CHAPTER 7

TARGET2, the ’s RTGS system

Updated on 17 December 2018 Chapter 7 tarGET2, the Eurosystem’s RTGS system 

mong the RTGS systems in use across building on the RTGS systems already in use the world’s major monetary areas, in participating countries, using the SWIFT A the euro area’s TARGET2 system network to connect them to each other. provides a good example of the key features described in the previous chapter. The national RTGS systems retained their specific features for processing domestic TARGET2 is the real‑time gross settlement payments in euro, but also had to incorporate system owned and operated by the a minimum set of harmonised functionalities Eurosystem. Implemented in 2007‑2008, relating to access conditions, opening hours, it is the second generation of TARGET cross‑border transaction pricing, intraday (Trans‑European Automated Real‑time credit and security. Gross‑settlement Express Transfer system), a system launched in 1999 alongside the TARGET was mainly intended to process single currency and designed to settle large‑value payments in euro, in particular large‑value payments in euro using operations connected with the euro area’s money. common monetary policy, and to provide final settlement in central bank money of the The central banks participating in net balances of euro transactions conducted TARGET2 are, in principle, those of the in ancillary systems. countries that adopted the euro as their currency. However, the central banks of After going live on 4 January 1999, the other European Union Member States can first‑generation TARGET facilitated the also participate so that users of their national implementation of the ECB’s monetary RTGS systems can settle euro transactions policy and the development of a single in TARGET2 (these central banks are then money market, while growth in cross‑border said to be “connected”). transactions spurred integration between euro area financial markets. At the end of 2017, alongside the (ECB), 24 national central Thanks to the system’s reliability and the banks (NCBs) were participants in fact that no minimum amount was set for TARGET2: the 19 NCBs of the euro area, payments processed, TARGET rapidly came plus 5 “connected” NCBs.1 to be used for other types of transaction, such as urgent commercial payments.

1. Origin and governance However, this configuration soon proved of TARGET2 to have limitations for banks and central banks. The large cross‑border banking 1.1. Origin groups were pressing for standardised services and the system was growing The Eurosystem has had a technically increasingly cumbersome – operationally centralised but legally decentralised RTGS and financially – as the NCBs of new system since 2007. EU Member States were connected to 1 In 2017, the members it. The Eurosystem therefore launched of the euro area were: Germany, Austria, 1.1.1. TARGET (1999‑2007) a deliberation on the second generation Belgium, Cyprus, (TARGET2). At the end of 2002, the Spain, Estonia, Finland, France, Greece, Ireland, The implementation schedule set for the Governing Council of the ECB adopted a Italy, Latvia, Lithuania, single currency in the mid‑1990s meant that series of guidelines with the aim of better Luxembourg, Malta, there was no time to develop a shared RTGS meeting users’ needs by harmonising the Netherlands, Portugal, Slovakia and system for euro transactions from scratch, the services offered, while allowing the Slovenia. The countries since it was imperative for a system to business relationships between national with connected NCBs were Bulgaria, be operational by the start of 1999. It was central banks and their participating banks Croatia, Denmark, therefore decided to develop TARGET by to remain on a decentralised basis. It also Poland and Romania.

98 – Payments and market infrastructures in the digital era TARGET2, the Eurosystem’s RTGS system Chapter 7 

From TARGET to TARGET2

SWIFT FIN Y-Copy

Bank A Bank B SWIFT

Suède

SWIFT

Interlinking SSP

CBs Ancillary Systems

Source: ECB – https://www.ecb.europa.eu/paym/t2/target/html/index.en.html Note: The central banks concerned migrated to the system in three phases from November 2007 to May 2008: Germany, Austria, Cyprus, Latvia, Lithuania, Luxembourg, Malta and Slovenia (Phase 1); Belgium, Spain, Finland, France, Ireland, the Netherlands and Portugal (Phase 2); Denmark, Estonia, Greece, Italy, Poland and the ECB (Phase 3).

launched a public consultation, in response The system’s developers chose to: to which Europe’s banks expressed their support for the guidelines adopted by • impose no upper or lower limit on the the Eurosystem, while stressing that the value of payments; harmonisation of services would have to go hand in hand with a consolidation of • standardise the rules for submitting the system’s technical infrastructure on a and processing payment orders via single platform. the platform, be it for domestic or cross‑border transactions; These principles were documented in the reference legal framework • harmonise the services provided in established by the ECB Guideline on participating countries; TARGET2 published in 2007.2 • offer liquidity management optimisation 1.1.2. TARGET2 services for participants;

Technically, TARGET2 is a single shared • simplify the regulations applicable to 2 The legal texts on TARGET2 can be settlement platform. ancillary systems (see Section 3 below); found on the ECB’s website http://www. ecb.europa.eu/ecb/ Commonly referred to as the SSP (Single • adopt a single pricing structure for services legal/1003/1349/html/ Shared Platform), TARGET2 is accessible in provided, aiming to recover the system’s index.en.html two ways: via the network service provider costs while factoring in a “public good 3 National central banks SWIFT or via the Internet.3 The platform has factor” relating to the positive externalities have a third access route, based on a a modular structure, in which each module generated by TARGET2 (see Chapter 19, proprietary network for is dedicated to a specific activity. on the economics of payment systems); contingency purposes.

Payments and market infrastructures in the digital era – 99 Chapter 7 tarGET2, the Eurosystem’s RTGS system 

• harmonise communication channels 1.2.1. The decision‑making body and procedures. The decision‑making body is the Governing 1.1.3. Legal framework Council of the ECB, which determines TARGET2’s strategy and broad operating Legally, TARGET2 relies on a number principles. It takes decisions on the basis of of national payment systems that are proposals made by two Eurosystem bodies, operated independently but satisfy a set the Market Infrastructure Board (MIB) and of harmonised conditions. the Market Infrastructures and Payments Committee (MIPC), which address While, technically speaking, TARGET2 is a operational and strategic development single payment platform, in legal terms it issues, respectively. remains a decentralised structure because it comprises a number of interconnected 1.2.2. Steering bodies national RTGS systems. The steering bodies are the central banks Each national RTGS system is operated of the Eurosystem (the ECB and euro area by the national central bank (NCB), NCBs), which own TARGET2. They put which holds the accounts of banks and harmonised conditions in place for the financial institutions in accordance with opening and functioning of accounts and the decentralisation principle underpinning contribute to the system’s development. the implementation of the Eurosystem’s common monetary policy. The French The various NCBs and the ECB coordinate component system of TARGET2 (TARGET2- their work within the MIB and MIPC referred Banque de France) is therefore operated by to above, as well as within the Working the Banque de France. Group on TARGET2 for technical aspects. 4 Entitled “Agreement on TARGET2”, this The various component systems within NCBs provide the sole point of contact (the agreement must be the Eurosystem must, however, satisfy a national service desk) for participants in their updated whenever a change in the TARGET2 number of harmonised conditions for the national communities. This decentralised Guidelines affect opening and functioning of accounts, as structure is used for signing account its terms. set out in the Guideline on TARGET2. These conditions form the basis of the agreements signed between each central bank and its participants when the latter open an account in a TARGET2 component system. Figure

