Budapest, 28 November 2002 1
Developments in euro payment systems Challenges for accession countries Tom Kokkola, Senior Policy Expert European Central Bank Budapest, 28 November 2002 2
Introduction: The role of the ECB/Eurosystem • Article 3. 1 (Basic tasks of the ESCB): – definition and implementation of monetary policy – conduct of foreign exchange operations – holding and management of official foreign reserves of the Member States – promotion of smooth operation of payment systems • Article 22 (Clearing and payment systems): “The ECB and national central banks may provide facilities, and the ECB may make regulations, to ensure efficient and sound clearing and payment systems within the Community and with other countries. ” Budapest, 28 November 2002 3
The role of the ECB/Eurosystem The objectives • Maintaining systemic stability • Ensuring efficiency of payment systems • Maintaining public confidence in payment systems, instruments and currency • Protecting the transmission channel for monetary policy Budapest, 28 November 2002 4
Introduction The Eurosystem’s role in payment systems Different roles to perform the same task of “promoting the smooth operation of payment systems” • Operational role – for example, TARGET and provision of settlement facilities • Catalyst role – for example, cross-border retail payment services • Regulation • Oversight Budapest, 28 November 2002 5
Introduction Contents: 1. Implications of the move to a common currency 2. Large-value payment systems, including future developments in TARGET 3. Retail payments issues 4. Securities settlement and collateral 5. The utmost importance of co-operation Budapest, 28 November 2002 6
1. Implications of the move to a common currency The needs of the single currency Before Monetary Union (-> 1998) - Several currencies - Autonomous national monetary policies - Segmented money markets - NCBs + European Monetary Institute - National payment systems Budapest, 28 November 2002 In Monetary Union (1999 ->) One single currency - One monetary policy - One money market - Eurosystem An integrated payment system - 7
1. Implications of the move to a common currency • New borders: geographical borders no longer matter, but those of the single currency. • Part of what was foreign activities becomes domestic (= euro area). • Single European passport. • Remote access. • Strong foreign participation. Budapest, 28 November 2002 8
1. Implications of the move to a common currency Foreign ownership (expressed as a % of total bank assets, end 2001) Budapest, 28 November 2002 9
2. Implications of the move to a common currency Budapest, 28 November 2002 10
2. Large-value payment systems, including future developments in TARGET Budapest, 28 November 2002 11
2. Large-value payment systems Trans-European Automated Real-time Gross-settlement Express Transfer Budapest, 28 November 2002 12
2. Large-value payment systems Objectives • To contribute to the smooth conduct of monetary policy and the singleness of the money market • To improve the soundness of payment systems (risk reduction) • To increase the efficiency of cross-border payments in euro Budapest, 28 November 2002 13
2. Large-value payment systems Guiding principles • • • Market principle Decentralisation principle Minimum approach with regard to harmonisation of national RTGS systems Budapest, 28 November 2002 14
2. Large-value payment systems Market principle • • Use of TARGET not mandatory • Other payment arrangements (Euro 1, PNS, correspondent banking) can operate in parallel to TARGET Only payments directly connected with central bank operations (in which the Eurosystem involved either on the receiving or the sending side) and settlement of large-value net settlement systems have to go through TARGET Budapest, 28 November 2002 15
2. Large-value payment systems Decentralisation principle • • Use of RTGS infrastructures in EU countries Banks settlement accounts at NCBs Direct exchange of payments between NCBs Some centralised functions undertaken by ECB (TARGET co-ordinator, end-of-day functions, helpdesk, test centre, settlement accounts for Euro 1 and CLS) Budapest, 28 November 2002 16
2. Large-value payment systems The decentralised structure “The central bank correspondent banking model” NCB Bank Interlinking Bank NCB ECB Bank NCB Bank Budapest, 28 November 2002 17
2. Large-value payment systems Minimum approach • Rationale: minimising time and cost for the establishment of TARGET • Harmonisation only if necessary to ensure singleness of monetary policy or - level playing field for banks - • Not entirely identical services offered by the different national RTGS systems Budapest, 28 November 2002 18
2. Large-value payment systems TARGET Interlinking system Queuing + cash management facilities National RTGS S 100 NCB (R) 100 Communication NETWORK NCB (S) 100 R Credit institutions National RTGS 100 2 1 DOMESTIC MESSAGE FORMAT Budapest, 28 November 2002 INTERLINKING MESSAGE 3 FORMAT DOMESTIC MESSAGE FORMAT 19
