Ireland’s Payment and Securities Settlement Systems Infrastructure

2nd edition

April 2020

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Contents Foreword by Sharon Donnery, Deputy Governor ...... 4

1 Introduction and Overview ...... 7 1.1 Introduction ...... 7 1.2 Payment Systems ...... 7 1.2.1 Payment systems/schemes in Ireland ...... 9 1.3 Securities Settlement Systems (SSSs) ...... 10 1.3.1 Central Securities Depositories (CSD) ...... 10 1.3.2 CSDs serving the Irish market ...... 10 1.3.3 Central Counterparty (CCP) ...... 10 1.4 Oversight of FMIs ...... 11 1.4.1 Oversight standards ...... 13 1.5 Payment system classification in the euro-area ...... 13 1.5.1 Lead Overseer ...... 15 1.5.2 Oversight assessment process in the euro-area ...... 15

2 Ireland’s Payment Ecosystem: Payment Instruments ...... 17 2.1 Cash and Cheques ...... 17 2.2 Credit Transfers and Direct Debits ...... 17 2.3 Payment Cards ...... 18 2.4 E-money ...... 19 2.4.1 Consumer usage of e-money ...... 20

3 Ireland’s Payment Ecosystem: Clearing ...... 21 3.1 Automated Clearing House ...... 21 3.1.1 Irish participants in STEP2 ...... 21 3.1.2 Settlement cycles in STEP2 ...... 21 3.2 Card Payment Schemes ...... 23 3.3 IPCC ...... 23 3.4 Oversight and Resilience ...... 23 3.4.1 STEP2 ...... 23 3.4.2 Card payment schemes – VISA, Mastercard ...... 24 3.4.3 IPCC ...... 25 3.4.4 Major Incident Reporting ...... 25

4 Ireland’s Payment Ecosystem: Settlement ...... 26 4.1 Real-time Gross Settlement system ...... 26 4.1.1 Participation in TARGET2-IE ...... 26 4.1.2 Role of the National Central Bank (TARGET2) ...... 26 4.1.3 System Resilience and Contingency ...... 27 4.2 EURO1 ...... 28 4.3 Oversight and Regulation ...... 29 4.4 Major Incident Reporting ...... 29

5 Ireland’s Securities Clearing and Settlement Systems ...... 30 5.1 Settlement Finality ...... 30 5.2 Regulation of Securities Settlements and Clearing Systems...... 30 5.3 Settlement of Irish securities ...... 32 5.3.1 Irish Government Bonds ...... 32 5.3.2 Irish Equities ...... 32 5.3.2.1 CCP Clearing for Euronext Dublin ...... 33 5.4 Oversight of Securities Clearing and Settlement Systems ...... 34 5.4.1 Departure of the UK from the EU ...... 35

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6 Oversight of other FMIs ...... 36 6.1 Foreign-Exchange Settlement – Continuous Linked Settlement ...... 36 6.1.1 Oversight of CLS ...... 36 6.2 Trade Repositories...... 36 6.3 Oversight of critical service providers ...... 36

7 Market Infrastructure developments in Ireland ...... 38 7.1 Interconnectedness of participants...... 38 7.2 National Payments Plan ...... 40 7.3 Stakeholder engagement ...... 41 7.3.1 The Irish Retail Payments Forum (IRPF) ...... 41 7.3.2 National Stakeholder Groups (NSGs) ...... 41 7.3.3 Innovation Hub ...... 41 7.3.4 Promoting Cyber Resilience ...... 42 7.4 Future Developments ...... 43 7.4.1 SEPA Instant Credit Transfers ...... 43 7.4.2 Eurosystem retail payments strategy ...... 45 7.4.3 Evolution of oversight frameworks ...... 45

Appendix 1: Single Euro Payments Area (SEPA) ...... 46 Appendix 2: Payment Services Directive...... 49 Appendix 3: Ireland’s National Payments Plan (NPP) ...... 51 Glossary of terms ...... 52 List of Abbreviations ...... 56

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Foreword by Sharon Donnery, Deputy Governor

One of the statutory objectives of the Central Bank of Ireland (the Central Bank) is to ensure that “payment, settlement, and currency systems are safe, resilient and efficient and that access to such systems is not restricted”. Financial stability, a core mandate of the Central Bank, is heavily supported by, and dependent on, the smooth functioning of the payments system. These two objectives are at the core of the publication of this paper - enhancing our awareness and understanding of some of the current infrastructures and systems that the Irish market and consumers are reliant upon. This understanding is crucial as we look ahead to the next decade.

The payments system covers a wide range of transactions at all levels of the financial system and the choice of payment instruments in the Irish economy continues to increase. From consumer and business instruments such as credit transfers, direct debits, credit or debit cards, cash and cheques; to the clearing level of financial institutions such as interbank clearing or card payment schemes, up to settlement in central bank money. This paper focuses on electronic payments and securities settlements systems, and how they are adapting to the technological change that is re- shaping the financial sector, presenting challenges to banks, businesses and people alike. While developments in relation to cash are outside the scope of this paper, the Central Bank continues to consider the development of all payment instruments, including cash, to ensure market participants have appropriate choice to support their transactions. As set out in our Strategic Plan (2019 – 2021), the Central Bank is committed to engage with

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stakeholders to develop and implement an appropriate strategy for the Irish cash cycle that will meet the needs of the evolving payments landscape.

Almost ten years ago the Central Bank published a paper entitled “Ireland’s Payment and Securities Settlement Systems Infrastructure.” The purpose of that publication was to explain how the Central Bank discharges its responsibilities in this field and to describe its role in the area of payment and settlement systems. A lot has happened in this space over the last decade, and it is timely that we reflect again on the infrastructures operating or providing these services in Ireland. When I consider the Irish experience as outlined in this paper, some clear observations come to mind.

Firstly, I recognise that we, as a country and as a market, have migrated from local arrangements and systems to embrace and utilise infrastructures that have pan-European or global reach. Reflecting on the Central Bank’s mission to “serve the public interest by safeguarding monetary and financial stability and by working to ensure that the financial system operates in the best interests of consumers and the wider economy,” the paper draws out the enhanced system confidence which this move has brought, both as a result of resilience of the infrastructures themselves, and the robust oversight regime of the Eurosystem.

Secondly, I note the impact of SEPA, the Single Euro Payments Area, which has driven significant changes in the Irish payments market, allowing euro payments to be processed across borders at the same cost, and as efficiently and safely, as national payments.

Thirdly, I observe and expect further changes to both the payment ecosystem and consumer behaviour with the second Payment Services Directive (PSD2), combined with the impact of technological innovation and new entrants to the market. The securities settlement landscape in Ireland is also changing with the implementation of the Central Securities Depositories Regulation (CSDR) and the on-going industry project to migrate the Irish equity industry and certain funds to new settlement arrangements in response to the UK’s departure from the European Union.

Lastly, I would highlight the role of the Eurosystem both in terms of our current position and future evolution. The Eurosystem is engaged in a

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number of initiatives which aim to promote efficiency, innovation and ultimately achieve greater integration in financial markets in Europe – both in the wholesale and retail space. In this regard, the Central Bank will play a lead role in current initiatives such as the enhancement of TARGET services and the relaunch of the Eurosystem’s retail payments strategy.1

The electronic payment and securities settlement infrastructure in Ireland is unique, but then again the financial market infrastructures in all jurisdictions, both inside and outside the euro area, have their own national elements and have been moulded by the payment behaviours of domestic consumers, legacy systems, national policies, external developments and initiatives. As was the case ten years ago, the key objective of this publication is to promote awareness and understanding of the Irish ecosystem, the key infrastructures and interconnections, and the role the Central Bank plays in this regard. This understanding is crucial as we move into a new decade where the pace of change and financial innovation will be quicker and more disruptive.

Sharon Donnery, Deputy Governor

1 TARGET services are a number of services developed and operated by the Eurosystem which ensure the free flow of cash, securities and collateral across Europe.

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1 Introduction and Overview

1.1 Introduction

Payment and securities settlement systems are essential to the efficient The efficient and functioning of all modern economies, which rely for their continued growth effective operation and overall well-being on the free and open trade of goods and services. of payment and Transactions of all types flow through payment and securities settlement securities settlement systems on a daily basis; these can be large or small, ranging from high- systems is essential value transfers between financial institutions reflecting their involvement to meet the general in wholesale financial market activity, to low-value (or retail) payments business needs of the made between individual customers of those same financial institutions. economy and the The efficient and effective operation of payment and securities settlement personal banking systems is essential to meet the general business needs of the economy and requirements of the the personal banking requirements of the public. public at large Financial market infrastructure (FMI) refers to institutions responsible for providing clearing, settlement and recording of financial transactions. FMIs form the backbone of the financial system, providing the networks through which financial institutions and financial markets are connected. They establish secure arrangements for the timely clearing and settlement of obligations between counterparties, thus assisting institutions in the management of counterparty credit risks. FMIs typically handle large volumes and values; therefore, it is essential that FMIs are safe and efficient for a stable and well-functioning financial system.

This paper provides a broad overview of Ireland’s current payment and securities settlement systems infrastructure, explaining what payment and securities settlement systems are and why they are important. One of the Central Bank’s statutory objectives is to ensure that “payment, settlement, and currency systems are safe, resilient and efficient and that access to such systems is not restricted.” The resilience of these systems is critical for maintaining financial stability. This paper sets out the rationale underlying their oversight and outlines the role of the Central Bank in carrying this out to ensure that they are operating to appropriate standards relative to their importance to the financial system.

1.2 Payment Systems

A payment is a transfer of funds, which discharges an obligation on the part of a payer vis-à-vis a payee. At its most basic level, this refers to the exchange of physical currency (banknotes and coin). Cash continues to play an important role in the financial system and the economy as a whole. This paper focusses on electronic payments therefore the role of cash is not elaborated on further here. A payment system means a funds transfer

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system with formal and standardised arrangements and common rules for the processing, clearing and/or settlement of payment transactions. Payment systems are Payment systems are normally grouped into two distinct categories, (i) normally grouped retail payment systems and (ii) wholesale or large-value payment systems. into two categories: The former are used to process retail payments or low-value payments, e.g. retail payment utility bills, salaries, person-to-person (P2P), person-to-business (P2B), systems and business-to-business (B2B) etc. Wholesale payment systems are generally wholesale or large- used to process high-value payments made between banks for their own value payment account (interbank) or by banks on behalf of their bigger corporate systems customers.

FIGURE 1: IRELAND'S PAYMENTS ECOSYSTEM

The ‘payment pyramid’ above (Figure 1) illustrates the structure of the payment ecosystem in Ireland. All of the systems and schemes referred to The ‘payment are described in further detail later in this paper. pyramid’ illustrates the structure of the The bottom level represents consumer transactions (e.g. point-of-sale payment ecosystem purchases) and the payment instruments used to make these payments, e.g. in Ireland cash and cards. The middle level represents the clearing process that takes place within the retail payment systems/schemes, used by banks to give effect to the transactions conducted in the bottom level. This typically refers to the process of transmitting, reconciling and, in some cases, confirming transfer orders prior to settlement. Payment service providers (PSPs) connect to the clearing and settlement layers via the respective systems or scheme in different ways depending on their business models (see Section 7.1 for additional information).

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Transactions represented in the bottom level percolate upwards, in that the underlying aggregated settlement generally takes place in the ‘high- value’ category. For example, PSPs typically put all their credit transfer requests for a particular date into a batch file which is sent to the retail payment system for clearing (in the case of Ireland this is EBA Clearing’s STEP2 system) and then finally participants settle their STEP2 obligations by paying a net calculated amount in TARGET2. The upper level is where the ultimate settlement of all of the transactions in the levels below takes place, in what is termed ‘central bank money’. Central bank money refers to deposits held by system participants on settlement accounts at a central bank, whereas commercial bank money refers to deposits held on account at a commercial bank.