Non-euro central bank’ Governors’ ECB decision With respect to “connected” NCBs, governors/ Forum making bodies

bodies boards

these banks sign an agreement with Central bank decision-making the Eurosystem’s NCBs,4 whereby they Non-euro Market Currencies Infrastructure CSD Steering Board undertake to fulfil the harmonised conditions, level Steering Group Group (CSG) bodies except for those relating to euro area Steering (NECSG)

T2S matters common monetary policy and intraday credit. National user Ami-Pay Ami-SeCo National user Group (NUG) Group (NUG) bodies Market Pay SeCo advisory 1.2. Governance of TARGET2 Groups Technical Operations T2S Project T2S Change TARGET2 is included in the Eurosystem’s Working Group Managers Group Managers Group Review Group on TARGET2 governance structure for its market (OMG) (PMG) (CRG)

Reporting infrastructures, i.e. TARGET2 and T2S. Escalation The chart below shows how the various Technical Groups decision‑making bodies are positioned in Source: ECB. the governance structure for TARGET2.

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Box 1: TARGET2 balances

TARGET2 balances1 are the net positions resulting from cross‑border payments between euro area countries processed via the TARGET2 decentralised .2

When payments are made between banks holding accounts at different NCBs, the ECB acts as the counterparty to each NCB’s position and a multilateral net balance is calculated. These multilateral net balances are booked at the end of each business day in the respective NCBs’ accounts at the ECB, in order to account for cross‑border flows of central bank money. For each NCB, the net balance of these flows constitutes theTAR GET2 balance.

C1: Cumulative TARGET2 balances by country (EUR billions) 1,000 900 800 700 600 500 400 300 200 100 0 -100 -200 -300 -400 -500 June June June June June June June June June June June 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 AT BE DE ES EU FR GR IE IT LU NL PT Source: Banque de France. Note: Data published regularly on this page of the ECB’s website: http://sdw.ecb.europa.eu/servlet/desis?node=1000004859

The consolidated balance is always zero. The balances in TARGET2 are not payable and as such are never settled. At the end of the day, the balance showing for each NCB is added to the previous day’s balance; the sum of the daily balances constitutes the cumulative balance.

As shown in the chart, since 2008 some central banks have accumulated a credit or debit position vis‑à‑vis the Eurosystem’s other central banks.

…/… 1 For further information on TARGET2 balances, see the Banque de France “Focus” of May 2012 and the articles published by the ECB in Bulletins 2013‑05 (pages 103 to 114) and 2017‑03. https://publications.banque-france.fr/sites/default/files/medias/documents/focus-06_2012-05-31_en.pdf https://publications.banque-france.fr/sites/default/files/medias/documents/focus-06_2012-05-31_fr.pdf https://www.ecb.europa.eu/pub/pdf/mobu/mb201305en.pdf https://www.ecb.europa.eu/pub/pdf/other/ebbox201703_01.en.pdf?5678d031c7926c9d075f9cda8be41f99 https://publications.banque-france.fr/sites/default/files/medias/documents/be3_2017_fr.pdf 2 During the system’s daytime operating hours, NCBs of non-euro area countries (“connected” NCBs) must maintain an overall credit balance vis‑à‑vis all the central banks in the Eurosystem at all times.

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The types of transaction underlying these cross‑border payment flows vary significantly, reflecting the diversity of the economic and financial activities performed within the highly integrated monetary area.T hey can include payments for goods purchased from a foreign supplier, or payments within a given banking group, in which two entities participate in TARGET2 separately through two different NCBs. Cross‑border payment traffic could increase if euro area banking groups centralise their treasury management. Flows can also reflect a simple outflow of capital from the national banking system to other banks in the euro area.

Until the sovereign debt crisis in the euro area in 2011, cross‑border payment flows inTAR GET2, whether between current accounts or investment portfolios, were offset by financing in the interbank market, also on a cross‑border basis. However, the climate of distrust created by the financial crisis caused the interbank market – and the offsetting flows it provided – to dry up. Credit institutions then turned to their central banks for the liquidity that had become difficult or impossible to obtain in the interbank market.

TARGET2 balances are therefore indicative of imbalances that cannot be compensated naturally by market funding streams and require intervention by the Eurosystem. They are also useful indicators of the attractiveness and financial health of euro area countries and of monetary solidarity between central banks in the Eurosystem. TARGET2 balances are now monitored as key indicators of the interbank market’s normalisation and are often referred to by the President of the ECB during press conferences on monetary policy.

It should be noted that this “balance” mechanism is not specific to the euro area. Similar systems are used in other countries whose payment systems in central bank money are, like TARGET2, based on a principle of decentralisation, such as the Fedwire system in the United States, in which banks show positions similar to those of the NCBs in TARGET2.

opening agreements, using the standing platform and especially with respect to facilities associated with the Eurosystem’s crisis management. monetary policy, applying for free intraday credit backed by collateral (see Chapter 15), 1.2.3. Advisory bodies and crisis management measures. The governance of TARGET2 also relies heavily The ECB, as the operator of a system on regular reporting and dialogue between component, implements the harmonised participating central banks and banking conditions for TARGET2. It does not, communities, through working groups and however, open settlement accounts for advisory bodies at the national and European banks established in the euro area. Its levels. At the European level, AMI Pay5 brings operational role consists of providing together the Eurosystem and the main settlement services for pan‑European European banks that use TARGET2, so that payment systems such as EURO1 and the latter can express their needs as regards STEP2, or international systems like the CLS the functioning of TARGET2. In addition to system (see Chapter 9). In addition, via its AMI Pay, national stakeholder groups provide 5 Advisory group on service desk, the ECB helps to coordinate forums for each national community to Market Infrastructures the NCBs in their daily use of the single discuss TARGET2‑related issues. for Payments.

