Volume 3, No. 1June 1998

NPS UPDATE

NPS UPDATE Vol. 3 No.1 - June 1998

While the process of clearing customer paymentsbetween banks is a highly efficient process by

international standards, the lack of an online real-timeinterbank settlement facility was identified in theNational Payment System (NPS) reform initiative as amajor shortcoming in the current system and as anobstacle to financial system modernisation.

In terms of the current practice of back-dating settle-ment, the interbank clearing of customer paymentsbetween banks is effected on the day following thedepositing thereof. The interbank obligations result-ing from the clearing process are forwarded to theReserve Bank, which passes the necessary bookentries and, depending on the previous day’s activity,some banks receive funds, whereas others pay awayfunds. This settlement process required manualintervention and did not provide participating bankswith any intraday information.

Furthermore, the interbank settlement process did nottake due cognisance of increasing exposures andrisk. As a result of the exponential increase in the val-ues and volumes of transactions, the interbank settle-ment exposures grew menacingly large. An evenmore discomforting factor was that neither banks northe Reserve Bank knew what the settlement exposureof any particular bank would be. Since the settlementexposure was determined to a large extent by thepayment transactions of the customers of banks, withprocessing being an after-the-event affair, banks hadno way of determining what their settlement obliga-tions would be the next morning.

In view of the nature of the settlement process, the

system was ultimately dependent on the ReserveBank for settlement. In the event of any bank notbeing able to meet its settlement obligations at thetime of settlement, the Reserve Bank would have hadto step in, in order to ensure that the system complet-ed the processing cycle. Failure to square off the sys-tem at that late stage in the process would havecaused serious disruption in the financial system.

The new South African Multiple Option Settlement (SAMOS) system was introduced on9 March 1998, as planned. The system has brought domestic interbank settlement prac-

tices in line with international best practice and signals the start of a new era in paymentpractices in South Africa. The introduction of the system follows an intensive effort by the South Africanbanking 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 sys-tems. This edition focuses on the SAMOS system and the impact that it will have on both the banking sys-tem and the broader financial system in South Africa.

CONTENTS

Newsletter of the South African National Payment System (NPS) reform initiative

Introduction of new interbank settlement practices

Background

SAMOS launched . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1Introduction of new interbank settlement pracitces. . . . . . . . . . . . . 1

Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1The new system. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Online real-time link between participating banks . . . . . . . . . . . 2Secure high-value fund transfers between participating banks. . 2Settlement risk reduced by prefunding . . . . . . . . . . . . . . . . . . . 2Collateral managed dynamically . . . . . . . . . . . . . . . . . . . . . . . . 2

Impact of the SAMOS system on the domestic financial system. . . 3Increased participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3Exposures monitored in real time . . . . . . . . . . . . . . . . . . . . . . . 3Early warning signals of a potential systemic crisis. . . . . . . . . . . 3Synchonisation of delivery and payment . . . . . . . . . . . . . . . . . . 4Customer-to-customer fund-transfers in real time . . . . . . . . . . . 4Facilitation of new monetary policy operational procedures . . . . 4

Next steps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4Electronic submission of settlement positions byPayment Clearing Houses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4Intraday finality (5 October 1998) . . . . . . . . . . . . . . . . . . . . . . . . 4Exchange of customer-related payment informationbetween banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4Same-day settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

SAMOS and the new monetary-policy procedures . . . . . . . . . . . . . 5Repos . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Statutory cash reserves. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Marginal lending facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Daily process. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

SAMOS Customer Support Centre (CSC) . . . . . . . . . . . . . . . . . . . 6Year 2000 compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6NPS Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7SADC payment system project . . . . . . . . . . . . . . . . . . . . . . . . . . . 7SAMOS user group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7SANPAY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7Banknotes and coin project . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

SAMOS launched

The new interbank fund-transfer and settlement system, SAMOS, provides participating banks with a range of addi-tional functions and business opportunities, including:

All banks wishing to participate in the new system can link to an online real-time network provided by the ReserveBank. 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 ReserveBank and, through the Reserve Bank, between themselves.

The SAMOS system processes all fund-transfer messages received by the Reserve Bank. The SAMOS systemenables 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 alltransactions.

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. Thisimplies that banks cannot build up exposures to one another within the SAMOS system. All funds transferred areirrevocable, and the underlying transactions can thus be finalised during the course of the business day, as and whenthe bank and the customer require.