1.2.1 Payment systems/schemes in Ireland As indicated in the depiction of Ireland’s payments ecosystem (Figure 1), the bottom layer consists of payment instruments used by consumers to carry out transactions. The next two layers represent the payment systems/schemes serving the Irish payments market:

Middle level (retail - clearing):

. STEP2, EBA Clearing’s pan-European automated clearing house. EBA Clearing is a private company, owned by 49 of the major banks operating in Europe, based on a country-neutral governance model; . VISA Europe (hereafter referred to as “VISA”), an international card payment scheme headquartered in the UK, which serves the Irish credit and debit card markets; . Mastercard Europe (hereafter referred to as “Mastercard”), an international card payment scheme headquartered in Belgium, which serves the Irish credit and debit card markets; and, . The Irish Paper Clearing Company Limited (“IPCC”), which is responsible for cheque clearing operations in Ireland. Administration of the IPCC has been outsourced from the Irish Payments Council to Banking & Payments Federation Ireland (BPFI).

Upper level (wholesale - settlement):

. TARGET2, the Eurosystem’s real-time gross settlement system (RTGS). Eurosystem refers to the central banking system of the euro area. It comprises the ECB and the national central banks of those EU Member States whose currency is the euro; and, . EURO1, EBA Clearing’s pan-European large value payment system.

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In accordance with Regulation (EU) No 260/2012 (the “Single Euro All Irish retail Payments Area (SEPA) Regulation”), all Irish retail payments, with the payments, with the exception of cheques, rely on payment systems/schemes with pan- European-based reach and international card payment schemes. The exception of systems/schemes are described in detail later in this paper, with additional cheques, rely on information on SEPA included in Appendix 1. payment systems/schemes 1.3 Securities Settlement Systems (SSSs) with pan-European- Securities usually refer to shares in companies and other securities based reach and equivalent to shares in companies or bonds or other forms of securitised international card debt that are typically bought, sold or traded for investment purposes. payment schemes Alternatively, the securities owned may be used as collateral to secure a lending agreement i.e. the securities can be used to offset the loan if the borrower fails to meet their obligations under the terms of the lending agreement.

1.3.1 Central Securities Depositories (CSD) Settlement of securities trades - whereby securities are transferred by the seller to the buyer and funds are transferred from the buyer to the seller - are typically made by book-entry in SSSs operated by central securities depositories (CSD). Settlement generally takes place on a delivery versus payment (DvP) basis where delivery of securities takes place concurrently with the corresponding payment. DvP addresses principal risk – the risk that a seller delivers a security but does not receive payment, or that a buyer makes payment but does not receive delivery of the security.

1.3.2 CSDs serving the Irish market The Irish market is unique in the euro area in the area of securities The Irish market is settlement, as there is currently no settlement infrastructure located in unique in the area of Ireland. The Irish market utilises settlement systems located in a number of securities different European countries. Trades in Irish government bonds are settlement, as there generally settled in Euroclear Bank, located in Belgium. Trades in Irish is currently no corporate securities and some exchange-traded funds (ETFs) are settled in settlement the UK-located CREST system operated by Euroclear UK and Ireland (or infrastructure EUI). The remaining Irish ETFs are settled in other European CSDs. located in Ireland

1.3.3 Central Counterparty (CCP) In securities and derivatives markets in which a central counterparty (CCP) operates, the CCP interposes itself between the buyer and the seller of a trade, becoming the buyer to every seller and the seller to every buyer. CCPs reduce participants’ exposure to counterparties, facilitate anonymous trading, or post-trade anonymity, and provide multilateral netting of trades. A number of CCPs provide services to the Irish market

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and EuroCCP is the CCP (see section 5.3.2.1) for Euronext Dublin (the Irish stock exchange).

1.4 Oversight of FMIs

Payment and securities settlement systems are essentially interconnected Oversight networks, and like all such structures are potentially susceptible to concentrates on the systemic risk, typified by the so-called ‘domino effect’, whereby a failure of sound and safe one participant in the system can impact on other participants, also causing functioning of them, and ultimately perhaps the entire system, to fail. Oversight concentrates on the sound and safe functioning of payment systems, payment systems, payment instruments, payment schemes and other payment payment infrastructures. Payment systems oversight includes both wholesale and instruments, retail payment systems. payment schemes and other payment The failure of a payment system or SSS could have significant implications infrastructures for a country’s economy as a whole, for its financial stability, and for public confidence in its currency and banking system. There is a clear rationale for an independent third party to either directly provide, or indirectly secure, the ‘public good’ of stability in such systems. In some countries, this ‘public good’ factor has been ensured by public sector bodies providing and/or operating the payment and securities settlement infrastructure. In other countries, some or all of the payment and securities settlement systems are provided by the private sector. In general, the large-value payment system is provided by a public authority, such as the central bank - specifically in Ireland’s case, the Central Bank through TARGET2-Ireland - ensuring systemic stability and that risk is minimised and controlled. The retail payment system’s infrastructure serving the Irish market is primarily owned and operated by the private sector (see Section 3).

SSSs operated by CSDs are of systemic importance to the functioning of securities markets. A SSS serves as an essential tool to control the integrity of a securities issuance due to its role in the securities holding systems through which their participants report the securities holdings of investors. This maintains investor confidence by hindering the undue creation or reduction of issued securities. SSSs, operated by CSDs, are used by the Eurosystem counterparties to post collateral in the context of monetary policy operations (open market operations and standing facilities) and the provision of intraday credit. SSSs are also used for posting collateral in respect of transactions between credit institutions, making them important actors in the collateralisation process. Given their strategic importance, SSSs are subject to oversight because weaknesses in such systems can be a source of risk for the financial system as a whole. Disruptions in SSSs can impact on the payment systems to which they are linked, either directly through a ‘spill-over’ effect, or because they are used to receive collateral

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backing the provision of intraday credit to participants in such payment systems. Similarly, disruptions could affect central banks’ monetary policy operations if the system concerned is used for receipt of collateral.

There is a general acceptance that the oversight of payment and securities settlement systems should be entrusted to central banks, with the aim of There is a general ensuring the proper functioning of such systems, thereby contributing to acceptance that the overall financial stability. This role for central banks in relation to payment oversight of payment and securities settlement systems arises naturally from their overall and securities responsibility for the banking system, of which the payment system is an settlement systems integral and vital component. According to the European Central Bank should be entrusted (ECB), oversight of payment systems is ‘a typical central bank function to central banks whereby the objectives of safety and efficiency are promoted by monitoring existing and planned systems, assessing them against the applicable standards and principles, whenever possible, and, where necessary, inducing change.’ A similar rationale can be applied to the oversight of SSSs. Financial stability is heavily dependent on the proper functioning of payment systems, particularly interbank clearing and settlement systems. Central banks are well placed to carry out the required oversight role of these systems given that they provide what is generally accepted as the best means of discharging the settlement obligations that arise between system participants – real-time gross settlement in central bank money. Central banks also have an operational role vis-à-vis payment and securities settlement systems, for example, providing commercial banks with settlement facilities and with their day-to-day liquidity requirements.

The Treaty on the Functioning of the European Union (the “Treaty”) and the The Treaty on the Statute of the European System of Central Banks and the European Central Functioning of the Bank (the “Statute”) provide a legal basis for the Eurosystem (including the European Union and Central Bank) to conduct oversight as part of its mandate. Pursuant to the the Statute of the fourth indent of Article 127(2) of the Treaty, as mirrored in the fourth European System of indent of Article 3.1 of the Statute, one of the basic tasks to be carried out through the European System of Central Banks shall be “to promote the Central Banks and the smooth operation of payment systems”. One example of the Eurosystem European Central promoting the smooth operation of payment systems is through its role in Bank provide a legal conducting oversight. Article 22 of the Statute also provides “the ECB and basis for the the national central banks may provide facilities, and the ECB may make Eurosystem regulations, to ensure efficient and sound clearing and payments systems (including the within the Union and with other countries”. The specific legislative regime Central Bank) to governing payment systems and schemes varies across Member States. conduct oversight as The Central Bank Act, 1997 provides that should a payment system wish to part of its mandate be established or operated in Ireland, it is necessary to submit the rules for such a proposed payment system to the Central Bank for its approval.

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1.4.1 Oversight standards The Committee on Payments and Market Infrastructures (CPMI) is a forum for central banks to cooperate on an international basis in relation to oversight, policy and operational matters. Together with the International Organization of Securities Commissions (IOSCO), CPMI sets international standards to promote safe and efficient payment, clearing, settlement and related arrangements. In June 2013, the Governing Council of the ECB adopted the CPMI-IOSCO Principles for Financial Market Infrastructures (PFMIs), as the standard for Eurosystem oversight of all types of FMIs in the euro area under Eurosystem responsibility. The PFMIs contain 24 principles (see Figure 2) under which various requirements are prescribed. Figure 2: PFMIs applicatle to payment systems

1.5 Payment system classification in the euro-area

For payment systems deemed systemically important in the euro-area, the For payment PFMIs for payment systems are set out in a legally binding manner in an systems deemed ECB Regulation - Regulation of the ECB (EU) No 795/2014 on oversight systemically requirements for systemically important payment systems (the “SIPS important in the Regulation”). The SIPS Regulation imposes requirements on payment euro-area, the systems to ensure their efficiency and soundness. The SIPS Regulation has PFMIs for payment 18 articles (corresponding to the principles contained in the PFMIs) systems are set out containing rules against which SIPS are overseen and assessed. These in a legally binding articles impose strict requirements in the areas of operational risk, credit manner in the SIPS risk, liquidity risk, settlement finality, participation default rules and Regulation procedures, amongst others.

In order to determine which systems should be subject to the SIPS Regulation, consideration is given to those systems that have the potential to trigger systemic risks if not sufficiently protected against the risks to which they are exposed. Of the payment systems serving the Irish market, TARGET2, STEP2 and EURO1 are classified as SIPS.

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According to the SIPS Regulation, a payment system shall be identified as a SIPS if: a) it is eligible to be notified as a system pursuant to Directive 98/26/EC by a Member State whose currency is the euro or its operator is established in the euro area, including establishment by means of a branch, through which the system is operated; and b) it satisfies at least two of the following criteria over a calendar year: i. the total daily average value of euro-denominated payments processed exceeds EUR 10 billion; ii. the total euro-denominated payments processed represent at least one of the following: . 15% of total volume of euro-denominated payments in the European Union; . 5% of total volume of euro-denominated cross-border payments in the European Union; . A market share of 75% of total volume of euro-denominated payments at the level of a Member State whose currency is the euro; iii. its cross-border activity (i.e. participants established in a country other than that of the SIPS operator and/or cross border links with other payment systems) involves five or more countries and generates a minimum of 33% of the total volume of euro-denominated payments processed by that SIPS; and iv. it is used for the settlement of other FMIs.

Any payment system that does not meet the criteria for a systemically important payment system set out in the SIPS Regulation is assessed against a subset of the PFMIs as, although they are not deemed systemically important, their proper functioning contributes to the overall safety and efficiency of the financial system. The number of PFMI principles to which different systems are subject varies depending on their classification. The Eurosystem, in its oversight framework, has identified two categories of non-SIPS: prominently important retail payment systems (PIRPS) and other retail payment systems (ORPS). PIRPS are assessed against 12 principles and ORPS are assessed against 9. These payment systems are classified based solely on their market share at euro area country level.

 A system will be classified as a PIRPS if its market share is 25% or higher of total euro- denominated payments by volume at the level of a Member State whose currency is the euro; and  A system will be classified as an ORPS if its market share is below 25% of total euro- denominated payments by volume at the level of a Member State whose currency is the euro.

As at end-2019, Ireland’s only indigenous payment system, IPCC, is classified as an ORPS.