102 – Payments and market infrastructures in the digital era TARGET2, the Eurosystem’s RTGS system Chapter 7 

2. Participation in TARGET2 Box 2: Participation in TARGET2 TARGET2 is open to large‑scale participation. Although its guidelines set At the end of 2017, 1,963 accounts were open in TARGET2, out conditions for access to the system, enabling transactions to be settled for 1,073 direct thanks to the considerable freedom of participants, 684 indirect participants and 48,443 addressable interpretation left to the NCBs and, more BIC holders all across the globe. In addition, 79 ancillary importantly, the fact that institutions can systems were settling transactions in TARGET2 (including participate in the system indirectly, more 25 retail payment systems, 23 securities settlement systems than 50,000 entities across the globe can and 4 central counterparties). now settle transactions in TARGET2. These entities are listed in the system’s directory In 2016 the average share of transactions submitted to the (the T2‑Directory). platform by indirect participants (“tiering”) was around 5% based on value and 18% based on volume, with no 2.1. Direct participation evidence of significant concentration around a few direct or indirect participants. Direct participation, linked to the opening of an account in central bank money at a NCB participating in TARGET2, is open to credit institutions established in the • credit institutions or any of the entities European Economic Area (EEA) and credit listed in the above points, which are institutions established outside the EEA, established in a country with which provided that they act through a branch the European Union has entered into established in the EEA. a monetary agreement (in practice, Andorra, Monaco, San Marino and Although credit institutions may gain the Vatican). access to the system by opening an account at another central bank (remote 2.2. Indirect participation access), they can only use all the features of TARGET2, notably access to intraday Indirect participation, which broadens the credit, if they open an account at the user base, can take three forms: central bank of a country in which they have an establishment. • Indirect participant status, which gives legal certainty: If they do not wish Each central bank may also admit the to open an RTGS account in TARGET2, following entities as direct participants: notably because the cost involved is not commensurate with their transaction • investment firms established in the EEA; volumes in euro, credit institutions established in the EEA can sign a • Treasury departments of central or contract with one – and only one – direct regional governments of Member participant that is either a central bank in States active in the money markets, the Eurosystem or a connected central and public sector bodies of Member bank or a credit institution established States authorised to hold accounts in the EEA, in order to submit payment for customers; orders and/or receive payments through the account of said direct participant • entities established in the EEA that in TARGET2. When a central bank manage other market infrastructures registers a credit institution as an indirect known as ancillary systems and acting participant in the TARGET2 directory, in that capacity, so that final settlements the participant obtains full participant in central bank money can be performed status and thus benefits from payment on an RTGS account; finality (see Chapter 5).

Payments and market infrastructures in the digital era – 103 Chapter 7 tarGET2, the Eurosystem’s RTGS system 

• Addressable BIC status, which allows There is one noteworthy exemption to this rule: extensive participation: A direct the CLS system (see Chapter 9), which was participant can also register entities set up to reduce settlement risk on foreign known as “addressable BICs” in the exchange transactions by operating on a TARGET2 directory in order for them payment‑versus‑payment basis. Transactions in to submit or receive payment orders euro processed in this system use TARGET2 for via the direct participant’s account. final settlement. Although its operator is The legal texts do not specify any overseen by the US federal reserve system, it legal or geographical criteria for such is subject to collective oversight by the central registries. The entity must simply banks of G10 member countries and by other possess a business identifier code (BIC). central banks whose currencies are processed The entities concerned are generally in CLS, thus enabling the Eurosystem to correspondent banks, clients of entities participate in the oversight of CLS as an that hold accounts in TARGET2, or ancillary system that settles transactions in branches of such account‑holding entities TARGET2 (for information on the Eurosystem’s or of indirect participants. Contrary to policy on the location of infrastructures, see registration as an indirect participant, also Chapter 17, Section 3.3.1). the registration of an institution as an addressable BIC does not give the institution legal status or, by extension, 3. TARGET2 functionalities legal security. Once they are admitted to use the • Multi‑addressee access, which TARGET2 platform, all users gain access facilitates transactions between to the same functionalities with the same institutions in the same banking pricing structure, regardless of the location group: A credit institution may grant in which they operate. At the same time, access to its TARGET2 account to one or TARGET2 offers them a range of sufficiently more of its branches and to an indirect diversified services to meet their respective participant belonging to the credit business needs. institution’s banking group. 3.1. Harmonised, flexible 2.3. Ancillary systems functionalities

Payment systems that handle a substantial The following operations can be share of transactions in euro and settle performed on an account opened in a their net balances in TARGET2 must be TARGET2 component system: operated by an entity established in the EEA and must comply with the oversight • interbank payment orders, including requirements applicable to the location of monetary policy operations; infrastructures providing services in euro, as amended from time to time and published • direct debit orders. Unlike the case on the ECB website. above, it is the payee who is debited in favour of the order originator; At present, payment systems that process a substantial portion of their transactions • liquidity transfers between accounts; in euro must be legally established in the euro zone if their daily settlements • payments issued by/to a non‑bank in euro exceed EUR 5 billion or if they client. In such cases, payments that are represent, individually, more than 0.2% low‑value but urgent can be executed. of the total value of euro transactions settled via interbank payment systems Each participant holds at least one RTGS in the euro area. account, identified by a BIC. Several

104 – Payments and market infrastructures in the digital era TARGET2, the Eurosystem’s RTGS system Chapter 7  accounts can be held if this is warranted be processed one by one, in accordance in view of the participant’s activity. with their level of priority, on a “first in, first out” (FIFO) basis. In practice, each For establishments that do not need all the payment order is assigned a level of priority platform’s functionalities but are still subject (highly urgent, urgent or normal) based on to the minimum reserve requirement, or their criticality.8 for entities that do not have access to TARGET2, central banks have the option of If a participant has insufficient liquidity in using the Home Accounting Module (HAM), their account or if their funds are blocked which allows “local” accounts to be opened by a TARGET2 function (an exemption from offering limited standardised services: cash the FIFO principle is granted if offsetting management (in relation to cash‑based payment orders generate a net increase in 6 Under this arrangement, activities, for withdrawals or deposits), the payer’s liquidity – see the Section on transactions conducted management of minimum reserves, access TARGET2 features below), their payment by the RTGS account holder are deemed to to the Eurosystem’s standing facilities, orders are placed in a queue. At the end have been conducted interbank transfers and a co‑management of the day, all payment orders that have by the holder of the service for small institutions that lack not been settled before the cut‑off time for local account. the appropriate technical infrastructure, the type of order concerned are rejected. 7 Since 2013, Option A consists of a EUR 150 whereby the local account is co‑managed flat monthly fee and a by an RTGS account holder.6 A monitoring tool is made available to unit transaction cost of EUR 0.80; Option B TARGET2 participants. The ICM (Information consists of a EUR 1,825 The size of participating banks is taken into and Control Module) provides real‑time flat monthly fee and a account in the transaction pricing options, interactive access to a wealth of information, degressive transaction fee based on monthly which combine a flat monthly fee with especially concerning their liquidity in volumes, ranging from a flat or degressive volume‑based unit the system and the status of payments EUR 0.60 to EUR 0.125 transaction cost.7 they have issued and received (settled or (see also Chapter 19). queued). Participants can consult the queues 8 Assigned by the participant itself or based Technically, TARGET2 enables all payment relevant to them at any time and can issue on the type of payment orders and final receipts of payment to highly urgent payment orders. The ICM is order concerned. For example, payment orders be formatted and processed in a uniform accessible on a U2A (User to Application) issued to CLS are always manner. Payment orders are supposed to or A2A (Application to Application) basis. rated highly urgent.

