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FINANCE PORTFOLIO COMMITTE
31 August 2004
NATIONAL PAYMENT SYSTEM AMENDMENT BILL: BRIEFING
Chairperson: Dr R Davies (ANC)
Documents handed out
National Payment System Amendment Bill [B14-2004]
Presentation on the National Payment System Bill
The Committee was briefed on the National Payment System Amendment Bill. The Bill would allow institutions that are currently excluded from the Banks Act to become limited members of the payment system management body. The major reason for the proposed amendments to the Act is to include Continuous Link System banks. There are also technical problems in the current Act. Participants of a settlement system are obliged to become members of the payment system's management body called the Payment Association of South Africa. The Bill also seeks to confer powers to issue directives to the Reserve Bank. At the moment there is nothing in the Act that binds a curator to agreements signed between participants. The Bill proposes to bind the curator until such time he or she declares he cannot be bound. The Bill would allow institutions that are currently excluded from the Banks Act to become limited members of the payment system management body.
The South African Reserve Bank was represented by Ms D Hlajoane (Assistant General Legal Counsel) Mr D Mitchell Head: National Payment System Department, Mr B Khoza (Senior Counsel) and Mr J Pienaar (Consultant: National Payment System). Mr Mitchell briefed the Committee on the Bill.
In the late 1980s and early 1990s the Bank for International Settlements had two major concerns about payments systems. They were concerned that national payment systems were not electronic. This created a large risk regarding overnight payments that had entered into the system but not yet been settled. They requested that the central banks over the world should improve this situation. They also felt that the private sector should reduce the risk around foreign exchange settlement. In 1998 South Africa launched its electronic settlement system called South African Multiple Options Settlement (SAMOS) system. It settles payments in gross and it is real time.
The Reserve Bank holds the accounts of various clearing houses. One bank can pay another through the SAMOS system with immediate effect. Once the transaction has been recorded in the books of the Reserve Bank it is final and irrevocable. The only way to reverse such a transaction is to send an equal transaction in the opposite direction.
The Bond Exchange of South Africa and the Johannesburg Securities Exchange are other clearing houses that exist in South Africa. The obligations arising out of bonds and equities transactions are determined by Share Transaction Totally Electronic (STRATE). These are passed into the settlement system for final and irrevocable settlement. The SAMOS system settles approximately R3.2 trillion per month, which equates to between R220b and R250b per day. There is not that much liquidity in the markets. The SAMOS system is doing what it is supposed to do and that is circulating money.
South Africa banks have fairly sophisticated networks of their own such as automated teller machines. Normally, one would find big corporates and smaller payment service providers like post banks linking to the payment system via the big banks. A lot of retailers also have their own networks. The National Payment System Act covers transactions from the payer up to the beneficiary.
The Continuous Link System (CLS) was the private sector's response to the Bank for International Settlements. In a foreign exchange there are two legs to the transaction. If one makes a Rand-Dollar transaction the Rand part gets settled in South Africa and the Dollar part of the transaction would be settled at the United States Federal Reserve Bank. Problems arise due to time zones. In 1976 there was a Dollar-German Mark transaction. The Dollar side of the transaction was settled successfully. By the time the German market opened and the German part of the transaction had to be performed the bank failed. The CLS condenses the settlement of foreign exchange transactions into a shorter period. The advantage of the CLS is that it can settle large values with less liquidity. At the moment it settles 1.3 trillion dollars in foreign exchange settlements using between R30b and R50b. In the future non-CLS banks would be subjected to higher capital adequacy requirements. If South Africa enters into the CLS in November 2004 it would do so with three other countries: Hong Kong, Korean and New Zealand. If South Africa does not enter into the system by November chances are that it would probably not be allowed to enter into the system for at least two years.
The Bill is the work of the Standing Committee for the Review of the National Payment System (NPS) Act. The Committee was established in terms of Section 15 of the NPS Act. It is chaired by the Reserve Bank. Members were appointed individuals from banking industry for a renewable period of 3 (three) years.
The major reason for the proposed amendments to the Act is to include CLS banks. There are also technical problems in the current Act. Participants of a settlement system are obliged to become members of the payment system's management body called the Payment Association of South Africa. The Bill also seeks to confer powers to issue directives to the Reserve Bank.
To be allocated a settlement account at the Reserve Bank one needs to be a bank, a mutual bank or a branch of a foreign bank registered in South Africa. CLS would not have a physical presence in South Africa and therefore could not be registered in the country. The Reserve Bank had to find a mechanism to bring something like the CLS into the settlement system without having to register it as a bank. A decision was taken to have a designated settlement system. The Bill would allow the Reserve Bank to designate a system that it believes to be in the interest of the safety, effectiveness and efficiency of the payment system. The Bill would distinguish between South African settlement system participants and CLS participants. The current Act allows for finality and irrevocability of South African payments. There is a need to cater for the finality and irrevocability of payments through the Continuous Link System that go through the Reserve Bank.
At the moment there is nothing in the Act that binds a curator to agreements signed between participants. The Bill proposes to bind the curator until such time he or she declares he cannot be bound. Curatorship and liquidation provisions apply to both South African and foreign liquidations and curatorships. This means that a CLS settlement posted through the Reserve Bank cannot be unwound by a curatorship that is being conducted by a foreign appointed curator.
The Bill would allow institutions that are currently excluded from the Banks Act to become limited members of the payment system management body. The Reserve Bank would be allowed to issue directives. A directive would only become effective after three months of issue except in cases where there is somebody who is causing systemic risks. In such cases the directives would be effective immediately.
Section 7 of the current Act prohibits any person from being involved in third party payment system unless such a person is a bank, mutual bank or a branch of a foreign institution. The Bill seeks to allow any person to offer such services provided they comply with directives issued by the Reserve Bank from time to time.
Extensive consultation on the Bill took place with various government Departments (like the National Treasury, Department of Trade and Industry and Department of Justice), the banking industry, institutions providing payments to third persons end-users and business associations.
Dr Davies asked if by becoming part of CLS South Africa would thereby reduce the cost of foreign exchange transactions.
Mr Mitchell replied that he could not state categorically that once South Africa becomes part of the CLS there would be a reduction in the cost of foreign exchange transactions. The future costs of foreign exchange transactions would be more expensive for non CLS members.
The Chairperson said that there seems to be a premium on joining the CLS by November 2004. Some mechanism to fast track the Bill should be found otherwise South Africa would not meet the date. The Reserve Bank should set into motion the process of fast tracking the Bill.
The meeting was adjourned.
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