Risk Management and Depository Services AMEDA LEADERSHIP FORUM

Risk Management and Depository Services AMEDA LEADERSHIP FORUM Risk Management and Depository Services Interbank Money Markets and Payment Systems: A Two Way Relationship PRESENTED BY: Anthony van Eden DATE: 28 th April 2009 AMEDA Leadership Forum – Alexandria, Egypt, 27 th -30 th April 2009 1

Risk Management and Depository Services Glossary of Terms and Acronyms Capital Event : Coupon or Maturity payments On-us : Settlement of counterparties intra-bank CSD : Central Securities Depository Participant : CSD Participant ETME : Electronic Trade Matching Engine RTL : Real Time Line ISIN : International Standard Identification Number SARB : South African Reserve Bank ISO : International Standards Organisation SAMOS : South African Multi-Option Settlement System JSE : JSE Limited – licensed stock exchange SFIDVP : Simultaneous Irrevocable Delivery versus Payment MM : Money Market SOR : Securities Ownership register MMCCR : MM Central Client Register STP : Straight Through Processing MMSR : MM Securities Register SWIFT : Society for Worldwide Interbank Financial Telecommunications MMPBPR : MM Participant & Business Partner Register USD : United States Dollar MMSS : Money Market Securities System ZAR : South African Rands AMEDA Leadership Forum – Alexandria, Egypt, 27 th -30 th April 2009 2

Risk Management and Depository Services 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. AMEDA Leadership Forum – Alexandria, Egypt, 27 th -30 th April 2009 3

Risk Management and Depository Services South African Money Market Statistics Approximate Monthly Nominal Value (billions) ZAR USD (USD 1=ZAR 10) (Extracted May 2008) 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 AMEDA Leadership Forum – Alexandria, Egypt, 27 th -30 th April 2009 4

Risk Management and Depository Services Background to the South African Money Market Informal market– no exchange or Automated Trading Systems; Clearing and settlement unchanged sinception 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 SFIDv. P; certificate splitting; physical delivery against Capital Events; Stringent exchange controls; AMEDA Leadership Forum – Alexandria, Egypt, 27 th -30 th April 2009 5

Risk Management and Depository Services 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; AMEDA Leadership Forum – Alexandria, Egypt, 27 th -30 th April 2009 6

Risk Management and Depository Services Risk Management Through the Deployment of Infrastructure in Money Markets Risk Reduction: v Operational; v Credit; v Settlement; v Systemic; and v Reputational. AMEDA Leadership Forum – Alexandria, Egypt, 27 th -30 th April 2009 7

Risk Management and Depository Services Strate’s Money Market Securities System – Phase 1 AMEDA Leadership Forum – Alexandria, Egypt, 27 th -30 th April 2009 8

Risk Management and Depository Services High Level Interaction 2 MMS MFA 2 Issuer Agent 3 4 Custodian 5 Optional 4 MMSR 3 1 ETME Bulk Matching 5 A Bilateral Bulk Trade Allocation 13 14 4 Optional 1 1 3 2 Issuer Agent Custodian A Trader 4 5 Ref Nos. 2 A FULL Participant 3 6 Message Router Traders 4 2 4 8 Participant 3 7 SOR 12 Ref Nos. Corporate 4 5 2 Issuers 7 9 CLIENTS Trader 4 A MMCCR Message Router 1 Message Router A MMPBPR Issuer 1 JSE (NNA) Settling Bank 8 9 B 9 A 13 11 Settling Banks 10 11 SAMOS RTL 10 Information Flows: 14 - Cash Movement… A - Client Maintenance 2 - ISIN Issue 4 - Trade Reporting 1 - ISIN Request 3 – Amend Issue 5 - Trade Matching 7 - Commit 9 – Payment Instruction 11 – Settlement Confirmation AMEDA Leadership Forum – Alexandria, Egypt, 27 th -30 th April 2009 6 - Allegement 8 - Payment Request 9 10 - Payment Advice 12 - SFIDVP 13 – Status Confirmation

