sarb nps update apr2002

SAReserve Bank - NPS Update, April 2002

April, 2002

SAMOS Business Continuity

SARB-Link Renewal

Oversight in the SA NPS

Risk Reduction Measures

Common Monetary Area Cross-border Transactions

A Review of the SADC Payment System Project

THE EVOLUTION OF SAMOS

The South African Multiple Option Settlement System, SAMOS, is a vitalcomponent of the National Payment System (NPS). Regular reviews ofits functionality are conducted to accommodate the different and chan-ging requirements for the settlement process.

SAMOS Version 4.0, implemented on 6th October 2001, includes theContinuous Batch Processing Line (CBPL) settlement option thatenables banks to meet only net obligations in a full batch. CBPL enablesa NPS operator or a Financial Market Exchange (FME) to send instruc-tions in batches for settlement to SAMOS on behalf of banks linked to apayment stream. Banks have to meet their net obligations in the batch,and settlement takes place when all banks have funded accounts rela-ting to the agreement.

Presently STRATE, the securities settlement body, uses the CBPL func-tionality to submit settlement instructions to facilitate the settlement oftrades on equities.

Another major inclusion in SAMOS Version 4.0 is an enhancement toaccommodate reference numbers on SWIFT formatted transactionsoriginating from sources outside South Africa. This has enabled benefi-ciary banks to reconcile payment and settlement information originatingfrom different sources.

SAMEX, the South African Reserve Bank (SARB) front-end system inter-facing to SAMOS, has been re-developed to run on the Windows NTplatform. Functionality on the enhanced SAMEX enables it to interfacewith SAMOS Version 4.0.

The introduction of Separate Trading of Registered Interest and Principalof South African Government Securities (STRIPS), by the NationalTreasury on the 15th of January 2002 had resulted in SAMOS having toaccommodate the new bonds as collateral. The proximity of the imple-

mentation date of SAMOS Version 4.0 tothe implementation of the STRIPS re s u l t e din having to provide a subsequentenhancement, to allow the use of thebonds as collateral in SAMOS on the 15thof January 2002. The permanent feature toaccommodate this re q u i rement will beincluded in the new version of SAMOS.This is scheduled for the latter part of 2002.

South African Reserve Bank

WHAT IS EMV, and what does it mean for bankers, etc ?

SAMOS Version 4

Use of STRIP Bonds as Collateral on SAMOS

NPSNPS UpdateUpdateNewsletter of the National Payment System (NPS) Department

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SAMOS BUSINESS CONTINUITY

Background

The attack on the World Trade Centre dramatically brought into focus the necessity for organisations to have solid and effec-tive business continuity arrangements. In an increasingly integrated business environment, businesses can rarely afford tobe offline as this could result in financial ruin.

The nature of the SAMOS system also requires that participants be able to submit instructions to the system at all timesduring operational hours. It is the responsibility of each participant to ensure that contingency arrangements are in place tofacilitate continuity of their business operations and in particular their interface to the SAMOS system.

The SA Reserve Bank has also embarked on a project to review the current BCP arrangements and specifically as theyrelate to the SAMOS system. This project is focussed on two areas namely, internal to the SA Reserve Bank as provider ofsettlement services as well as external as the overseer of the National Payment System. In this process the following pha-ses will form the basis of the review;• Business risk analysis• Contingency evaluation and planning• Testing• Review ongoing compliance arrangements.

Impact and ContingencyThe impact analysis of the unavailability and current contingency arrangements for various facilities that relate to the settle-ment system are detailed below;

Financial Instrument Register

Scenario: Clearing Manager Application is down.

Impact: Reserve of collateral cannot take place. This could result in insufficient capacity to settle obligations.

Contingency: Loans will have to be granted to the participant requiring funds using a manual process. SARB will payfunds into the settlement account of the participant requiring funds and attach a script logged at the FIRusing a manual process.

Assumptions: The SAMOS system is up and SARB Finance department grant the approval for this arrangement.

SWIFT message carrier

Scenario: SWIFT encryption unit is faulty, SWIFT telecommunication line is down or SWIFT interface gateway is down.

Impact: Participants making exclusive use of SWIFT message service will be unable to participate on SAMOS.Circulation of available funds will be restricted.

Contingency: Participating banks may use SAMEX (MQ) to submit their instructions to SAMOS. SA Reserve Bank as NPSoperator may also provide MQ facilities to use for single and batch settlements.

Assumptions: The SAMEX interface is available or the SARB NPS operator facility is available.

