Address by Dr Chris Stals, Governor of the South African Reserve Bank, at the Fifteenth Payment Systems International Conference, Sun City. 1. BackgroundThe political reforms in South Africa over the past five years opened up the way for major changes in the South African financial sector. With the removal of sanctions, boycotts, disinvestment campaigns and the withdrawal of foreign loan funds from South Africa, the challenge was extended to reintroduce the South African financial markets in the world environment. This reintegration took place at a time when the international markets also changed drastically, and when the trend towards financial globalisation gained momentum.During the past four years, many international financial institutions established themselves in South Africa to participate in the expansion of the South African markets. Today, there are about 25 foreign banks with established branches or subsidiaries, and about 60 with representative offices operating in South Africa, competing with and supplementing the activities of about 40 local banks. Many other international fund managers and financial brokers also entered the South African market. Many South African banks and other financial institutions, on the other hand, established themselves in other African countries and in the rest of the world.Explosive increases occurred in the volume of transactions in the South African financial markets. Total turnover in the secondary bond market increased from R2 300 billion in 1995 to R4 600 billion in 1997. The total value of shares traded on the Johannesburg Stock Exchange increased from R63 billion in 1995 to R207 billion last year. The average daily turnover in the South African market for foreign exchange last year exceeded US $10 billion. During the first three months of 1998, non-residents increased their holdings of South African securities (shares and bonds) by about R17 billion.These greater volumes brought with them greater risk exposures, and therefore a need for more sophisticated and modern risk management procedures. Financial regulation and supervision in South Africa had to introduce inter-nationally recognised principles and procedures, e.g. the Basle Committee directives for bank regulation. Modern electronic data processing and communication systems had to be introduced. It also became necessary to review the national payment, settlement and clearing system.Against this background, the South African Reserve Bank took the initiative in April 1994, together with the banking industry, to reform the South African National Payment System. The problem was approached on an all-inclusive national level and a strategy was formulated to upgrade the existing South African payment system to comply with world-best standards.In May 1994, a strategy-formulation team, consisting of representatives of the Reserve Bank and the banking community, was established. A collaborative consensus building approach was adopted. The Reserve Bank acted as facilitator, and it took the task force approximately 14 months to produce a first draft of a proposed strategy for the upgrading of the NPS. This document was intensely discussed amongst the many stakeholders before it was finally presented to the South African Council of Banks (COSAB), for approval. The document, entitled the South African National Payment System: Framework and Strategy, which has become known as the blue book, is widely recognised as a product of the South African banking industry and its recommendations are accepted as the basis for the official strategy for the reform of the payment system.The National Payment System Framework and Strategy identified the lack of a sophisticated electronic settlement process as a major shortcoming in the South African payment system. To this end a strategy was formulated to introduce an online central bank settlement system that would enable banks to effect interbank fund transfers electronically and in real time, when required. 2. Development of a new electronic interbank settlement systemThe project to implement