GLOSSARY

Bank reserves: Deposits held by banks with the central bank.

Bill of exchange: A written order from one party (the drawer) to another (the drawee) to pay a specified sum on demand or on a specified date to the drawer or to a third party specified by the drawer. Widely used to finance trade and, when discounted with a financial institution, to obtain credit. (See also draft)

Business continuity: A payment system’s arrangements which aim to ensure that it meets agreed service levels even if one or more components of the system fail or if it is affected by an abnormal external event. Include both preventative measures and arrangements to deal with contingencies.

Central bank credit (liquidity) facility: A standing credit facility that can be drawn upon by certain designated account holders (e.g. banks) at the central bank. In some cases, the facility can be used automatically at the initiative of the account holder, while in other cases the central bank may retain some degree of discretion. The loans typically take the form either of advances or overdrafts on an account holder’s current account which may be secured by a pledge of securities or of traditional re-discounting of bills.

Central counterparty: An entity that is the buyer to every seller and seller to every buyer of a specified set of contracts, e.g., those executed on a particular exchange or exchanges.

Central securities depository: A facility (or an institution) for holding securities, which enables securities transactions to be processed by book entry. Physical securities may be immobilised by the depository or securities may be de-materialised (i.e. so that they exist only as electronic records). In addition to safekeeping, a central securities depository may incorporate comparisons, clearing and settlement functions.

Cheque: A written order from one party (the drawer) to another (the drawee, normally a bank) requiring the drawee to pay a specified sm on demand to the drawer or to a third party specified by the drawer. Cheques may be used for settling debts and withdrawing money from banks. (See also bill of exchange).

Chip card: Also known as an IC (integrated circuit) card. A card containing one or more computer chips or integrated circuits for identifications, data storage or special purpose processing used to validate personal identification numbers (PINs), authorise purchases, verify account balances and stor personal records. In some cases, the memory in the card is updated every time the card is used (e.g., an account balance is updated).

Clearing and settling institution: An institution which transmits information and funds through a payment system network. It may operate as an agent or a principal.

Clearing/clearance: The process of transmitting, reconciling and, in some cases, confirming payment orders or security transfer instructions prior to settlement, possibly including the netting of instructions and the establishment of final positions for settlement. Sometimes the term is used (imprecisely) to include settlement.

Clearing house: A central location or central processing mechanisms through which financial institutions agree to exchange payment instructions or other financial obligations (e.g., securities). The institutions settle for items exchanged at a designated time based on the rules and procedures of the clearing house. In some cases, the clearing house may assume significant counterparty, financial or risk management responsibilities for the clearing system. (See also clearing/clearance, clearing system)

Clearing member: A member of a clearing house. All trades must be settled through a clearing member. A direct clearing member is able to settle only its own obligations.

Credit risk/exposure:The risk that a counterparty will not settle an obligation for full value, either when due or at any time thereafter. In exchange-for value systems, the risk is generally defined to include replacement cost risk and principal risk.

Credit transfer: A payment order or possibly a sequence of payment orders made for the the purpose of placing funds at the disposal of the beneficiary. Both the payment instructions and the funds described therein move from the bank of the payer/originator to the bank of the beneficiary, possibly via several other banks as intermediaries and/or more than one credit transfer system.

Debit order: A debit order collection is a transaction where debit order collectors can collect money from a debit order payer’s bank account without the debit order payer having to do anything other than having given such debit order collector approval to do so.

Delivery: Final transfer of a security or financial instrument.

Delivery versus payment: A link between a securities transfer system and a funds transfer system that ensures that delivery occurs if, and only if, payment occurs.

Electronic money: Value stored electronically in a device such as a chip card or a hard drive in a personal computer.

Final settlement: A settlement which is irrevocable and unconditional.

Interchange fee: Transaction fee payable in the context of a payment card network by one participating financial institution to another, for example by an acquirer to a card issuer in respect of a card payment by the cardholder to the card acceptor (merchant).

Legal risk: The risk of loss because of the unexpected application of a law or regulation or because a contract cannot be endorsed.

Liquidity risk: The risk that a counterparty (or paricipant in a settlement system) will not settle an obligation for full value when due. Liquidity risk does not imply that a counterparty or participant is insolvent since it may be able to settle the required debit obligations at some unspecified time thereafter.

