Tromp AG
Improving financial infrastructure
through strategic thinking, collaboration and technology
Developing a business model for the introduction of an electronic money market in South Africa
An industry initiative was launched in South Africa to develop a business model for the clearing and settlement of money market instruments. A team, representative of the key stakeholders, formulated a strategic framework and conceptual model of an electronic market

Following the introduction of the South African RTGS system and the successful transformation of the equities and bond market to electronic trading and settlement environments, the remaining market in need of transformation, in the South African financial infrastructure, was the money market.

In order to modernise the money market, an industry forum (the so-called Money Market Forum) embarked on a project to develop a high-level business model and specifications for the clearing and settlement of money market instruments. Representatives were nominated by the various stakeholders, including, the central bank, national treasury, the market regulator and the issuers of financial instruments, to form a strategy team to develop a conceptual business model and the necessary specifications so that tenders could be invited from service providers.

The Money Market Forum appointed Perago to assist the stakeholders in the process of developing the conceptual solution, business specifications and Request for Proposal documents.

The initiative aimed to enhance the South African money market practices in order to improve the tradability of instruments, increase market liquidity and reduce risk inherent in money market practices.

Approach adopted

The team formed between the market participants and the Perago consultants followed the strategic approach in order to develop a strategic framework and conceptual model of the envisaged market infrastructure.

  • Phase1: Development of the strategic framework

    The first task was to develop a strategic mindset in order to create a mutual goal and common understanding of the requirements of the diverse group of stakeholders. Once the team had formulated a concept of the envisaged market, feedback sessions were conducted to inform the market participants of the concept the team had in mind. Once the views of the market participants had been obtained the concept solution was enhanced and the strategic framework was finalised.

    The framework sketched a market with the following salient characteristics:
    • Market participants, including issuers of financial instruments, would have access to a central Instrument Ownership Register ("IOR"), where beneficial ownership records will be maintained
    • Issuers would have the capability to create instruments and make these instruments available to investors
    • The money market environment would be integrated with the RTGS environment, thereby offering delivery-versus-payment
    • Money market instruments would be standardised and would be created from generic instrument characteristics by issuers
    • Risks would be understood and managed by the participants

  • Phase 2: The high-level business specifications

    The next phase of the assignment was to develop the strategic framework and conceptual model, produced in phase 1, into high-level business specifications. For this purpose an iterative process was adopted with the consultants producing conceptual process flows and data diagrams, followed by workshops and whiteboard sessions with industry experts to soundboard and refine the work done. Once the high-level business specification was accepted by the Money Market Forum, presentations were given to the industry participants to inform them of the outcome and obtain their feedback. Thereafter the feedback was considered for addition or amendment to the business specification.

  • Phase 3: Development of the tender specifications

    In the strategic framework it was envisaged that a service provider would provide and operate the new financial infrastructure as a service to the industry. The next stage of the process was therefore the development of a detailed specification to be issued to interested service providers. The tender specification incorporated the broad outline of the envisaged market as well as technical details on the solution design, process flows, data requirements, technical processing requirements, volumes anticipated, etc. The tender was issued to numerous identified service providers.

  • Phase 4: Tender evaluation process

    The consultants developed an evaluation process to be followed by the bid evaluation team. The process entailed a scoring and weighting system as well as a cost analysis model to enable quantitative analysis of the respective solutions proposed. Following the work done by the consultants the Money Market Forum allocated the development of the financial infrastructure to STRATE Ltd, the CSD and settlement system provider for the South African equity market and bond market.

Results achieved

The initiative had, inter alia, the following outcome:
  • A strategic framework
    The strategic framework produced provided all stakeholders with a long-term view of the evolution of the market.

  • Financial instruments
    The objective of providing flexibility to issuers and standardisation across instruments was achieved, resulting in four generic money market instrument types. By using the four generic instrument types, all market instruments in use could be specified by simply setting the various parameters. Further permutations of these parameters could also be applied to create new instruments.

  • Electronic ownership records
    An Instrument Ownership Register ("IOR") was established to maintain the electronic ownership records and facilitate the use of the instruments for trading and securitisation. The IOR would manage the instruments over their life cycle, i.e. from issuance to maturity.

  • Integration with RTGS
    A Delivery-versus-Payment (DvP) engine was conceptualised that would link the money market IOR with the RTGS system of the South African Reserve Bank, thereby facilitating delivery versus payment.

  • Establishment of the infrastructure
    The Money Market Forum awarded the contract for the establishment and operation of the money market infrastructure to the South African Central Securities Depository (CSD) and the system went live in 2010.
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