SWIFT security solution

Scenario: Keys used for Bilateral Key Exchange (BKE) have expired or the relevant hardware is dysfunctional. resul-ting in messages not reaching SAMOS.

Impact: Messages sent by participant are not reaching SAMOS.

Contingency: Initiate the BKE process. Participating banks may use SAMEX (MQ) to submit their instructions to SAMOS.

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SA Reserve Bank as NPS operator may also provide MQ facilities to use for single and batch settlements.

Assumptions: Relevant SWIFT support staff is available both at the SARB and participant site. The SAMEX interface isavailable or the SARB NPS operator facility is available.

SAMEX (MQ) security solution

Scenario: Certificates and keys used for security have expired.

Impact: Messages sent by participant are not reaching SAMOS.

Contingency: The participant’s security officers come to SARB to renew these certificates. SWIFT certified participantsmight use SWIFT to submit their instructions to SAMOS. SA Reserve Bank as NPS operator or Bankservmay also provide facilities to use for single and batch settlements. Participants may make arrangements touse the Participant Disaster Recovery Facility at the SARB.

Assumptions: Relevant participant security officers as well as the certification authority are available. SWIFT connectivityis available. The SARB NPS operator facility or Bankserv connectivity is available.

SAMEX (MQ) message carrier

Scenario: The relevant SAMEX hardware (server, security devices or frame relay access device or communication line)is dysfunctional.

Impact: Participant cannot generate messages or generated messages are not reaching SAMOS.

Contingency: SWIFT certified participants might use SWIFT to submit their instructions to SAMOS. SA Reserve Bank asNPS operator or Bankserv may also provide facilities to use for single and batch settlements. Participantsmay make arrangements to use the Participant Disaster Recovery Facility at the SARB.

Assumptions: Relevant participant security officers as well as the certification authority are available. SWIFT connectivityis available. The SARB NPS operator facility or Bankserv connectivity is available. The Participant DisasterRecovery Facility and relevant role players are available.

Collateral Market Values

Scenario: The Money and Capital Market department’s market value upload facility is not available.

Impact: No new market values will be electronically uploaded. Collateral might be over or under valued for loansgranted in SAMOS. Depending on the magnitude of the disaster the market values of collateral may bevolatile.

Contingency: Market values can be manually changed using the SAMOS Management system. Depending on the volati-lity of the rate, the Money and Capital Market department would need to take this volatility into considera-tion. The previous day's values can be used until correct values can be provided.

Assumptions: Market value figures are available.

SARB’s Ledger system (CBS)

Scenario: The CBS application is not available.

Impact: In the event of CBS being needed for manual settlement, due to SAMOS being unavailable, the impactcould be systemic in that no settlements can be processed. If the SARB CBS interface to SAMOS isunavailable the SARB Finance department will have difficulty in reconciling payments.

Contingency: A report can be produced by the SAMOS Customer Support Centre for CBS (Finance Dept) that reflectsthe amounts on the SAMOS settlement accounts for take on. SARB's Finance Department should put

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manual procedures in place as back-up for CBS.

Assumptions: The SAMOS system is available.

Bankserv (ACB)- PCH

Scenario: The clearinghouse system is not available.

Impact: If the problem is connectivity to SAMOS then it can have an impact on participants' capacity to settle ifbatched transactions have to be settled as single instructions. Banks will have difficulty in determining theirfinal positions.

Contingency: Bankserv's contingency plan. The current contingency arrangement for code line clearing is a secondmachine with the same software and hardware as the production machine, on the same site. If the settle-ment figures are available then the NPS operator backup facility at SARB Jhb (MMJ) can be used. Singlesettlement instructions can be sent to effect the gross settlement by participants at source.

Assumptions: Bankserv’s continuity plans will surfice to continue their business. SARB NPS operator facility is available.

SAMOS Customer Support Centre

Scenario: SAMOS Customer Support Centre facility is not available.

Impact: Unable to provide support to participants. Monitoring and call logging facilities are lost.

Contingency: Revert to manual process if necessary for logging calls and refer to paper based documentation for par-ticipant support.

Assumptions: The SAMOS system is available. The telephone communication link to participants is available and only themainframe application access and/or other SAMOS management tools are unavailable.

SAMOS system

Scenario: The SAMOS system is not available.

Impact: No electronic settlement will be possible.