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1.5.1 Lead Overseer As per the Eurosystem’s oversight framework, oversight assessments are led by the respective lead authority for the payment system, known as the lead overseer. The Eurosystem assigns the lead overseer role to the national central bank (NCB) that is best placed to do so either because of its proximity to the overseen entity or because of national laws that attribute specific oversight responsibilities to the NCB concerned. This is typically the case for systems with a clear national anchor.

For systems that have no domestic anchor, the body entrusted with oversight responsibility is the NCB of the country where the system is legally incorporated, unless the Governing Council of the ECB decide otherwise and assigns the primary oversight responsibilities to the ECB which is the case for TARGET2, STEP2 and EURO1. The ECB has established a Standing Assessment Group, consisting of volunteering NCBs (including the Central Bank), which jointly assess the payment systems for which the ECB is lead overseer.

System/ Classification Oversight Lead Operator/Owner Scheme Standards Overseer TARGET2 SIPS SIPS Regulation ECB Eurosystem STEP2 SIPS SIPS Regulation ECB EBA Clearing EURO1 SIPS SIPS Regulation ECB EBA Clearing VISA n/a2 PFMIs Bank of England VISA Europe Limited CPS Oversight / ECB3 Framework Mastercard ORPS CPS Oversight National Bank of Mastercard SA Framework Belgium

IPCC ORPS PFMIs Central Bank of Irish Payments Ireland Council (BPFI) SEPA n/a Payment ECB EPC Scheme Instrument Framework

Table 1: Summary of the payment systems/schemes serving the Irish market as at end-2019

1.5.2 Oversight assessment process in the euro-area An oversight assessment typically follows a three-step process:

Step 1: Relevant information is collected from the payment system. This generally includes relevant system documentation and a self-assessment against the applicable standards completed by the system operator.

2 Due to its location in the UK, VISA does not fall in scope of the Eurosystem’s oversight framework. The Bank of England and the ECB have established a cooperation agreement for the oversight of VISA. 3 The Bank of England is the supervisor of VISA; the ECB is the lead overseer of VISA.

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Step 2: An assessment of the information received by the lead overseer against the applicable standards. The lead overseer must confirm whether the key considerations prescribed under each applicable principle have been satisfied. Step 3: On the basis of the assessment results, and if it finds that a particular FMI does not have a sufficient degree of safety and efficiency, the lead overseer takes action and induces change using the range of tools at its disposal. The tools include moral suasion, public statements, influence stemming from the Eurosystem’s participation in FMIs and cooperative oversight arrangements as well as the potential to issue binding regulations and sanctions for euro area payment systems. Oversight assessments are conducted on both a regular and ad-hoc basis, with a ‘comprehensive assessment’ against all relevant principles typically conducted every 3-5 years. Whenever a payment system implements a change, e.g. to its technical platform, structure or introduces a new service, a ‘gap assessment’ is conducted against all affected principles. Similarly, a ‘gap assessment’ is conducted if the oversight standards or regulations are amended. Finally, oversight assessments are conducted on newly established payment systems before they enter the market. The ECB publishes the Eurosystem Oversight Report4 on a regular basis. This includes a review of the oversight activities performed in the reporting period and reflects on activities and developments in the regulatory and policy sphere and on the market side. ******************

The following sections of this paper detail the individual infrastructures and instruments that serve the Irish payments market, moving up through the various levels of the Irish ecosystem starting with consumer transactions, progressing to the clearing level and finishing with wholesale payments and settlement in central bank money (upper level in the payment pyramid, figure 1). Subsequently, a detailed description of the infrastructures offering services in respect of securities settlements is included.

In addition to its specific oversight role, the Central Bank is also involved in a broader policy perspective in payment and securities settlement systems developments. The paper concludes with a synopsis of developments in financial market infrastructures and related matters.

4 https://www.ecb.europa.eu/pub/pdf/eurosystemoversight/eurosystemoversightreport2016.en.pdf

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2 Ireland’s Payment Ecosystem: Payment Instruments

Credit transfers, direct debits, payment cards (credit or debit), pre-paid cards including e-money, cash and cheques are the most commonly used payment instruments by consumers in the euro area. These instruments facilitate the transfer of funds between a payer and a payee. Any clearing and settlement of these transactions takes place in the middle and upper levels of the payment pyramid.

2.1 Cash and Cheques Cash continues to be an important payment instrument in Ireland, particularly for lower value payments, with circa €26.6bn withdrawn from ATMs in Ireland during 2018, an increase of 7.5% in the value of cash withdrawn from the previous year. The average amount per Cash continues to be ATM withdrawal was €124.50 in 2018. an important payment instrument The use of cheques is declining at an average rate of 12% per year since 2015. The number of cheques written in Ireland has more than halved, in Ireland, reducing from over 90 million in 2010 to circa 28 million in 2018. This can particularly for lower be explained by the migration of consumers towards digital electronic value payments solutions, such as online and mobile channels, increased card payments (point-of-sale / contactless payments), and the reduction in cheques issued by public bodies, e.g. Department of Employment Affairs and Social Protection. In Ireland, cheques are cleared by IPCC (see section 3.3) with settlement occurring in TARGET2. The Central Bank is the lead overseer of IPCC.

2.2 Credit Transfers and Direct Debits

A SEPA credit transfer (SCT) is the European standard for the delivery of As per the SCT funds (push transaction) between the originator (payer) and a beneficiary Scheme Rules, (payee). As per the SCT scheme, credit transfers must be completed by the credit transfers end of the business day following the day on which they were initiated. A must be completed SEPA direct debit (SDD) is the standard for the collection of funds (pull by the end of the transaction) between a debtor (payer) and the creditor (payee), e.g. utility business day bills. SCTs must adhere to the SCT scheme, which is an inter-bank payment following the day on scheme, defined by the European Payments Council (EPC). Similarly, SDDs which they were must adhere to the SDD scheme. The SCT and SDD rulebooks represent initiated the operationalisation of the SEPA Regulation, by ensuring common sets of rules and standard procedures for scheme participants across European borders. The use of the SCT and SDD standards for euro payments is mandatory in the EU. The clearing and settlement (i.e. processing that

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triggers the movement of funds) of SCTs and SDDs occurs in the middle and upper levels in the payment pyramid. For Irish transactions, this takes place in STEP2 (see Section 3.1) and TARGET2 (see Section 4.1). Both SCT and SDD schemes are overseen and assessed by the ECB as lead overseer.

2.3 Payment Cards Payment cards typically exist in two basic types, debit cards and credit cards. Debit cards allow the cardholder to charge purchases directly to their bank account, while credit cards provide the cardholder with a specified credit limit within which they can make purchases. A prepaid card is another form of payment card used by consumers for payments, linked to a previously deposited cash balance. Purchases made with prepaid cards are checked for approval against existing funds.

VISA and Mastercard, two international card schemes, serve the Irish The card payment payment cards market. The card payment processing model utilised by processing model VISA and Mastercard is commonly referred to as the ‘Four-Corner Model’. utilised by VISA and The four parties involved are the card issuer, acquirer, cardholder and Mastercard is merchant. The card payment scheme (Mastercard or Visa) and the relevant settlement bank are considered separate entities. Figure 3 depicts the commonly referred various flows between the four parties for a typical merchant transaction. to as the ‘Four- Corner Model’

FIGURE 3: CARD PAYMENTS - PROCESS FLOWS

The flows included in Figure 3 are explained as follows:

Step 1: A consumer purchases goods/services from a merchant, at a point-of-sale or online, and pays with a card (VISA or MasterCard, issued by their bank).

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Step 2: The merchant’s point-of-sale (POS) system captures the consumer’s account information and securely sends it to the acquirer. Depending on the value of the transaction the consumer may ‘tap and go’ (contactless payment) or be required to enter a personal identification number (PIN). Step 3: The acquirer submits a request to the issuer via the card payment scheme to review the consumer’s account, (i.e. check that the consumer’s card is valid and that they have the required funds). If there are sufficient funds to cover the cost of the transaction, an authorisation hold is placed on the consumer’s account. The acquirer is notified of the resulting approval or error code via the card payment scheme. Step 4: Clearing is the process of exchanging transaction data between issuer, card payment scheme and acquirer. The card payment scheme calculates the amounts for settlement; funds are exchanged between the acquirer and the issuer for the net value of the cleared transactions (timing and method of exchange varies depending on the contractual arrangements). Step 5: The acquirer provides the merchant with funds due. Step 6: The consumer receives the goods or services from the merchant (in reality this would usually be step 4 where goods are exchanged at the POS before clearing and settlement is complete).

The consumer will be largely unaware of the processes underlying a card payment transaction and the parties involved in facilitating it. In particular, the role of the acquirer who directs the authorisation flow to the relevant card payment scheme. The authorisation process generally takes places within seconds while the clearing and settlement of a transaction (i.e. the transfer of funds into the merchant’s payment account) may take a number of days to complete in full.

2.4 E-money In an increasingly connected world, having access to the right kind of money at the right time has become more and more important for individuals and businesses alike. E-money is an additional payment instrument in common use in Ireland, although in the vast majority of cases it is highly likely that the consumer is unaware that they are carrying out transactions via an e-money institution (EMI). An EMI is an undertaking that has been authorised to issue e-money in accordance with Directive 2009/110/EC. Payment institutions (PIs) are a category of PSP, which came into being following the adoption of Directive 2007/64/EC (the

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“Payment Services Directive” or “PSD”). As technology continues to evolve, further new PSPs are emerging including electronic money (e-money) institutions. At end 2019, the Central Bank authorised 12 EMIs and 20 PIs. PIs and EMIs, as PIs and EMIs, as with traditional banks, that are authorised in another EU with traditional jurisdiction can offer services in Ireland. This can be either on a freedom of banks, that are establishment (FoE) or on freedom of services (FoS) basis. FoE firms authorised in passporting into Ireland will have a physical location here, either as a another EU branch, or via an agent. The Central Bank is responsible for supervision of jurisdiction can compliance with the firm’s conduct requirements, as set out in Titles III and offer services in IV of Directive (EU) 2015/2355 (“PSD2”). FoS firms passporting into Ireland Ireland provide services without establishing a physical presence here. The home competent authority, and not the Central Bank, is responsible for supervising compliance with the firm’s conduct requirements under Titles III and IV of PSD2. Additional information in relation to the PSD and the second Payment Services Directive (PSD2) can be found in Appendix 2.

PIs and EMIs establish a relationship with ‘traditional banks’ that are participants in established payment infrastructures such as TARGET2. The initial transfer of funds, which is subsequently issued as e-money, originates from TARGET2 accounts (central bank money). EMIs and PIs that provide payment services are required to safeguard all funds received either ring fenced in a separate account or covered by an insurance policy for an amount equivalent to that which would be segregated. In addition, EMIs and PIs are required to hold own funds, as calculated using a prescribed method and agreed with their national competent authority (NCA). Notwithstanding this safeguarding requirement, the protections associated with deposit accounts in terms of the deposit guarantee scheme do not apply to PIs and EMIs.

2.4.1 Consumer usage of e-money The consumer can use either a mobile application or a physical card to make payments via their e-money account. The consumer pre-loads the mobile application (or the card) via an electronic transfer from their payment account. This is the equivalent of the consumer buying the electronic equivalent (e-money) of banknotes and coins where funds are always exchanged, and redeemed, at par (i.e. 1:1 basis). The consumer can make a payment utilising the e-money card (physical or virtual) in the same way as a card issued on a payment account (i.e. by a bank). To the consumer, the ‘application’ appears to work in a similar manner to a closed loop instant payments solutions, for peer-to-peer transactions, whereby the funds are sent and received instantly. In reality, funds are ‘blocked’ on the account until such time as the actual transfer of funds takes place. These type of applications can also offer consumers an easy way of accessing their money in a number of different currencies.

