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Payments and Market Infrastructure Two Decades After the Start of the European Central Bank Editor: Daniela Russo

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Payments and market infrastructure two decades after the start of the European Central Bank Editor: Daniela Russo July 2021 Contents Foreword 6 Acknowledgements 8 Introduction 9 Prepared by Daniela Russo Tommaso Padoa-Schioppa, a 21st century renaissance man 13 Prepared by Daniela Russo and Ignacio Terol Alberto Giovannini and the European Institutions 19 Prepared by John Berrigan, Mario Nava and Daniela Russo Global cooperation 22 Prepared by Daniela Russo and Takeshi Shirakami Part 1 The Eurosystem as operator: TARGET2, T2S and collateral management systems 31 Chapter 1 – TARGET 2 and the birth of the TARGET family 32 Prepared by Jochen Metzger Chapter 2 – TARGET 37 Prepared by Dieter Reichwein Chapter 3 – TARGET2 44 Prepared by Dieter Reichwein Chapter 4 – The Eurosystem collateral management 52 Prepared by Simone Maskens, Daniela Russo and Markus Mayers Chapter 5 – T2S: building the European securities market infrastructure 60 Prepared by Marc Bayle de Jessé Chapter 6 – The governance of TARGET2-Securities 63 Prepared by Cristina Mastropasqua and Flavia Perone Chapter 7 – Instant payments and TARGET Instant Payment Settlement (TIPS) 72 Prepared by Carlos Conesa Eurosystem-operated market infrastructure: key milestones 77 Part 2 The Eurosystem as a catalyst: retail payments 79 Chapter 1 – The Single Euro Payments Area (SEPA) revolution: how the vision turned into reality 80 Prepared by Gertrude Tumpel-Gugerell Contents 1 Chapter 2 – Legal and regulatory history of EU retail payments 87 Prepared by Maria Chiara Malaguti Chapter 3 – SEPA: setting the scene 98 Prepared by Monika Hempel, Francisco Tur Hartmann and Wiebe Ruttenberg Chapter 4 – The EPC contribution to the future of payments in Europe 104 Prepared by Javier Santamaria, Gerard Hartsink and Etienne Goosse Chapter 5 – The Euro Retail Payments Board (ERPB) 112 Prepared by Monika Hempel and Karine Themejian Single Euro Payments Area (SEPA) step by step timeline 117 Part 3 The financial integration of EU post-trade systems 119 Chapter 1 – The history of European financial services integration over the last 20 years 120 Prepared by David Wright Chapter 2 – Plus ça change: 20 years of Giovannini barriers 124 Prepared by Godfried De Vidts Chapter 3 – European Commission post-trading initiatives: what have we learned? 128 Prepared by Diana Chan Chapter 4 – The Code of Conduct for clearing and settlement 133 Prepared by Judith Hardt Chapter 5 – The contribution of T2S to integration in the European Union 139 Prepared by George Kalogeropoulos The long and winding road towards the integration of post-trade systems 143 Part 4 The Eurosystem as overseer 145 Chapter 1 – Oversight of financial market infrastructures: a core central bank function 146 Prepared by Daniela Russo and Lawrence Sweet Chapter 2 – The Eurosystem oversight policy framework 152 Prepared by Corinna Freund Chapter 3 – The Eurosystem cyber resilience strategy for financial market infrastructures 162 Prepared by Constantinos Christoforides and Wiebe Ruttenberg Key milestones toward enhanced cyber resilience 169 Contents 2 Part 5 Oversight of payments, payment systems and critical service providers 171 Chapter 1 – Oversight of payment systems in the euro area 172 Prepared by Patrick Papsdorf Chapter 2 – An overview of the evolution of the institutional arrangements of the SWIFT cooperative oversight since the late 1990s 180 Prepared by Johan Pissens Chapter 3 – The oversight of payment instruments and schemes 185 Prepared by Stephanie Czák-Ludwig, Patrick Papsdorf and Stefan Antimov Chapter 4 – European Forum on the Security of Retail Payments (SecuRe Pay) 189 Prepared by Stephanie Czák-Ludwig, Fiona van Echelpoel and Dirk Haubrich Key milestones for payment systems oversight 193 Key milestones for payment instruments oversight 194 Part 6 Oversight of central securities depositories and securities settlement systems 195 Chapter 1 – Supervision and oversight of central securities depositories and securities settlement systems 196 Prepared by Eddy Wymeersch Chapter 2 – The user standards 207 Prepared by Daniela Russo and Beata Wróbel Chapter 3 – ESCB-CESR recommendations for securities settlement systems and central counterparties in the European Union 212 Prepared by Elias Kazarian Chapter 4 – The origin and impact of the 2014 CSD Regulation: a market perspective 221 Prepared by Paul Symons and Ilse Peeters Chapter 5 – The ECB/Eurosystem role in the authorisation and supervision of CSDs 227 Prepared by Adrian Popescu Chapter 6 – Oversight of T2S and the T2S Cooperative Arrangement 231 Prepared by Alberto Romera and Beata Wróbel Chapter 7 – The European landscape in the field of securities settlement 235 Prepared by