NPS UPDATE. While the process of clearing customer payments. Introduction of new interbank settlement practices. SAMOS launched. Background CONTENTS

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1 NPS UPDATE Volume 3, No. 1 June 1998 Newsletter of the South African National Payment System (NPS) reform initiative The new South African Multiple Option Settlement (SAMOS) system was introduced on 9 March 1998, as planned. The system has brought domestic interbank settlement practices in line with international best practice and signals the start of a new era in payment practices in South Africa. The introduction of the system follows an intensive effort by the South African banking industry and local technology suppliers, and has illustrated that the local industry has the capacity, both in terms of business knowledge and technology skills, to produce sophisticated, state-of-the-art systems. This edition focuses on the SAMOS system and the impact that it will have on both the banking system and the broader financial system in South Africa. SAMOS launched Introduction of new interbank settlement practices Background While the process of clearing customer payments between banks is a highly efficient process by international standards, the lack of an online real-time interbank settlement facility was identified in the National Payment System (NPS) reform initiative as a major shortcoming in the current system and as an obstacle to financial system modernisation. In terms of the current practice of back-dating settlement, the interbank clearing of customer payments between banks is effected on the day following the depositing thereof. The interbank obligations resulting from the clearing process are forwarded to the Reserve Bank, which passes the necessary book entries and, depending on the previous day s activity, some banks receive funds, whereas others pay away funds. This settlement process required manual intervention and did not provide participating banks with any intraday information. Furthermore, the interbank settlement process did not take due cognisance of increasing exposures and risk. As a result of the exponential increase in the values and volumes of transactions, the interbank settlement exposures grew menacingly large. An even more discomforting factor was that neither banks nor the Reserve Bank knew what the settlement exposure of any particular bank would be. Since the settlement exposure was determined to a large extent by the payment transactions of the customers of banks, with processing being an after-the-event affair, banks had no way of determining what their settlement obligations would be the next morning. In view of the nature of the settlement process, the system was ultimately dependent on the Reserve Bank for settlement. In the event of any bank not being able to meet its settlement obligations at the time of settlement, the Reserve Bank would have had to step in, in order to ensure that the system completed the processing cycle. Failure to square off the system at that late stage in the process would have caused serious disruption in the financial system. CONTENTS SAMOS launched Introduction of new interbank settlement pracitces Background The new system Online real-time link between participating banks Secure high-value fund transfers between participating banks.. 2 Settlement risk reduced by prefunding Collateral managed dynamically Impact of the SAMOS system on the domestic financial system... 3 Increased participation Exposures monitored in real time Early warning signals of a potential systemic crisis Synchonisation of delivery and payment Customer-to-customer fund-transfers in real time Facilitation of new monetary policy operational procedures Next steps Electronic submission of settlement positions by Payment Clearing Houses Intraday finality (5 October 1998) Exchange of customer-related payment information between banks Same-day settlement SAMOS and the new monetary-policy procedures Repos Statutory cash reserves Marginal lending facility Daily process SAMOS Customer Support Centre (CSC) Year 2000 compliance NPS Act SADC payment system project SAMOS user group SANPAY Banknotes and coin project

2 The new system The new interbank fund-transfer and settlement system, SAMOS, provides participating banks with a range of additional functions and business opportunities, including: Online real-time link between participating banks All banks wishing to participate in the new system can link to an online real-time network provided by the Reserve Bank. These banks are able to link to the Reserve Bank service (SARB LINK) either directly or via SWIFT, the international fund-transfer mechanism. This link enables banks to exchange payment messages with the Reserve Bank and, through the Reserve Bank, between themselves. SARB PCH PCH BANK BANK SWIFT PCH BANK Secure high-value fund transfers between participating banks The SAMOS system processes all fund-transfer messages received by the Reserve Bank. The SAMOS system enables banks to effect their fund transfers in real time, through a fully auditable and robust system. The system provides a highly secure vehicle for interbank payment flows and ensures the authenticity and non-repudiation of all transactions. Settlement risk reduced by prefunding The risk of settlement failure by any participating bank is avoided through application of the principle of prefunding. An instruction to transfer funds will therefore be carried out by the SAMOS system 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 SAMOS 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 SAMOS system operates on the principle of full collateralisation of all loans. Banks can reserve financial instruments to be used as collateral should they require additional funding during the day. These instruments have to be available in electronic format. This can be done by immobilising the instruments at either the Central Depository (CD) or in the Financial Instrument Register (FIR) of the Reserve Bank. 2

