Market infrastructure and payments

Market infrastructures are the backbone of financial markets as they enable the safe flow of funds and financial assets in the economy. Their smooth operation is crucial to maintaining confidence in the currency and supporting monetary policy operations and the stability of the financial system as a whole. The integration of market infrastructures across national borders in Europe is a necessary condition for achieving a truly single market, which will increase efficiency for consumers, companies and banks.

The Eurosystem plays a central role in this field. It provides payment and securities settlement services, oversees financial market infrastructures and payment instruments, and works with market stakeholders to achieve financial market integration. Cooperation and dialogue with other financial institutions and non-euro area central banks on policy aspects relating to regional and global developments in the field of market infrastructure and payments are also high on the Eurosystem’s agenda.

1.1 Integration and innovation in retail payments

Retail payments are “everyday” payments between, for example, private persons, companies, non-governmental organisations and government agencies which are of relatively low value and typically not of a time-critical nature.

A major milestone was reached in this field on 1 August 2014 as the Single Euro Payments Area (SEPA) was successfully implemented for credit transfers and direct debits in the euro area, allowing consumers and businesses to use a single payment account for all euro credit transfers and direct debits. The migration period for euro-denominated credit transfers and direct debits in non-euro area countries will end on 31 October 2016. The Eurosystem has shaped the implementation of SEPA from its inception, playing a catalyst role in this major integration project and facilitating dialogue between all players.

Innovation in the field of retail payments, focusing on instant and mobile payments, and the integration of card payments are the next steps for SEPA. In April 2014 the ECB published a report entitled “Card payments in Europe – a renewed focus on SEPA for cards”, which called for implementation of the vision of “any card at any terminal”.

The Eurosystem also works with market stakeholders on the further development of an integrated, innovative and competitive market for euro retail payments via the Euro Retail Payments Board (ERPB). Through the ERPB, the Eurosystem is now actively involved in facilitating “instant payments” in euro, i.e. payments that flow in real time from the sender to the recipient, allowing the recipient to re-use the funds immediately. In December 2014 the ERPB launched work to facilitate person-to-person mobile payments and contactless proximity payments. The ERPB also published a set of recommendations to address remaining SEPA post-migration issues.

1.2 The large-value payment system for the euro: TARGET2

The Eurosystem operates the infrastructure for the real-time settlement of large-value and urgent euro payments in central bank money, TARGET2. TARGET2 settles, among other things, Eurosystem monetary policy operations and interbank transactions, thus fulfilling a crucial function for the euro area. Reaching 24 central banks of the EU and around 55,000 banks worldwide, TARGET2 is one of the largest payment systems in the world.

TARGET2 continued to function smoothly in 2014, reaching 100% availability.

It settled a total of 90,337,036 transactions and had a turnover of €492,431 billion, corresponding to a daily average of 354,263 transactions and €1,931 billion.

A reduction of 2.4% was observed in the settled volumes as compared with end-2013, driven by a decrease in the number of customer payments following the completion of the migration to SEPA instruments.

In 2014 work continued on migrating TARGET2 to new industry standards (ISO20022). Moreover, progress was made in ensuring that the system achieves full compliance with the ECB Regulation on oversight requirements for systemically important payment systems (see below for more details), particularly in the areas of risk assessment, liquidity stress testing and tiered participation.

1.3 Integrated and harmonised securities settlement: TARGET2-Securities

From June 2015 the Eurosystem’s new infrastructure, TARGET2-Securities (T2S), will offer securities settlement in central bank money across borders in Europe.

Between June 2015 and February 2017 as many as 24 European central securities depositories (CSDs) will outsource their securities accounts to T2S, and 23 NCBs will open cash accounts in T2S for the simultaneous and final transfer of securities against central bank money.

For T2S stakeholders 2014 was an intense year of testing and preparations.

The T2S software, developed by the Deutsche Bundesbank, the Banco de España, the Banque de France and the Banca d’Italia, was made available for user testing with CSDs and NCBs on 1 October, after completion of the Eurosystem acceptance testing in September.