2. Large-value payment systems Operating hours and days • Common operating hours, ECB time: Customer payments from 7. 00 am to 17. 00 Interbank payments from 7. 00 am to 18. 00 • Operating days calendar: in addition to Saturdays and Sundays TARGET closed on New Year’s Day, Good Friday, Easter Monday, 1 May, Christmas Day and 26 December • On closing days: no standing facilities, no settlement of euro money market or FX transactions involving the euro, EONIA not published Budapest, 28 November 2002 20
2. Large-value payment systems Practical experiences • Capability of processing a high number of payments • End-to end completion of payment execution within minutes in normal operating conditions • No liquidity shortages • TARGET is de facto standard for large-value payments in euro • Three objectives have been met Budapest, 28 November 2002 21
2. Large-value payment systems Challenges • Better meet customers’ needs, inter-alia, by providing an extensive harmonised service level • Cost-efficiency • Is prepared for swift adaptation to future developments including the enlargement of the euro area and the Eurosystem • But leave the responsibility for the business relations with the credit institutions with the NCBs Budapest, 28 November 2002 22
2. Large-value payment systems Principles for TARGET 2 1. Market principle 2. Decentralisation principle: business level, but less platforms than central banks 3. Broadly defined core service 4. Single price structure 5. Cost effectiveness Budapest, 28 November 2002 23
2. Large-value payment systems 1. Have an own platform that has to be cost recovery capable at the single price structure and compliant with all agreed TARGET 2 features: • outside interface, • common services, • . . . 2. Join the single shareable platform Budapest, 28 November 2002 24
2. Large-value payment systems Budapest, 28 November 2002 25
2. Large-value payment systems Daily average volume TARGET EURO 1 TARGET cross-border Budapest, 28 November 2002 26
2. Large-value payment systems Daily average value TARGET • TARGET cross-border EURO 1 Budapest, 28 November 2002 27
2. Large-value payment systems Average size of transactions TARGET cross-border TARGET EURO 1 Budapest, 28 November 2002 28
2. Large-value payment systems Figures as of May 2002 Budapest, 28 November 2002 29
2. Large-value payment systems EURO 1 - Institutional set-up => EURO 1 is a real cross-border system: • The EBA Clearing Company S. A. , which is in charge of the daily management and operation of EURO 1, is located in Paris, • the legal basis and the clearing rules of EURO 1 are under German law, • the netting centre (SWIFT) is incorporated in Belgium and • the participants come from 20 different countries. Budapest, 28 November 2002 30
2. Large-value payment systems EURO 1 - Type of system • EURO 1 is a net system, but not a netting system: • “Netting” is a legal concept • “Net system” is an economic concept Budapest, 28 November 2002 31
2. Large-value payment systems EURO 1 - Legal structure • SOS (Single Obligation Structure) => Economically the SOS is equal to multilateral netting, but legally it is different! => The SOS foresees that a participant has always only one single claim or obligation towards the system (i. e. the community of other participants), payment orders become part of the single claim/obligation upon processing; no bilateral obligations exist at any time. => Due to the SOS an unwinding is not possible. Budapest, 28 November 2002 32
2. Large-value payment systems EBA Clearing System: Euro 1 Features: 1. Single obligation structure (SOS) 2. Bilateral credit lines (min EUR 5 million; max EUR 30 million) multilateral credit and debit limits (max. EUR 1 billion) 3. Cash liquidity pool 4. If failure > liquidity pool, surviving banks provide additional liquidity 5. Settlement at the ECB via TARGET at the end of business day 6. Role of the ECB: Settlement agent, holder of the liquidity pool and overseer Budapest, 28 November 2002 33
2. Large-value payment systems EURO 1 - Types of transactions • EURO 1 processes credit transfers (customer and interbank payments) • At present: Division between interbank and customer payments: 35% interbank payments and 65% customer payments • Processing of direct debits planned Budapest, 28 November 2002 34
2. Large-value payment systems EURO 1 - Access criteria • Own funds of at least EUR 1. 25 billion • Short-term credit rating of at least P 2 (Moody’s) or A 2 (Standard & Poor) • Direct access to an EU RTGS system connected to TARGET • Adequate technical and operational facilities • =>Since 17 September 2001: 73 participants from all 15 EU countries and from Australia, Japan, Norway, Switzerland, USA (EU branches of the latter five countries) Budapest, 28 November 2002 35
2. Large-value payment systems Continuous Linked Settlement CLS is a project for establishing a multi-currency system for the settlement of foreign exchange transactions on a PVP basis in the books of a private bank acting as settlement agent where all members will open multi-currency accounts. Start of operations: September 2002 Eligible currencies from the start: euro, pound sterling, US dollar, Swiss franc, Canadian dollar, Japanese yen and Australian dollar. Later on also: Norwegian krone, Hong Kong dollar, Danish krone, Swedish krona and New Zealand dollar. Budapest, 28 November 2002 36