3 The dynamic collateral management process works as follows: 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 sufficient financial instruments available to be pledged as collateral for a Reserve Bank loan. In such a case, the system will automatically raise a loan of the required amount against this security and transfer the funds necessary to process the fund-transfer instruction from the bank s loan account into its settlement account. The SAMOS system will then effect the transfer of funds from the paying bank s settlement account to the receiving bank. This process is completed without any manual intervention. Similarly, banks have the option to automatically repay loans throughout the day on receipt of incoming payments. This is achieved by the bank setting parameters indicating their repayment preference within the system. At the end of the settlement day, any remaining balance on a bank s intraday loan account will automatically be reflected as an overnight loan. This loan will be subject to the rules governing the marginal lending facility (see article on SAMOS and the new monetary-policy procedures on page 5.) The introduction of the new system will have a significant impact on the payment, clearing and settlement system in South Africa. Numerous changes have already been made to existing practices, processes, arrangements and agreements, and many more will be made during the 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 capitalise on the new payment-processing architecture. Impact of the SAMOS system on the domestic financial system The new settlement arrangements and the SAMOS system, when fully implemented, will place the South African settlement practices on par with international best practice and will present 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 increased participation. All registered South African banks (which includes mutual banks and branches of foreign banks) are eligible to participate in the SAMOS system. This has already taken effect, in that the number of participating banks in the settlement process has increased from 11 banks in the old system to 21 banks in the new system. Indications are there that the number of participants will continue to increase during the next few months. Exposures monitored in real time Aparticipating bank can monitor its balances on the SAMOS system in real time. In other words, the effect of any payments made or received by a participating bank will immediately be reflected on that bank s SAMOS position monitor. The bank will therefore be fully informed at all times of its settlement account position, intraday loan account balance and collateral utilised. The Reserve Bank will be able to monitor the SAMOS positions of all participating banks and will have a holistic view of the whole system. Settlement Position Collateral Position SAMOS POSITION MONITOR Settlement Account Balance ,00 Loan Account Balance ,00 Amount Reserved ,00 Amount Available ,00 Early warning signals of a potential systemic crisis Various system indicators will enable the Reserve Bank to ascertain whether a bank is having difficulty with making payments. This will enable the Reserve Bank to take pro-active steps in order to address a potential systemic crisis before it destabilises the payment system. 3

4 Synchronisation of delivery and payment The SAMOS system will provide intraday finality of settlement between banks, thereby enabling the financial and other markets to introduce delivery versus payment. The finality of payment achieved through the SAMOS system can be synchronised with the delivery of immobilised or dematerialised scrip, thereby providing safe and secure financial market transactions. Customer-to-customer fund-transfers in real time The implementation of the SAMOS system and the interbank settlement network provides key building blocks in the enhancement of the payment services and products available to business and the general public. The new technological architecture that has been introduced provides a vital link that could enable the interlinking of payment networks and services on a national basis in future, thereby creating endless permutations of payment services and products. Facilitation of new monetary policy operational procedures Together with the implementation of the SAMOS system, the Reserve Bank also introduced new monetary-policy operational procedures via repurchase agreements (repos). In terms of these new arrangements, banks can obtain central bank funds via repos. The movement of funds, resulting from repo transactions, is effected through the SAMOS system, in real time. Also see - SAMOS and the new monetary-policy procedures on page 5. The real-time capability of the new settlement system provides for the effective and rapid transmission of monetarypolicy signals through the financial system and paves the way for more dynamic interbank and money markets. Next steps Electronic submission of settlement positions by Payment Clearing Houses Currently the results of the interbank clearing processes (that is, the bilateral settlement positions of all banks) are manually captured into the SAMOS system daily. As from the middle of 1998, these positions will be forwarded electronically, thereby decreasing the processing time significantly. This will place the Reserve Bank into a position to determine the final overall liquidity position of banks (for the previous settlement cycle date) earlier. The Reserve Bank will therefore be able to determine the final positions and initiate the repo tendering process (see article on SAMOS and the new monetarypolicy procedures on page 5) sooner, which will facilitate the completion of the process by 12:00 daily. Intraday finality (5 October 1998) The switch to intraday finality will mean that all settlement instructions received by the SAMOS system will become final and irrevocable when processed successfully. The main implication of this change is that banks will need to monitor their positions in the SAMOS system carefully and ensure at all times that they have sufficient funds or financial instruments available in order to process their settlement instructions. Exchange of customer-related payment information between banks The SAMOS system enables banks to pass underlying customer-payment information to one another, together with the settlement instruction that is sent through the SAMOS system, thereby reducing the reconciliation effort and enabling banks to offer new services to their customers. During the next few months, the technical details and the necessary clearing agreements will be finalised in order to enable the implementation thereof together with intraday finality. Same-day settlement The final step required to bring South African settlement practices in line with international practices is to effect final end-of-day settlement on a same-day basis with the simultaneous termination of the current backdating practice. The date of this change will be negotiated with the banks, and the impact that this may have on their customers and operations will receive due consideration. 4