The prospect of T2S has created the conditions for the securities industry to work together to harmonise the way securities settlement is carried out across borders and to achieve greater safety and efficiency as well as an open competitive environment.³⁵

1.4 Provision of Eurosystem collateral management services

Market players view the possibility of easily mobilising assets as collateral as crucial to their risk and liquidity management and to their compliance with regulatory requirements.

In order to facilitate the cross-border use of collateral for Eurosystem credit operations, the Eurosystem offers the Correspondent Central Banking Model (CCBM). In 2014 two improvements were made to the CCBM. The requirement to repatriate securities back to the issuer CSD before mobilising them via the CCBM was removed on 26 May; in addition, triparty collateral management services became accessible at the cross-border level via the CCBM as of 29 September. These enhancements enable counterparties to consolidate their collateral holdings in one, or just a few, CSDs of their choice and to manage their collateral more efficiently.

In view of market and regulatory developments that have led to higher demand for collateral, the ECB worked closely with the industry via its Contact Group on Euro Securities Infrastructures (COGESI), publishing three reports on important issues related to collateral eligibility, availability and mobility.

1.5 Oversight of market infrastructures and payment instruments

Disruptions in the financial market infrastructure can lead to major disruptions for the economy. The Eurosystem’s oversight function plays a key role in making sure that risks are controlled and prevented to the largest possible extent, also taking into account international oversight standards and regulatory developments.³⁶

To ensure the efficient management of risks and sound governance arrangements, the ECB adopted a Regulation on oversight requirements for systemically important payment systems, which entered into force on 12 August 2014. The Regulation is consistent with the Principles for financial market infrastructures issued by the Committee for Payments and Market Infrastructures of the BIS and the International Organization of Securities Commissions. On 20 August 2014 the ECB identified four systems as systemically important and therefore subject to the new Regulation:

TARGET2 (operated by the Eurosystem itself), EURO1 and STEP2-T (operated by EBA CLEARING), and CORE(FR) (operated by STET). This list will be reviewed annually. The Eurosystem has conducted a gap analysis to ensure the compliance of TARGET2 with the new oversight requirements.

35 More information on the post-trade harmonisation activities triggered by T2S can be found at www.harmonisation.T2S.eu

36 More information on the Eurosystem’s oversight activities can be found in the Eurosystem oversight report 2014.

The Eurosystem also undertook a comprehensive review of the oversight standards for euro retail payment systems that are not systemically important. As a result, the ECB published on 21 August 2014 the Revised Oversight Framework for Retail Payment Systems, according to which non-systemically important retail payment systems are subject to selected Principles for financial market infrastructures, according to the level of risk posed to the market served.

With regard to the oversight of securities and derivatives infrastructures, the main activities in 2014 were related to new regulation. The Eurosystem continued to work in the respective central counterparty colleges on the (re)authorisation of EU central counterparties with a large euro-denominated central clearing business under the European Market Infrastructure Regulation (EMIR), and it contributed to the drafting of the technical standards for the CSD Regulation. In addition, the oversight assessment of the T2S design continued in 2014 and will be finalised before T2S goes live in June 2015.

Payment instruments were also subject to oversight initiatives in 2014 aimed at increasing safety. In 2014 the Eurosystem finalised the assessment of

23 international and major domestic card payment schemes operating in the euro area against the harmonised Eurosystem oversight framework for card payment schemes. Most card schemes were found to observe or broadly observe the

oversight standards, and the Eurosystem has started a dialogue with the operators of these schemes to address any outstanding issues. In November 2014 the ECB also published two guides for the assessment of direct debit schemes and credit transfer schemes against the oversight standards for payment instruments.

Finally, Eurosystem overseers continued to contribute to the work of the European Forum for the Security of Retail Payments (SecuRe Pay), a forum for voluntary cooperation for the European Banking Authority and the ESCB in their functions as regulators, supervisors or overseers.