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3 Ireland’s Payment Ecosystem: Clearing

Clearing refers to the ‘process of transmitting, reconciling and, in some cases, confirming transfer orders prior to settlement, potentially including the netting of orders and the establishment of final positions for settlement’. The process of clearing the payment instruments referred to earlier (SCTs, SDDs and some card payments) is carried out by an automated clearing house (ACH), which is defined as ‘an electronic clearing system in which payment orders are exchanged among participants (primarily via electronic media) and handled by a data-processing centre’.

3.1 Automated Clearing House In 2014, the clearing and settlement of Ireland’s electronic payments In 2014, the clearing (credit transfers and direct debits) migrated to STEP2, EBA Clearing’s pan- European automated clearing house (PE-ACH). STEP2 is one of the key and settlement of clearing mechanisms in the SEPA area, both in terms of processing values Ireland’s electronic and volumes and participating institutions. STEP2 connects over 4,800 payments migrated payment service providers across all SEPA countries. to STEP2

3.1.1 Irish participants in STEP2 At end-2019, six Irish credit institutions are direct participants in the SCT service and five Irish credit institutions are direct participants in the SDD service. In order to become a direct participant in STEP2, the participant must be authorised to conduct banking business and have direct or indirect access to a TARGET2 account. It is a further condition for admission to a given STEP2 service that the applicant has adhered to the corresponding SEPA Scheme Rulebook. In addition to the direct participants in STEP2, there are over 200 Irish PSPs, primarily credit unions, connected to STEP2 via direct participants.

3.1.2 Settlement cycles in STEP2 STEP2 operates as a system based on simultaneous settlement, on a gross basis, of all payments included in a given cycle. System participants send payment transactions via input files containing mixed bulks or pre-sorted batches of SEPA payments to the STEP2 system. Payments are validated throughout the day and, if received before the relevant cycle cut-off time, processed in bulks/batches in pre-determined cycles. STEP2 ultimately settles in central bank money in TARGET2. The design of STEP2 is based on payment orders being transmitted to the recipient after settlement has occurred (“send – settle – deliver”). There are seven settlement cycles (see

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table 2) for SCTs, one for standard SDDs (CORE) and one for business to business direct debits (B2B).

STEP 2 Clearing & Settlement Cycles in GMT

File submission Settlement Target Incoming payments – cut-off time outputs received from STEP2 – at the latest

Cycle 00 20.00 20.40 21.40

Cycle 01 24.00 01.00 02.00

Cycle 10 05.15 06.30 08.00

Cycle 11 08.00 08.45 10.15

Cycle 12 10.30 11.15 12.45

Cycle 20 13.00 13.45 15.15

Cycle 21 15.00 15.20 15.45

TABLE 2: SETTLEMENT CYCLES - INFORMATION AND SETTLEMENTS PERIODS

For SCTs, participants must be ready to process incoming payments during each of the five ‘daytime’ cycles (SCT10 to SCT21) whereas direct participants can, for each of their outgoing bulk (or batch), specify in which cycle the payments shall be processed. Any participant wishing to send or receive payments during the ‘night time’ cycles (SCT00 and SCT01) has to register separately for each cycle.

The Irish banks are the most active participants in the night-time cycle, The Irish banks’ use SCT00, with over 40% of Irish SCTs processed during this cycle (see table of the night-time 3). settlement cycles in STEP2 has led to an expectation amongst Irish consumers that

TABLE 3: VOLUME OF SCT TRANSACTIONS PROCESSED PER CYCLE5 payments will always be credited to their Payment delays can occur when a bank fails to submit a payment file(s) account at the start before the relevant cycle sending cut-off or does not provide sufficient of the business day funds for settlement, or indeed, if the system or the settlement in central bank money experiences a disruption and the cycle to which the payment file(s) was submitted cannot be completed. In the latter cases, the file(s) will be queued and processed during the next available cycle. To date, such

5 IE volumes do not total 100% due to rounding

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infrequent disruptions have resulted in some intra-day delays to settlement in central bank money. The manner in which the Irish participants have utilised the STEP2 night-time settlement cycles typically results in funds being made available in the relevant commercial bank accounts during the night. This has led to an expectation amongst Irish consumers that payments are always credited to their account at the start of the business day. However, as per the SEPA SCT scheme rules, PSPs are obligated to settle credit transfers before the end of the following business day.

3.2 Card Payment Schemes Following the cessation of Laser (previous domestic card payment scheme) in 2014, all card transactions in Ireland rely on international card payment schemes i.e. Mastercard and VISA. Both schemes require their licensees to be authorised to provide the relevant payment services in the jurisdiction in which they issue or acquire debit/credit cards.

The settlement flows for these transactions depend on the relationship between the individual issuer, the acquirer and the card payment scheme. Some parties settle in-house (e.g. intra-group), others settle via EBA Clearing’s STEP2 (with ultimate settlement in TARGET2) and some settle via TARGET2 following processing within the card schemes internal network. Both card payment schemes have adopted a ‘no single point of failure’ approach to their operations with contingency arrangements in place including back-up sites and substitutability for settlement banks.

3.3 IPCC IPCC provides the framework through which participants exchange funds to honour cheques and other paper instruments used by their customers (both personal and corporate). There are 10 participant institutions, including the Central Bank. IPCC operates on a decentralised basis; the individual IPCC members own and operate the infrastructure that completes the critical business functions. The participating banks rely on their own payment infrastructures or those of an outsourced third party service provider to clear paper instruments. The underlying payment obligations are netted on a bilateral basis; the Central Bank acts as the settlement agent for these by processing the payments (i.e. settling the value) via TARGET2.

3.4 Oversight and Resilience

3.4.1 STEP2 The safe and efficient operation of payment systems such as STEP2 is essential to maintaining and promoting financial stability and economic

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growth. If not properly managed, STEP2 has the potential to trigger systemic risks and could act as a channel through which major shocks are transmitted. In this context and, moreover, taking the volumes and values processed into account, STEP2 is classified as a SIPS, and is therefore subject to the SIPS Regulation and the oversight of the ECB as competent authority in conjunction with the national central banks. As per EBA’s Annual Reports (2014-2018), the service availability of all EBA CLEARING’s payment services was uninterrupted from January 2014 to December 2018.

3.4.2 Card payment schemes – VISA, Mastercard In 2015, Regulation (EU) 2015/751 (the Interchange Fee Regulation or IFR) came into effect in the EU, for all domestic and international card payment schemes, including VISA and Mastercard. The IFR was introduced with the aim of addressing the problem of high and divergent interchange fees across the EU, and to provide for uniform technical and business requirements for card-based payment transactions carried out within the EU to allow PSPs to provide their services on a cross-border basis and for consumers and merchants to use cross-border services. Interchange fees are usually applied between the payment card acquiring PSP and the payment card issuing PSP belonging to a certain payment card scheme. Interchange fees are one element of the fees (usually called a ‘merchant service charge’) paid by a retailer to its acquiring PSP.

Under the IFR, it also became necessary to separate the scheme and processing infrastructure aspects of card payment schemes. As the cost of processing is a significant part of the total cost of card acceptance, it is important for this part of the value chain to be open to effective competition. On this basis, card schemes and their processing infrastructures should be independent in terms of accounting, organisation and decision-making processes.

In January 2016, Mastercard’s processing infrastructure was brought within the scope of the Eurosystem’s oversight framework. As a result, it is considered a payment system and is included in the annual classification exercise conducted by the Eurosystem, which classifies payment systems in terms of their systemic importance. The National Bank of Belgium (NBB) is the lead overseer for Mastercard, and therefore leads the assessment process. Due to its location in the UK, VISA’s processing infrastructure is not subject to the Eurosystem’s oversight framework. However, the Bank of England assesses VISA against the 17 principles in the PFMIs as it considers VISA systemically important for financial stability purposes.

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Regarding the scheme aspects (policies, rules etc.) of VISA and Mastercard, the ECB has developed the oversight framework for card payment schemes (Eurosystem’s CPS framework) with a particular focus on the security and efficiency of card payments. The VISA and Mastercard schemes are both assessed against this framework by their respective lead overseers i.e. the ECB and the NBB.

3.4.3 IPCC The Eurosystem has classified IPCC as an ORPS, which is the lowest payment system classification in terms of systemic importance. The Central Bank is the lead overseer for IPCC, and is responsible for conducting comprehensive oversight assessments of IPCC against all relevant principles contained in the PFMIs. In its capacity as lead overseer, the Central Bank also participates in IPCC Board meetings as an observer. The Irish Payments Council’s (IPC) role in relation to IPCC is to provide administrative and operational support, which it has delegated to BPFI.

3.4.4 Major Incident Reporting The Eurosystem has developed its major incident-reporting framework for payment schemes and retail payment systems, to which STEP2, VISA, Mastercard and IPCC are all subject. This framework is part of the comprehensive Eurosystem oversight framework for payment systems and schemes. It sets out the arrangements for reporting incidents. The reporting framework is closely aligned to incident reporting requirements for PSPs under the PSD2. The framework requires the system to provide an initial report to the relevant lead overseer for major incidents within 3 hours of the incident occurring. The report should provide a comprehensive description of the incident, the root cause of the incident and any actions/measures taken to resolve the issue. The respective system or scheme operator remains responsible for resolving all issues arising.

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4 Ireland’s Payment Ecosystem: Settlement

4.1 Real-time Gross Settlement system

RTGS systems provide for the immediate and irrevocable settlement and transfer of funds on a continuous basis in real-time, with immediate finality. TARGET2 is the wholesale or large value payment system, the RTGS system, for euro denominated payments and is a designated payment system under Directive 98/26/EC (the “Settlement Finality Directive”, see section 5.1). TARGET2 is owned and operated by the Eurosystem, with payments settled in central bank money (on accounts held with the Eurosystem central banks). As of 2018, TARGET2 maintained its position as the leading European platform for processing large-value payments, processing 90% of the total value settled by large value payment systems in euro.

TARGET2 was developed on a single technical platform, offering harmonised core services to participating central banks. The technical infrastructure was developed using a modular approach to allow individual participating national central banks tailor the system to the needs of their individual countries’ banking communities. Each participating central bank operates a domestic TARGET2 module, known locally as TARGET2-XX, where “XX” stands for the relevant country code, e.g. TARGET2-IE for Ireland. TARGET2’s single shared platform (SSP) is maintained by Banque de France, Deutsche Bundesbank and Banca d'Italia (referred to as the 3CB) on behalf of the Eurosystem.

The Central Bank has two roles in terms of TARGET2-IE; firstly as operator The Central Bank has and secondly as overseer. Each central bank has a national service desk two roles in terms of which is represented by a settlement manager in its dealings with other TARGET2-IE: firstly central banks and a crisis manager who is responsible for managing as operator and abnormal events. During 2018, TARGET2 processed 88.5m transactions with a total value of €432.5 trillion of which TARGET2-IE processed over secondly as overseer 866,000 transactions with a value of €3.01 trillion.

4.1.1 Participation in TARGET2-IE The access criteria for TARGET2-IE are set out in the TARGET2-IE terms and conditions on the Central Bank’s website. At end-2019, there were 15 direct participants in the payments module of TARGET2-IE.

4.1.2 Role of the National Central Bank (TARGET2) As each central bank is fully responsible for business relations with “its” users, TARGET2 was designed along “client-based” lines in a way that

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allows the participating central banks to meet their administrative and monitoring requirements. The national service desks are responsible for, amongst other things:

o all contacts with and provision of business support to their users (i.e. credit institutions holding a payments module (PM) account or dedicated cash account and ancillary systems), including the management of the relevant static data; o daily operational management (e.g. opening/closing of national technical components); o monitoring payments activities of their participants (e.g. payment flows, liquidity and user behaviour) and monitoring of any local technical components; o providing intraday liquidity to their participants; o handling local contingency arrangements and abnormal situations.

