices in line with international best practice the final
endof-day settlement process needs to be effected on a same day basis. The date of
this change will be negotiated with the banks taking due consideration of the
impact this would have on their customers and operations.
2.3 Impact on the financial system
The new settlement arrangements and the SAMOS system have placed the South
African settlement practices on par with international best practice and presented many new
challenges and opportunities to the banking and non-banking sector. Major changes include:
Increased participation
•
In line with the philosophy of the new NPS, the interbank settlement system
has been opened to enable more participation. All registered South African
banks are eligible to participate in SAMOS. The number of participating
banks in the settlement process has already increased from 11 banks in the old
system to 21 banks in the new system. The number of participants will most
probably increase significantly over the next few months.
Exposures monitored in real time
•
A participating bank can monitor its balances in the SAMOS system in real
time. In other words, the effect of any payments made or received by a
participant will immediately be reflected on the banks' position monitor. The
bank will thus be fully informed at all times of the position in its settlement
account, intraday-loan account and the utilisation of collateral provided. The
Reserve Bank will be able to monitor the positions of all participating banks
and the system as a whole.
• Early warning signals of potential systemic crisis
Various system indicators will enable the Reserve Bank to ascertain whether
any particular bank is experiencing difficulty in meeting its payments
commitments. This will enable the Reserve Bank to take pro-active steps to
address a potential systemic crisis before it destabilises the payment system.
• Synchronisation of payment and delivery
The fact that the SAMOS system will eventually provide intraday finality of
settlement between banks will enable the financial markets to intro-duce the
practice of delivery against payment. The finality of payment achieved
through SAMOS can be synchronised with the delivery of immobilised scrip,
thereby providing safe and secure financial market transactions.
• Customer-to-customer funds transfers in real time
Finally, the implementation of the SAMOS system and the interbank
settlement network provides a key building block in the enhancement of the
payment services and products available to business and the general public.
The new technological architecture introduced provides a vital link which
could enable the interlinking of payment networks and services on a national
basis in future, thereby creating endless permutations of payment services and
products. The opportunity for banks and non-banks to co-operate and
collaborate in order to exploit the potential of SAMOS introduces a new era in
the provision of payment products and services in South Africa.
3. Payment system of the future
The key to establishing the envisaged architecture was to create a highly secure
and efficient settlement network between the Reserve Bank and banks. The settlement network
as introduced enables banks to transfer funds to one another, through their accounts at the
Reserve Bank, in real time. It can also be used to expand the national payments infrastructure by
interlinking the payment networks of banking institutions to the settlement network. This could
enable corporate customers of banks, for example, retailers, to link their networks to the national
payment infrastructure. Other institutions such as the Post Office or any other entity wishing to
provide payment services to the public could, through the intermediation of a bank, link their
technological infrastructure to the national network. This could theoretically allow a member of
the public frequenting a point-of-sale device of a payment-service provider to transfer funds and
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 would
represent a major step towards safe and secure payments for the broad public and would enable
the further modernisation of the financial system in South Africa.