5 SAMOS and the new monetary-policy procedures The introduction of the SAMOS system created an opportunity for the Reserve Bank also to implement new monetary-policy operational procedures. Under the previous arrangements, banks had to approach the Reserve Bank after final settlement to obtain overnight accommodation (a fully collateralised credit facility at an interest rate determined by the Reserve Bank, known as the Bank rate) in order to settle their clearing obligations. Under the new arrangements, and by utilising the SAMOS system, banks will have a number of new options for funding their settlement account, in addition to credit arrangements with other banks. Three funding options are available to banks. These options can also be utilised in combination. Reserve Bank loans through repurchase transactions (repos) Temporary utilisation of statutory cash reserves Reserve Bank loans through the marginal lending facility Repos Banks can sell securities to the Reserve Bank on a conditional buy-back or so-called repurchase agreements. In the process, the banks in effect borrow funds from the Reserve Bank and agree that the funds will be repaid after a certain period of time ( repurchased ). The loan is covered by a corresponding electronic transfer of ownership of a sufficient amount of securities to the Reserve Bank. The loan is provided on condition that the full amount is repaid within a predetermined period (currently set at seven days), at which time ownership of the securities is electronically reverted to the bank. In order to cater for market-value fluctuations, the value of the securities provided needs to be marginally more than the value of the loan. Both the transfer of the loan amount and the repayment of the loan are effected through the SAMOS system. The Reserve Bank makes only a limited amount of funds available to banks via the repo arrangement on a daily basis. Banks wishing to make use of Reserve Bank funding through this mechanism can participate in the daily tender, by bidding for a specified amount, at an interest rate that they are willing to pay, or at the fixed rate set by the Reserve Bank, when applicable. Statutory cash reserves Banks can utilise their statutory cash-reserve holdings at the Reserve Bank in order to fund their settlement account. This is, however, a temporary liquidity supplement since banks are required to maintain an average level of cash-reserve holdings over a period of one month (as calculated from the fifteenth day of a month to the fourteenth day of the following month). Marginal lending facility Banks that have a debit balance on their intraday loan account at the close of the settlement process, that is, after all interbank and cash reserve transactions have been finalised, will automatically obtain an overnight loan, secured by the same collateral, for the full outstanding balance under the so-called marginal lending facility. On these account balances, interest charges are levied a preset rate, which is higher than the repo rate. DAILY PROCESS The daily interbank settlement process is effected in a number of steps, according to a strict timetable. This schedule will be adapted as the processes are automated. The following timetable was implemented on 15 April 1998: 7:00 Cut-off for submission of interbank obligations arising from the overnight clearing processes. This information is provided by authorised payment clearing houses. 7:00-9:00 Inhouse Reserve Bank processing. 9:00-9:05 Interim settlement positions (including clearing results) are available to individual banks within the SAMOS system (finalise window). 9:05-10:30 Banks lend or borrow funds in the interbank market in order to square their positions (position window). 9:45 The Reserve Bank finalises the estimate of the daily liquidity requirements of all participating banks (that is, the system as a whole). 10:30 Interbank transactions are completed. Marginal lending and cash-reserve holding of all participating banks are finalised. The settlement cycle day is completed and all transactions finalised for the previous day s date. 12:00 The Reserve Bank announces the amount of funds available on tender under the repo facility. 12:00-12:15 Banks submit their bids for funds under the repo facility. 12:30 Repo allocations are made to banks, and the official repo rate for the day is provided to banks. 13:30 Settlement of repo transactions is completed via the SAMOS system. 5