Box 3: The TARGET2 business day

The TARGET2 business day begins on the evening of the previous business day (D‑1) at 19:00 CET.

A night‑time settlement procedure is available from 19:30 to 07:00 CET the next day, with a three‑hour stoppage for technical maintenance between 22:00 and 01:00 CET. The night‑time window is used for settlement by certain ancillary systems.

Daytime settlement operations begin at 07:00 CET and end at the following times:

• 17:00 CET for customer payments; • 18:00 CET for interbank payments.

During this time, ancillary systems carry out one or more settlement operations using one or more of the procedures provided by TARGET2 (see below).

…/…

Payments and market infrastructures in the digital era – 105 Chapter 7 tarGET2, the Eurosystem’s RTGS system 

Between 18:00 and 18:15, depending on their liquidity position, participants based in the euro area can make use of the Eurosystem’s standing facilities.1

The day usually ends at 18:15, followed by preparations for the next business day.

The chart below shows that more than 50% of payment orders, based on value, are executed by 12 noon, reflecting higher activity levels in the morning.

C2: TARGET2 traffic Intraday distribution in (%) 100

80

60

40

20

0 07:00 08:00 09:00 10:00 11:00 12:00 13:00 14:00 15:00 16:00 17:00 18:00

Volume Value Linear distribution Source: ECB – TARGET annual report 2017.

1 Lending facility or deposit facility, depending on whether the participant has a net credit or debit position.

The TARGET2 platform is accessible via TARGET2 operates every day except SWIFT or the Internet. When a participant Saturdays, Sundays and six public holidays9 connects via SWIFT, it can use all the (between 255 and 257 days a year overall). platform’s functionalities. Some credit institutions, however, especially the smallest 3.2. Services for ancillary systems among them, do not have access to SWIFT, which is why an alternative internet‑based The multitude of financial players that connection route was developed in 2010. participate in financial market infrastructures Users of this route have access to a more all depend on the proper execution of restricted range of services. For example, payment orders. Timely settlement they cannot issue direct debit orders or of ancillary systems’ transactions in participate in a group of accounts. This TARGET2 is thus crucial for financial stability. access route is intended particularly for small, low‑volume credit institutions, for TARGET2 enables financial market 9 New Year’s Day, which the cost of accessing the SWIFT infrastructures established in the EEA offering Good Friday, Easter Monday, 1 May, network would be disproportionate to their services in euro (central counterparties, Christmas Day and business levels. securities settlement systems, retail Boxing Day.

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T1: Comparison of settlement procedures Settlement Procedure title Description procedure1 Procedure 2 Real‑time Transfer between the accounts of two direct participants. settlement Procedure 3 Bilateral settlement The ancillary system sends debit and credit transactions simultaneously on the participant’s T2 account. Each transaction is processed separately. Procedure 4 Standard Debits and credits are recorded simultaneously on the participant’s T2 account multilateral but all debit transactions must be settled before credit transactions. settlement Procedure 5 Simultaneous Debits and credits are recorded simultaneously on the participant’s T2 account multilateral but must be verified before settlement to ensure that they are settled on an settlement “all or nothing” basis Procedure 6 Dedicated liquidity Standing or one‑time orders, for the purpose of managing the liquidity reserved and cross‑system for settling (interfaced model) or prefinancing (real‑time model) an ancillary settlement system’s transactions, can be submitted by the TARGET2 participant or the ancillary system in which it participates. The real‑time model enables instant payments to be settled in TARGET2.2 1 The procedure column begins with Procedure 2 because Procedure 1 was discontinued in 2017. 2 Procedure 6 can be used during the business day or the night‑time window. The real‑time model went live in November 2017. It gives TARGET2 participants a level of flexibility when arranging the pre‑funding of their positions in instant payment systems (see Section 6 below and Chapter 10). payment systems) to settle their transactions 3.3. Liquidity management by opening one or more RTGS accounts with mechanisms their central bank to settle euro transactions conducted by their participants. These In order for TARGET2 to function smoothly accounts can then be used to settle the cash as an RTGS system, participants must at all positions that their participants hold in their times maintain sufficient liquidity to allow RTGS accounts, facilitating final settlement the payments they submit to be settled in central bank money. within a satisfactory timeframe (90% of transactions are settled in under 39 seconds A dedicated interface module, the Ancillary and 50% in under 26 seconds). System Interface (ASI), was developed to facilitate the submission and settlement of Given the importance of liquidity for the payment instructions. It provides a range proper execution of large‑value payments, of pre‑defined standard services. liquidity management tools are given careful consideration in TARGET2. The aim is With all their transactions rated “highly to give participants access to the most urgent”, each ancillary system uses the powerful liquidity management mechanisms processing procedures appropriate for its currently available. needs, together with additional services if necessary (establishment of a reporting At any time during the business day, a period on the beginning or end of a participant’s liquidity comprises the balance settlement cycle, use of a guarantee fund). of its account(s) in the system at the start of the day, the difference between the value TARGET2 offers participants five different of payments received and payments issued settlement procedures, which satisfy the since the start of the day, and the value of ancillary systems’ various needs: any intraday credit obtained from the NCB of the country in which it is established.10 Each ancillary system’s profile and 10 As they are not blocked, regulatory reserves can settlement time in TARGET2 is shown on Based on the subsidiarity principle, with be used during the day the ECB website. which TARGET2 is in strict compliance, to make payments.

