TARGET2 – Slovakia‘s new target in the area of payment systems Ing. Branislav Kopkáš Národná banka Slovenska
The number one topic of present days is the approaching Slovakia‘s accession to the euro- area. We learn almost every day that we will pay with euro banknotes and coin soon, i.e. we learn about cash payment transactions. However, the euro is not only a cash currency; in fact, a major part of funds circulates in ways other than through our purses, shop cash registers or bank vaults. In the case of money transfers, cashless payment transactions are the more important part in terms of volume. Accession to the euro area will bring about fundamental changes also in this area, although they might not be as obvious for a common citizen as with the said currency. These changes affect entities involved in the payment infrastructure, i.e. banks and other financial institutions, all the more.
WHOLESALE VERSUS RETAIL Slovakia within a few minutes, but in the case of One very distinct difference exists in the world the TARGET2 system this also holds for transfers of cashless transfers – their subdivision accord- directed to other European countries. There is no ing to whether they serve directly the institu- difference in the speed and quality of payment tions involved in the payment infrastructure, or processing between domestic and cross-border their clients. The first group is usually designated payments. Although TARGET2 is primarily de- as wholesale transfers and the other one as retail signed for transfers of large volumes in connec- transfers. This foreshadows that the next most tion with monetary policy operations, there are marked difference will be in the volumes of the no restrictions regarding the value or purpose individual transfers and in the subsequent risks of the transfer. The system does not reject client brought about by such transfers. The differences reimbursements, provided, of course, the client in these two spheres also require differences in can afford them (the price of a RTGS priority pay- the approaches and properties of systems, via ment for the client can be as much as more than which these transfers are carried out. Exactly this 100 times higher than that of a normal payment feature will become even more evident upon Slo- product). vakia’s adoption of the euro, as domestic whole- sale transfers will belong to the new payment A LOOK AT THE HISTORY OF THE system TARGET2 from 2009 and the existing SIPS TARGET2 SYSTEM system will thereby lose a substantial proportion TARGET2 is the second generation of the original of the volumes processed. TARGET system, which was started for the first time in 1999 in connection with the creation of WHAT IS TARGET2 the single currency euro as a safe and fast in- Together with the FEDWIRE system (the payment strument for performing cross-border transfers system of the US Federal Reserve Bank) and the mainly for monetary policy operations and other CLS system (Continuous Linked Settlement – a glo- operations on the European money and capital bal system for the settlement of operations on FX market. The then TARGET system consisted of markets), TARGET2 is one of the largest and most 15 national RTGS systems (real-time gross settle- important independent settlement systems in the ment systems) operated by the central banks of world. It will perform the settlement of 350,000 individual European Union countries (11 of them payments in the total value of 2.4 trillion euros. were euro area members at that time). Those TARGET2 is an abbreviation of Trans-European Au- systems were mutually connected by a network tomated Real-time Gross settlement Express Transfer called interlinking. The actual network consisted system. That means that every single funds trans- of technological SWIFT infrastructure and special fer carried out by means of this system is settled rights destined for communication between indi- independently, without setting off against other vidual central banks, including the European Cen- transfers, and immediately, without undue delay. tral Bank (ECB). If a member of the TARGET system The settlement is carried out on the accounts of (most frequently an institution) wanted to carry the central bank; therefore this system involves out a transfer, he first sent a payment report to no credit risk. One can rightly say that our cur- his central bank and the central bank, after debit- rent system – the SIPS (Slovak Interbank Pay- ing his account, sent a report to the central bank
ment System) – can carry out a final payment in of the beneficiary via the interlinking network. BIATEC
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1 A queue stands for a set of payments The central bank of the beneficiary then com- der transfers. Within the integrated SSP solution, that have been entered in the system, pleted the operation by crediting the account of it is also possible to provide the participants with but are still waiting for processing due to a current lack of liquidity on the receiving bank. Last but not least, records of comprehensive information on the state of cur- the account of the sender. these transfers were also kept by the ECB itself. rent and projected liquidity, taking into account This record-keeping yielded the numerical state queues1 in the broad European context, which of mutual receivables and payables of euro area has not been possible in the previous system. countries, which resulted for them from the indi- Furthermore, it is possible to apply full harmoni- vidual transfers. This short description is sufficient zation of the used infrastructure and transmission to demonstrate the main drawback of the system formats. Last but not least, the important concen- – three, usually completely different, platforms, tration of responsibility for risk management for which increased not only the potential risk of such the operator of the technological platform has transfers, but also their price. Also, in the TARGET to be mentioned. If any risk management frame- system, domestic RTGS transfers were substan- work and requirements on the security of techno- tially cheaper than cross-border transfers. In ad- logical components of the SSP are applied, they dition, in the case of domestic transfers there was relate to the services of all central banks