Regulatory Alerts2007-01-18
South African Reserve Bank: Basel II Final Arrangements for Parallel-Run and Implementation Issues
The South African Reserve Bank mandates all banks to participate in a four-stage parallel-run process during the fourth quarter of 2007 to submit both Basel I and proposed Basel II statutory returns. The circular establishes specific submission deadlines for electronic data, with the first run due by 31 October 2007 covering solo and consolidated reports, followed by subsequent runs through 31 January 2008. Additionally, the regulator encourages internal audit oversight and anticipates external auditor verification of return quality in 2008 to ensure compliance with the finalized regulations effective 1 January 2008.
[Logo: South African Reserve Bank] South African Reserve Bank From the Office of the Registrar of Banks
Confidential
2007-06-14
Banks Act Circular 5/2007
To all banks and branches of foreign banks
Basel II – Final arrangements for parallel-run and other implementation issues
Executive summary
This circular serves to confirm that all banks will be required to participate in the parallel-run process during the fourth quarter of 2007.
1. Background
As previously indicated by this Office, this circular confirms that all banks will be required to participate in the parallel-run process.
The parallel-run process refers to the fact that banks will be required during the fourth quarter of 2007 to submit both the statutory returns prescribed by the current Regulations relating to Banks (Basel I), as well as the proposed statutory information returns (proposed BA returns) included in the Proposed amended Regulations relating to Banks (Proposed Regulations - Basel II).
Banks are reminded to consider the content of this circular in conjunction with the contents of the latest versions of the following position papers released by the Accord Implementation Forum:
- Position Paper 4 – Key milestones
- Position Paper 63 – Road to Parliament
- Position Paper 150 – Adjustment to timelines and elucidation of requirements
- Position Paper 235 – Preliminary standards for electronic submission of proposed BA returns
2. Timelines
The remaining key milestones, which form part of the parallel-run process, can be depicted as follows:
| 22 Aug 07 | 31 Aug 07 | 31 Oct 07 | 30 Nov 07 | 7 Jan 08 | 31 Jan 08 |
|---|---|---|---|---|---|
| Meeting of the Standing Committee for the Revision of the Banks Act to consider Draft 5 of the Proposed Regulations and to obtain the Committee's approval for submission of the Proposed Regulations to the Minister of Finance | Release of preliminary standards for electronic BA return submissions, based on Draft 5 | 1st parallel-run (PR) submission by banks | 2nd PR submission by banks | 3rd PR submission by banks | 4th PR submission by banks |
| Finalisation of the Proposed Regulations | Release of final standards for electronic BA return submission |
3. Electronic submissions of the proposed statutory returns
The parallel run will entail electronic submissions of the proposed BA returns. In quarter one of 2007 this Office released preliminary standards (unique numbers and validation rules) for electronic BA-return submissions, based on Draft 4 of the Proposed Regulations that was issued on 15 January 2007 (refer to Position Paper 235).
In view of the outstanding key milestones involved in finalising the Proposed Regulations, Position Paper 235 can only be updated based on Draft 5 of the Proposed Regulations once it has been considered by the Standing Committee for the Revision of the Banks Act on 22 August 2007.
The BSD will release an updated version of Position Paper 235 by no later than 31 August 2007. The parallel-run submission will therefore be based on the Proposed BA returns as contained in Draft 5 of the Proposed Regulations, which will be released on the same day.
It is envisaged that the Proposed Regulations, in other words Draft 5, will be presented to the Minister of Finance during October 2007 for his consideration and approval. As soon as the Proposed Regulations are approved by the Minister of Finance, the BSD will publish the final set of standards for electronic submissions.
4. Final arrangements
Banks are requested to take note of the final arrangements and dates for the parallel-run submissions below.
4.1 First parallel run
The first parallel-run submission will be based on monthly, quarterly, six-monthly and annual reporting as at 30 September 2007, and will cover both solo and consolidated submissions.
The completed BA returns should be submitted by no later than 31 October 2007.
The above-mentioned can be illustrated as follows:
| BA returns to be submitted | Reporting dates | |
|---|---|---|
| Form number | Title/description | Solo supervision |
| Bank in Republic | ||
| BA 100 | Balance sheet | Sep 07 |
| BA 110 | Off-balance-sheet activities | Sep 07 |
| BA 120 | Income statement | Sep 07 |
| BA 125 | Shareholders of a bank/controlling company | |
| BA 130 | Restriction on investments, loans and advances | Sep 07 |
| BA 200 | Credit risk: Monthly return | Sep 07 |
| BA 210 | Credit risk: Quarterly return | Quarter ended Sep 07 |
| BA 220 | Credit risk: Six-monthly return | Six months ended Sep 07 |
| BA 300 | Liquidity risk | Sep 07 |
| BA 310 | Minimum reserve balance and liquid assets | Sep 07 |
| BA 320 | Market risk | Sep 07 |
| BA 330 | Interest-rate risk: Banking book | Sep 07 |
| BA 340 | Equity risk in the banking book | Sep 07 |
| BA returns to be submitted | Reporting dates | |
|---|---|---|
| Form number | Title/description | Solo supervision |
| Bank in Republic | ||
| BA 350 | Derivative instruments | Sep 07 |
| BA 400¹ | Operational risk: Six-monthly return | Sep 07 |
| BA 410³ | Operational risk: Annual return | Sep 07 |
| BA 500 | Securitisation schemes and related exposure | Sep 07 |
| BA 600 | Consolidated return | |
| BA 700 | Capital adequacy | Sep 07 |
| BA 900 | Institutional and maturity breakdown of liabilities and assets | Sep 07 |
| BA 920 | Analysis of instalment rate transactions, leasing transactions and selected assets | Quarter ended Sep 07 |
| BA 930 | Interest rates on deposits, loans and advances at month-end | Sep 07 |
¹ If the year-end period or interim period does not correspond with September 2007, use the most recent year-end or interim period as a basis to determine the three-year period. ² AMA banks also to submit a return for “Controlling company consolidated” where BSD is the home or lead supervisor. ³ Only for AMA banks, however some banks may be requested to submit the return. ⁴ Banks submitting the return must also submit a return for “Controlling company consolidated”.
