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Future Development in the TARGET System

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Future Development in the TARGET System FUTURE DEVELOPMENTS IN THE TARGET SYSTEM At the same time as the introduction of the euro and the single monetary policy in 1999, the Trans- European Automated Real-time Gross settlement Express Transfer (TARGET) system commenced live operations. TARGET, the large-value payment system for the euro, has contributed to the rapid integration of the euro money market and has since successfully served the needs of the monetary policy of the ECB. Over the past few years, the environment in which TARGET operates has changed and still continues to change. Technical developments as well as the fast-moving process of European integration have triggered requests from system users for further and more harmonised services. In addition, TARGET will need to cope with the forthcoming EU enlargement process. Against this backdrop, the Governing Council of the ECB decided in October 2002 to revamp the TARGET system. This article describes the transition stage from the current system to the next generation of TARGET (TARGET2). Section 1 provides a brief history of the current system, taking stock of the achievements made so far. Section 2 examines the driving forces behind the changes in TARGET. Section 3 outlines the cornerstones of the TARGET2 system and Section 4 discusses the envisaged time scale for the project. 1 TARGET – THE LARGE-VALUE PAYMENT both geared towards fostering the secure and SYSTEM OF THE EUROSYSTEM efficient transfer of payments. The existence of efficient and robust large- With regard to the operational side of large- value payment systems is of key importance for value payment systems, the Eurosystem the smooth functioning of the economy. A manages the TARGET system. large-value payment system should be efficient in order to ensure the uniform distribution of THE HISTORY AND FEATURES OF TARGET liquidity and a homogeneous level of short-term Prior to the introduction of the euro and the interest rates across a monetary area. This is a launch of a single monetary policy in 1999, prerequisite for the efficient conduct of payments between EU countries mainly relied monetary policy operations. A large-value on correspondent banking. Correspondent payment system should also be robust in order banking is an arrangement under which one to cushion systemic risk and to contribute to bank (correspondent) holds deposits owned by financial stability. If a payment system for other banks (respondents) and provides large-value transfers lacks robustness, not only payment and other services to those respondent could it cause disruptions in the financial banks. In view of the needs of the new monetary sector, but it could also allow these to spread area, such arrangements were no longer from one market participant to another. considered appropriate and the establishment of an efficient and robust payment system for the In recognition of the important role played by euro area as a whole was required. Against this payment systems in general and large-value background, the Eurosystem decided to create transfer systems in particular, the Eurosystem TARGET, a large-value payment system for the has – in accordance with the Treaty – been euro. The main objectives of TARGET were the assigned the task of promoting the smooth contribution to the singleness of the euro money functioning of such systems. The Eurosystem market in order to serve the needs of the single carries out this task through the operation of monetary policy, and the improvement of the payment facilities, as well as by overseeing the soundness and efficiency of payment transfers euro payment and settlement systems. These in the euro area. two functions are distinct in concept, but are ECB Monthly Bulletin April 2004 59 Given the scope of the project, TARGET was Chart 1 TARGET traffic – volumes and developed under considerable time pressure. It values was therefore designed on the basis of the (daily averages) current infrastructure in place at the national level. Thus TARGET became a decentralised volume (thousands; left-hand scale) value (EUR billions; right-hand scale) system, consisting of 15 national payment 275 2,000 systems and the ECB payment mechanism (EPM), which are interlinked. Harmonisation 250 1,750 was only introduced for those features whose conformity was necessary to ensure the 225 1,500 singleness of monetary policy and a level playing-field amongst credit institutions. 200 1,250 175 1,000 TARGET is a real-time gross settlement (RTGS) system that provides immediate intraday finality 150 750 1999 2000 2001 2002 2003 and settlement in central bank money. Security and business continuity has always been one of its key Source: ECB. features. TARGET can be used for all credit transfers in euro, both interbank and customer TARGET has been the market’s preferred payments, and furthermore there is no upper or system for large-value payments in euro from lower value limit for payment transfers. In order to the outset. In its first year of operations, the meet the needs of the financial market in general number of payments processed in TARGET and its customers in particular, TARGET has daily amounted to a daily average of more than operating hours starting at 7 a.m. and ending at 6 163,000 payments, representing a value of €925 p.m. C.E.T., as well as common closing days. billion. Four years later, in 2003, around Liquidity is also widely accessible in TARGET. 