without price harmonization, so that the prices differed in exceptions. the individual countries. Moreover, the situation Disadvantages that can be mentioned are the was supposed to become more complicated by increase in prices for the performance of domes- the planned euro area enlargement. That would tic RTGS transfers in connection with a more in- require the setting up and operation of compat- tensive use of the not quite cheap SWIFT services. ible RTGS systems also for the newcomers, which It has to be said, however, that in the case of in- would not be the cheapest affair for them. Within terest in using the system, it is not necessary to a short time, the first voices calling for a change operate own SWIFT interfaces at any rate, but it appeared and in 2002 the Governing Council of is possible to use for example services of the so- the ECB decided to create a new generation of called Service Bureau, which acts as intermediary the system. TARGET2 was supposed to be the for the connection. In addition, the TARGET2 sys- new generation. tem enables several forms of participation, where besides direct participation it is possible to access UNITY IS STRENGTH the system even without an own account and The basic requirement for the creation of the own communication interfaces in the form of in- new system was the elimination of the hetero- direct participation, with the responsibility for the geneous architecture of the original system and management of the necessary liquidity and for the enabling of maximum possible harmoniza- the exchange of payment reports with system tion regarding the level of services, technologi- being assumed by the direct participant acting cal environment and prices of system usage. The as intermediary for the connection of the indirect original proposal of the German central bank, the participant. Deutsche Bundesbank, to create a new system on In connection with measures for the renewal one technological platform, was developed later of activity, it has to be mentioned that the SSP is in cooperation with two other central banks – the operated in two regions, in two different sites in Banca d’Italia and Banque de France, and the con- each of them. The sites are mutually connected sortium “3CB“ was created. The consortium thus by a synchronous system for data mirroring and became the manager and provider of the so- are fully identical in terms of computer and op- called Single Shared Platform – SSP. erational capacity. In case of site breakdown, SSP means that the users communicate with processing can continue at the other site within the system directly and in the same manner via one hour. In case of a breakdown of the whole standard technological interfaces (i.e. not via the region, the limit for the continuation of process- original RTGS platforms). From the start of the ing in the other region is two hours. solution, however, it has been seen to it that the system continues to be legally and economically MODULAR STRUCTURE OF THE SSP presented and understood as an association of SSP services are differentiated within what is national RTGS systems. Each participating central called modules. In addition to the basic function- bank continues to operate its own RTGS system ality (carrying out transfers between RTGS ac- and governs its relations with the customers in- counts), the SSP offers also other services that are dependently (it keeps their accounts, concludes close to the actual RTGS system and to activities contracts with them etc.), “outsources” only the of central banks. These services are for example provision and operation of the technological plat- the support of the minimum reserves manage- form to another supplier (in this case to the 3CB ment, the performance of automatic overnight consortium). This solution has some fundamental operations (overnight refinancing and steriliza- advantages. First of all, the costs of operation of tion operation) and the keeping of additional ac- technological platforms on the part of the central counts for special purposes with a restricted pay- banks do not arise. Thus this concentration should ment functionality. In the case of these additional bring about reductions in final prices and a short- modules, each central bank can decide, whether er period of time necessary for the finalization of it will convey their services to the banking com-
BIATECthe settlement process in the case of cross-bor- munity. The use of modules is not free of charge
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and each central bank has to weigh whether a system became a thing of the past3. At present, 2 Specifically only for the management purchase of such a service within the SSP will be after the end of the migration, the TARGET2 sys- of minimum reserves, cash operati- ons and the provision of automatic effective, whether, for example, cost savings and tem currently uses approximately 1000 banks (di- operations (standing facilities). improvement of the service quality for the bank- rect participants) and 60 ancillary systems in 21 3 Before the completion of the whole ing community will be reached, or whether it will countries of Europe. migration, the interlinking system was used for the purposes of RTGS be more advantageous to provide services within transfers between countries still using one’s own solutions. The financing of the devel- SLOVAKIA – THE FIRST COUNTRY the original system and countries opment and use of the platform is performed on NOT TO MIGRATE that have already migrated to the the basis of the so-called capital key. The key is By its accession to the euro area, Slovakia was new system. applied absolutely in the case of the obligatory obliged to join the new TARGET2 payment sys- basic functionality, and in the case of optional tem, because the system is a mandatory require- modules the amount of the key is adjusted rela- ment for carrying out monetary transactions. tively, within a group of central banks that have However, in our case the issue is the operation decided to use the module jointly. of a RTGS system that has not participated in the original TARGET system. Thus, the process will MIGRATION TO TARGET2 constitute no migration process in the true sense In connection with the TARGET2 system, the term of the word, but a connection to