2. Large-value payment systems What is FX settlement risk ? You deliver the currency being sold but you do not receive the currency you bought the full amount of each trade is at risk = principal risk Budapest, 28 November 2002 37
2. Large-value payment systems Pv. P mechanism Settlement of one leg occurs if, and only if, the other leg settles If you pay, you will either get paid or get a refund No risk of losing principal amount of fx transactions Budapest, 28 November 2002 38
2. Large-value payment systems General Overview of CLS Corporate structure: Budapest, 28 November 2002 39
2. Large-value payment systems The CLS Bank. . . has settlement accounts with …to receive and pay funds through USD Fedwire EUR ECB TARGET JPY CLS Bank NY Fed Bank of Japan FEYCS/ Bo. J Bank of England New. Chaps Swiss National Bank SIC Bank of Canada LVTS Reserve Bank of Australia RITS GBP CHF CAD AUS Budapest, 28 November 2002 40
3. Retail payments issues Budapest, 28 November 2002 41
3. Retail payment issues Payment instruments Trends within the European Union: Budapest, 28 November 2002 42
3. Retail payment issues Banknotes and coins in circulation outside credit institutions, as a percentage of GDP Budapest, 28 November 2002 43
3. Retail payment issues Budapest, 28 November 2002 44
3. Retail payment issues The current situation • Relatively poor service level for crossborder retail payments – in terms of pricing – in terms of speed of payment execution • Low volumes, but not necessarily low demand Budapest, 28 November 2002 45
3. Retail payment issues Too expensive – On average EUR 15. 51 to transfer EUR 100 – Double charging in 25% of the transfers – Total average price: EUR 17. 10 Too slow execution – Average execution time 3. 4 working days – Seven working days or more for 5% of the transfers Budapest, 28 November 2002 46
3. Retail payment issues Budapest, 28 November 2002 47
3. Retail payments issues Future prospects What is needed • Straight-through-processing – consistent routing mechanism --> IBAN/BIC – IPI – SWIFT MT 102+/103+ • Common default interbank exchange fee • Reduced balance of payments reporting requirements Budapest, 28 November 2002 48
3. Retail payments issues How to achieve the single payment area? – Integrate national and cross-border activity – Clubs – ACH network – Single ACH – Technology jump a possibility? Budapest, 28 November 2002 49
3. Retail payments issues EURO 1 - STEP 1: • EBA developed STEP 1 in order to offer crossborder retail payment services • STEP 1 is operating since November 2000 • It uses the technical platform of EURO 1 • STEP 1 participants settle their balances via a EURO 1 participant Budapest, 28 November 2002 50
3. Retail payments issues STEP 1: Participants • 5 rounds since 20 th November 2000 • 81 Institutions • from 10 different EU countries • 23 different Settlement Banks designated • (to be opened to EEA based banks) Budapest, 28 November 2002 51
3. Retail payments issues Regulation (EC) No 2560/2001: • establishes the principle of equal charges for domestic payments and cross-border payments in euros • requires banks to inform their customers in advance on the charges they apply for all payment services • lays down standards to facilitate automation of payment systems (such as the International Bank Account Number and the Bank Identifier Code). Banks must indicate them on account statements and companies on their invoices • national rules, such as statistical reporting obligations, which make practical distinctions between domestic and cross-border payments will be either eliminated or harmonised • threshold to be increased from € 12, 500 to € 50, 000 on 1. 1. 2006. Budapest, 28 November 2002 52
Domestic payment areas Cross-border + payments Efficient domestic infrastructure Inefficient cross-border infrastructure Efficient pan-European infrastructure High volume Low volume High volume Low margin High margin Low margin + & High service level & Low prices € 0 -3 Budapest, 28 November 2002 + & Low service level & High prices + & High service level & Low prices € 17 -24 53 53 53
Price € 17 -24 Profit margin Transparency & Competition • “OUR”charging • “Eurocred” • MIF (cost based) Loss • Co-operation bodies • Business practises • STP standards • Clearing&settlement Price € 0 -3 infrastructure Profit margin Processing costs € 0. 1 - 0. 4 Domestic payments Efficient pan-European infrastructure Processing costs Profit margin Processing costs Cross-border payments Budapest, 28 November 2002 Pan-European payments 54 54
Eurosystem/EPC co-operation European Payments Council General Assembly European Payments Council Co-ordination group European Payments Council Working Groups - customer requirements - cash - cards - STP - infrastructure Budapest, 28 November 2002 55
3. Retail payments issues STEP 2 blueprinting: Objectives and principles a pan-European system with direct bank participation offering distribution of payment instructions to any bank operating in the EU minimising bank internal costs related to processing customer payments highly automated, simple to use, based on broadly accepted industry standards open to progressive integration of domestic traffic Budapest, 28 November 2002 56