Pierre Beck Evolution of SSS/CSD standards, oversight and regulation 243 Contents 3 Part 7 Oversight of Central Counterparties (CCPs) 245 Chapter 1 – Financial stability of central counterparties and trade repositories 246 Prepared by Steven Maijoor Chapter 2 – EMIR and EMIR 2 250 Prepared by Clément Rouveyrol Chapter 3 – Central counterparties: technical standards, supervisory convergence and stress test 257 Prepared by Giampiero Carlà and Andreas Georgopoulos Chapter 4 – The ECB and Eurosystem role in central counterparty oversight and colleges 264 Prepared by Simonetta Rosati and Clément Rouveyrol Chapter 5 – The EU framework for CCP recovery and resolution 274 Prepared by Corinna Freund Chapter 6 – Trade repositories: reporting requirements, data quality initiatives and supervision 283 Prepared by Joanna Lednicka and David Buiatti Road map for CCP regulation 290 Part 8 Looking forward: the challenges ahead 291 Chapter 1 – The future of central bank money: digital currencies? 292 Prepared by Ulrich Bindseil Chapter 2 – Climate change: time to act 305 Prepared by Elisabeth de Vogel and Olaf Sleijpen Chapter 3 – Future challenges for oversight 318 Prepared by Denis Beau Chapter 4 – The future of cross-border payments 324 Prepared by Jon Cunliffe Chapter 5 – Payments as a gateway for financial inclusion 334 Prepared by Massimo Cirasino Chapter 6 – Future challenges for central clearing 348 Prepared by Daniela Russo and Pietro Stecconi Abbreviations 358 Bibliography 359 Contents 4 Contents 5 Foreword This book is being published at a very good point in time. Two decades after the start of the ECB we can assess the work conducted in the euro area to build an efficient payment infrastructure and draw lessons from the experience of these years. At the same time, the advent of digitalisation is radically transforming the European payment landscape. On the retail front, current technology and advanced business solutions make payments possible at almost any time and place. New digital payment instruments, including privately issued “stablecoins” as well as central bank digital currencies, are emerging. The ECB is among the top global central banks conducting analyses on the possible introduction of a digital currency. Large-value payments are also evolving rapidly. In addition to the move to real-time settlement in almost every country worldwide, the range of entities participating in the payments value chain has expanded beyond banks to include financial market infrastructures (FMIs), other financial and non-financial companies and, more recently, fintechs and big techs. The increased prominence of technological companies in payments is shaping market dynamics and user demand. Application programming interfaces that allow different applications to communicate with each other and cloud computing services which allow on-demand scalability help address these changing needs. The complexity of today’s payment services and systems requires the utmost attention to guarantee high levels of reliability, availability and security. This creates some crucial challenges regarding the future evolution of payments. A first challenge arising from the accelerated digitalisation relates to cyber incidents, which are becoming a major source of risk for the financial system in general and payments in particular. The more payments rely on digital processes – thereby minimising human intervention, and physical data checks and storage – the larger the volume of data held by service providers will be, and the greater the challenges relating to their maintenance, storage and, in the event of disruptions, restoration. Improving cyber resilience is therefore essential in order to alleviate these risks. A second emerging challenge is how to preserve financial stability through risk- proportionate regulation, oversight and supervision. In particular, in order to guarantee the stability of the financial sector, public authorities must avoid the digitalisation of payments increasing the risk of runs. This will require, for example, an appropriate design of the new instruments – including those issued by public authorities – or the imposition of adequate accountability or liquidity standards on private providers. Foreword 6 New issues are emerging. Not only does the expansion of new unregulated non- bank intermediaries challenge entity-based frameworks but also new technologies make it possible for the decision-making of certain FMI functions to be unanchored from any (easily identifiable) physical or legal person, thereby muddling FMI governance. This could be the case, for example, of solely software driven (decentralised) FMI functions. A further challenge is how to reconcile user demand for convenience and seamless integration among different services – which global players offer thanks to their control of social media, online
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