Payments and market infrastructures in the digital era – 107 Chapter 7 tarGET2, the Eurosystem’s RTGS system  only the NCB of the country in which “groups of accounts”. These can take the participant is established can grant it two forms: intraday credit. This credit is free of charge but must be guaranteed (collateralised) • Consolidated account information and repaid before the end of the day (CAI) groups: Group managers have a (hence the term “intraday credit”).11 simple overview of the total liquidity of Eligible collateral for intraday credit is the accounts in their group. They can, the same as that for the Eurosystem’s however, transfer liquidity from one account monetary policy transactions and is subject to another. to the same valuation and risk control rules. In practice, the collateral used to • Aggregated liquidity (AL) groups: secure intraday credit is the portion of As well as having an overview of the the collateral deposited with NCBs that total liquidity of the group’s accounts, is not used to guarantee monetary policy as above, these groups centralise their refinancing operations. liquidity (in a virtual account), facilitating the integrated management of intraday From 2011 to mid‑2017, the average daily liquidity for all the accounts in the group. value of intraday credit consumed amounted A transaction on any of the accounts to 4.7% of the average amount of collateral can be settled as long as the virtual available for use. account balance – i.e. the sum of the individual account balances plus any Among the system’s participants, only credit lines – is sufficient. This means counterparties eligible for Eurosystem that an account in the group can show monetary policy operations can obtain a debit balance during the day, provided 11 Annex I to Guideline intraday credit. At the end of the day, the that the overall position for the group of ECB/2011/14. failure by such counterparties to repay their accounts remains in credit. 12 These institutions are credit is considered as a request to use the as follows: marginal lending facility. Such requests are 3.3.2. Optimisation of payment • credit institutions automatically granted by the Eurosystem, order management established in the EEA that are not eligible at the rate in force set by the ECB. counterparties for Assignment of priorities: Issuing Eurosystem monetary Other entities admitted to participate in participants can change the priority level policy operations and/or do not have 12 TARGET2 can obtain intraday credit, assigned to urgent and normal payments, access to the marginal provided that a guarantee is in place to but highly urgent payments must remain lending facility; ensure that the credit will be repaid at the classified as such.14 • investment firms end of the day. This is the case, for example, established in the EEA; of investment firms established in the EEA, Changes to transaction queues: Each • institutions that manage ancillary provided that they have an agreement with account has three payment queues, systems, acting in that a counterparty to Eurosystem monetary corresponding to the three priority levels. In capacity, provided that policy operations to cover any residual debit order to optimise their liquidity, participants the agreement under which the institution positions at the end of the day. can change the order of their payments in can be granted intraday each of these queues. credit has previously been submitted to In all cases, institutions that fail to repay and approved by the their credit are subject to penalties. Transfers with specified settlement Governing Council. times: transfer orders can be assigned a 13 Accounts that are 3.3.1. Liquidity pooling specific settlement time, up to five business connected to TARGET2 via the Internet cannot days in advance. belong to a group For institutions that choose to have several of accounts. accounts, or participating banking groups Liquidity reservation: TARGET2 participants 14 Highly urgent payments established in several countries, if they can reserve liquidity to settle certain are those connected with 13 central bank operations connect via SWIFT the TARGET2 platform transactions, either by assigning it on the and those conducted by allows them to pool their liquidity by creating basis of transaction priority or by transferring ancillary systems.

108 – Payments and market infrastructures in the digital era TARGET2, the Eurosystem’s RTGS system Chapter 7  funds to sub‑accounts used to settle While a payment order is being processed, transactions for certain ancillary systems. an optimisation process based on “offsetting checks” attempts to clear the Limit‑setting: Direct participants can set transaction immediately against other a limit on the maximum value of payments queued transactions. For example, if they are willing to settle without receiving participant A submits an instruction to advance funding. These limits can be pay participant B, the system will seek bilateral (relating to one other participant) offsetting transactions submitted by and/or multilateral (relating to all other participant B which, if they are settled participants). The minimum amount for any simultaneously with participant A’s limit is EUR 1 million. order, will reduce both participants’ liquidity needs. 15 The different algorithms 3.3.3. Liquidity‑saving algorithms and their uses are presented in Appendix I The processing of queued payment orders of the TARGET2 Participants also benefit from optimisation depends on the priority assigned to them by Guidelines “Technical specifications for processes built into the platform in order the issuing participant and the settlement the processing of to save liquidity.15 algorithms take this into account. payment orders”.

Box 4: Non‑settled payments by the end of the day

Transactions not settled by the end of the day, due to insufficient liquidity on a participant’s account or a limit breach, are small in number. In 2017, they made up only 0.3% of the total daily volume in TARGET2 and 1.0% of the total daily value. This is because the vast majority of payments are settled without recourse to intraday credit (on average, less than 3% of transactions in value terms are settled using intraday credit)..

C3: Transactions not settled by the end of the day (millions) (EUR millions)

4,000 120

3,500 100 3,000 80 2,500

2,000 60

1,500 40 1,000 20 500

0 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 Volume (left-hand scale) Value (right-hand scale) Source: ECB – Transactions not settled at the end of the day – TARGET 2017 Annual Report.

Payments and market infrastructures in the digital era – 109 Chapter 7 tarGET2, the Eurosystem’s RTGS system 

Payment orders in the “highly urgent” C4 and C5: Transactions settled in TARGET2 and “urgent” queues are settled using the By total offsetting procedure alone. Payment orders (Millions) (%) 96 3 in the “normal” queue are processed on a 2.12 1.57 2 continuous basis, using algorithms designed 94 1.43 1.10 1.23 1 to resolve any blockages. 0.09 - 0.11 92 0 -1 -2.43 90 -2 4. TARGET2 performances -2.59 -3 88 -4 4.1. Activity based on volume 86 -5 -6 -6.54 and value 84 -7 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 In the wake of the 2008 financial crisis, Yearly total (left-hand scale) Yearly increase (right-hand scale) TARGET2 saw its business plummet in 2009, reflecting the gloomy economic By value and financial environment. In 2014 and 2015, (EUR billions) (%) the direct use of the platform for certain 700 5 transactions decreased as the migration to SEPA redirected these flows to other 600 0 payment systems.16 Then, from 2015 500 -5 to 2017, the successive waves of migration 400 -10 to T2S also reduced the traffic in TARGET2: 300 -15 CSD transactions previously settled in 200 -20 TARGET2 are now settled in T2S and are no longer recognised as transactions 100 -25 0 -30 processed by TARGET2. 2011 2012 2013 2014 2015 2016 2017 Turnover In 2017, over 255 business days, the Yearly increase number and value of transactions settled Yearly GDP-growth (right-hand scale) in TARGET2 totalled 89.3 million and Source: ECB – TARGET 2017 Annual Report.

C6: Types of transaction By total By value

3 13 27

7 42

77 20 11

16 Even though these systems use TARGET2 Payments between market participants for the final settlement Payments related to operations with the central bank of their net positions, Payments related to exogenous settlement systems this additional business cannot compensate Payments related to fund transfers for the number of transactions subject to Source: ECB – TARGET 2017 Annual Report. gross settlement.

110 – Payments and market infrastructures in the digital era TARGET2, the Eurosystem’s RTGS system Chapter 7 

C7: Incidents and delays of closing time in TARGET2 (in total; %) 99.98 100.00 100.00 100.00 100.00 140 100.0 99.83 99.87 100.00 100.00 99.98 100.00 99.81 99.90 99.89 120 112 99.8 100 99 99.6

80 99.4 62 60 99.2 48 40 33 99.0

20 9 98.8 2 2 1 1 2 1 0 1 2 1 3 0 2 0 2 0 1 1 2 0 0 4 0 98.6 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Incidents impacting the availability of TARGET2 (left-hand scale) TARGET2 delays of closing time (left-hand scale) TARGET2 availability (yearly %, right-hand scale) Source: ECB – TARGET 2017 Annual Report (data for TARGET to 2007, then TARGET2).

