EBA CLEARING Shareholders Meeting Report of the Board 30 th June 2009 Contents 1. The Company’s activities in 2008 3 1.1 Introduction 3 1.2 EURO1 / STEP1 Services 4 1.3 STEP2 Services 8 1.4 Operations of the Clearing Systems 12 1.5 Other relevant matters of interest 14 1.6 Activities of Board Committees 14 1.7 Corporate matters 16 1.8 Financial situation 18 2. The Company’s activities in 2009 21 2.1 EURO1 / STEP1 Services 21 2.2 STEP2 Services 23 2.3 Operations of the Clearing Systems 25 2.4 Other relevant matters of interest 26 Table of Appendices Appendix 1: Changes in EURO1/STEP1 participation 27 Appendix 2: List of direct participants in EURO1/STEP1 33 Appendix 3: List of STEP2 direct participants 41 Appendix 4: Annual accounts for 2008 47 layout: www. quadratpunkt.de photo credit: © Mihai Simonia - Fotolia.com 2 EBA CLEARING Shareholders Meeting 30 th June 2009 // Report of the Board 1. The Company’s activities in 2008 The period under report is 1 st January 2008 to 31 st December 2008. 1.1 Introduction 2008 was a year of unprecedented turmoil in the financial markets. The payments business has proved resilient during the crisis – providing stable and recurring revenue for banks – but it has not remained unaffected by the major changes marking the financial industry as a whole. The high profile of SEPA, the impact of regulation and the amount spent on bank-internal implementation and compliance pushes banks to realise savings based on the new payments infrastructure they have built. Conso - lidation of banks in different countries has further blurred the distinction of ‘cross border’ and ‘domestic’ payments. It should be noted that the credit crisis has accelerated the process of consolidation. Clearing houses and local processing centres, who are themselves under pressure to achieve return on investment, are opening their doors to payments that originate outside the country in which they have traditionally operated. Due to SEPA, there is now a standard payment format and standard schemes that can be used for most payments sent within Europe today. The political pressure to migrate domestic payments into the SEPA schemes continues. Public authorities in a number of countries have stated that they will begin sending SEPA formats in the course of 2009. The above factors indicate that for the first time, banking groups that have so far put a medium number of payments into three or four clearing systems can go shopping for clearing and settlement services with an aggregate number of payments exceeding a million, searching for the operator that will provide best price and highest reliability. EBA CLEARING is very well positioned to compete for this business, and for many banks is the default choice. During the crisis period, EBA CLEARING switched to highest levels of alert - ness. The Company introduced increased levels of monitoring and established a new procedure for a daily dialogue with the ECB to ensure immediate exchange of latest information in terms of market disturbance. The increased resilience of EBA CLEARING ensured that the Company was at all times in a position to manage the risks that could cause distur - bance to its systems and enabled the Company to react quickly and decisively in such situations where banks’ ownership changed to ensure compliance with the conditions for ongoing participation. 3 EBA CLEARING Shareholders Meeting 30 th June 2009 // Report of the Board 1.2 EURO1 / STEP1 EURO1 provided a robust and resilient service throughout the financial services turmoil. Volumes continued to grow and values were noticeably higher reflecting confidence in the finality and certainty of payments provided by the unique legal structure underpinning the system. The payment profiles of the participants did not change during the period under report and the release of payments was not delayed in any way by the sending banks. Given the broad membership base within EURO1 and to avoid any mis- understandings as a result of the continuing media reports concerning banks, EBA CLEARING also had informal contact with central banks and other actors to ensure an accurate picture was obtained based on facts. The optimisation of liquidity that the EURO1 Service provides was clearly seen as a benefit to its users and overall only two percent of the bilateral limits granted were adjusted by banks at the height of the crisis, which in turn reduced the available liquidity in the system by less than one percent. In the meantime many of these changes were reinstated as the market recognised the remedial action being taken by governments across Europe. In terms of volume, the daily average in EURO1 decreased by three percent from December 2007 (231,663) to December 2008 (224,147) due to the migration of the settlement messages for the SCT settlement to TARGET2. In STEP1, there was a decrease in the daily average payment volumes of 12 per cent for December 2008 compared with December 2007 due to the migration of the settlement messages for the SCT settlement to TARGET2 and also due to the reduction in the number of direct participants. Also, December 2007 had been the all-time record month for the STEP1 system. 