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  1. AMEDA LEADERSHIP FORUM Risk Management and Depository Services Interbank Money Markets and Payment Systems: A Two Way Relationship PRESENTED BY: Anthony van Eden DATE: 28th April 2009

  2. Glossary of Terms and Acronyms

  3. Presentation Overview • South African Money Market statistics; • Background to the South African Money Market; • Risk management through the deployment of infrastructure in MM - The South African Dematerialisation of MM Project; • Other benefits associated with a dematerialised MM.

  4. South African Money Market Statistics Average Duration per Issue -100 days

  5. Background to the South African Money Market • 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; • Stringent exchange controls;

  6. Background to the South African Money Market (continued) • Securities Services Act; • National Credit Act; • Deposit Taking Institutions Act; • Central Bank (SARB) 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;

  7. Risk Management Through the Deployment of Infrastructure in Money Markets • Risk Reduction: • Operational; • Credit; • Settlement; • Systemic; and • Reputational.

  8. Strate’s Money Market Securities System – Phase 1

  9. High Level Interaction 2 JSE (NNA) MMS Issuers 1 MFA 4 A Traders A 4 2 MMPBPR MMCCR MMSR 5 1 2 Message Router 3 4 3 1 Optional Message Router Issuer 1 ETME A 4 Issuer Agent 2 Bulk Matching 1 Issuer Agent 3 2 Custodian 5 3 2 A CLIENTS Custodian 4 A Bilateral Bulk Trade Allocation SOR 4 3 Trader Optional 5 4 4 Trader 7 9 12 Ref Nos. 5 FULL Participant 8 Corporate Participant 6 13 Settling Bank Ref Nos. 7 Message Router 8 14 9B 9A 13 11 10 Settling Banks 11 SAMOS RTL 11 10 10 Information Flows: 14 - Cash Movement…

  10. Reduction of Operational risk • Accurate and complete recording • End to end STP – from ISIN issue to Maturity; • Standardised electronic communication with MMSS – ISO 15022 message types; • All MM securities will be:- • standardised into four generic categories; • allocated an ISIN real-time via the CSD; • issued, traded and settled electronically; • Use of unique identifiers - Participants, Business Partners, investors, security issuing, SOR Securities Accounts, trade matching, clearing and settlements trades and Capital Events; • Electronic Trade Matching Engine (“ETME”) – post trade/pre-settlement validation trade information;

  11. Reduction of Operational risk (continued) • Accurate and complete recording (continued) • Any change in beneficial ownership must be reported to ETME; • Trade details cannot be modified or cancelled once matched; • Carries, Repurchase Agreements (Repos) and Reverse Repos treated as Sale and Buy Back transactions –change in beneficial ownership of Securities; • Both legs to Buy Backs reported simultaneously - all four legs must match; • Amendment to 2nd leg of Buy Back reported by both counterparties to ETME for matching; • ETME warns trading party where counterparty leg match not made within Market agreed time interval; • Standardised generic settlement procedures for trades and Capital Events;

  12. Reduction of Operational risk (continued) • Security • Securities issued into and retained in electronic format in the SOR in CSD; • SOR legally regarded as record of definitive ownership; • Communication with MMSS via SWIFT or Strate WAN – reliable, secure and robust; • Use of unique identifiers for Participants and Business Partners linked to roles in the MMSS; • Transfer of ownership based on SFIDvP; • Capital Events paid to entitled investors’ Participants in total for dissemination.via accounting entry. • Existing secure and proven inter-bank settlement systems via SARB SAMOS RTL using ISO 15022 messages over SWIFT infrastructure;

  13. Reduction of Settlement Risk • Carries; Repurchase and Reverse Repurchase Agreements treated as change in beneficial ownership i.e. Buy Backs; • All four legs to Buy Backs reported MUST matched for settlement of 1st leg; • Amendment to 2nd leg of Buy Back reported to ETME; • Matched bulk trades cleared and settlement instructions processed on a gross principal-to-principal basis; • Participants have access to real time records of client Securities accounts. • Participants commit to delivery of securities/settlement for client’s matched trades “Against” and “Free” of Payment;

  14. Reduction of Settlement Risk (continued) • Payment instructions only sent to Participant by CSD once commitments for delivery and settlement matched by MMSS; • 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 until Pledge Release instructions received or security matures; • Participants notified immediately by CSD when insufficient securities for delivery ; • Trade settlement only fails at close of SARB settlement windows;

  15. Reduction of Settlement Risk (continued) • Settlement status messages sent by MMSS to Participants which can also query on-line, real-time ; • “Real-time” settlement in Central Bank funds (SAMOS RTL) or intra-bank (“on-us”;) for trades and Capital Events; • Existing secure and proven inter-bank settlement systems via SARB SAMOS RTL using ISO 15022 messages over SWIFT infrastructure;; • Transfer of securities simultaneous with confirmation “Final and Irrevocable” settlement in Central bank Funds or “on us.” • Capital Events settled electronically on payment date; • Standardised generic settlement procedures for trades and Capital Events;

  16. Reduction of Credit Risk • Participants have to commit to cash settlement before securities are reserved/locked; • Use of SARB SAMOS RTL:- • Final and irrevocable settlement; • Real time availability of funds on settlement date; • Facilitates more efficient and accurate credit management – cash flow forecasting; • SARB has real time statistics of compliance with Liquid Asset Requirements;

  17. Reduction in Systemic risk • Bulk trades cleared and settled on Gross principal to principal settlement – avoid one “fail all fail;” • Participants have ability to electronically freeze Securities Accounts of its clients; • Curator appointed by the SARB has the ability to place freeze over all of a banks Securities Accounts. • SARB has real time statistics of compliance with Liquid Asset Requirements;

  18. Reduction in Reputation risk • Combating 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.” • Settlement excellence • Achieved through risk mitigation outlined above.

  19. Other Benefits Associated with a Dematerialised MM • Improvement in Liquidity • More timely settlement of trades and Capital Events via SAMOS RTL should increase activity in the secondary market; • Enhanced STP • Commensurate Cost savings associated with paper driven issuing, recording, custody and settlements.