Contingency: Banks may have to revert back to the previous method (prior to SAMOS) of settlement using SARB's CBSsystem. Batches will be settled manually on CBS. Single SIs need to be routed to a PCH (i.e. ZAPS) forend of day settlement. Banks that do not form part of ZAPS can also revert back to using cheques for pay-ment as an interim measure. Bankserv’s systems would be temporarily changed to remove validations fortransaction amount limits. SARB will generate ledger statements from CBS to enable participating banksto reconcile.

Assumptions: Participants have connectivity to Bankserv. Bankserv systems are available. There would be sufficient timeto remove the transaction limits from Bankserv systems. The CBS system is available.

Way forward

Participants will be invited to take part in the Work group that will identify weak links in the overall system where pressuremay develop and set out the contingency plans for the payment industry.Current participants include:- SARB (MMJ, MCM, NPSD, Finance Dept)- Settlement banks- Bankserv- UNEXCOR- STRATE (JSE).Participants are however responsible to ensure that their BCP plans are in place.

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SARB-LINK RENEWAL

This project was registered and initiated to investigate possible alternates to current infrastructure, to pointout and remedy single points of failure as well as to identify various components of the SARB-Link infra-structure which are either outdated or reached the maximum of their capacity usage.

During the investigation, the current SARB-Link environment was documented, an assessment was madeof this environment and alternative products or upgrades to existing products were identified where appli-cable. Finally a recommendation report was compiled which included single points of failure, outdatedequipment and technological advancements on the current infrastructure, and a presentation on these re-commendations was presented to Business Systems and Technology Department and National PaymentSystem Department management. These recommendations were approved, and the procurement phaseinitiated.

This renewal project included investigations into the current security solution, and possible replacementsthereof, as well as the future implementation of the latest SWIFT offering called SWIFT Net. These investi-gations were at the time not conclusive due to time constraints of the project, and the limited availability ofinformation. Business Systems and Technology Department and National Payment System Departmentmanagement then further tasked the project team to initiate a sub project to investigate these replacementsin more detail. This project became known as the “SARB-Link Renewal - Phase 3 Project”. This investiga-tion now ran parallel to the actual implementation of Phases 1 and 2.

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SA Reserve Bank SARB-Link Infrastructure


Diagram 1.1 removed


The Phase 1 and 2 implementation was completed at the end of October 2001, and some of the technicaladvantages of these renewal phases were the following:

1. Provision of a redundant route for internal SAMOS users.2. Replacement of the out-dated Cascade Frame Relay Switch.3. Increase in available ports for new participants.4. Created the possibility for participants to now connect via Cisco equipment.5. Replacement of outdated Ethernet Hubs with more manageable Cisco switches.6. SARB-Link became a single protocol network – IP. (Previously IP and SNA)7. Removal of the McData Controllers, which were seen as a single point of failure, and in doing so also

decreasing operational costs on maintenance.8. Removal of the extremely costly SNAX connectivity software from the Tandem Platform, resulting in

an extensive operational saving.9. A more manageable SARB-Link Environment.10. Initiated a move to an Ethernet only network. (Currently Token-Ring and Ethernet)

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SA Reserve Bank SARB-Link Infrastructure


Diagram 1.2 removed


As can be seen from the mentioned advantages, the implementation of Phase 1 and 2 proved to be very be-neficial to the SAMOS system and the SA Reserve Bank as a whole.

* Diagram 1.2 (on page 6) depicts the current configuration, however also includes the completed move toEthernet as per point 10 above, which has been initiated as a sub-project and is currently in progress.

As previously mentioned, the “SARB-Link Renewal - Phase 3 Project” investigation has been completed, andthe results and recommendations presented to both Business Systems and Technology Department andNational Payment System Department management met with favourable responses. With regard to the secu-rity recommendations, a mandate to continue with gaining the approval of the Security Architecture TaskGroup (SATG) was received from management, and a meeting has been scheduled for mid November. TheSATG is responsible for the security infrastructure within SARB-Link, and any proposed changes have to beapproved by them. The SATG is made up from members of participating financial institutions.

The security recommendations take the form of an IPSEC (Secure Internet Protocol) solution using PKI (PublicKey Infrastructure) with an onsite Certification Authority, running on a Windows 2000 platform, to replace thecurrent Map solution. This solution has been proposed for the following major reasons:

This solution has also been tested on the SARB-Link test environment, and the proposal was drawn up withthe assistance of the South African Certification Authority (SACA).