4.1.3 System Resilience and Contingency

TARGET2 offers sophisticated business contingency arrangements TARGET2 offers appropriate with the systemic importance of the infrastructure. The T2 sophisticated availability since 2011 has been 99.9%. The business continuity concept of business contingency TARGET2 consists of a two-region/four-site architecture (Figure 4). There arrangements are two regions for payment processing and accounting services, and in each region, there are two different sites. Regular region rotations are applied, thus ensuring full readiness and preparation in both regions in any event. TARGET2 participants are oblivious as to which region the system is operating from and unaware as to when a region rotation takes place.

FIGURE 4: TARGET2 OPERATING SITES (Source: ECB)

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This architecture enables TARGET2 to provide the highest level of service, minimise operational risk and avoid systemic risk. Contingency and business continuity measures have the objective to ensure that failures of TARGET2 components at all levels do not cause any disruption to the overall functioning of TARGET2.

In addition, to the two-region/four-site architecture, TARGET2 also provides:

(i) A contingency network, the SSP operational team will activate this on a per country basis on request by a central bank in case of a SWIFTNet outage (network service provider facilitating access to the TARGET2 platform). (ii) A contingency module, whereby the SSP has the ability to manually process a limited number of critical payments on behalf of a central bank and its TARGET2 participants in the case of a prolonged TARGET2 outage. For example, STEP2 payments could be processed via the contingency module to minimise a contagion effect, i.e. in the event that TARGET2 was unavailable for an extended period, retail payments could continue to clear and settle. The contingency module can only run for one business day. (iii) An additional contingency solution (enhanced contingency solution – ECONS1) was included in the latest version of TARGET2 to go into live operation in November 2019. ECONS1 has the capability to run for a number of consecutive days (up to 5). In the event of a prolonged incident, ECONS1 can be used for the processing of critical and very critical payments including the processing of ancillary system payment files in specific situations, such as the unavailability or inaccessibility of the SSP components or if the time needed for the activation of the alternate site/region lasts too long.

4.2 EURO1 EURO1 is a private sector large value payment system for single same-day euro transactions at a pan-European level. As with STEP2, EBA Clearing owns and operates EURO1. The system provides immediate finality for every processed payment and operates on a multilateral net basis. Therefore, instead of having to manage multiple bilateral accounting arrangements, participants only have one multilateral position which EURO1 settles in central bank money in TARGET2. At end-2019, there were 44 participants in EURO1. EURO1 processes on average 200,000 transactions per day with a daily average of approximately €200 billion. In Ireland, EURO1 has a significantly smaller market share than TARGET2. EURO1 is subject to oversight by the ECB, in conjunction with the national central banks.

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4.3 Oversight and Regulation As with STEP2, both TARGET2 and EURO1 are classified as SIPS and, as such, are required to comply with the requirements as set out in the SIPS Regulation and other relevant frameworks developed by the Eurosystem.

4.4 Major Incident Reporting The respective operators of TARGET2 and EURO1 are required to notify the lead overseer, i.e. the ECB, immediately if a major incident occurs in line with reporting requirements in the SIPS Regulation. Following this initial engagement, a formal incident report is required, at the latest, on the second business day following the occurrence of the incident. The report should provide a comprehensive description of the incident, the root cause of the incident and any actions/measures taken to resolve the issue. The respective system or scheme operator remains responsible for resolving all issues arising.

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5 Ireland’s Securities Clearing and Settlement Systems

There is no securities settlements infrastructure located in Ireland. Therefore, as part of its oversight and regulatory activities, the Central Bank monitors developments in securities clearing and settlement that have the potential to impact on the infrastructures for clearing and settlement of Irish securities.

5.1 Settlement Finality One of the issues that comes under consideration in the area of oversight is that of settlement finality. Directive 98/26/EC (the “Settlement Finality Directive” or “SFD”) aims at reducing the systemic risk associated with participation in payment and securities settlement systems, in particular the risk linked to the insolvency of a participant in such a system. The SFD regulates designated systems used by participants to transfer financial instruments and payments. It guarantees that transfer orders which enter into such systems are finally settled, regardless of whether the sending participant has become insolvent or transfer orders have been revoked in the meantime. Participants to designated systems include financial institutions, e.g. banks, systems operators, CSDs or CCPs.

The SFD requires Member States to notify certain designations to the European Securities and Markets Authority (ESMA):

i. the national systems and the respective system operators which are to be included within the scope of the SFD; and, ii. the national authorities that must be notified when insolvency proceedings are opened against a participant or a system operator. In the case of Ireland, this authority is the Central Bank.

5.2 Regulation of Securities Settlements and Clearing Systems Regulation (EU) No 909/2014 (the “Central Securities Depositories Regulation” or “CSDR”) relating to securities settlement and CSDs entered into force on 17 September 2014. The CSDR applies to CSDs based in the EU and their participants. The Central Bank is designated as the national competent authority responsible for carrying out the functions of a competent authority referred to in the CSDR, including the authorisation and supervision of CSDs established in Ireland.

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The principal objectives of the CSDR are to:

. Increase the safety and efficiency of securities settlement and the settlement infrastructures in the European Union; . Harmonise the different CSD rules in the European Union; and,, . Establish an enhanced level playing field among CSDs.

Regulation (EU) No 648/2012 (the European Market Infrastructure Regulation or EMIR) came into force on 16 August 2012. The primary objective of EMIR is to reduce systemic risk by increasing the transparency of the over-the-counter (OTC) derivatives market, mitigating counterparty credit risk, and reducing the operational risk associated with OTC derivatives. One of the key elements of EMIR is that it lays down the regulations for the authorisation and supervision of CCPs, which are a key part of the European securities infrastructure. EMIR applies to entities conducting derivative activity, including banks, insurance undertakings, investment firms, and investment funds etc. EMIR also details the requirements for clearing OTC transactions and the rules that govern CCPs. Irish entities use CCPs, either directly or indirectly, to clear derivative transactions, in particular to meet their EMIR requirements.

As with the CSDR, the Central Bank is the designated competent authority for EMIR in Ireland. In 2019, EMIR was amended further to the European Commission’s regulatory fitness and performance programme (Refit) under which legislation is periodically reviewed to see if improvements can be made. The aim was to maintain the key elements of EMIR while making the requirements more proportionate for less systemically important entities. The EMIR Refit legislation seeks to relieve small companies, especially non- financial counterparties, of disproportionate costs and administrative burdens by simplifying the reporting requirements and the clearing obligations. Due to the growing size, complexity and cross-border nature of clearing in the EU and globally, the supervisory requirements have been updated and EMIR is amended by (EU) 2019/2099 (EMIR 2.2). This amending legislation establishes clear and coherent supervisory arrangements for EU and third-country CCPs. These changes were necessary to improve the current framework under EMIR, ensure financial stability and support the further development and deepening of the capital markets union (CMU).

Clearing markets are well integrated across the Union but highly concentrated in certain asset classes and highly interconnected. Currently, 16 EU CCPs have been authorised under EMIR along with 32 third-country

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CCPs that have been recognised under EMIR equivalence provisions. The concentration of risk makes the failure of a CCP a low-probability but a potentially high-impact event. In 2016, to address the challenges posed by the growing importance of CCPs, and the potential risks for financial stability if a CCP were to fail, the EU Commission adopted a legislative proposal on CCP recovery and resolution.

5.3 Settlement of Irish securities As referred to earlier, the Irish market is unique in the area of securities Irish Government settlement as it has no domestic infrastructure of its own and utilises bonds settle in settlement systems located in different European countries. Irish Government bonds are issued and settled in Euroclear Bank in Belgium Euroclear Bank in while corporate securities and some ETFs are issued and settled in the Belgium Euroclear UK and Ireland (EUI) ‘CREST’ system in the United Kingdom. The remaining Irish ETFs and Irish corporate bonds are settled in other European CSDs, including Euroclear Bank.

5.3.1 Irish Government Bonds The Central Bank maintains the register for Irish Government bonds, which The Bank maintains are issued by the National Treasury Management Agency (NTMA). This the register for Irish consists of the capital register for each issue, which is the record of the Government bonds total capital outstanding, and the accounts of the individual holders of each issue.

Irish government bonds are issued and settled in Euroclear Bank, which is an international central securities depository (ICSD) located in Brussels. Euroclear Bank is a wholly owned subsidiary of Euroclear SA/NV. Settlement is in commercial bank money with participants having cash accounts with Euroclear Bank, which typically provides the participants with intraday credit to facilitate settlement. The Central Bank, in maintaining the capital register for Irish government bonds, ensures that the total of individual holdings on the register in a particular bond issue corresponds at all times to the amount recorded in the capital register for that issue. Arrangements are also in place to facilitate changes to the outstanding capital of all bond issues resulting from new issues/tranches of existing issues and cancellation transactions by the issuers, and to record these in Euroclear Bank’s system. A daily reconciliation process is carried out between the Central Bank, in its role as registrar, and Euroclear Bank, and a full reporting system is in place.

5.3.2 Irish Equities Irish equities are traded on Euronext Dublin, and are settled in the ‘CREST’ system operated by the Euroclear UK & Ireland (EUI) CSD. EUI, which is

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incorporated in the UK, is also a wholly owned subsidiary of Euroclear SA/NV. EUI provides DvP settlement in central bank money via a number of settlement banks and Free of Payment (FOP) settlement. Each CREST participant appoints a settlement bank to settle the cash leg of securities transactions. These settlement banks extend intraday credit to their customers to facilitate settlement. There are currently no settlement banks located in Ireland providing settlement facilities in euro for Irish trades in Irish securities; such services are provided by settlement banks in other Member States.

Transactions in Irish securities in the CREST system take place under Irish law, EUI being approved as an operator under S.I. No. 68 of 1996 Companies Act, 1990 (Uncertificated Securities) Regulations, 1996.

5.3.2.1 CCP Clearing for Euronext Dublin EuroCCP is the CCP serving Euronext Dublin, since April 2019. EuroCCP is authorised as a CCP under EMIR. EuroCCP is regulated by De Nederlandsche Bank (DNB, the Dutch National Central Bank) and by the Netherlands Authority for the Financial Markets (AFM). The Central Bank is a voting member of the EuroCCP EMIR supervisory college.

An example of a typical trade, the parties involved and flows between them are depicted in Figure 5 below, with an explanation of the flows included subsequently.

FIGURE 5: CLEARING AND SETTLEMENT OF IRISH EQUITIES AND ETFS

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The flows included in Figure 5 are explained as follows:

Step Purchaser Buyer

1 Individual instructs broker to purchase Individual instructs broker to sell shares in Company ‘x’ shares in Company ‘x’

2 Broker sends buy request to stock Broker sends sell request to stock exchange and confirms price exchange and confirms price

3 Stock exchange sends instruction to the CCP. A CCP acts as a counterparty to both sellers and buyers, collecting money from each, which allows it to guarantee the terms of a trade. The trading parties’ accounts are updated and the transfer of money and the stock arranged.

4 Settlement takes place, i.e. the exchange of cash and securities between the buyer and seller on the intended settlement date.

5 Transaction is complete and register is updated by the registrar

5.4 Oversight of Securities Clearing and Settlement Systems As the settlement infrastructures for Irish securities are located outside Ireland, the Central Bank does not have primary oversight responsibility for the relevant settlement systems. Therefore, it relies on co-operation with the national competent authorities in Belgium and the UK (the countries in which the relevant systems are located) in order to ensure that it can be appropriately involved in the oversight of the systems concerned.

Previously, the focus has been on ensuring that the Central Bank has access to information on oversight activities, an opportunity to comment on proposed activities and a channel for communication in the event of a major incident. The Central Bank has to date co-operated by means of MoUs with the National Bank of Belgium (NBB) and the Bank of England (BoE) regarding the oversight of Euroclear Bank and EUI. However, in line with the entry into force of the CSDR, co-operation with the NBB in relation to the oversight of Euroclear Bank and the BoE in respect of CREST will be in accordance with the provisions of that legislation.