4 EBA CLEARING Shareholders Meeting 30 th June 2009 // Report of the Board EURO1 settlement in TARGET2 On 19 th May 2008, EURO1 successfully migrated to the TARGET2 Payments Module. At that occasion, a new agreement was entered into between EBA CLEARING and the ECB for the settlement services supplied by the ECB, thereby taking into account the requirements stemming from the Harmonised Terms and Conditions applying to TARGET2. The EURO1 Rules were adapted accordingly, and a new legal opinion on the EURO1 System Documentation under the law governing EURO1, i.e. German law, was issued. The settlement, pre-funding and collateral arrangements continued seam - lessly and this completed a period where EURO1 had continued to harmo - niously settle with some banks operating under TARGET and others operating under TARGET2. As a result of operating under TARGET2, the direct debit option became available for the pay-in phase of the settlement process. This was a function that banks had previously requested, but had not been possible under TARGET. Over half the direct participants have adopted this methodology. This has considerably speeded up the settlement process. A project was launched to start planning how the settlement process (inclu - ding the liquidity bridge) and the collateral arrangements could be moved from the Payments Module to an Ancillary System Interface model. The collateral arrangements, which are currently hosted in an internal account of the ECB outside of the Payments Module, benefit from a grand - fathering for a limited period of time and need to be revisited. Consultation with the user community via the project steering group, comprising mem - bers of the Treasury and Liquidity Group and the Operations and Technical Committee revealed concerns about the resultant timing of this migration and investigations into possible compromise solutions were started. Liquidity Bridge As from 7 th July, following formal approval by the ECB as overseer, two ad - ditional distribution windows were introduced within the liquidity bridge arrangements. These take place at 13.00 CET and 15.30 CET. The benefits have worked through with smoother processing for many large users of the system that had experienced queues towards the end of the day. 5 EBA CLEARING Shareholders Meeting 30 th June 2009 // Report of the Board By doubling the number of windows there was a resultant 51 percent increase in the volume of distributions for July compared to June and a corresponding 35 percent increase in values. Banks are being encouraged to set new maximum daily direct debit limits to four times their credit cap to ensure that they can participate to the maximum in each of the four distri - bution windows. New Releases With Release 10.3 in June 2008 specific functionality was created to facili - tate the use of EURO1/STEP1 as a channel of choice for Euro Priority Payments. This included the capability to identify Euro Priority Payments in on-hold queues and the possibility of selectively receiving confirmation that such payments have been duly processed. Release 10.4 in December 2008 was one of the largest ever to be applied to EURO1. The main change was the increase in output capacity of EURO1 by 40 percent. The effect has been that FIN payment messages are distri - buted faster by SWIFT-Net FIN to the receiving bank. Another important change was the migration to use double authentication in the FIN-Copy services of EURO1/STEP1. This change was to add an additional layer of security at the messaging level between the banks and EURO1/STEP1. This was a mandatory change for all participants and sub-participants, which, had a bank not completed the migration to double authentication, would have caused all its EURO1/STEP1 payments to be rejected. EURO1/STEP1 Directory In response to requests from users and in order to further increase the attractiveness of EURO1, the Board agreed to create a Directory to assist banks with identifying the EURO1 / STEP1 correspondent bank for benefi - ciary banks unknown to the EURO1 / STEP1 systems. This would enable banks to route such payments via EURO1 / STEP1 and benefit from the low transaction pricing and liquidity requirements. During the year, the form and structure of the Directory were developed at no cost to the community on the basis of alignment with the TARGET2 Directory to ensure ease of operation and usage for all participants. The SWIFT Directory Services was the model adopted. 6 EBA CLEARING Shareholders Meeting 30 th June 2009 // Report of the Board The Directory was opened for the initial input of data concerning reachable (client) banks from October 2008.