With regard to the SWIFT-Net investigation, the proposal is that we go ahead with formal plans to replace ourexisting X.25 SWIFT service with the new IP based SWIFT-Net service (FIN Service) when it becomes avai-lable in South Africa (2003). Part of this investigation has taken into account the equipment which could pos-sibly be used for the most redundant implementation, and based on these findings a budgetary figure hasbeen included in next years BSTD budget. Closer co-operation between SWIFT and SARB has already beguntaking place in order to begin discussing testing methods, finalizing dates and ensuring the correct solutions.

Further information on the above can be obtained from the Infrastructure Development and Deployment divi-sion of BSTD upon request, by contacting Koos Risseeuw (012) 313-3458 or Andrew Jennings (012) 313-3654.

1. Viable replacement for current Map Solution.

2. Leverage SAMEX NT infrastructure.

3. Open Standard Security Protocol.

4. Leading Vendor support.

5. Lowest cost of ownership for digital certificate solutions.

6. Reduction of extremely high maintenance and operational costs.

7. Flexible with ease of configuration.

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The National Payment System forms a vital part of the economicand financial infrastructure of the country. The efficient functioningof the payment system allows transactions to be effected safely andon time and thus makes a key contribution to overall economic per-formance of the country. Payment systems can also involve signif-icant exposures and risks for participants. The payment systemcan also be a channel for the transmission of disturbances from onepart of the economy or financial system to another. The potential of“systemic risk” is an important reason why the central bank mustbe involved in the design and operations of payment systems.

The Bank for International Settlement (BIS) defines payment sys-tem oversight as follows: “…oversight of payment systems is acentral bank task, principally intended to promote the smooth func-tioning of payment systems and to protect the financial system

OVERSIGHT IN THE SOUTH AFRICAN NATIONAL PAYMENT SYSTEM

Members of the NPS Oversight team are Johann Bence, Johnny Pienaar (contracter),Wayne Kotze, Mike Stocks and in front Magaret Olivier and Raadhika Sookoo.


from possible domino effects which may occur when one or moreparticipants in the payment system incur credit or liquidity pro-blems. Payment systems oversight aims at a given system (e.g. afunds transfer system) rather than individual participants.”

The South African Re s e r ve Bank’s (the Bank) oversight of pay m e n tsystems is an integral part of its wider responsibilities for monetaryand financial stability. Oversight of payment systems is therefore akey element in the Bank’s responsibility for the stability of thefinancial system as a whole. As the values moving through pay-ment systems have increased, the robustness of the payment sys-tems and risk management have become issues of increasingimportance. The focus of the Bank’s oversight function is thereforeto identify potential risk posed by the design and operation of pay-ment systems and to take steps to control the risk. The Bank’soversight role also relates closely to its operational role as prov i d e rof the settlement medium (central bank money) and as ultimatep r ovider of liquidity to the banking system and the economy as aw h o l e .

The main objective for the Bank in overseeing payment systems isto ensure that sufficient weight is given to risk reduction and ma-nagement in their design and operation. The focus must also be one f f i c i e n c y, e.g. whether a system processes payments in a timelyand reliable way, at a reasonable cost.

The Oversight function of the National Payment Sy s t e mDepartment (NPSD) is a relatively new function in the Department,which has been established to address risk in the payment systemand to ensure that the payment system conforms with the inter-national trend relating to systemically important payment systems.

The Oversight section of the NPSD has embarked upon profilingeach of the participants in the National Payment System. The pro-files are the first step in trying to monitor the payment flows andto identify risk in the National Payment System so that correctiveaction can be taken in order to minimise possible impacts of therisk on other payment system participants and the payment sys-tems as a whole. Individual profiles will allow analysts in NPSD tounderstand the system participants’ operations and the risk thatthe system participants face daily. As the profiles evo l ve over time,the National Payment System participants will be included in thed e velopment and enhancement process to ensure quality informa-tion is used on a high level when looking at the system as a whole.

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RISK REDUCTION MEASURES

Introduction

The SAMOS system has to-date been in operation for more than three years. Over this period, the banks, includingthe Reserve Bank, have learnt to utilise the system and its facilities as well as plan and apply strategies within thesettlement arena.

From the outset, one of the focus areas of the National Payment System Department (NPSD) has been to steer theNational Payment System, and the participants, towards compliance with the Bank for International Settlements’(BIS) core principles for systemically important payment systems. In addition to, and in support of this drive, prac-tices which bring risk to the payment system are identified, evaluated, and measures established to reduce the riskswhere possible.