CSDR provides certain roles for the Central Bank as a host competent authority in a situation where a CSD that is authorised in another Member State wishes to provide CSD services in Ireland. While the CSD will be authorised and supervised by the home Member State, the Central Bank, as host Member State will also play a role in the ongoing oversight and supervision of that CSD. Depending on the nature of the services offered

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by these CSDs in Ireland, the Central Bank has specific roles under the CSDR, including reviewing that the proposed operations of the CSD comply with Irish law or providing a reasoned opinion on an authorisation application, as appropriate. The CSDR also envisages co-operation between home and host authorities in the on-going supervision of CSDs.

5.4.1 Departure of the UK from the EU The UK’s departure from the EU will impact on the settlement of Irish corporate securities, as the CREST system, operated by EUI, is located in The UK’s departure the UK. Euronext and the Irish market participants have indicated that from the EU will Euroclear Bank is their preferred alternative. In conjunction with the impact on the relevant authorities, all parties are actively engaged to provide a solution to settlement of Irish facilitate the continued settlement of trades in Irish securities and the corporate securities continued access of Irish corporates to capital markets.

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6 Oversight of other FMIs

6.1 Foreign-Exchange Settlement – Continuous Linked Settlement Continuous Linked Settlement (CLS) Bank provides global multicurrency settlement services for foreign exchange transactions, using a payment- versus-payment (PvP) mechanism, meaning that a foreign exchange operation is settled only if both counterparties simultaneously have an adequate position in the currency they are selling.

6.1.1 Oversight of CLS The US Federal Reserve System has accepted primary oversight responsibility for CLS, leading a cooperative oversight framework in which the ECB participates, together with the G10 national central banks. Within the Eurosystem, the ECB has primary responsibility for the settlement of euro-denominated payments by CLS, in close cooperation with other Eurosystem central banks. The US Federal Reserve has developed a protocol for the Co-operative Oversight Arrangements of CLS.

6.2 Trade Repositories A trade repository (TR) is an entity that centrally collects and maintains the records of OTC derivatives. TRs play a central role in enhancing the transparency of derivative markets and securities financing markets and thus of the financial system under EMIR and EU Regulation 2015/2365 (Securities Financing Transaction Regulation or SFTR). ESMA has direct responsibilities regarding the registration, supervision, oversight and recognition of TRs based inside and outside the EU. EU-based TRs need to be registered, and third country (non-EU) based TRs, which are doing business in the EU need to be recognised by ESMA, in order for counterparties to use them for their reporting requirements.

6.3 Oversight of critical service providers Since 2017, critical service providers (CSPs) fall within the scope of the Eurosystem oversight policy framework, namely the Eurosystem policy for the identification and oversight of critical service providers of FMIs. CSPs have a direct contractual arrangement with an entity to provide services which are essential for ensuring information confidentiality and integrity, service availability, as well as the smooth functioning of its core operations. Examples of CSPs include data centres, financial messaging/network service provider, payment processing services, telecommunication services and utilities. There are two such CSPs, namely SIA-COLT and SWIFT,

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providing connection to Eurosystem’s FMIs. SIA-COLT provides connection services to T2S and TIPS. Whereas, the connection to T2 is currently based on the SWIFT technology.

From an Irish perspective, SWIFT is one of the key CSPs providing the secure financial messaging service. SWIFT is overseen by the NBB. Although SWIFT is a messaging system rather than a payment system, it is nonetheless a vital component of payment systems such as TARGET2 given that SWIFT messages are used to communicate the instructions to effect payments. Central banks in general, and in Eurosystem terms the ECB and all NCBs, therefore have a vested interest in ensuring the reliability and safety of the SWIFT system. To do this, it is necessary to have an oversight regime analogous to that for payment systems. In January 2004, the G10 central bank governors agreed that SWIFT would be overseen by a group of G-10 central banks in cooperation with the NBB as the lead overseer, given that SWIFT is incorporated in Belgium. The relationship between the NBB and the cooperating central banks is reflected in bilateral MoUs. The SWIFT cooperative oversight group (OG) is composed of all the G-10 central banks, the ECB and the chairperson of the G-10 Committee on Payment and Settlement Systems (CPSS), and is the forum through which central banks conduct co-operative oversight of SWIFT. The NBB publishes periodic reports on its oversight of SWIFT.

Starting in 2021, both SIA-COLT and SWIFT will enable market participants to access the three TARGET services6 and the Eurosystem’s Collateral Management System (ECMS) through the new single market infrastructure connectivity gateway.

6 The three TARGET services refers to are TARGET2, TARGET2 Securities (T2S) and TIPS.

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7 Market Infrastructure developments in Ireland

In addition to the reliance on payments systems such as STEP2 and TARGET2 and the underlying networks provided by the critical service providers, there is a similar reliance on individual PSPs to provide access to such systems.

PSPs determine how they connect to the various systems and schemes based on their business models and commercial decisions. In recent years, the level interconnectedness has increased adding layers, or complexities, to the payments ecosystem and potential increased operational risks.

7.1 Interconnectedness of participants

PSPs can decide to participate directly, indirectly or be addressable via a PSPs can decide to direct participant in the various payment systems/schemes depending on participate directly, the business model adopted. Data, such as financial messages and indirectly or be instructions, are exchanged between the participants and the systems or addressable via a schemes using dedicated secure financial messaging services. As PSPs have continued to streamline their processing, back office or settlement direct participant in operations, this has led to an increase in outsourcing of certain the various payment functionalities or rerouting of payment files via another entity to facilitate systems/schemes clearing and/or settlement. depending on the business model The level of interconnectedness of participants across various different systems and schemes has increased as a result. Figure 6 gives a stylised adopted depiction of this interconnected payments network.

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FIGURE 6: STYLISED REPRESENTATION OF DIRECT AND INDIRECT SYSTEM PARTICIPATION The type of system participation illustrated for each entity in Figure 6 is as follows:

. Bank A: Direct T2-IE participant, direct STEP2 participant . Bank B: Direct T2-IE participant, reachable BIC in STEP2. Reachable BICs refer to PSPs which have a BIC (ISO9362) for which a STEP2 Participant has been appointed. A “reachable BIC” does not send or receive payment orders directly through STEP2; all payment orders are included in the files sent and received by the STEP2 participant’s PSP. . Bank C: Direct T2-XX participant (where ‘XX’ stands for the country code in which the TARGET2 component is located, e.g. TARGET-DE), Direct STEP2 participant . Bank D: Direct T2-IE participant . Bank E: Indirect T2-IE participant, reachable BIC in STEP2 . Bank F: Direct T2-IE participant, indirect STEP2 participant (settling in a non-domestic T2 account)

There are benefits to the increased interconnectedness such as efficiency gains, reduced costs, and potential increased resilience due to reliance on the more sophisticated operational and business continuity systems of larger institutions. However, there are also risks. In particular, there is potential concentration risk. This also highlights the importance of close collaboration between the relevant overseers and national central banks.

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7.2 National Payments Plan Following the launch of the national payments plan in 20117 (see Appendix 3 for additional information), the Minister for Finance appointed Indecon (international economic consultants) to complete a study on payment usage in Ireland and benchmark Ireland against other countries in 2018.8 The report shows that Ireland has moved from being a cash-dependent economy, with Ireland then ranked 10th out of 27 European countries for the combined use of card payments, credit transfers and direct debits. Debit cards now account for 74% of cards in Ireland, with 124% increase in contactless transactions posted from 2016 to 2017. This is likely a reflection of the increased rollout of contactless card functionality. The increased acceptance of cards by retailers, contactless transaction limits increases (from €15 to €309), restructuring of stamp duty on debit and credit cards are also factors contributing to this increase.

Ireland has seen a take-up of electronic payments in line with global trends with almost half of Irish credit card expenditure made online. In 2016, cheque usage has reduced to less than 8 per capita p.a. compared with 237 e-payments per capita p.a. In 2005, 22.8% of all households did not use a bank account. Indecon reported that this has fallen by three-quarters to just 6.3% of all households by 2015. The Payment Account Directive provided for greater accessibility to payment accounts. An important aspect is the increased take-up of electronic payments for social welfare payments. Many credit unions and An Post have also introduced electronic banking initiatives.

Indecon concluded that the rapid advancement in electronic payments has Rapid advancement benefited the Irish economy, but there may be some concerns around in electronic security and continuity of payment systems in Ireland given the absence of payments has an indigenous payment system. Indecon also stated that there is a risk that benefitted the Irish some segments of Ireland’s society could be excluded by an acceleration of a move to electronic payments. This view will be considered by the Central economy Bank in collaboration with relevant stakeholders.

7 https://www.centralbank.ie/docs/default-source/news-and-media/2014/april/10-april/national- payments-plan---final-version.pdf?sfvrsn=4 8 https://assets.gov.ie/6204/040219135457-648b24bc4c234983a39b3a323f939f1d.pdf 9 The contactless limit was subsequently further increased to €50 on 1 April 2020

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7.3 Stakeholder engagement

7.3.1 The Irish Retail Payments Forum (IRPF) In 2018, the Bank In 2018, the Central Bank established the Irish retail payments forum established the Irish (IRPF) in order to provide a forum in which PSPs and payment services Retail Payments users (PSUs) can come together (supply and demand side) to engage in an Forum open and constructive dialogue with each other in relation to Irish retail payment services generally.

The principal aims of the IRPF are:

. to promote the continued safety and efficiency of retail payments in Ireland, and . to foster co-operation between all stakeholders in relation to the development and provision of new and improved payment services and payment instruments.

7.3.2 National Stakeholder Groups (NSGs) In January 2018, the Central Bank established national stakeholder groups (NSGs) as the fora for involving national stakeholders in the work of the respective Eurosystem advisory groups on market infrastructures. The advisory group on market infrastructures for payments (AMI-PAY) and similarly for securities and collateral (AMI-SeCo) were established to support financial market integration in the field of payments and securities clearing and settlement and collateral management respectively. The groups also act as an advisory body for all issues related to the development, implementation and operation of the financial market infrastructures managed by the Eurosystem including related projects.

The role of the NSGs has increasing importance as the Central Bank and the Irish market prepare for the major infrastructural projects that are underway (T2/T2S Consolidation and the ECMS projects). The objectives of these projects are to facilitate further market integration, to reduce operational costs, to identify modernisation opportunities for Eurosystem market infrastructure services and to improve the services that the Eurosystem currently offers to the financial market for payments, collateral and securities.

7.3.3 Innovation Hub In April 2018, the Central Bank launched its Innovation Hub to facilitate The Innovation Hub engagement with entities engaged in innovation, start-ups and incumbents facilitates in financial services based on new technologies. The purpose is two-fold. engagement with Firstly, this provides a direct, dedicated contact point within the Central entities engaged in Bank for such firms in answering questions and providing them with innovation, start-ups and incumbents in financial services

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relevant information in respect of the Irish regulatory landscape. Secondly, it provides the Central Bank with an opportunity for greater insight into technological developments and innovations. This approach ensures shared insights into how innovation is developing including potential impacts on the Irish payments eco-system and on our role and responsibilities.

7.3.4 Promoting Cyber Resilience The Central Bank plays an active role in monitoring the security and operational reliability of TARGET2-IE participants and promoting endpoint security arrangements in TARGET2. The Eurosystem, in its capacity as TARGET2 system operator, developed a set of requirements that should be implemented to address information security risks with which all participants in TARGET2 must comply taking into account their internal systems used for sending/receiving TARGET2 payments (i.e. back office systems, internal networks and external network connectivity infrastructure). This aligns with principle 17 of the PFMIs which states that ‘an FMI should consider establishing minimum operational requirements for its participants. For example, an FMI may want to define operational and business continuity requirements for participants in accordance with the participant’s role and importance to the system.’ The TARGET2 self-certification regime has been in place since 2007. The scope of this self-assessment was enlarged in 2017, mandating all direct participants to self-certify their level of compliance with the requirements and submit their completed self- certification to their local central bank. The first comprehensive exercise was completed in 2018.