The SAMOS system operates on the principle of full collateralisation of all loans. Banks can reserve financialinstruments 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 CentralDepository (CD) or in the Financial Instrument Register (FIR) of the Reserve Bank.

2NPS UPDATE Vol. 3 No.1 - June 1998

PCH PCH

BANKBANK

PCH BANK

SARB

SWIFT

Settlement risk reduced by prefunding

Collateral managed dynamically

Online real-time link between participating banks

Secure high-value fund transfers between participating banks

The new system

At the end of the settlement day, any remaining balance on a bank’s intraday loan account will automatically bereflected as an overnight loan. This loan will be subject to the rules governing the marginal lending facility (see articleon 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 inSouth Africa. Numerous changes have already been made to existing practices, processes, arrangements andagreements, 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 sys-tems if they wish to capitalise on the new payment-processing architecture.

The new settlement arrangements and the SAMOS system, when fully implemented, will place the South Africansettlement practices on par with international best practice and will present many new challenges and opportuni-

ties to the banking and non-banking sector. Major changes include:

In line with the philosophy of the new NPS, the interbank settlement system has been opened to enable increasedparticipation. 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 banksin the settlement process has increased from 11 banks in the old system to 21 banks in the new system. Indicationsare there that the number of participants will continue to increase during the next few months.

Aparticipating bank can monitor its balances on the SAMOS system in real time. In other words, the effect of anypayments 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 accountbalance and collateral utilised. The Reserve Bank will be able to monitor the SAMOS positions of all participatingbanks and will have a holistic view of the whole system.

Various system indicators will enable the Reserve Bank to ascertain whether a bank is having difficulty with makingpayments. This will enable the Reserve Bank to take pro-active steps in order to address a potential systemic cri-

sis before it destabilises the payment system.

3NPS UPDATE Vol. 3 No.1 - June 1998

Increased participation

Exposures monitored in real time

Early warning signals of a potential systemic crisis

Impact of the SAMOS system on the domestic financial system

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 systemwill automatically determine whether the bank has sufficient financial instruments available to be pledged as col-lateral for a Reserve Bank loan. In such a case, the system will automatically raise a loan of the requiredamount against this security and transfer the funds necessary to process the fund-transfer instruction from thebank’s loan account into its settlement account. The SAMOS system will then effect the transfer of funds fromthe paying bank’s settlement account to the receiving bank. This process is completed without any manual inter-vention.

Similarly, banks have the option to automatically repay loans throughout the day on receipt of incoming pay-ments. This is achieved by the bank setting parameters indicating their repayment preference within the system.

SAMOS POSITION MONITORSettlement Position

Settlement Account Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 000 000,00Loan Account Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 450 000,00

Collateral PositionAmount Reserved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 000 000,00Amount Available . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 550 000,00

The SAMOS system will provide intraday finality of settlement between banks, thereby enabling the financial andother markets to introduce delivery versus payment. The finality of payment achieved through the SAMOS sys-

tem can be synchronised with the delivery of immobilised or dematerialised scrip, thereby providing safe and securefinancial market transactions.

The implementation of the SAMOS system and the interbank settlement network provides key building blocks in theenhancement of the payment services and products available to business and the general public. The new tech-

nological architecture that has been introduced provides a vital link that could enable the interlinking of payment net-works and services on a national basis in future, thereby creating endless permutations of payment services andproducts.

Together with the implementation of the SAMOS system, the Reserve Bank also introduced new monetary-policyoperational 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 theSAMOS 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 monetary-policy signals through the financial system and paves the way for more dynamic interbank and money markets.

Currently the results of the interbank clearing process-es (that is, the bilateral settlement positions of all

banks) are manually captured into the SAMOS systemdaily. As from the middle of 1998, these positions will beforwarded electronically, thereby decreasing the process-ing time significantly. This will place the Reserve Bankinto a position to determine the final overall liquidity posi-tion of banks (for the previous settlement cycle date) ear-lier. The Reserve Bank will therefore be able to deter-mine the final positions and initiate the repo tenderingprocess (see article on SAMOS and the new monetary-policy procedures on page 5) sooner, which will facilitatethe completion of the process by 12:00 daily.

The switch to intraday finality will mean that all settle-ment instructions received by the SAMOS system will

become final and irrevocable when processed success-fully. The main implication of this change is that bankswill need to monitor their positions in the SAMOS systemcarefully and ensure at all times that they have sufficientfunds or financial instruments available in order toprocess their settlement instructions.