Risk Reduction Measures

As mentioned above, the NPSD is committed to reducing risk in the payment system. To this end, the departmentpublished Position Paper 1/2000 during September 2000, identifying the measures that would be implemented toreduce risk in the system.

The areas addressed and the results achieved as a result of the risk reduction initiative include:

Payment Clearing House (PCH) Agreements

The drafting and signing of PCH agreements, between PCH participants, was aimed at formalising proceduresbetween participants in the various payment streams. It was of particular concern to the NPSD that, although par-ticipants in the various PCH’s operate according to certain technical rules, no formal agreement was in place betweenthem relating to bi-lateral arrangements, item limits or settlement assurance. In the case of failure by one or more ofthe participants to meet their settlement obligations, chaos could result. In addition, there appeared to be a per-ception that the Reserve Bank would automatically assure settlement should one, or more, participant fail to meettheir obligations.

Resulting from this initiative, the PCH agreements governing the batched payment streams have been signed by allbanks participating in the respective payment streams.

The remaining agreements to be signed include the Card Agreement and the Bond Exchange (BESA) Agreement.

Item Limits

To address the excessive exposures created in the various payment streams, item limits in each payment streamhave been incorporated into the PCH agreements.

The motivation for implementing item limits stems from evidence that should the “high values” be removed from thesepayment streams, the value of payments which could be settled across the Real-Time Line (RTL) could be increasedto exceed 90% of total value settled in the SAMOS system.

Currently, with the item limits implemented to-date, the total value processed in the ZAPS payment stream hasdecreased from R1.4 trillion per month in October 1998 to R6 billion in September 2001. This decrease correspondswith an increase in the RTL.

The settlement patterns across the other payment streams are being closely monitored as the items limits in eachpayment stream are implemented.

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Item Limits have been implemented in all payment streams by the end of January 2002.

Settlement Assurance

Prior to the implementation of the SAMOS system only a few formal agreements existed between the participatingparties and these were focussed upon the task and not the reduction of risk and risk exposures.

In terms of the South African National Payment System Strategy and Framework document (“Blue Book”) principlesrelating to risk reduction and the BIS Core Principles, clauses needed to be drafted into the PCH Agreements where-by settlement of the PCH batches would be assured by the participants. These clauses imply that the participants ina PCH would provide assurance, in the form of collateral acceptable to the Reserve Bank, to assure coverage of, atleast, the greatest net debit position and preferably twice the greatest net debit position, in the PCH. Should a par-ticipant, therefore, fail to meet its obligation in the batch settlement on a particular day, the Reserve Bank would havethe option to attach the collateral provided by the participants in order to fund the settlement account of the defaul-ting party, and thereby assure settlement. The activation of this process would have to be managed and co-ordina-ted in terms of other options that the Reserve Bank may wish to exercise in its role as banker to the banks or over-seer of financial stability in a crisis situation. The implementation of settlement assurance of the PCH batches wouldensure that the banking community have a role to play in funding banks which face a liquidity shortage in such a cri-sis situation.

However, the provision of collateral to cover the greatest net debit position in the PCH batches, in terms of currentpractices, would currently pose a major problem as it is doubtful that the banks could afford to collateralise thesepositions. The only other option available to the banks implies that high-values would have to be removed from therelative payment streams in order to make the provision of settlement assurance practicable.

The effect of the implementation of item limits will be monitored over a period to determine to what extent settlementassurance may have to be applied. As noted above, the implementation of the item limits to reduce these exposuresand settlement assurance will be phased in over a period.

Settlement on day-of-value

Moving to settlement on day-of-value and discontinuing the practice of back-dating settlement of the PCH batchesrepresents the last phase of the current risk reduction measures envisaged in the NPS and is largely dependent onthe successful removal of high values from the inappropriate payment streams into the SAMOS immediate finalityfacility in the RTL.

The motivation to move to settlement on the day of value can best be summarised by the comment IV.1 in the BISdocument “Core Principles for Systemically Important Payment Systems” which states the following, “Between thetime when payments are accepted for settlement by the payment system (including satisfaction of any relevant riskmanagement tests, such as the application of limits on exposures or availability of liquidity) and the time when finalsettlement actually occurs, participants may still face credit and liquidity risks. These risks are exacerbated if theyextend overnight, in part because likely time for the relevant authorities to close insolvent institutions is between busi-ness days. Prompt final settlement helps to reduce these risks. As a minimum standard, final settlement should occurat the end of the day of value.”