EUR 432,781 billion respectively, giving of service: for instance, in 2017, 100% average daily figures of 350,106 transactions of payments submitted were settled in and EUR 1,697 billion. In less than seven less than five minutes, thanks to a 100% days, TARGET2 processes the equivalent availability rate.19 of the annual GDP for the entire euro area, 17 As regards the French making it one of the largest RTGS systems component system, 17 in 2017 TARGET2‑Banque in the world. 5. Oversight of TARGET2 de France processed 8.2 million transactions with a total value of At the European level, TARGET2 is the only Within the Eurosystem, payment systems EUR 66,840 billion, system used for operations connected are governed by the ECB regulation on giving daily averages of with the Eurosystem’s monetary policy systemically important payment systems.20 32,166 transactions and EUR 263 billion (reaching and transactions relating to settlements for This regulation transposes the Principles the equivalent of GDP in ancillary systems operating in euro. In 2016, for financial market infrastructures just under 10 days). these transactions represented respectively (PFMI, see Chapters 17 and 18) into the 18 The figures do not include 7% and 15% of total business based on Eurosystem’s rules for payment systems. large‑value transactions relating to correspondent volume and 12% and 26% based on value. TARGET2 was identified as a systemically banking arrangements or important payment system (SIPS) by a houses. TARGET2 also handles the vast majority decision of the ECB Governing Council 19 The system’s technical of other large‑value payments in euro, be of August 2014. It must therefore meet availability is measured on the basis of its daytime they interbank or commercial transactions, stringent requirements, especially in terms processing hours between processed in payment systems.18 of risk management and governance. 07:00 and 18:45 CET (or 19:00 on the last day of Each year, these represent around 60% the minimum reserve based on volume and 90% based on The ECB was appointed by the Governing maintenance period), value, the remainder being processed in Council as the competent oversight authority taking into account any extension in operating the EURO1 system. for TARGET2, working within a cooperative hours due to problems framework. In practice, all the national within TARGET2 or ancillary systems for which 4.2. Service level central banks are invited to participate in the final settlements oversight activities for TARGET2. were implemented via With the launch of the single platform the platform. in 2007‑2008, the service provided by In 2015, an assessment was carried out of 20 ECB Regulation 795/2014 of 3 July 2014, amended by the TARGET system became even more the platform’s compliance with requirements ECB Regulation 2017/2094 stable. TARGET2 provides a very high level under the ECB regulation on systemically of 3 November 2017.

Payments and market infrastructures in the digital era – 111 Chapter 7 tarGET2, the Eurosystem’s RTGS system  important payment systems, overseen by fully operational teams are on hand in case the ECB together with those euro area a crisis situation develops. central banks that volunteered to participate in the exercise. Since then, the assessment If a whole region is affected by a problem, has regularly been updated and published it must be possible to resume operations on the ECB website.21 within two hours by switching to the other region. Moreover, participants’ most critical 5.1. Resilience of transactions can be processed by central the technical architecture banks without waiting for normal operations to resume, by activating the contingency Because TARGET2’s technical infrastructure module in the region that is still available. relies on a single platform, the platform is subject to very strict requirements in terms As part of its deliberation on potential of security and efficiency. From the outset, cyber‑attacks on the banking and financial the platform’s architecture was designed sector, the Eurosystem is discussing to meet these requirements, which were strengthening the contingency module to subsequently confirmed and codified by the offset the effects of incidents that could ECB regulation on systemically important prevent TARGET2 from operating for more payment systems (see Chapter 17). than a day.

In order to ensure the system’s Moreover, should the SWIFT messaging operational continuity, TARGET2 (like T2S, system become unavailable, the Eurosystem see Chapter 14) relies on extremely robust has a closed network known as CoreNet, technical architecture. The settlement which connects all the NCBs with each platform was developed in two regions other and the ECB and enables them all to 21 See the report entitled several hundred kilometres apart, each of connect to the TARGET2 platform. “TARGET2 Summary which has two sites far enough apart to of the self‑assessment against the principles have different “risk profiles” but sufficiently Duly authorised central bank personnel for financial market close to be able to operate in synchronous would therefore be able to execute highly infrastructures” published by the ECB in mode. The regions operate on a six‑monthly urgent payments on behalf of their users May 2018: http://www. rotating basis, making sure that experienced, (credit institutions or ancillary systems). ecb.europa.eu

Figures

Source: ECB – https://www.ecb.europa.eu/paym/t2/professional/contingency/html/index.en.html

112 – Payments and market infrastructures in the digital era TARGET2, the Eurosystem’s RTGS system Chapter 7 

5.2. The role of central banks managers of the SSP’s service desk) and the ECB’s TARGET2 coordinator (see In the event of a malfunction affecting the chart below, “Organisation of TARGET2’s TARGET2 platform or one or more of its operational continuity”).24 participants, central banks can intervene to ensure the system’s operational continuity. 5.2.2. Crisis situations

5.2.1. Continuous support Each NCB also appoints a crisis manager, (national service desk) who must hold a more senior position at the bank and be involved in crisis management In order to provide high‑quality service to at the level of the Eurosystem. its user community and to ensure that the platform operates properly, each central In general, the measures taken in the event bank has a single point of contact: the of an incident are: national service desk or help desk. • workaround solutions: support The national service desk handles any procedures to sustain the minimum questions regarding accounts opened in level of business necessary to limit an TARGET2, regardless of their category. incident’s impact; The teams can be reached throughout the TARGET2 business day and are available • delays in TARGET2’s operations, continuously between 06:45 and 19:15 CET. especially end‑of‑day procedures (for The national service desk can extend its TARGET2 as a whole); hours when required (for the launch of new applications, when business hours • operational continuity measures, are prolonged, etc.). As regards the French e.g. switching the system to a secondary component system of TARGET2, the Banque site or to the other region; de France makes a dedicated extranet site22 available to its participants, which handles • contingency measures to facilitate a all questions on TARGET2‑BF participation, limited number of critical transactions operational issues, evolution, reference data using the contingency module. and connectivity. The contingency module, accessible only Every day, each national service desk to central banks, is activated if a platform ensures that transactions are processed module becomes unavailable, making an smoothly in their TARGET2 component inter‑regional switch necessary. It enables system, focusing particularly on payments the settlement of a small number of critical qualified as critical or systemically important transactions that cannot be put on hold (e.g. transactions for ancillary systems). until the switch is finalised. It involves If a user has difficulty communicating with providing external liquidity to TARGET2, as the platform, the service desk can submit the positions of participants’ accounts are payment instructions on their behalf. set to zero. It does not have mechanisms 22 https://www.target2bf.fr/

to manage queues or groups of accounts. 23 The national central Each national service desk is run by a banks of France, settlement manager, who is responsible for By its nature, this module is intended Germany and Italy. the day‑to‑day management of transactions to handle settlement for critical ancillary 24 The unit relies on a permanently available and represents the central bank in an ad hoc systems, in particular CLS, which operates teleconference procedure. unit made up of all the SSP’s settlement under very tight time constraints covering 25 A processing delay 25 managers and services managers all the time zones. affecting CLS’s (representatives of the 3CB,23 which transactions in a given geographical region supply the platform’s technical architecture A reporting framework has been established could have knock‑on and are responsible for its operation, and for crisis situations. effects across the globe.