261,000 payments with a value of €1,650 Minimum reserve holdings are available for billion were transferred on average per business settlement purposes during the day and the day (see Chart 1). This represents a share in Eurosystem provides unlimited intraday credit free overall large-value payments made in euro of of interest (but collateralised) to its counterparties. almost 87%, in terms of value, and 58%, in terms of volume. Together with the Fedwire TARGET plays a key role in the financial Funds Service in the United States, TARGET system since it is the compulsory channel for belongs to the two biggest large-value payment monetary policy operations, and also due to the systems in the world. fact that all large-value net settlement systems in the euro area settle in central bank money via The preferred use of TARGET is also TARGET. Furthermore, TARGET is used for attributable to the network externalities it achieving delivery versus payment in securities offers. Today, more than 43,400 banks – settlement systems and for realising payment including branches and subsidiaries – are versus payment in the field of foreign exchange accessible through TARGET worldwide, while settlement. more than 3,300 credit institutions participate in the system. The broad market coverage of THE ACHIEVEMENTS OF TARGET TARGET has also facilitated the harmonisation The TARGET system has contributed to the of market business practices in the European high degree of liquidity in the euro money Union (e.g. with regard to the operating days of market. With the launch of live operations in the euro money market and foreign exchange 1999, the national money markets were transactions involving the euro). In order to be successfully integrated into an efficient single aware of and respond to participants’ needs, the euro money market practically overnight. Eurosystem attaches high importance to ECB Monthly Bulletin 60 April 2004 ARTICLES maintaining an ongoing dialogue with TARGET The use and acceptance of a payment system users. largely depends on its safety and reliability. In Future developments this respect, TARGET has proven to be robust in the TARGET is widely utilised for liquidity shifts and resilient. In spite of the decentralised TARGET system across credit institutions. In particular, multi- structure of TARGET the level of availability country banks and banking groups use stood at 99.79% in 2003. Temporary service TARGET for their centralised treasury interruptions in TARGET were bridged by management. This has brought about the high special contingency arrangements aimed at average value of TARGET inter-Member State ensuring the smooth and timely processing of interbank transfers, which stood at €17 million specific payments, whose delayed processing in 2003. It is worth noting that TARGET is also could have potentially triggered systemic risk. increasingly used for retail (customer) transfers Almost 96% of the inter-Member State traffic at the inter-Member State level. In 2003 was processed in less than 5 minutes. Owing to customer payments accounted for 48% of the exceptional service disruptions, the processing total inter-Member State volume, but only 5% time exceeded 30 minutes for 0.28% of inter- of the inter-Member State value (compared with Member State payments in TARGET. 23% and 2% in 1999, respectively). Because correspondent banking activities within the euro area have substantially declined since the 2 THE NEED FOR CHANGES IN TARGET introduction of the euro, to a certain extent, retail traffic has been shifted to TARGET. This Experience gained over the past five years of development may, however, only be of a operation shows that the TARGET system has temporary nature since the banking community clearly met its objectives, by contributing to the is currently taking measures to create an reduction of systemic risk and enhancing efficient Single Euro Payment Area (SEPA), financial stability, and has therefore become the which include work on pan-European preferred system for large-value processing in infrastructures for retail payments. euro. However, there are changes in the field of payment systems, both in terms of technology Theoretically, in an RTGS system where and business practice, with which TARGET transfers are settled individually throughout the must keep pace. For example, payment system day, there is an intrinsic tendency amongst users are increasingly demanding enhanced banks to wait for incoming payment flows services, particularly in the field of liquidity before initiating their own payments.
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