The BIS Task Force responsible for drafting the core principles also documented, inter alia, (in their discussion do-cumentation), the following,”In systems that conduct a net settlement at a designated time, the time between a) thecompletion of the processing cycle during which payments are accepted and b) the extinguishing of net claimsthrough the settlement process should be kept to a minimum.”

With effect from 7 May 2001 all PCH batches are being settled immediately upon receipt in the SAMOS system andare no longer scheduled for 07:00 on the next business day. This means that the overnight exposure of between 8and 14 hours in the settlement system has been eliminated. This implies that settlement of payment obligations forall payments, including the PCH batches, now occur on the intended day of value.

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Throughput in the SAMOS System and results achieved

The implementation of the risk reduction measures have had positive results.

The removal of the Temporary (“Dummy”) Collateral and the implementation of the facility to allow the banks toreserve the available Cash Reserve Contra Account balance in SAMOS has had a positive effect. Although few bankshave availed themselves of this facility, the overall liquidity management of the banks has improved with fewer occur-rences of insufficient funds in the SAMOS system.

The option given to the banks to either reduce their exposures in the PCH environment by implementing item limits,as opposed to the Reserve Bank requiring the banks to collateralise their greatest net debit position, has beenfavourably accepted.

The effect of item limits in each payment stream is shown in the following table, including figures of January 2001vs January 2002:

PERIOD January 2001 January 2002

Payment Stream Value Processed % of Total Value Processed % of Total

Total Value Processed 3,824,101,628,667.91 3,134,946,677,872.06

Real-Time Line 3,271,608,974,364.20 85% 2,817,575,684,337.46 90%

Cheque Stream (CLC) 274,641,093,830.87 7% 129,297,399,563.08 4%

EFT Stream 246,920,245,794.64 6% 179,381,538,397.80 5%

ZAPS Stream 28,721,203,010.20 0.8% 6,282,163,273.72 0.2%

SASWITCH Stream 2,210,111,668.00 0.1% 2,409,892,300.00 0.1%

During 2001 the value of collateral reserved at start-of-day in SAMOS remained reasonably constant.

Conclusion

The NPSD will continue evaluating and implementing various risk reduction measures that not only improve themechanisms within the NPS, but also reduce all risks within the system.

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COMMON MONETARY AREA CROSS-BORDER TRANSACTIONS : POSITION PAPER

The implementation of the strategies contained in the South African National Payment System (NPS) Strategy andFramework document (Blue book) is currently being actively pursued by the South African banking industry in con-junction with the Payments Association of South Africa (PASA) and the South African Reserve Bank (SARB).

One of the fundamental principles contained in the Blue book is a re q u i rement that all payment related risks should beidentified, quantified and assessed with the purpose of enabling the participants to manage their exposures in the NPS.Coupled to this is the re q u i rement that cro s s - b o rder practices should be reviewed with the purpose of formalising theSouth African Rand (ZAR) leg of the payment in the NPS and, in the long term, having these practices comply withi n t e rnational best practice.

In order to achieve this, a document entitled “Position Paper on Common Monetary Area Cro s s - b o rder Payments” hasbeen drawn up by the NPS Department of the SARB in conjunction with PASA and the banking industry. This docu-ment which outlines the principles to be applied by the clearing banks in South Africa when clearing cro s s - b o rder pay-ments through the Payment Clearing House (PCH) facilities of the NPS was approved by the Governors of the SAReserve Bank and was issued to the South African banking industry on 22 October 2001.

It is intended that the application of the principles outlined in the document will promote the achievement of a legallysound cro s s - b o rder payment system within the CMA where the risks involved are effectively identified and managed.


WHAT IS EMV, AND WHAT DOES IT MEAN FOR BANKERS, RETAILERS ANDCONSUMERS?

During your travels, you would have been inconvenienced by the diversity of electrical plugs in different countries: 3 squarepins in UK; 2 flat pins in France; 2 round pins in USA; 2 flat pins (angled) in Australia etc.; and what about your GSM mobilephone? Same problem: works great in the UK and some countries in Europe, but is mostly useless in North America andother parts of the world. This frustration is entirely due to a lack of interoperability.

As we become aware of the enormous opportunities and challenges, unequalled in the history of commerce, accompany-ing the dramatic developments in smart card technology, the question of a single, common operating standard demandsattention. The banks, and other major players, recognise that smart cards provide vastly superior storage and processingcapacity together with flexibility, impossible on magnetic stripe. They also offer opportunities for multiple applications at thehighest levels of operational security. As the expanding global developments in e-commerce, mobile commerce and vir-tual commerce start to impact the marketplace, smart card issues become critically important.