Risk Management and Depository Services Reduction of Operational risk Accurate and complete recording v End to end STP – from ISIN issue to Maturity; v Standardised electronic communication with MMSS – ISO 15022 message types; v All MM securities will be: ü ü allocated an ISIN real-time via the CSD; ü v standardised into four generic categories; 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; v Electronic Trade Matching Engine (“ETME”) – post trade/pre-settlement validation trade information; AMEDA Leadership Forum – Alexandria, Egypt, 27 th -30 th April 2009 10

Risk Management and Depository Services Reduction of Operational risk (continued) Accurate and complete recording (continued) v Any change in beneficial ownership must be reported to ETME; v Trade details cannot be modified or cancelled once matched; v Carries, Repurchase Agreements (Repos) and Reverse Repos treated as Sale and Buy Back transactions –change in beneficial ownership of Securities; v Both legs to Buy Backs reported simultaneously - all four legs must match; v Amendment to 2 nd leg of Buy Back reported by both counterparties to ETME for matching; v ETME warns trading party where counterparty leg match not made within Market agreed time interval; v Standardised generic settlement procedures for trades and Capital Events; AMEDA Leadership Forum – Alexandria, Egypt, 27 th -30 th April 2009 11

Risk Management and Depository Services Reduction of Operational risk (continued) Security v Securities issued into and retained in electronic format in the SOR in CSD; v SOR legally regarded as record of definitive ownership; v Communication with MMSS via SWIFT or Strate WAN – reliable, secure and robust; v Use of unique identifiers for Participants and Business Partners linked to roles in the MMSS; v Transfer of ownership based on SFIDv. P; v Capital Events paid to entitled investors’ Participants in total for dissemination. via accounting entry. v Existing secure and proven inter-bank settlement systems via SARB SAMOS RTL using ISO 15022 messages over SWIFT infrastructure; AMEDA Leadership Forum – Alexandria, Egypt, 27 th -30 th April 2009 12

Risk Management and Depository Services 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 1 st leg; Amendment to 2 nd leg of Buy Back reported to ETME; Matched bulk trades cleared and settlement instructions processed on a gross principal-toprincipal 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; AMEDA Leadership Forum – Alexandria, Egypt, 27 th -30 th April 2009 13

Risk Management and Depository Services 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; AMEDA Leadership Forum – Alexandria, Egypt, 27 th -30 th April 2009 14

Risk Management and Depository Services Reduction of Settlement Risk (continued) Settlement status messages sent by MMSS to Participants which can also query on-line, realtime ; “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; AMEDA Leadership Forum – Alexandria, Egypt, 27 th -30 th April 2009 15

Risk Management and Depository Services Reduction of Credit Risk Participants have to commit to cash settlement before securities are reserved/locked; Use of SARB SAMOS RTL: v Final and irrevocable settlement; v Real time availability of funds on settlement date; v Facilitates more efficient and accurate credit management – cash flow forecasting; SARB has real time statistics of compliance with Liquid Asset Requirements; AMEDA Leadership Forum – Alexandria, Egypt, 27 th -30 th April 2009 16

Risk Management and Depository Services 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; AMEDA Leadership Forum – Alexandria, Egypt, 27 th -30 th April 2009 17

Risk Management and Depository Services Reduction in Reputation risk Combating Money Laundering v Ownership maintained in CSD at beneficial owner level in SOR; v Only foreign companies can open Nominee accounts in SOR; v SOR legally regarded as the “definitive record of ownership. ” Settlement excellence v Achieved through risk mitigation outlined above. AMEDA Leadership Forum – Alexandria, Egypt, 27 th -30 th April 2009 18

Risk Management and Depository Services Other Benefits Associated with a Dematerialised MM Improvement in Liquidity v More timely settlement of trades and Capital Events via SAMOS RTL should increase activity in the secondary market; Enhanced STP v Commensurate Cost savings associated with paper driven issuing, recording, custody and settlements. AMEDA Leadership Forum – Alexandria, Egypt, 27 th -30 th April 2009 19

Risk Management and Depository Services THANK YOU AMEDA Leadership Forum – Alexandria, Egypt, 27 th -30 th April 2009 20