a fully new sys- migration stands for the gradual or immediate tem. The preparation of the strategy and proce- replacement of the original TARGET system and dure for this process started at Národná banka local RTGS systems with a single shared platform. Slovenska as early as in 2005, when the National The transition to the SSP from the original RTGS Euro Changeover Plan for the Slovak Republic systems has been planned from the beginning as was adopted. The current RTGS-SIPS system has gradual, but variability in individual cases should been and, for the time being, still is the only plat- be retained. The central banks had the possibility form for the settlement of payments in large vol- to choose the conditions, under which they grad- umes in Slovakia. In addition, it is also a system, ually “renounce” to their RTGS system and pass to by means of which hundreds of thousand of retail the SSP. In some cases, the central banks have de- payments are processed and settled daily. Conse- cided to keep their original RTGS system, although quently, it is a system that fulfills two basic func- they have migrated already to TARGET2. The term tions within one technological platform, which PHA (Proprietary Home Account System) has been enables to achieve cost savings and low prices for introduced for such a parallel system. The motives the services offered for financial institutions – the of such a procedure of banks were of different na- participants of the system. ture and the complicated and sudden transition During the preparation of the strategy, several of a large number of local banks to the new plat- available possibilities were weighted and space in form is mentioned as the main reason. There are the payment infrastructure was searched, which two variants of such an approach. The first vari- the existing SIPS system and its technologies ant consists in keeping the whole payment func- could take besides the TARGET2 system after ac- tionality in the parallel RTGS system and it can be cession to the euro area. The decision arose at the used for any transfers of banks and their clients. end of 2006, when a strategy reckoning with the In the second case, only the specific functionality SIPS system as a platform for the processing and typical of the activity of central banks is kept in the clearing of retail payments in the form of what is PHA, such as for example cash operations or the called the Ancillary System (AS) to the TARGET2 monitoring of minimum reserves. It holds for the system. The RTGS functionality will not be sup- first variant that the appropriate central bank can ported in the SIPS system any more and will be operate it for general RTGS purposes not longer completely transferred to TARGET2 under the than 4 years from the migration to the TARGET2 conditions of Slovakia. This solution supports sev- system. In addition, it has to apply such a price eral arguments. Should the RTGS functionality be policy that the participating banks are motivated kept also in the SIPS system, i.e. the system would to a transition to the SSP (the prices for general function as the PHA, quite hard changes would PHA services are supposed to be higher than the be necessary, which would add a functionality harmonized prices for services in the SSP). On the for ad hoc real-time liquidity transfers between other hand, if the PHA platform is destined only the systems SIPS and TARGET2. Moreover, the for specific purposes2, it can be operated over an risk management framework applicable to the indefinitely long period of time. When a PHA is TARGET2 system would have to be applied to the operated, the central bank must ensure the pos- SIPS system. As for the potential cost savings for sibility of real-time liquidity transfers between the the users of such a system compared to the use SSP and PHA accounts. of the SSP, it has to be said that it is barred by rules The migration of the member states to the that are supposed to place at a disadvantage in TARGET2 system has been planned in four stag- such a PHA in terms of price. The only merit of the es, the last one having been reserved only as an solution would be the possibility to use the ex- emergency “time window” for banking communi- isting proprietary communication infrastructure ties whose transition would fail in the first three of the SIPS system, if the banks would not pass waves. The third wave of countries migrated suc- to the SSP and to SWIFT. However, when it was
cessfully on 19 May 2008 and the original TARGET taken into account that most banks had already BIATEC
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4 An intraday is the authorised used SWIFT because of correspondence banking, as a necessary condition for the legal protection overdraft of the RTGS account to the this advantage started to appear as not quite con- of the irrevocability of payments entered in the amount of the value of the pledged collateral. vincing. system, only the prepared current amendment to The reconstruction of the SIPS system to a re- this act, effective from the day of the adoption of tail payment system was finally supported by the the euro in Slovakia, will remove some further ob- Slovak banking community. The new SIPS EURO stacles to the connection to the TARGET2 system. system has been designed as a so-called net mul- The technological conveniences enabling to cen- tilateral positions calculation system, which will tralize European liquidity within one technologi- be settled twice a day on RTGS accounts in the cal platform, entail some legal problems. The so- TARGET2 system. A special interface for the sup- called liquidity pooling is a frequently discussed port of AS settlement will be used for the infor- topic among professionals being close to the mation transmission. The interface also includes a TARGET2 system. This feature enables the virtual special procedure for the settlement of net multi- connection of several RTGS accounts, even in a lateral positions. cross-border context, with the liquidity obtained Because a part of the SIPS RTGS system served this way being able to be sufficient to cover also primarily for the settlement of transfers of large the payments, for which balances of independent volumes in connection with the performance of accounts would not be enough. This