Payment System and Markets

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Introduction

The financial system is divided into three parts: institutions, markets, and market infrastructures for handling payments and for the clearing and settlement of financial instruments. Thus, markets, payment systems and instruments, clearing systems (including central counterparties) and settlement systems for payment and securities transactions play a key role in ensuring the stability and efficiency of the financial system and in the economy as a whole. Monetary policy, too, relies on the existence of reliable and efficient payment systems.

A payment system is defined as the set of instruments, procedures, settlement channels, rules and intermediaries that enable money to be transferred from one economic agent to another.

The Bank of Italy participates in European and national payment systems by providing large-value and retail payment services. In this way it contributes to the smooth running of the economy, to financial stability, and to the efficiency and integration of the markets.

By law, the Bank of Italy is also in charge of supervising, regulating and drawing up guidelines relating to payment systems, the settlement of securities transactions, payment instruments, and markets relevant for monetary policy and financial stability. In this way it helps to promote an efficient and reliable financial system and to preserve public confidence in money and other means of payment. The Bank devotes particular attention to the needs of end-users, especially in the field of retail payment services.

As well as overseeing the payment system, the Bank also acts as a catalyst, encouraging private operators to take steps to improve the efficiency of payment infrastructures and services.

Reliable statistics on the payment system and market infrastructures are important to ensure the central bank’s accountability when performing its institutional functions, as well as to promote research and innovation in the relevant fields.

The CODISE (committee for business continuity in Italy’s financial marketplace) operates under the aegis of the Bank of Italy to coordinate action in the event of operating failures affecting the Italian financial market. It is the contact point for the European System of Central Banks (ESCB) in the event of pan-European failures.

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The provision of payment services

The ‘operational’ role played by the Bank consists in providing clearing and settlement services to the national and European banking and financial community in order to ensure efficient and reliable payment systems.

Depending on the settlement procedure concerned, payment systems may be gross or net settlement systems. In the first, payments are carried out individually by debiting or crediting the participants’ accounts at the central bank; in the second, each participant’s debit or credit position vis-à-vis all other participants is settled on their accounts with the central bank at predefined cut-off times.

The system also encompasses large-value payment systems and retail payment systems, according to the type of transaction handled.

Large-value payment systems process mainly interbank transactions (e.g. monetary policy operations, money market contracts, and FX trades) as well as commercial payments, generally for large amounts, which need to be executed without delay. The pan-European TARGET2 (T2) system is crucial in this respect as it allows individual euro-denominated transactions to be settled in central bank money on a gross basis in real time.

T2 was developed by the Bank of Italy, the Deutsche Bundesbank and the Banque de France on behalf of the Eurosystem; its day-to-day operational management is entrusted to the Bank of Italy and the Bundesbank.

Large-value payments can also be settled in EURO1, a system managed by EBA Clearing, a privately-owned company. It allows large-value euro-denominated transactions to be executed on a net multilateral basis, with end-of-day settlement through TARGET2.

Together with the central banks of France, Germany and Spain, the Bank of Italy has also developed TARGET2-Securities (T2S), a multicurrency pan-European platform for the settlement in central bank money of securities transactions. Its purpose is to remove the technical and operational barriers to cross-border settlement that continue to prevent the full integration of the European financial market. As with T2, the Bank of Italy and Deutsche Bundesbank are responsible for the day-to-day operational management. In order to minimise operational risk, the Eurosystem decided to schedule migration to the new platform in four waves. In the first one, i.e. the launch of T2S, the central securities depositories of Greece, Malta, Romania and Switzerland (the last two only for euro-denominated transactions) migrated on 22 June 2015. Considering the very large volume of transactions to be handled by Monte Titoli and the Italian financial marketplace (about 95 per cent of the overall traffic of the first wave), the Eurosystem has allowed them a longer time to complete their testing activities. The Italian depository, along with the domestic banking and financial community, therefore migrated on 31 August 2015. The central securities depositories of Portugal Interbolsa and Belgium (NBB-SSS) migrated in March 2016; the remaining euro-area central depositories will finish migrating to T2S by September 2017. Between September and December 2015, T2S settled around 87,000 transactions on average per day; in December the average daily volume of transactions amounted to €499 billion. T2S allows participants to automatically obtain credit from the central bank by offering as collateral securities they owns or purchase using this credit (self-collateralization); this serves to make securities markets more liquid and trading more fluid. During the same period, the value of self-collateralized transactions by banks rose from €13 billion to €15 billion. Upon the launch of T2S, 35 Italian financial market agents opened 52 cash accounts with the Bank of Italy; external Monte Titoli participants also opened 18 accounts with their respective central banks. Between 1 September and 31 December 2015, an average of around 47,000 transactions were settled per day, for some €122 billion. The Italian banks took advantage of the Eurosystem’s intraday credit by means of self-collateralization for an average daily amount of approximately €7 billion, with an average of 582 transactions per day.