Key among these concerns, apart from security, is the question relating to operating standards - agreed global standardsenabling credit and debit card interoperability.

In response to the demands of their member banks, the major international card payment associations - Europay,Mastercard and Visa - having identified the issue, established the EMV initiative as a worldwide industry working group. Theobjective of the EMV process is to facilitate the introduction of chip technology into the international payment systems bydeveloping joint specifications.

Inline with initiatives throughout the world, the EMV Forum South Africa, has been established. The EMV Forum is drivenby real business issues including:

• Achieving domestic and global interoperability and avoiding inflexible and limited proprietary schemes;• Keeping pace with future products and services springing from the foundation of chip technology;• Countering escalating fraud and payments security risks, and providing cardholder authentication.

The EMV Forum is a major initiative by South African Banks, the leading Card Associations and more re c e n t l y, Retailers, toinitiate and implement the global EMV chip card standard into the South African payments system. It is a chapter of EMVCo,LLC, the international operation formed in February 1999 by Europay International, MasterCard International and Vi s aI n t e rnational to manage, maintain and enhance the EMV Integrated Circuit Card Specifications for Payment Systems.

EMVCo will ensure that single terminal and card approval processes are developed at a level that will allow cross paymentsystem interoperability through compliance with the EMV specifications. Euro p a y, MasterCard and Visa have workedtogether over the last few years to develop specifications that define a set of re q u i rements to ensure interoperability betweenchip cards and terminals on a global basis, re g a rdless of the manufacture r, the financial institution, or where the card is used.

The overall objective of the international EMV process is to facilitate the introduction of chip technology into the internationalpayment system by developing joint specifications. Locally, the EMV Forum's objectives are to:

• Ensure interoperability and mutual acceptance of EMV chip cards at point of sale, bank branches, ATMs and otherdevices in "bank-owned", "retailer-owned" and "client-owned" environments.

• Ensure ongoing liaison with the appropriate Government offices and agencies regarding mutual developments and chip-related initiatives.

• Ensure co-ordination and liaison with thye SA Retail Payments Issues Forum (*SARPIF) on EMV chip matters.• Agree on the minimum common implementation requirements and migration timeframes for the acceptance of EMV chip

cards.• Reach agreement on switching, clearing and settlement of EMV transactions.• Ensure two-way communication with vendors/suppliers and retailers on standards and mandatory requirements.• Co-ordianate EMV related training conducted by Visa, Mastercard and other training initiatives.• Be the conduit for the gathering and sharing of information of common interest.• Function as a formal working group on EMV standards and to provide input, where necessary, to other industry bodies.

For more information please visit the Forum’s website at www.emv.co.za.


A REVIEW OF THE SADC PAYMENT SYSTEM PROJECT

The SADC Payment System Project suff e red seriously from a loss of momentum arising directly from a shortage of funds.This led to the delay in implementing the SADC Payment System Project in the Democratic Republic of Congo (DRC) andSeychelles, the cancellation of the Annual Regionally Workshops for the years 2000 and 2001. Additionally the pro j e c tteam have been unable to continue with the building of the re q u i red capacity in the SADC region, in terms of the re s u l t sof the profiling project which was completed during November 1999.

The loss of momentum, notwithstanding, the project continued making pro g ress with the various other projects that arebeing undertaken, as follows:

• The SADC Settlement Pro j e c t .• Guide to Developing a Strategic Framework for Payment System Modern i s a t i o n .• Updating of the publication, “Payment Systems in the Southern African Development Community”, (the Green Book).• Assistance to several individual SADC member countries with the development of their clearing and settlement sys-

t e m s .• Informal discussions with the Common Market for Eastern and Southern Africa (COMESA).

SADC Settlement Project

As a first step in the implementation of a decision taken by the Committee of Central Bank Governors (CCBG) inSADC at their meeting held in Cape Town in September 2000, the SADC Payment System Project team arrangeda meeting of Country Leaders in Pretoria on 26 and 27 November 2000. The major objectives of this meeting wereto establish from the country leaders whether countries were prepared to participate in the project to develop com-bined business and technical specifications for regional payment systems, to calculate resource requirements andto initiate the planning of the way forward. In this regard, a series of four analysis sessions were held for the initialdevelopment of the combined specifications based on common business requirements for the above mentionedsystems.