also applies monetary policy and other operations on the fi- to the total available liquidity, i.e. also after setting nancial market and the accounts maintained in it off with the amount of undrawn intraday credit4. were simultaneously accounts for the monitoring It can thus happen that an intraday credit, which of minimum reserves of banks, this mission will has been granted to a credit institution for exam- be the responsibility of the TARGET2 system. The ple in Germany, will be drawn also by its Slovak launch of the Slovak component, called TARGET2- branch, although the branch has not granted any SK, is planned for the first working day after acces- collateral to Národná banka Slovenska and will sion to the euro area. The main participants of the be able to have a debit balance on the RTGS ac- Slovak component will be some 30 financial enti- count. Although this applies only to states during ties (primarily credit institutions) and three ancil- an operating day and at the end of an oper‹êing lary systems (besides the said SIPS EURO system, day everything must be in line with the require- the participation of the Central Securities Deposi- ments of the central bank, only detailed analyses tory, a.s. and of First Data Slovakia, a.s., a company will show, whether such possibilities are compat- involved in the clearing of payment card transac- ible with domestic legislation. tions, is expected). In connection with the operation of the The contractual partner and place of everyday TARGET2 system, the European Central Bank is- support for all institutions participating in the sued the Guideline on a Trans-European Auto- TARGET2-SK system will be the system provider mated Real-time Gross settlement Express Trans- Národná banka Slovenska. In terms of staff, the fer system (ECB/2007/2). A substantial part of this operation will be ensured by settlement manag- document is made up of the so-called harmo- ers, support center operators and crisis managers. nized conditions of participation in the TARGET2 The presence of employees for the implementa- system representing a kind of collection of the tion of all the said activities is required approxi- rights and obligations of the system participants mately from 6.30 to 21.00 o’clock. Because the and central banks when using and operating the operating days of the TARGET2 system in the euro system. The entire collection is expected to be area are not identical with the working days in applicable and enforceable in the legal system of Slovakia, the TARGET2-SK system will be operated any country participating in the TARGET2 system. also during some Slovak state holidays, which are Although small exceptions or adjustments are al- no holidays. lowed in the case of some provisions, some facts cannot be changed at all. These include above all LEGAL ASPECTS OF THE prices of system usage, the time schedule of the TARGET2-SK SYSTEM operating day or the technological specialization Although the TARGET2-SK system is part of the for the processing of payment orders. large TARGET2 system built on a uniform techno- logical basis, the operation and use of the system PAYMENT SYSTEMS – will be always governed by the Slovak commer- A NEVER-ENDING STORY... cial law. Participation in the system will be based The launch of the TARGET2 system in November on a contractual basis, where the party undertak- 2007 and the completion of the migration in May ing to provide TARGET2 services according to the 2008 is considered a great success by the Euro- agreed conditions is Národná banka Slovenska. pean banking community. More than 200 experts The basic legislative norms, according to which of the 3CB consortium, including the active help the TARGET2-SK system will be operated, include of workers from other central banks, have par- Act No. 510/2002 Coll. on Payment Transactions ticipated in the development of the system. The as amended. Although the European Commis- coordination activity and supporting activity of sion Directive on the so-called settlement finality the ECB has enabled all central banks to partici- (the Settlement Finality Directive 1998/26/EC) has pate in the definition of the system properties.
BIATECbeen transposed to the current wording of the act The representatives of Národná banka Slovenska
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had the possibility to actively participate in such a to eliminate the disintegration and disharmony process. However, the development has not been in the European infrastructure for the securities and will not be completed, because there is still trading, clearing and settlement. The objective of room for the creation of new specifications and almost all activities in Europe in the area of pay- the development of its properties. Out of the next ment systems is harmonization and integration, tasks, one can mention for example the solution which is primarily substantiated by an increase of alternative technological possibilities for the in quality and decrease in prices of the services connection to the platform and the enabling of a for the participating institutions; and logically, the cost reduction, especially for small banks, as well end client should be main winner of such a devel- the ensuring of the compatibility of the system opment. However, we will have to wait some time with the SEPA (Single Euro Payment Area) stand- for a final assessment – only five or six years later ard. A new project called TARGET2-Securities al- we will be able to start evaluating the economic ready ties up with the successful TARGET2 project. and qualitative impacts of the harmonization and As the name suggests, the objective of the new globalization of services in the area of European project is to develop a platform that could help payment infrastructure.
References: 1. From TARGET to TARGET2 – Innovation and Transformation. A press release of the European Central Bank of 2006 2. Press conference for the introduction of TARGET2, Frankfurt 20 November 2007. 3. Guideline of the ECB of 26 April 2007 on a Trans-European Automated Real-time Gross settlement Express Transfer system (ECB/2007/2) 4. TARGET Annual Report 2007, European Central Bank, April 2008. 5. T2-SECURITIES Newsletter, European Central Bank, March
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