Payments and market infrastructures in the digital era – 113 Chapter 7 tarGET2, the Eurosystem’s RTGS system 

In the event of an incident, TARGET2 Organisation of TARGET2’s operational continuity participants communicate with their usual contacts at their respective central banks, Participating central banks ECB in particular their settlement managers, via National service desk TARGET2 coordination desk Users their national communication channels. National crisis ECB crisis manager manager

Incidents with potential systemic effects, Settlement TARGET2 however, are subject to coordinated manager coordinator management. The Eurosystem has 3CB established operational procedures to deal SSP service desk SSP service with any potentially abnormal situation, managers together with a communication framework SSP crisis that must be complied with in order to managers provide information in real time. Source: ECB – Info guide for T2 users. Various contingency units have been set up and can be activated when required: The CRSS contributes to the reliability of TARGET2. Accessible only by central • Crisis units: actively involved in managing banks, it provides a complete overview of liquidity‑related issues, notably during the activities of their TARGET2 component the launch of new services, these units system26 and can show all transactions step in to manage crises that develop in executed from the launch of TARGET2 until the TARGET2 system, ancillary systems the previous day.27 or participating institutions affecting liquidity, timelines for operations The CRSS is also a crucial decision‑support processed in a national component tool. It enables NCBs and the ECB to system, or involving systemic risk; perform in‑depth analyses of domestic and cross‑border transactions settled in 26 For reasons of • Crisis managers’ teleconference: TARGET2, provides insight into interbank confidentiality, a central This crisis unit within the Eurosystem payment flows within the euro area and bank only has access to detailed data on enables TARGET2 crisis managers to meets the oversight requirements to which participants in the communicate remotely so as to: the system is subject as a systemically TARGET2 component system that it operates. important payment system. Certain anonymised (i) take decisions assigned to reports, which facilitate them under TARGET2 procedures, The CRSS also facilitates detailed comparisons between the activities of the e.g. allowing payments not rated knowledge of participants and their activity different national banking “highly critical” to be processed in the in TARGET2 in the short and long term, communities, are, however, accessible to contingency module; notably in terms of liquidity management, all the central banks. recourse to intraday credit and collateral 27 In the CRSS system, (ii) take decisions relating to aspects mobilisation, and allows central banks activity data is stored and of crisis situations not covered by to exchange highly accurate detailed is available the next day in the CROSS module TARGET2 procedures, referring the information with their participants. (see the appendix to matter to the ECB Executive Board if this chapter). so warranted. The Eurosystem also has a simulator, 28 Like TARGET2, the which has been operational since 2009.28 simulator, which is developed and managed 5.2.3. Continuous monitoring By combining actual TARGET2 data by the 3CB and the of TARGET2’s operations extracted from the CRSS with the central bank of Finland, system’s various operational mechanisms, is governed by an agreement, approved The monitoring and ex‑post analysis of it can replicate previous days’ business, by the ECB Governing participants’ operations is carried out through producing results very close to the actual Council, between these four central banks and TARGET2’s Info centre (or Customer Related data, and assess the impact of potential the central banks that Services System – CRSS) and simulator. crisis situations. use the system.

114 – Payments and market infrastructures in the digital era TARGET2, the Eurosystem’s RTGS system Chapter 7 

While it is difficult to simulate a participant’s Ancillary systems for which final settlement actual behaviour in a crisis situation or is performed in TARGET2 can be classified to anticipate the extent of any knock‑on as critical participants based on the nature effects on other market infrastructures, the of their activity and the degree of systemic simulator makes it possible to assess the importance assigned to them by the impact of scenarios involving changes in Eurosystem. The systems concerned are data or parameters (removal of a participant large‑value payment systems, securities or algorithm). clearing and settlement systems and systemically important retail payment Various studies have been conducted using systems (SIPS, see Chapter 17). Around the TARGET2 simulator by working groups 30 ancillary systems are qualified as critical made up of supervisors, operators and participants each year.29 researchers. They have covered, inter alia:

• technical failure by a major participant, 6. The Eurosystem’s strategy for developing its infrastructures • different levels of withdrawals of available intraday credit lines, In 2015, ahead of the launch of TARGET2 Securities (T2S), the Eurosystem • the share of traffic relating to indirect initiated a strategic deliberation, participants and its concentration among “Vision 2020”, on the evolution of European direct participants (tiering), market infrastructures, particularly its “own” infrastructures. This process, conducted in • the identification of interdependencies close collaboration with users, led to the in TARGET2. launch of three projects corresponding to 29 https://www.ecb.europa. the strategy’s three pillars: eu The Eurosystem establishes an annual list 30 Annual conference on banking and financial of critical participants in TARGET2. • Instant payments, with the Target Instant services organised Payment Settlement (TIPS) project; by SWIFT. These are credit institutions and ancillary 31 “The future of Europe’s systems which, should they experience a • RTGS services, with the TARGET2‑ T2S financial market infrastructure: the security breach in their own infrastructures, consolidation project; Eurosystem’s Vision could have a significant impact on the overall 2020” (speech by Yves Mersch, a member functioning of TARGET2 (systemic risk). • Collateral management, with the of the Executive Board of Critical participants are subject to more Eurosystem Collateral Management the ECB, at the SIBOS stringent requirements in terms of operational system (ECMS) project (see Chapter 15). conference in October 2015 in Singapore). continuity (annual self‑certification), testing 32 Eurosystem's vision and crisis management. 6.1. Consultation with users for the future of Europe’s financial The Eurosystem qualifies a credit institution “Vision 2020” was presented in market infrastructure RTGS services – 30 31 as critical if its average daily business October 2015 at the SIBOS conference. consultative report represents 1% or more of the overall volume In February 2016 the Eurosystem launched 33 Consultation on of traffic in TARGET2. In 2014 another a public consultation on the first pillar of the the future of RTGS criteria was added: a credit institution can strategy (RTGS services).32 The responses services – summary of feedback received be qualified as critical, even if its volumes received were summarised in a document 33 34 “The next steps in are below the specified threshold, if, published in July 2016. the evolution of the based on a simulated technical failure by Eurosystem’s market the participant, the resulting non‑settled In September 201634 the Eurosystem infrastructure” (speech by Yves Mersch, a payments average 1.5% of the total volume reached another milestone with the launch member of the Executive of transactions processed in TARGET2. of an “’investigation phase” to define user Board of the ECB, at the SIBOS conference Around 20 credit institutions are qualified requirements for each of the three pillars in September 2016 as critical participants each year. and ensure that a business case was in Geneva).