Two further workshops were held also in Pretoria during periods 11 to 12 June and 13 to 15 June 2001. The pur-pose was to draft the Business Requirements Model for the SADC suitable real time gross settlement (RTGS) sys-tem. Consultants were also invited for an expert input.

A tremendous amount of work was done by a combined SADC RTGS System Project team which consisted ofup to three members from each participating country (Angola, Botswana, DRC, Mozambique, Swaziland, Tanzaniaand Zambia), members of the SADC Payment System Project team and a team of IT Professionals appointed bythe IT-Forum, including three consultants.

A group of fifty-four vendors identified by the participating countries were requested to respond to a pre-qualifica-tion questionnaire. Pre-qualification of vendors was undertaken and the request for proposal (RFP document) wasissued to seventeen vendors who were qualified to tender for the provision of a suitable RTGS system. A vendor’sbriefing was held in Johannesburg and twelve vendors indicated that they would submit proposals, but by the clo-sing date of 12 December 2001, only four proposals were received. Three of these were found to be substantive-ly responsive during a pre-evaluation assessment.

A Bids Evaluation Workshop was held in Pretoria during the period 14 to 18 January 2002, where the three sub-stantive bids were evaluated on a technical basis and thereafter on a financial basis. Arising from this process, twobidders were identified as being able to provide the solutions required by the region and were requested to pre-sent their solution to the project team at a workshop held in Pretoria during the period 13 to 15 February, 2002.

A final report on the project which was started in February, 2001, has been prepared and presented to theGovernors at the SADC Committee of Central Bank Governors meeting on 11 April, 2002.

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Representatives from SADC countries attending the RTGS Bids Evaluation workshop atCenturion Lake Hotel, 14 - 18 January 2002.

The Green Book Project

The Green Book which assisted in putting the SADC Payment System Project on the international “map” con-tains information up to approximately 1997. Additionally, some statistics supplied are not in accordance with theBank for International Settlements (BIS) standards. The project has been launched to update the Green Bookas at December 2000, and to improve the overall quality of the statistics provided by the region.

There are severe difficulties which are being experienced with this project, which is delaying the release of therelevant data. These difficulties will be discussed and resolved in the next meeting of the country leaders.

Guide to Developing a Strategic Framework for Payment System Modernisation

The development of the four volumes of the “Guide to Developing a Strategic Framework for Payment SystemModernisation” were completed in the final draft format. The volumes have since been combined into a singledocument. The finalised document is expected to be printed by April 2002 and have it available on the SADC-Bankers web-site at the same time.


Information regarding this publication can be obtained from:

ACB Automated Clearing BureauBankserv SA Bankers Services Co LtdBCP Business Continuity PlanningBKE Bilateral Key ExchangeBSTD Business Systems and Technology DeptCBPL Continuous Batch Processing LineCD Central DepositoryCPL Continuous-Processing LineCSC Customer Support CentreEFT Electronic Funds TransfersFIR Financial Instrument RegisterFME Financial Market ExchangeMICR Magnetic Ink Character RecognitionPCH Payment Clearing House

REPOs Repurchase AgreementsRTL Real-Time LineRTGS Real-Time Gross Settlement (system)SACA South African Certification AuthoritySAMEX The external interface supplied to banks

by the Reserve Bank in order to enablebanks to access the SAMOS system

SAMOS South African Multiple Option Settlement(system)

SARB-LINK Settlement message-exchange serviceSCD Settlement Cycle DateSI Settlement InstructionSTP Straight-Through ProcessingSTRATE Share Transactions Totally Electronic

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Assistance to individual SADC member countries

The project team has continued to give assistance to individual SADC member countries in respect of va-rious aspects of the development of Clearing and Settlement systems and other matters relating to themodernisation of payment systems in the relevant countries.

Informal discussions with COMESA

At a request from the Chairman of the COMESA Committee of Central Bank Governors to the Chairmanof the SADC Committee of Central Bank Governors, the SADC Payment System Project team arrangedtwo informal meetings with the combined COMESA/IMF team to discuss the possibility of COMESA andSADC co-operating on the development of a cross-border payment system.

The EditorEretha du Toit

Contact details: Telephone +27 12 313-4107Fax +27 12 313-4288

Design & LayoutAmine van Heerden

What does .... mean?

SA Reserve BankNational Payment System DepartmentPO Box 427PRETORIA0001

Internet Addresswww.reservebank.co.za

sarb nps update apr2002

Economy & Finance