Impact of Electronic Infrastructure on Inter- bank Flow of Funds

1World Bank Conference, Global Payments and Securities Settlements Landscape, Cape Town, 7-10 April 2009

Impact of Electronic Infrastructure on Inter-bank Flow of Funds

WORLD BANK CONFERENCE

PRESENTED BY: Anthony van EdenDATE: 8th April 2009

Global Payments and Securities Settlements Landscape

Dematerialised Money Market Securities in South Africa



Glossary of Terms and Acronyms

Capital Event

: Coupon or Maturity payment

CSD : Central Securities Depository

ETME : Electronic Trade Matching Engine

ISIN : International Standard Identification Number

ISO : International Standards Organisation

MM : Money Market

MMS : Money Market System

On-us : Settlement of counterparties intra-bank

Participant : CSD Participant

RTL : Real Time Line

SARB : South African Reserve Bank

SAMOS : South African Multi-Option SettlementSystem

SFIDVP : Simultaneous Irrevocable Delivery versus Payment

SOR : Securities Ownership register

SA : South Africa

STP : Straight Through Processing

SWIFT : Society for Worldwide Interbank Financial Telecommunications

USD : United States Dollar

ZAR : South African Rands



South African Money Market statistics;

Background to the South African Money Market;

Impact of infrastructure on the inter-bank flow of funds – Insight into

South African Dematerialisation of MM Project

Presentation Overview



South African Money Market Statistics

Annual Approximate Nominal Value (billions)(Extracted May 2008)

ZAR USD (USD1=ZAR10)

Primary Issues 78,60 7,86

Secondary trades 243,50 24,35

Maturities 85,9 8,59

Aggregate Value in Issue 514,0 51,40

Average Nominal Trade Value 35,00 3,50

Average Duration per Issue 100 days



Informal market– no exchange or Automated Trading Systems;

Clearing and settlement unchanged since inception of MM;

No formal Market Association;

Bearer certificates; telephonic trading ; paper based settlement instructions;

physical custody; manual recording of “ownership” and coupon calculations; no

guaranteed SFIDvP; certificate splitting; physical delivery against Capital Events;

Background to the South African Money Market



Stringent exchange controls;

Securities Services Act;

National Credit Act – June 2005;

Central Bank responsible for monetary policy and supervision;

Capital Adequacy Ratio: Required 9,75%; Actual 2008 between 12% - 14%;

Liquid Asset Requirement - Banks can only use 50 % intra-day and 25% of

collateral at SARB inter-day;

Banking IT systems, processes and procedures robust and relatively advanced;

Background to the South African Money Market



Risk Reduction:

Operational;

Settlement;

Systemic; and

Reputational.

Improvement in liquidity

Prevention of money laundering opportunities;

Enhanced Straight Through Processing;

Compelling Factors for Deployment of Infrastructure in Money Markets



AN INSIGHT INTO THE SOUTH AFRICAN “DEMATERIALISATION” OF MONEY MARKET PROJECT



All MM securities will be:-

standardised;

allocated an ISIN real-time via the CSD;

issued, traded and settled electronically;

Electronic communication using ISO 15022 standard messages types;

Communication via SWIFT infrastructure or Strate WAN – reliable, secure and robust

Use of unique identifiers for business partners, investors, security issuing, trade

matching, clearing and settlements trades of Capital Events;

Electronic Trade Matching Engine (“ETME”) – post trade/pre-settlement;

Reduction of Operational risk



Any changes in beneficial ownership reported and matched in ETME before

settlement Participants commit to delivery of securities or settlement of trades;

Both legs to Buy Backs reported and matched simultaneously for settlement;

End to end STP – from ISIN issue to Maturity;

Standardised settlement procedures for trades and Capital Events;

Reduction of Operational risk (continued)



Settlement messages via SWIFT infrastructure – reliable, secure and robust

Electronic settlement of trades and Capital Events on settlement date;

“Real-time” Settlement in Central Bank funds (SAMOS RTL) or intra-bank (“on-us”;)

for trades and capital Events;

Settlement of trades on GROSS, “principal to principal basis;”

Carries; Repurchase and Reverse Repurchase Agreements treated as change in

beneficial ownership i.e. Buy Backs;

Payment instructions form CSD only generated once commits for delivery and

settlement matched;

Reduction of Settlement Risk



Securities committed to delivery “reserved/locked” in SOR Securities Account

pending confirmation of final and irrevocable settlement;

Pledged securities reserved/locked in SOR Securities Account pending matched

Pledge Release instructions;

Settlement status messages sent by CSD – Participants can query settlement status

on-line real-time;

Simultaneous Final Irrevocable Delivery Versus Payment (“SFIDVP”) at SOR level;

Credit risk rests with Settling banks;

Capital Events settled electronically on payment date;

Daily reconciliation of securities between Participants and CSD;

Reduction of Settlement Risk(continued)



Existing secure inter-banking settlement using existing Central Bank’s Real Time

Line infrastructure – ISO 15022 messages over SWIFT infrastructure;

Bulk trades settled on Gross principal to principal settlement – avoid one “fail all fail”

Settling Participants notified by CSD when insufficient securities for delivery ;

Trade settlement only fails at close of Central Bank settlement windows;

Participants have ability to electronically freeze Securities Accounts of its clients;

Central Bank has the ability to place freeze over all of a banks Securities Accounts.

Central Bank acts as Participant for all Banks with collateralised loans – Liquid

Asset Requirements;

Systemic risk



Money Laundering

Ownership maintained in CSD at beneficial owner level in SOR;

Only foreign companies can open Nominee accounts in SOR;

SOR legally regarded as the “definitive record of ownership;”

Combating Money Laundering



End to end STP – from ISIN issue to Maturity;

ETME makes settlement process more efficient / timeous;

Executed trades reported for “matching” at “bulk” level – underlying allocations

included;

Participants have real time records of securities available for delivery;

Automated Capital Event payments settled at Participant level;

Centralised real-time electronic records in CSD of every electronic Security issued;

Opportunity for risk reduction and cost savings across the Market.

Enhanced STP



THANK YOUQuestions

Documents

Impact of Electronic Infrastructure on Inter- bank Flow of Funds