The SAMOS system enables banks to pass underlyingcustomer-payment information to one another,

together with the settlement instruction that is sentthrough the SAMOS system, thereby reducing the recon-ciliation effort and enabling banks to offer new servicesto their customers. During the next few months, thetechnical details and the necessary clearing agreementswill be finalised in order to enable the implementationthereof together with intraday finality.

The final step required to bring South African settle-ment practices in line with international practices is to

effect final end-of-day settlement on a same-day basiswith the simultaneous termination of the current back-dating practice. The date of this change will be negotiat-ed with the banks, and the impact that this may have ontheir customers and operations will receive due consider-ation.

4NPS UPDATE Vol. 3 No.1 - June 1998

Customer-to-customer fund-transfers in real time

Facilitation of new monetary policy operational procedures

Next steps

Electronic submission of settlement posi-tions by Payment Clearing Houses

Intraday finality (5 October 1998)

Exchange of customer-related pay-ment information between banks

Same-day settlement

Synchronisation of delivery and payment

5NPS UPDATE Vol. 3 No.1 - June 1998

The introduction of the SAMOS system created an opportunity for the Reserve Bank also to implement new mone-tary-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 deter-mined by the Reserve Bank, known as the Bank rate) in order to settle their clearing obligations. Under the newarrangements, and by utilising the SAMOS system, banks will have a number of new options for funding their settle-ment 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

SAMOS and the new monetary-policy procedures

Banks can sell securities to the Reserve Bank on aconditional buy-back or so-called repurchase agree-

ments. In the process, the banks in effect borrow fundsfrom the Reserve Bank and agree that the funds will berepaid after a certain period of time (“repurchased”). Theloan is covered by a corresponding electronic transfer ofownership of a sufficient amount of securities to theReserve Bank. The loan is provided on condition thatthe full amount is repaid within a predetermined period(currently set at seven days), at which time ownership ofthe securities is electronically reverted to the bank. Inorder to cater for market-value fluctuations, the value ofthe securities provided needs to be marginally more thanthe value of the loan. Both the transfer of the loanamount and the repayment of the loan are effectedthrough the SAMOS system.

The Reserve Bank makes only a limited amount of fundsavailable to banks via the repo arrangement on a dailybasis. Banks wishing to make use of Reserve Bankfunding through this mechanism can participate in thedaily tender, by bidding for a specified amount, at aninterest rate that they are willing to pay, or at the fixedrate set by the Reserve Bank, when applicable.

Banks can utilise their statutory cash-reserve holdings atthe Reserve Bank in order to fund their settlementaccount. This is, however, a temporary liquidity supple-ment since banks are required to maintain an averagelevel of cash-reserve holdings over a period of onemonth (as calculated from the fifteenth day of a month tothe fourteenth day of the following month).

Banks that have a debit balance on their intraday loanaccount at the close of the settlement process, that

is, after all interbank and cash reserve transactions havebeen finalised, will automatically obtain an overnightloan, secured by the same collateral, for the full out-standing balance under the so-called marginal lendingfacility. On these account balances, interest charges arelevied a preset rate, which is higher than the repo rate.

The daily interbank settlement process is effected in anumber of steps, according to a strict timetable. This

schedule will be adapted as the processes are automated.

The following timetable was implemented on15 April 1998:

7:00 Cut-off for submission of interbank oblig-ations arising from the overnight clearingprocesses. This information is providedby authorised payment clearing houses.

7:00 - 9:00 Inhouse Reserve Bank processing.

9:00 - 9:05 Interim settlement positions (includingclearing results) are available to individ-ual banks within the SAMOS system(finalise window).

9:05 - 10:30 Banks lend or borrow funds in the interbankmarket in order to square their positions(position window).

9:45 The Reserve Bank finalises the estimateof the daily liquidity requirements of allparticipating banks (that is, the systemas a whole).

10:30 Interbank transactions are completed.Marginal lending and cash-reserve hold-ing of all participating banks arefinalised. The settlement cycle day iscompleted and all transactions finalisedfor the previous day’s date.

12:00 The Reserve Bank announces theamount of funds available on tenderunder the repo facility.

12:00 - 12:15 Banks submit their bids for funds underthe repo facility.

12:30 Repo allocations are made to banks, andthe official repo rate for the day is provid-ed to banks.

13:30 Settlement of repo transactions is com-pleted via the SAMOS system.