4.2 Second parallel run
The second parallel-run submission will be based on monthly reporting as at 31 October 2007 and will cover only solo submissions. The completed proposed BA returns should be submitted no later than 30 November 2007.
The daily reporting of the proposed form BA 325 will commence on 1 November 2007.
The above-mentioned can be illustrated as follows:
| Reporting dates | ||
|---|---|---|
| Solo supervision | ||
| Form number | Title/description | Bank in Republic |
| BA 100 | Balance sheet | Oct 07 |
| BA 110 | Off-balance-sheet activities | Oct 07 |
| BA 120 | Income statement | Oct 07 |
| BA 200 | Credit risk: Monthly return | Oct 07 |
| BA 300 | Liquidity risk | Oct 07 |
| BA 310 | Minimum reserve balance and liquid assets | Oct 07 |
| BA 320 | Market risk | Oct 07 |
| BA 325 | Daily return: Selected risk exposure | Daily from 1 Nov 07 |
| BA 330 | Interest-rate risk: Banking book | Oct 07 |
| BA 340 | Equity risk in the banking book | Oct 07 |
| BA 350 | Derivative instruments | Oct 07 |
| BA 500 | Securitisation schemes and related exposure | Oct 07 |
| BA 700 | Capital adequacy | Oct 07 |
| BA 900 | Institutional and maturity breakdown of liabilities and assets | Oct 07 |
| BA 930 | Interest rates on deposits, loans and advances at month-end | Oct 07 |
4.3 Third parallel run
The third parallel-run submission will be based on monthly reporting as at 30 November 2007 and will cover solo submissions only. The completed proposed BA returns should be submitted no later than 7 January 2008.
The daily reporting of the proposed form BA 325 will continue during December 2007.
The above-mentioned can be illustrated as follows:
| Reporting dates | ||
|---|---|---|
| Solo supervision | ||
| Form number | Title/description | Bank in Republic |
| BA 100 | Balance sheet | Nov 07 |
| BA 110 | Off-balance-sheet activities | Nov 07 |
| BA 120 | Income statement | Nov 07 |
| BA 200 | Credit risk: Monthly return | Nov 07 |
| BA 300 | Liquidity risk | Nov 07 |
| BA 310 | Minimum reserve balance and liquid assets | Nov 07 |
| BA 320 | Market risk | Nov 07 |
| BA 325 | Daily return: Selected risk exposure | Daily during December 2007 |
| BA 330 | Interest-rate risk: Banking book | Nov 07 |
| BA 340 | Equity risk in the banking book | Nov 07 |
| BA 350 | Derivative instruments | Nov 07 |
| BA 500 | Securitisation schemes and related exposure | Nov 07 |
| BA 700 | Capital adequacy | Nov 07 |
| BA 900 | Institutional and maturity breakdown of liabilities and assets | Nov 07 |
| BA 930 | Interest rates on deposits, loans and advances at month-end | Nov 07 |
4.4 Fourth parallel run
The fourth parallel-run submission will be based on monthly and quarterly reporting as at 31 December 2007 and will cover solo submissions only in respect of the Economic returns.
The completed proposed BA returns should be submitted by no later than 31 January 2008.
The above-mentioned can be illustrated as follows:
| Reporting date | ||
|---|---|---|
| Solo supervision | ||
| Form number | Title/description | Bank in Republic |
| BA 900 | Institutional and maturity breakdown of liabilities and assets | Dec 07 |
| BA 920 | Analysis of instalment rate transactions, leasing transactions and selected assets | Quarter ended Dec 07 |
| BA 930 | Interest rates on deposits, loans and advances at month-end | Dec 07 |
5. Oversight by independent parties
5.1 Internal audit
This Office encourages oversight and sign-off by the respective banks’ internal audit departments to enhance the quality of submitted BA returns as part of the parallel runs.
5.2 External audit
There are fundamental differences between Basel I and Basel II, which clearly impact on the risk profiles of banks and this Office’s duty to understand the risk profiles of banks and the related capital impact.
During 2008, it is therefore likely that banks will be subjected to independent verification by their external auditors on the quality of banks’ statutory returns regarding compliance.
The report will be in respect of the statutory returns based on the finalised Proposed Regulations, which will be effective from 1 January 2008, of which specific detailed requirements will be communicated in due course.
6. General
- Banks should take note that, depending on the quality of submissions received during the parallel run, this Office might request certain banks to continue with parallel-run submissions after 1 January 2008 to ensure the safety and soundness of the banking sector as a whole.
- The parallel run does not affect the submission dates of the current DI returns.
- All banks will be expected at least to be in a position to submit the proposed BA returns as published in the 15 January 2007 edition of Draft 4 by end January 2008.
Acknowledgement of receipt
Two additional copies of this circular are enclosed for the use of your institution's independent auditors. The attached acknowledgement of receipt should be returned to this Office as soon as possible, duly completed and signed by both the chief executive officer of the institution and the said auditors.
[Signature] E M Kruger Registrar of Banks
The previous circular issued was Banks Act Circular 4/2007 dated 17 April 2007.