The Central Bank also monitors the compliance of TARGET2-IE participants with SWIFT’s customer security programme (CSP) given the criticality of SWIFT messaging for the operation of TARGET2 accounts. In February 2016, SWIFT implemented this programme following a cyber- heist in Bangladesh. The CSP establishes a security baseline for the entire SWIFT community; all SWIFT users were mandated to implement the CSP on their local SWIFT infrastructure by end-2018. The Central Bank has requested access to the self-attestations and observed the compliance of TARGET2 participants with the SWIFT CSP mandatory controls together with the action plans in case of a non-compliance. The Central Bank contributes to the development of measures supporting the compliance process, furthermore will ensure that endpoint security is properly managed in the context of the future consolidated T2-T2S environment.

In May 2018, the Governing Council of the ECB approved the framework for threat intelligence-based ethical red teaming (TIBER-EU). TIBER-EU is a common framework that delivers a controlled, bespoke, intelligence-led

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red team test against entities’ critical live production systems. Intelligence- led red team tests mimic the tactics, techniques and procedures of real-life threat actors (“hackers”) who are perceived as posing a genuine threat to entities. An intelligence-led red team test involves the use of a variety of TIBER-EU helps an techniques to simulate an attack on an entity’s critical functions and entity to assess its underlying systems (i.e. its people, processes and technologies). In line with protection, detection CPMI-IOSCO guidance, TIBER-EU helps an entity to assess its protection, and response detection and response capabilities, and to improve its governance and to capabilities, and to stimulate its learning and evolving. Although TIBER-EU was originally improve its intended to be applied to financial firms and FMIs e.g. payment systems, governance and to CSDs etc., the Framework has been drafted in such a way that it is entity or sector agnostic and can be tested on any type and size of entity, across the stimulate its learning financial and other sectors. The Central Bank adopted TIBER-EU for the and evolving Irish financial services sector in the form of TIBER-IE and supports such testing of financial institutions and infrastructure.

In December 2018, the ECB published the cyber resilience oversight expectations (CROE) for FMIs. The purpose of the CROE is to assist FMIs operationalise the various elements of CPMI-IOSCO cyber guidance. In addition, the CROE provides Overseers with clear expectations against which they can assess FMIs operating in their jurisdiction. In line with the Guidance, the CROE is presented in eight chapters that outline five primary risk management categories and three overarching components that should be addressed across an FMI’s cyber resilience framework. The risk management categories are: (i) governance; (ii) identification; (iii) protection; (iv) detection; and (v) response and recovery. The overarching components are: testing; situational awareness; and learning and evolving. Each chapter sets out three levels of expectations, which provide clarity and further details to both the FMI and its respective competent authority on how to concretely operationalise the cyber guidance.

7.4 Future Developments The retail payments industry continues to evolve rapidly, driven by digital transformation, regulatory change (e.g. PSD2) and the shift in consumer behaviour (move from traditional payment instruments to electronic payments such as card payments, e-money payment cards, mobile payments). A similar cultural shift may transpire as offerings such as instant payments, providing an alternative means of payment, by the domestic market participants are rolled out in Ireland.

7.4.1 SEPA Instant Credit Transfers SCTinst ensures a The SEPA Regulation included an optional instant payments scheme, which standardised is a growing area of interest. In November 2017, the EPC officially approach to instant

payments in the euro area

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launched the SCT Instant Payment Scheme (SCTinst) to ensure a standardised approach to instant payments in the euro area. The SCTinst scheme enables euro credit transfers with the funds made available on the payee’s account in less than ten seconds at any time and in an area that will progressively span over 34 European countries. The SCTinst scheme was primarily developed to prevent fragmentation in the market, at a time when many national only instant payment solutions were being developed. In addition, SCTinst aims to fulfil evolving consumer expectations, which have continued to move towards quicker, safer and more convenient payment services.

Similar to the SCT and SDD scheme, the SCTinst scheme provides a common standard for instant payments, enabling pan-European reach for customers of those PSPs that have adopted it. However, unlike the SCT and SDD schemes, adopting the SCTinst scheme is currently not mandatory. As of May 2019, 2,078 PSPs had adopted the SCTinst. This represents 50.7% of PSPs adhering to the SCTinst scheme (4,098), in all SEPA countries. EBA Clearing launched RT1, their instant payment solution for the processing of instant SEPA credit transfers at a pan- European level, in November 2017. In November 2018, the Eurosystem launched their instant payments solution, TIPS – TARGET Instant Payments Settlement.

Irish retail banks are, in the first instance, aiming to realise their ambition of launching a mobile payment solution (Project Pegasus – a collaboration project, led by BPFI) by Q1, 2021. This account-to-account mobile-based solution will be built on the SEPA infrastructure (payments will be routed via the current STEP2 SCT rails). The solution will be compatible with SEPA Instant rails (SCTinst). Ireland is one of the few countries in Europe that does not currently offer an instant payments solution to its customers. Project Pegasus will address this need and will be capable of integration into any European scheme that may emerge. In its capacity as catalyst, the Central Bank actively encourages the Irish retail banks to make instant payments available to its customers in a timely manner and continues to monitor Project Pegasus and related developments.

As mentioned above the Eurosystem developed an instant payments solution, TIPS, as an extension of TARGET2, offering final and irrevocable settlement of instant payments in euro in central bank money, at any time of day and on any day of the year. Participating PSPs can set aside part of their liquidity on a dedicated account opened with their respective central bank, to settle instant payments. TIPS allows real-time settlement in central bank money as long as the balance in the respective dedicated account is sufficient; these pre-funded accounts cannot have a negative balance.

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Funds contained in the TIPS dedicated accounts contribute towards participants’ minimum reserve requirements.

7.4.2 Eurosystem retail payments strategy The aim of the In November 2019, the ECB’s Governing Council relaunched its retail Eurosystem’s retail payments strategy. The aim of the Eurosystem’s strategy is to foster pan- payments strategy is European market initiatives for retail payments at the location of the to foster pan- purchase or interaction (point-of-interaction). European market Market initiatives are required to fulfil five key objectives: initiatives for retail payments at the 1. Pan-European reach and customer experience; location of the 2. Convenient and cost-efficient; purchase or 3. Safety and security; interaction 4. European identity and governance; and, 5. Global acceptance.

The Eurosystem welcomed the recent initiative of European banks to join forces in creating a pan-European retail payment solution, based on SCTinst, which envisages a payment solution for the euro area as a whole. The Central Bank is monitoring these developments, continuing to engage with relevant stakeholders and is supportive of initiatives that will ensure secure, fast and efficient retail payments.

7.4.3 Evolution of oversight frameworks As the payments ecosystem evolves, it may be necessary to adapt the Eurosystem’s oversight frameworks to ensure that they remain fit for purpose. The Central Bank, as chair of the IRPF, will continue to engage with market participants from both the demand and supply side and with relevant authorities and industry bodies. The short-term focus will be on closely monitoring and engaging with the market with a particular focus on instant payments, while the primary objective remains the same – that is to ensure that payment, settlement, and currency systems are safe, resilient and efficient and that access to such systems is not restricted.

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Appendix 1: Single Euro Payments Area (SEPA) Single Euro Payments Area (SEPA) has created a single market for euro- denominated retail payments, allowing payment services users to make cashless, euro-denominated payments to payees located anywhere in the area. SEPA covers all of the EU member states, together with Iceland, Liechtenstein, Norway, Switzerland, Monaco, San Marino and the UK. Regulation (EU) No. 260/2012 (the “SEPA Regulation”) set 1 February 2014 as the deadline for the replacement of national credit transfer and direct debit payments with SEPA equivalents in the euro area (although this was subsequently postponed to 1 August 2016). SI No. 132/2013 European Union (Requirements for Credit Transfers and Direct Debits in Euro) Regulations 2013, as amended, gave full effect to the SEPA Regulation in Ireland.

A payment service user, i.e. a member of the public/consumer who holds a payment account with a bank or other PSP located in the countries covered by the SEPA initiative, will regardless of where in SEPA they themselves are located be able to send euro-denominated payments to, and receive such payments from, accounts anywhere else in SEPA. The SEPA initiative aims to ensure that all consumers throughout the euro area, whether individual citizens or corporate entities, have common, standardised electronic retail payment instruments available to them. It provides consumers with an easy way to make a low-value payment from Dublin to Frankfurt as one from Dublin to Cork.

However, SEPA is not just about making cross-border payments – it is about making borders for payments obsolete by creating an integrated and harmonised EU-wide payments market in euro. SEPA seeks to foster the integration of the payments market in the euro area, and to stimulate efficiency and innovation in this field through the removal of infrastructural barriers to payments that previously hampered competition in the single market. SEPA makes payment services comparable and transparent to users by introducing new harmonised electronic payment instruments and payment services, which can be offered by all payment service providers in the euro area and thus making increased competition possible.

Benefits for consumers and businesses Simplicity, convenience and cost-effectiveness are the three core benefits of SEPA. Consumers can now rely on one payment account and card to make euro payments wherever they are in Europe, which provides consumers with convenience when they are travelling in Europe or making online purchases on websites. Equally, enterprises see potential increased business opportunities and can more easily access a broad European market. Additionally, SEPA creates a single market for payment services,

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leading to increased competition between PSPs, therefore benefiting consumer and merchants. This is particularly evident in Ireland in recent years with increased competition in the provision of current accounts by a number of PSPs which are based outside of Ireland.

In principle, SEPA allows consumers to use their bank accounts to make payments in euro to payees with bank accounts in other countries in the SEPA geographical reach in exactly the same way as they would make a payment to a payee resident in their own country. All euro-area bank customers are able to use one payment account in one country, and one set of payment instruments e.g. credit transfer, to conduct all of their euro payments business – the location of payer and payee within the euro area is irrelevant.

For example, an Irish resident with a property in France can pay a French electricity bill by direct debit from an Irish bank account, without having to open a bank account in France. It is also, of course, conceivable that this notional consumer might choose a French bank rather than the Irish bank, and end up paying Irish electricity bills from a French bank account. SEPA aims to provide real choice for the European consumer and real competition between its banks, on a level playing field, to the ultimate benefit of all.

Responsibility for SEPA The European banking and payments industry launched SEPA with the support of national governments, the European Commission, the Eurosystem, and other public authorities. In Ireland, with the exception of certain cases involving traders (generally meaning those acting for purposes related to trade, business or profession), the Central Bank is the competent authority in the State for the purposes of the SEPA Regulation and will take all necessary measures to ensure compliance.

The European Payments Council (the EPC) Since its formation in 2002, the EPC, as the European banking industry’s decision-making and co-ordination body for SEPA, has been the governance entity in charge of the design and management of the pan- European payment instruments (SCT and SDD). BPFI represents the banking, payments and fintech sector in Ireland is a member of the EPC. In practical terms, the EPC is the body responsible for defining the rules, procedures and standards that will apply to the SEPA-compliant payment instruments and schemes that the banks use to develop competitive products to offer to their customers.

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Therefore, each of the SEPA payment schemes has a rulebook that sets out the applicable rules for participation and the technical standards for the execution of SEPA payment transactions. These rulebooks are updated annually (in November) following a public consultation process, and the current versions must be followed by all users and participating PSPs. The SCT and SDD rulebooks are essentially instruction manuals that provide a common understanding among all interested parties on how to move funds from one account to another within SEPA.

Current status SEPA was promoted and supported by the Eurosystem. The European Commission provided the cornerstone by establishing a European legislative framework that set the ground for common rules on retail payment services and instruments. The execution of credit transfers and direct debits in euro is now harmonised. Cross-border use of both the SEPA credit transfer and SEPA direct debit schemes is growing year on year and showing no sign of slowing. In Ireland, the Indecon Report reported a rapid increase in the take-up of electronic payments for the combined use of card payments, credit transfers and direct debits, placing Ireland 10th of 27 European countries and ahead of the EU average.