Marginal lending facility

Statutory cash reserves

Repos DAILY PROCESS

6NPS UPDATE Vol. 3 No.1 - June 1998

Following 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 assis-tance. All components of the SAMOS system will be supported by the CSC, 07:30 to 17:00 Mondays to Fridays, andfrom 08:00 to 11:00 on Saturdays. The CSC is currently staffed by Rhona Badenhorst and Christa van Wyk, whohave also been involved in the training of SAMOS participants. Contact number (012) 313-4961.

SAMOS Customer Support Centre (CSC)

YEAR 2000 compliance

The SAMOS system has been designed with the year 2000 issue inmind and processes all dates according to the standard YYYYMMDD

notation. All components of the system will be certified to be fullyyear 2000 compliant by the end of Novmber 1998.

All participating banks will be required to certify to the Reserve Bankby December 1998 that their SAMOS interfaces are year 2000 com-pliant. 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 SAMOSsystem is available on the Reserve Bank’s website -

www.resbank.co.za

Front:

Christavan Wyk

Back:

RhonaBadenhorst

Comments on the draft NPS bill have been received and are currently being processed.

The first phase of the project, namely a sensitising and stock-taking exercise has been completed and a “GreenBook”, describing the current payment systems in all SADC countries, will be published shortly. The next phase ofthe 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 inMauritius at the request of the Bank of Mauritius. If this proves to be successful it could serve as a model for theimplementation of the system in other SADC countries, thereby simplifying regional payment system integration in thelong term.

A SAMOS user group was established and the first meeting held on 30 March 1998. All banks participating in theSAMOS system were invited to nominate a representative to attend these meetings which will, initially, be held oncea month at the Johannesburg Branch of the Reserve Bank. This forum will be utilised to channel enhancementrequests and to communicate any pertinent information regarding the SAMOS system amongst all participants on anongoing basis.

To ensure that the interests of all participants and key stakeholders are served by the NPS, the NPS strategy, interalia, made provision for the establishment of a representative forum named SANPAY.

An inaugural meeting was held on 27 May 1998. 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 levelof interest in and need for a forum such as SANPAY, as well as to discuss the various articles of SANPAY’s Deed ofEstablishment.

The South African Reserve Bank, together with the banks, initiated a project in 1997 to review the processing, han-dling 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 toassume a greater role in the national notes and coin management system. To this end it has also been agreed thatthe Reserve Bank will become involved in SBV Services (Pty) Limited, by obtaining a financial and managementinterest in the company. SBV Services is at present owned by the major banks and is mainly responsible for the pro-cessing and distribution of banknotes and coin.

Upon finalisation of an agreement regarding the above arrangement, the Reserve Bank will be in a position to shareresponsibility, seek solutions to problems as they occur, and participate in the day-to-day administration and organi-sation 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 willbe integrated into the Reserve Bank branch operations and the Bank, together with the shareholder banks, will alsowork on optimising the remaining SBV processes during this period in the interests of the banking system.

7NPS UPDATE Vol. 3 No.1 - June 1998

What’s happening ...

NPS Act

SADC payment system project

SAMOS user group

SANPAY

Banknotes and coin project

NPS UPDATE Vol. 3 No.1 - June 1998 8

ACB Automated Clearing BureauCD Central DepositoryCSC Customer Support CentreFIR Financial Instrument RegisterMICR Magnetic ink character recognitionPCH Payment clearing houseREPOs Repurchase agreementsSAMEX The external interface supplied to

banks by the Reserve Bank in orderto enable banks to access theSAMOS system

SAMOS South African Multiple OptionSettlement (system)

SARB LINK Settlement message-exchange ser-vice

If you would like your name to be added to our "com-munication" database or need additional informationregarding the South African National Payment System(NPS), please contact:

Ms Pat SmithSA Reserve BankNational Payment System DivisionPO Box 427PRETORIA0001

Contact details: Telephone +27 12 313-3460Fax +27 12 313-3142 or 3934E-mail SARBNPS@gwise.resbank.co.zaInternet http://www.resbank.co.za

Design & Layout Amine van Heerden

What does... mean? From the editor

SAMOS LAUNCH - 9 March 1998

FrontLeft to right:

Mr P Rawlings (FNB) Ms I Ströh (SARB)Dr PJ Tromp (SARB)Mr G Steyn (Nedcor)

BackLeft to right:

Mr MN Huber (SARB)Mr M Lear (STD)Mr E Leach (SARB)

Absent: Mr JWP Pienaar (ABSA)

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

SAMOS Technology Development Venture