3. Retail payments issues STEP 2 • STEP 2 is currently being built; it should go live in the beginning of 2003 • Differences to STEP 1: – will have its own technical platform – no single payment processing (i. e. transaction by transaction), but processing of batches containing several payments – will offer sorting and clearing services (ACH functionalities): banks send one batch, which will be split up; payments are sorted according to recipient bank; a new batch is compiled and forwarded to recipient Budapest, 28 November 2002 57
3. Retail payments issues STEP 2 vendor selection Decision by EBA Board : Based on the analysis made by EBA of the different proposals received and taking as key criteria • the experience of the vendor in developing and operating a robust ACH platform, • the commercial terms of the offering, • the outlook for volume build-up, achievement of critical mass and successful enlargement the Board selected the offer made by SIA. Budapest, 28 November 2002 58
4. Securities settlement and collateral Budapest, 28 November 2002 59
4. Securities settlement and collateral Liquidity in TARGET • Minimum reserves = liquidity available intraday for payment activity • Unlimited intraday credit free of interest • 100% collateralisation of any credit – Broad range of assets eligible as collateral for both payment systems and monetary policy operations – Easy substitution of collateral – Cross-border use of collateral Budapest, 28 November 2002 60
4. Securities settlement and collateral TARGET and Securities Settlement Systems • All ESCB lending operations (intraday and overnight) have to be fully collateralised • “Standards for the use of EU SSSs in ESCB credit operations” • Overall objectives: – avoidance of inappropriate risks – same safety level for all central banks’ operations, regardless of settlement method Budapest, 28 November 2002 61
4. Securities settlement and collateral Risk aspects: minimum standards for SSSs • Content of the standards - settlement risk - custodian risk - legal aspects - operational aspects • Scope of the standards - domestic SSSs - international SSSs - links between SSSs Eligible in Eurosystem operations: - 20 SSSs (17 + 3) - 66 Links Budapest, 28 November 2002 62
4. Securities settlement and collateral Consolidation Horizontal consolidation of SSSs at a domestic level CADE Iberclear (ES) SCLV Monte Titoli CAT Monte Titoli (IT) LDT Budapest, 28 November 2002 63
4. Securities settlement and collateral Horizontal consolidation of SSSs at a European level CEDEL (ICSD) Clearstream DBC (DE) Euroclear (ICSD) CIK (BE) Sicovam (FR) Necigef (NL) Euroclear CBISSO (IE) Crest (UK) Interbolsa (PT) ? Budapest, 28 November 2002 64
4. Securities settlement and collateral Consolidation of CCPs for securities at a European level SBF (FR) BCC (FR) Clearnet BXS (BE) AEX (NL) Budapest, 28 November 2002 65
4. Securities settlement and collateral Vertical consolidation at domestic level: Trade Execution DBAG Central Counter party Settlement Budapest, 28 November 2002 Stock Exchanges MEFF-AIAF-SENAF Eurex Clearing MEFF Italian CCP CLEARSTREAM IBERCLEAR MONTE TITOLI Borsa Italiana 66
4. Securities settlement and collateral Vertical consolidation at European level: Trade Execution EURONEXT Central Counter party Settlement Budapest, 28 November 2002 CLEARNET EUROCLEAR 67
4. Securities settlement and collateral Budapest, 28 November 2002 68
5. The utmost importance of co-operation Budapest, 28 November 2002 69
5. The utmost importance of co-operation Among central banks Eurosystem composition Extended composition TARGET Management Working Group Budapest, 28 November 2002 Payment and Settlement Systems Committee Securities Settlement Working Group Payment Systems Policy Working Group 70
5. The utmost importance of co-operation Eurosystem: TARGET issues PSSC TMWG NCBs Budapest, 28 November 2002 COGEPS (large value) Ad hoc Meetings TMWG-TWG TARGET user groups Ad hoc groups of banks TWG National banking communities 71
5. The utmost importance of co-operation Eurosystem/EPC co-operation EPC General Assembly PSSC COGEPS (Retail) EPC Co-ordination group EPC Working Groups - customer requirements - cash - cards ECB Observer - STP - infrastructure ECBS Budapest, 28 November 2002 72
5. The utmost importance of co-operation Securities Clearing and Settlement Systems (SCSS) Groups of banks PSSC COGESI (custodians and users) CSDs & ICSDs Budapest, 28 November 2002 73
5. The utmost importance of co-operation Constructive co-operation between • central bank, market participants and systems operators • EU and accession countries - Banking associations - Banks and system operators Budapest, 28 November 2002 74
Summary • Move to integrated (and consolidated) euro payment and settlement infrastructures • Transition strategy • Active co-operation Budapest, 28 November 2002 75
Budapest, 28 November 2002 76
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