Payments and market infrastructures in the digital era – 115 Chapter 7 tarGET2, the Eurosystem’s RTGS system  available. To this end, user Task Forces were development of national, non‑interoperable set up. Information on their work can be solutions. To counter this risk, the found on the ECB’s website.35 Eurosystem took two successive measures:

In January 2017, the Eurosystem launched • improvements were made to TARGET2, a public consultation concerning TIPS with the November 2017 introduction user requirements and estimated of a new settlement procedure for volumes.36In June 2017, in view of the ancillary systems, “ASI 6 Real‑Time”, responses received, the ECB Governing intended to support retail payment Council decided to launch the TIPS systems (ancillary systems for TARGET2) project. The system is expected to go live that clear instant payments. Payment in November 2018.37 systems offering an instant payment service can now proactively manage the In May 2017, the Eurosystem launched liquidity reserved for pre‑funding their another public consultation on the future participants’ instant payments during RTGS services.38 In light of the responses TARGET2’s daylight operating hours and received, in December 2017 the Governing night‑time processing window; Council decided to launch the TARGET2‑T2S consolidation project, as well as the ECMS • considering that this would not be enough project.39 On the same occasion, it was to ensure the reachability of instant announced that the , payment solutions, the Eurosystem went 35 See the section on Banco d’España, Banque de France and one step further and proposed an instant “Payments & Markets/ Banca d’Italia (collectively known as the payment settlement service in central Ongoing initiatives” on the ECB website. “4CB”) would act as service providers for bank money , operational since November 36 TARGET instant payment these two projects. 2018: Target Instant Payment Settlement settlement Public (TIPS). As its name suggests, this new consultation on the draft 6.2. The Target Instant Payment service was designed as a functional TIPS user requirements Settlement (TIPS) project40 extension to TARGET2. It will, however, 37 ECB to develop a service for the settlement rely on a new technical platform in order of instant payments For the Eurosystem, as a catalyst for to meet the needs specific to instant (ECB press release of European financial market integration, payments (notably in terms of processing 22 June 2017). a major challenge is ensuring that the speed, volume and 24/7/365 availability). 38 ECB consults on the introduction of instant payment services user requirements for the future RTGS service does not reintroduce fragmentation into the The chart below presents information and in the context of the European retail payments market, with the payment flows in TIPS. T2-T2S consolidation 39 ECB approves major projects in field of large‑value payments and collateral management Information and payment flows in TIPS (ECB press release of 7 December 2017). Service validates and 40 For a more detailed 2 makes reservation presentation of the TIPS service, see the following article on the ECB 1 Sends 3 Forwards transaction transaction website, published in MIP on line (June 2017), the final version of the TIPS User requirements Service Accepts (June 2017) and the 6 TIPS 4 transaction Instant Participant confirms Participant Instant presentations made payment payment at the Focus session originator beneficiary of July 2017 and at Service settles Service 5 7 confirms SIBOS in October 2017, together with the note on the coexistence of Source: ECB – https://www.ecb.europa.eu/paym/intro/news/articles_2017/html/201706_article_tips.en.html TIPS with other instant payment services

116 – Payments and market infrastructures in the digital era TARGET2, the Eurosystem’s RTGS system Chapter 7 

TIPS flows with payment systems acting as “instructing parties ”

Forwards 1 Sends 3 transaction transaction

Accepts Originator Service 4 Beneficiary ACH1/ 6 confirms TIPS transaction ACH2/ Participant/ Instructing Instructing Participant/ Reachable Party Party Service validates and Party Reachable Party 2 makes reservation Service settles Service 5 7 confirms

Source: ECB.

As the rules for participating in TIPS are aspect. The consolidation project aims to the same as those for TARGET2, TIPS can bring TARGET2 into line with T2S,42 optimise draw on a vast network of participants the synergies between the two services, cut (direct participants, indirect participants their costs through economies of scale and and addressable BICs), which should strengthen their resilience (notably in terms facilitate pan‑European reachability for of cyber security). It also aims to offer users instant payment services. Moreover, as a new set of services to meet their needs shown in the chart above, retail payment expressed during public consultations and systems (also called Automated Clearing the work done by the Task Forces set up by Houses or ACH, because they calculate the Eurosystem. The consolidated system a net balance from gross transactions) should be operational in November 2021. can represent participants in TIPS, acting as instructing parties to submit instant The chart below provides an overview of payment instructions in TIPS on their behalf. the future Target services. Features to note include: A retail payment system can thus directly process instant payments between two of • the introduction of a Central Liquidity its participants using the ASI6 Real‑Time Management (CLM) mechanism. This is procedure to settle them in TARGET2. the main organisational change in the services provided by the Eurosystem 41 For a more detailed However, if the credit institution of the in terms of market infrastructures. presentation of instant payment’s beneficiary does not The centralised mechanism allows the TARGET2‑T2S consolidation project and participate in the same retail payment participants to allocate liquidity to new RTGS services, see system as the credit institution of the instant the Eurosystem’s various settlement the ECB website for the documents produced payment issuer, but both institutions are services, i.e. T2S, TIPS and RTGS (for following the public participants in TIPS, then the retail payment the settlement of large‑value payments); consultation in May 2017, system of the issuer’s credit institution can the presentations made at SIBOS in October 2017 use TIPS on behalf of its participant. • additional services that will bring a range and the Focus session of improvements, namely in terms of of December 2017 6.3. The TARGET2‑T2S payment management, interfaces 42 Namely to enable consolidation project41 with ancillary systems and interaction TARGET2 to use the latest financial with users; messaging format, Although the term “consolidation” might ISO 20022, as T2S does. At present, TARGET2 suggest that this project is largely technical • the introduction of a number of shared uses the older, more in nature, it also has a strong “business” services, including a single portal basic format, 15022.

Payments and market infrastructures in the digital era – 117 Chapter 7 tarGET2, the Eurosystem’s RTGS system 

Towards consolidated services

Central Liquidity Management

T2S RTGS Services TIPS

Securities High-value Instant settlement payments payments

Common Reference Data

Shared Operational Services (Billing, Scheduler, etc.)

Data Warehouse

Eurosystem Single Market Infrastructure Gateway

Source : ECB.

providing access to all the Eurosystem’s • the possible extension of opening hours infrastructures (Eurosystem Single if the need is expressed; Market Infrastructure Gateway – ESMIG). • the ability to provide a settlement Additional improvements that the future service in currencies other than the system will make include: euro if central banks outside the euro area (which participate in the system as • migration to the ISO 20022 standard; connected NCBs) so request.

118 – Payments and market infrastructures in the digital era