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Appendix 2: Payment Services Directive The aim of the PSD was to open the market to new entrants such as payment institutions. These entities can offer services including:

. executing payment transactions: . issuing and/or acquiring of payment instruments; and . money remittance. The revised Payment Services Directive (PSD2) widens the scope of PSD by covering new services and players as well as extending the scope of existing services. Additionally, PSD2 introduces enhanced security measures in the payment chain.

PSD2 entered into force on 12 January 2016 and EU Member States were given until 13 January 2018 to transpose it into national law with the exception of certain rules around strong customer authentication and common secure communication. PSD2 has been given effect in Ireland by way of SI No. 6/2018 European Union (Payment Services) Regulations 2018.

The main objectives of the PSD2 are

. to contribute to a more integrated and efficient European payments market; . to further level the playing field for payment service providers by including new players; . to make payments safer and more secure; and, . to enhance protection for European consumers and businesses.

PSD2 is supplemented by regulatory technical standards (RTS), e.g. strong customer authentication. Additionally, guidelines (GLs) under the PSD2, such as those on major incidents reporting and security measures for operational and security risks, have been issued. These RTS and GLs were developed by the European Banking Authority (in co-operation with the ECB for certain RTS and GLs). The RTS and GLs form part of the legal framework in the area of payment services.

Overview of the PSD2 PSD2 opens up the EU payments market to third party PSPs offering services based on access to information from the payment account. In particular, the PSD2 covers the following three types of services:

. payment initiation services (PIS), which help consumers make online payments and inform the merchant immediately of the payment

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initiation, allowing for the immediate dispatch of goods or immediate access to services purchased online; . account information services (AIS), which give consumers and businesses an overview of their financial situation by consolidating information across the different payment accounts they may have with one or more payment service providers; . issuance of card-based payment instruments by third-party payment service providers (TPPs) that request confirmation of the availability of funds from the payment service provider servicing the account.

PSD2 requires that all such third-party PSPs be authorised and regulated. It authorises the relevant national competent authorities to monitor and supervise their activities. PSD2 sets out rules for access to payment accounts for third party PSPs. Member States must ensure that account- servicing PSPs (ASPSPs – typically banks) are not blocking or obstructing the use of payment initiation service providers (PISPs) and account information service providers (AISPs) for the account held with the ASPSP by the payer.

PSD2 enhances consumer protection. In the event of an unauthorised transaction, the payment service user (PSU) must be refunded immediately. The PSU is not liable if it was not possible for them to be aware of a loss that resulted from theft or misappropriation of the payment instrument, (e.g. data breaches, hacking attacks, copied payment cards). In other cases of lost or stolen payment instruments (e.g. lost payment card), the PSU can be held liable for a maximum of €50, provided their obligation to notify the payment service provider is fulfilled and the payer did not act in a grossly negligent or fraudulent manner.

Increased security for payment services PSD2 sets out strict security requirements for electronic payments and the protection of consumers’ financial data. PSPs are required to ensure strong customer authentication (SCA) for the initiation and processing of electronic payments.

For remote transactions (e.g. online payments), the security requirements go even further, requiring a dynamic link to the amount of the transaction and the account of the payee, to further protect the user by minimising the risks in case of mistakes or Box 1: SCA fraudulent attacks.

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Appendix 3: Ireland’s National Payments Plan (NPP) The Central Bank led the preparation of a National Payments Plan (NPP), which was launched in April 2013. It set out a number of recommendations aimed at transforming how payments were made in Ireland.

The objectives included:

. Deliver a significant increase in the use of secure and efficient electronic payment methods; . Improve the efficiency of the cash cycle; . Identify measures needed to create an enabling environment that facilitates the provision and use of new, innovative electronic payment methods; . Ensure the migration of all electronic credit transfer and direct debit payments to the Single Euro Payments Area (SEPA) standards in accordance with EU legislation; . Promote financial inclusion; and . Raise awareness of the objectives of the NPP, in particular to ensure that affected stakeholder groups are fully informed of the benefits of reform.

The NPP delivered a number of key activities, including the ‘e-day’ initiative on 19 September 2014, after which the public sector would no longer accept or issue cheques to businesses, and the successful rollout of voluntary Rounding (see box).

The success of the NPP is evident from the findings in the 2018 publication (Indecon Report) in which Ireland was benchmarked against other countries.

Box 2: Rounding

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Glossary of terms Unless indicated otherwise all definitions referenced in this document are taken from ECB’s ‘Glossary of Terms related to Payment, Clearing and Settlement Systems’.

Ancillary systems (ASs) (defined in T2 User Detailed Functional Specification – UDFS): ancillary systems are: retail payment systems (RS), large value payment systems (LVPS), foreign exchange (FX) systems, money market systems, clearing houses, securities settlement systems (SSS).

Ancillary System Interface (ASI) (defined in T2 User Detailed Functional Specification – UDFS): a standardised interface to the Payments Module (PM) which can be used by ancillary systems (ASs) to perform the cash clearing of their business.

Business Identifier Code (BIC) (defined in T2 User Detailed Functional Specification - UDFS). BIC refers to an International Organization for Standardization (ISO) technical code that uniquely identifies a financial institution. SWIFT is the registration authority for BICs. A BIC consists of eight or eleven characters, comprising a financial institution code (four characters), a country code (two characters), a location code (two characters) and, optionally, a branch code (three characters).

Card issuer: a financial institution that makes payment cards available to cardholders, authorises transactions at point-of-sale (POS) terminals or automated teller machines (ATMs) and guarantees payment to the acquirer for transactions that are in conformity with the rules of the relevant scheme.

Card scheme: a technical and commercial arrangement set up to serve one or more brands of card which provides the organisational, legal and operational framework necessary for the functioning of the services marketed by those brands.

Central bank money: liabilities of a central bank, in the form of either banknotes or bank deposits held at a central bank, which can be used for settlement purposes.

Central counterparty (CCP): an entity that interposes itself, in one or more markets, between the counterparties to the contracts traded, becoming the buyer to every seller and the seller to every buyer and thereby guaranteeing the performance of open contracts.

Central securities depository (CSD): an entity that: 1) enables securities transactions to be processed and settled by book entry; 2) provides custodial services (e.g. the administration of corporate actions and redemptions); and 3) plays an active role in ensuring the integrity of

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securities issues. Securities can be held in a physical (but immobilised) form or in a dematerialised form (whereby they exist only as electronic records).

Clearing: the process of transmitting, reconciling and, in some cases, confirming transfer orders prior to settlement, potentially including the netting of orders and the establishment of final positions for settlement. Sometimes this term is also used (imprecisely) to cover settlement. For the clearing of futures and options, this term also refers to the daily balancing of profits and losses and the daily calculation of collateral requirements.

See also settlement.

Clearing house: a common entity (or a common processing mechanism) through which participants agree to exchange transfer instructions for funds, securities or other instruments. In some cases, a clearing house may act as a central counterparty for those participants, thereby taking on significant financial risks.

Dedicated Account (defined in T2 User Detailed Functional Specification - UDFS): Account in the PM on which dedicated liquidity for ancillary system settlement is held.

Delivery versus payment (DvP): a securities settlement mechanism, which links a securities transfer and a funds transfer in such a way as to ensure that delivery, occurs if – and only if – the corresponding payment occurs.

Eurosystem: the central banking system of the euro area. It comprises the ECB and the national central banks of those EU Member States whose currency is the euro.

Free-of-payment (FOP) delivery: a delivery of securities which is not linked to a corresponding transfer of funds.

Funds transfer system (FTS): a formal arrangement based on a private contract or legislation, with multiple membership, common rules and standardised arrangements, for the transmission, clearing, netting and/or settlement of monetary obligations arising between its members.

ICSD: see international central securities depository.

International Bank Account Number (IBAN): an International Organization for Standardization (ISO) technical code that is an expanded version of the basic bank account number (BBAN). Intended for use internationally, the IBAN uniquely identifies an individual account at a specific financial institution in a particular country. The IBAN also includes the bank identifier of the financial institution servicing that account.

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International central securities depository (ICSD): a central securities depository (CSD) which was originally set up to settle Eurobond trades and is now active also in the settlement of internationally traded securities from various domestic markets, typically across currency areas. At present, there are two ICSDs located in EU countries: Clearstream Banking in Luxembourg and Euroclear Bank in Belgium.

Large-value payment: large-value payments are generally for very large amounts, are exchanged mainly between banks or between participants in financial markets, and usually require urgent and timely settlement.

Oversight: the oversight of payment systems is a typical central bank function whereby the objectives of safety and efficiency are promoted by monitoring existing and planned systems, assessing them against the applicable standards and principles whenever possible and, where necessary, fostering change. Oversight activities increasingly relate also to securities clearing and settlement systems.

Payment: in a strict sense, a payment is a transfer of funds which discharges an obligation on the part of a payer vis-à-vis a payee. However, in a technical or statistical sense, it is often used as a synonym for “transfer order”.

Payment system: this term has two meanings:

1) in some cases, it refers to the set of instruments, banking procedures and interbank funds transfer systems which facilitate the circulation of money in a country or currency area; 2) in most cases, it is used as a synonym for “funds transfer system”.

See also funds transfer system.

Pan-European automated clearing house (PE-ACH): a business platform for the processing of euro payment instruments which is made up of governance rules and payment practices and supported by the necessary technical platform(s).

Payments Module (defined in T2 User Detailed Functional Specification – UDFS): Mandatory module which allows the settlement of payments in the RTGS account, held by all direct participants. In addition, it offers advanced services for liquidity management, for the communication with participants and ancillary systems.

Point-of-sale (POS) terminal: a device allowing the use of payment cards at a physical (not virtual) point of sale. The payment information is captured either manually on paper vouchers or by electronic means.

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Prepaid card: a card on which a monetary value can be loaded in advance and stored either on the card itself or on a dedicated account on a computer. Those funds can then be used by the holder to make purchases.

Retail payment: a non-time-critical payment of relatively low value. These payments are typically made outside of the financial markets and are both initiated by and made to individuals and non-financial institutions.

Settlement: the completion of a transaction or of processing with the aim of discharging participants’ obligations through the transfer of funds and/or securities. A settlement may be final or provisional.

Securities settlement system (SSS): a system which allows the transfer of securities, either free of payment (FOP) or against payment (delivery versus payment).

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List of Abbreviations ATM Automated Teller Machine

BIS Bank for International Settlements

CCP Central Counterparty

CLS Continuous Linked Settlement

CPSS Committee on Payment and Settlement Systems

CSD Central Securities Depository

DvP Delivery versus Payment

ECB European Central Bank

ECOFIN Economic and Financial Affairs Council

EFT Electronic Funds Transfer

EPC European Payments Council

ESA Euroclear SA/NV

ESCB European System of Central Banks

ESMA European Securities and Markets Authority

EU European Union

EUI Euroclear UK and Ireland

FOP Free of Payment

ICSD International Central Securities Depository

IOSCO International Organisation of Securities Commissions

IPCC Irish Paper Clearing Company Limited

NCB National Central Bank

NPIP National Payments Implementation Programme

NTMA National Treasury Management Agency

PE-ACH Pan-European Automated Clearing House

PSD Payment Services Directive

PSU Payment Service User

RTGS Real-Time, Gross Settlement

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SCT SEPA Credit Transfer Scheme

SDD SEPA Direct Debit Scheme

SEPA Single Euro Payments Area

SIPS Systemically Important Payment System

SSP Single Shared Platform

SSS Securities Settlement System

SWIFT Society for Worldwide International Financial Telecommunication

TARGET Trans-European Automated Real-time Gross settlement Express Transfer

T2S TARGET2 Securities

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