CHAPTER 7 TARGET2, the Eurosystem’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 central bank 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 European Central Bank (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 T2S 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. 100 – Payments and market infrastructures in the digital era TARGET2, THE EUROSYStem’s RTGS SYSTEM CHAPter 7 Box 1: TARGET2 balances TARGET2 balances1 are the net positions resulting from cross‑border payments between euro area countries processed via the TARGET2 decentralised payment system.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.