6 SAMOS Customer Support Centre (CSC) F ollowing the introduction of the SAMOS system, the Reserve Bank has established a customer support centre, which logs all problems that participating banks may encounter in the utilisation of the SAMOS system. The CSC has been staffed with fully trained personnel, who are available throughout the business day in order to provide assistance. All components of the SAMOS system will be supported by the CSC, 07:30 to 17:00 Mondays to Fridays, and from 08:00 to 11:00 on Saturdays. The CSC is currently staffed by Rhona Badenhorst and Christa van Wyk, who have also been involved in the training of SAMOS participants. Contact number (012) Front: Christa van Wyk Back: Rhona Badenhorst YEAR 2000 compliance The SAMOS system has been designed with the year 2000 issue in mind and processes all dates according to the standard YYYYMMDD notation. All components of the system will be certified to be fully year 2000 compliant by the end of Novmber All participating banks will be required to certify to the Reserve Bank by December 1998 that their SAMOS interfaces are year 2000 compliant. Compliance testing of the system as a whole, involving all participants, will be scheduled in due course. A full statement regarding the year 2000 compliance of the SAMOS system is available on the Reserve Bank s website 6

7 What s happening... NPS Act Comments on the draft NPS bill have been received and are currently being processed. SADC payment system project The first phase of the project, namely a sensitising and stock-taking exercise has been completed and a Green Book, describing the current payment systems in all SADC countries, will be published shortly. The next phase of the project is aimed at the formulation of payment system strategies in each SADC member state. A team from the SA Reserve Bank is currently investigating the feasibility of implementing the SAMOS system in Mauritius at the request of the Bank of Mauritius. If this proves to be successful it could serve as a model for the implementation of the system in other SADC countries, thereby simplifying regional payment system integration in the long term. SAMOS user group A SAMOS user group was established and the first meeting held on 30 March All banks participating in the SAMOS system were invited to nominate a representative to attend these meetings which will, initially, be held once a month at the Johannesburg Branch of the Reserve Bank. This forum will be utilised to channel enhancement requests and to communicate any pertinent information regarding the SAMOS system amongst all participants on an ongoing basis. SANPAY To ensure that the interests of all participants and key stakeholders are served by the NPS, the NPS strategy, inter alia, made provision for the establishment of a representative forum named SANPAY. An inaugural meeting was held on 27 May A number of business associations and organisations attended. The purpose of this meeting was to provide attendees with a brief overview of the NPS project, to determine the level of interest in and need for a forum such as SANPAY, as well as to discuss the various articles of SANPAY s Deed of Establishment. Banknotes and coin project The South African Reserve Bank, together with the banks, initiated a project in 1997 to review the processing, handling and distribution of banknotes and coin on a national level. Resulting from the deliberations, the Reserve Bank, in agreement with the commercial banks, has undertaken to assume a greater role in the national notes and coin management system. To this end it has also been agreed that the Reserve Bank will become involved in SBV Services (Pty) Limited, by obtaining a financial and management interest in the company. SBV Services is at present owned by the major banks and is mainly responsible for the processing and distribution of banknotes and coin. Upon finalisation of an agreement regarding the above arrangement, the Reserve Bank will be in a position to share responsibility, seek solutions to problems as they occur, and participate in the day-to-day administration and organisation of SBV Services together with the current shareholder banks. Over a transition period of three years the functions and responsibilities that fall within the central bank s domain will be integrated into the Reserve Bank branch operations and the Bank, together with the shareholder banks, will also work on optimising the remaining SBV processes during this period in the interests of the banking system. 7

8 SAMOS LAUNCH - 9 March 1998 SAMOS Technology Development Venture Left to right: Mr ST Matthysen (PQ Africa) Mr E Leach (SARB) Dr PJ Tromp (SARB) Dr CL Stals, (SARB) Mr RJ Marnitz (PQ Holdings) Mr JH Smit (SARB) Interbank Strategy Team Front Left to right: Mr P Rawlings (FNB) Ms I Ströh (SARB) Dr PJ Tromp (SARB) Mr G Steyn (Nedcor) Back Left to right: Mr MN Huber (SARB) Mr M Lear (STD) Mr E Leach (SARB) Absent: Mr JWP Pienaar (ABSA) What does... mean? ACB CD CSC FIR MICR PCH REPOs SAMEX SAMOS SARB LINK Automated Clearing Bureau Central Depository Customer Support Centre Financial Instrument Register Magnetic ink character recognition Payment clearing house Repurchase agreements The external interface supplied to banks by the Reserve Bank in order to enable banks to access the SAMOS system South African Multiple Option Settlement (system) Settlement message-exchange service From the editor If you would like your name to be added to our "communication" database or need additional information regarding the South African National Payment System (NPS), please contact: Ms Pat Smith SA Reserve Bank National Payment System Division PO Box 427 PRETORIA 0001 Contact details: Telephone Fax or SARBNPS@gwise.resbank.co.za Internet Design & Layout Amine van Heerden 8