National Payment System Act, 1998 or NPS Act: The Act providing for the management, administration, operation, regulation and supervision of payment, clearing and settlement systems in South Africa.

Oversight of payment systems: A central bank task, principally intended to promote the smooth functioning of payment systems and to protect the financial system from possible ‘domino effects’ which may occur when one or or more participants in the payment system incur credit or liquidity problems. Payment systems oversight aims at a given system (e.g., a funds transfer system) rather than individual participants.

Participant/member: A party who participates in a transfer system. This generic term refers to an institution which is identified by a transfer system (e.g., by a bank identification number) and is allowed to send payment orders directly to the system or which is directly bound by the rules governing the transfer system. (See also direct participant/member, indirect participant/member)

Payment: The payer’s transfer of a monetary claim on a party acceptable to the payee. Typically, claims take the form of banknotes or deposit balances held at a financial institution or at a central bank.

Payment Clearing House(PCH): An arrangement between two or more clearing system participants and Reserve Bank settlement system participants, governing the clearing or netting of payment instructions between those clearing system participants and Reserve Bank settlement system participants.

Payment Instruments: An instruction to transfer funds or make a payment.

Payment system: A payment system consists of a set of instruments, banking procedures and, typically, interbank funds transfer systems that ensure the circulation of money.

Payment versus payment: A mechanism in a foreign exchange settlement system which ensures that a final transfer of one currency occurs if and only if a final transfer of the other currency or currencies takes place.

PCH agreement: A bilateral contractual relationship entered into between the parties to govern the clearing of payment instructions between them.

PCH system operator(PSO): A person that clears on behalf of any two or more Reserve Bank settlement system participants.

Real-time gross settlement: The continuous (real-time) settlement of funds or securities transfers individually on an order by order basis (without netting)

SAMOS: The South African Multiple Settlement System, operated by the SARB.

Seigniorage: In a historical context, the term seigniorage was used to refer to the share, fee or tax which the seignior, or sovereign, took to cover the expenses of coinage and for profit. With the introduction of paper money, larger profits could be made because banknotes cost much less to produce than their face value. When central banks came to be monopoly suppliers of banknotes, seigniorage came to be reflected in the profits made by them and ultimately their major or only shareholder, the government. Seigniorage can be estimated by multiplying notes and coin outstanding (non-interest bearing central bank liabilities) by the long-term rate of interest on government securities (a proxy for the return on central assets).

Settlement: An act that discharges obligations in respect of funds or securities transfers between two or more parties.

Settlement agent: An institution that manages the settlement process (e.g., the determination of settlement positions, monitoring of the exchange of payments, etc) for transfer systems or other arrangements that require settlement.

Settlement bank: Either a central bank or private bank used to effect money settlements.

Settlement instruction: An instruction given to a settlement system by a settlement system participant or by a PCH system operator on behalf of a Reserve Bank settlement system participant to effect settlement.

Settlement risk: General term used to designate the risk that settlement in a transfer system will not take place as expected. The risk may comprise both credit and liquidity risk.

Settlement system: A system used to facilitate the settlement of transfers of funds or financial instruments.Supervision of financial institutions:The assessment and enforcement of compliance by financial institutions with laws, regulations or other rules intended to ensure that they operate in a safe and sound manner and that they hold capital and reserves sufficient to support the risks that arise in their business.

Supervision of financial institutions: The assessment and enforcement of compliance by financial institutions with laws, regulations or other rules intended to ensure that they operate in a safe and sound manner and that they hold capital and reserves sufficient to support the risks that arise in their business.

Systemically important payment system: A payment system is systemically important where, if the system were insufficiently protected against risk, disruption within it could trigger or transmit further disruptions among participants or systemic disruptions in the financial area more widely.

System operator: A person authorized to provide services to any two or more persons in respect of payment instructions.

Systemic risk: The risk that failure of one participant in a transfer system, or in financial markets generally, to meet its required obligations will cause other participants or financial institutions to be unable to meet their obligations (including settlement obligations in a transfer system) when due. Such a failure may cause significant liquidity or credit problems and, as a result, might threaten the stability of financial markets.

Velocity: The average number of times a measure of money (as captured, for instance, by a monetary aggregate) turns over within a specified period of time. The income velocity of circulation is typically calculated as the ratio of a monetary aggregate to nominal GDP.