2004, so did the external fund management programme. in 2004, south africa ’ s gross reserves amounted to approximately us $ 8 billion and this had grown to us $ 50 billion by 2011. however, with the most recent review, which took place this year, we decided that the funds under external management would be reduced, primarily because the latest saa supported benchmarks and related portfolios that could largely be managed internally. currently, we are at an advanced stage of reviewing the custodial arrangements we have in place, including the type of model which we would like to follow going forward. the custodial review entails : • benchmarking services received from custodians against current world custodial service standards ; • reviewing the current ratings of custodians against minimum ratings standards ; • reviewing services required from custodians against the bank ’ s business requirements ; and • determining the capabilities of custodians to provide ancillary services such as accounting, performance attribution, settlements and risk measurement and reporting. prior to the custodial review, the bank embarked on a comprehensive systems renewal project in order to upgrade the bank ’ s it and risk management systems, so as to create a superior reserve and risk management operational platform. the two projects, the systems renewal and custodian review, of course have a direct bearing on each other. we hope to make final decisions for the systems renewal later this year and hopefully be in a position to start implementing whichever system is chosen by the end of the year or early in 2014. the decision regarding custodial arrangements we also hope to make early next year. 4. asset tapering and reserves management what will keep reserves managers up at night? no doubt an important issue for reserves managers going forward is that of asset purchase tapering and the timing of policy tightening after the asset purchasing programme has been completed. the implementation of asset purchases by the us federal reserve in a bid to dampen yields on the longer end of the yield curve resulted in significant increases in prices of us treasuries, and prices of other advanced economy and emerging market bonds. in such an environment, it was not too difficult for reserve managers to earn good returns as yields rallied substantially, albeit with a fair amount of volatility. but as they say, everything that goes up must come down. the mere expectation of tapering by the us federal reserve had a significant impact on markets, bis central bankers ’ speeches introducing significant volati

this growth, as reserve holdings were increased to provide a form of insurance against future balance of payments crises. the expansion in global liquidity since the 2008 global financial crisis further provided encouragement to increase reserve holdings, as central banks tried to limit appreciation pressure on exchange rates emanating from the surge in capital inflows, and hence intervened in the foreign exchange markets and by so doing, increased their holdings of foreign currency. south africa certainly benefitted from the abundance of global liquidity in many ways, and also used this period to build up our foreign exchange reserve levels. this was done through a combination of direct purchases ( mostly related to large fdi transactions ) as well as opportunistic purchases in the foreign exchange market. the bank, together with the national treasury, considers various formulae when assessing what should be the optimal level of reserves for a country such as ours. we look at both an adjusted greenspan - guidotti rule, as well as the jean - rancierre model, both tweaked to take into account the specifics of the south african economy. the level which is arrived at provides a guide to what would be an adequate level of reserves to hold to protect against external vulnerabilities, however, this bis central bankers ’ speeches is not considered a hard target which has to be reached at all costs. it is for this reason that we have decided to not publicly release any such indicative levels or ranges. these numbers also tend to change quite a bit from year - to - year, largely influenced by the assumptions made and various forecasts used. the costs involved in accumulating reserves are always considered alongside the benefits of higher reserves, as at some point, the costs of accumulating reserves may far outweigh the benefits to be had. the composition of reserves assets has also changed over time and reserve managers have become more comfortable with and therefore gradually moved to riskier assets. bearing in mind the low yielding environment we found ourselves in post - 2008, with increased levels and costs associated with holding reserves, asset allocation decisions were influenced towards a greater focus on returns. reserve managers have explored different avenues to achieve this, including : • diversification in the currency composition towards non - traditional reserve currencies such as the korean won, new zealand dollar, australian dollar and canadian dollar. however, the diversification into alternative currencies as opposed to traditional currencies remains quite small as an overall proportion of reserves, around 3 per cent, given that