For credit operations with banks, including monetary policy operations and intraday credit in support of the payment system, the Eurosystem requires counterparties to provide eligible assets as collateral (securities or bank loans). The Bank of Italy manages the assets provided by banks operating in Italy in a pool as collateral for a plurality of financing operations.

Unlike their large-value counterparts, retail payment systems enable the transfer, clearing and/or settlement of payment orders made by households, firms and general government entities, mostly of low value, which are settled intraday at various cut-off times.

In each payment that gives rise to a transfer of funds from debtor to beneficiary, the customer and his or her bank are involved in the initial and final stages of the transaction (i.e. in the dealings (i) between the customer issuing the payment order and his or her bank and (ii) between the recipient bank and the final beneficiary). In the intermediate phase the dealings are between the banks and the operators making the transfers and settling the transactions. This is when clearing (transmission, matching, confirmation of payments and calculation of a final settlement position) and settlement (extinction of the obligations that arose during clearing) of the payment flows take place, based on the CSM (Clearing and Settlement Mechanism) model in which one or more parties jointly perform the two tasks. Clearing is usually managed by private operators, in a system of free competition. Instead, settlement is typically managed by the central banks and consists in settling the banks’ credit and debit positions on their accounts with the central bank.

The Bank of Italy manages the BI-Comp clearing system, which clears payments on a multilateral net basis that are then settled in central bank money through T2. BI-Comp handles the transactions stemming from the various clearing systems, such as those managed by ICBPI, ICCREA and SIA.

The Bank also operates the CABI clearing system, which enables payments to be made on its own account or on behalf of general government entities in SEPA format, settling them in central bank money. In this capacity the Bank acts as treasurer to the Italian State.

The Bank keeps the Interbank Register of Bad Cheques and Payment Cards, a computerised database with detailed information on the unlawful use of cheques and payment cards. The technical aspects are outsourced. The Bank carries out regular checks on the activity of the outsourcer and intervenes in the event of reporting anomalies.

The Bank of Italy can also issue declarations in lieu of protest for dishonour of bank or postal cheques that have been presented in time but have not been honoured. These declarations, which are equivalent to a protest for the purpose of recourse (see Articles 34 and 45, Royal Decree 1736/1933), are issued, at the request of the drawee, by the heads of the Rome and Milan clearing houses (where cheques and other paper-based payment instruments are materially exchanged) in their capacity as public officers.

The Bank facilitates and promotes access to euro-area markets and settlement systems by providing external international bodies and non-euro-area central banks with a broad range of services for the management of their euro reserves, applying the standard terms and conditions established by the Governing Council of the ECB (Eurosystem Reserve Management Services - ERMS).

The Bank believes strongly in the importance of sharing information on current developments in the payment system with the domestic banking and financial community.

Cooperation with Italy’s banking and financial community takes various forms, such as public consultations, and occurs both at the official level, within the T2 and T2S National User Groups (NUGs), and through training/info sessions with payment system participants.

The payment system is constantly evolving, both technically and in terms of regulations and best operating practices. Accordingly, the Bank takes part in several fora for international cooperation, including committees, working parties and task forces set up to pursue the common objective of central banks and other authorities, which is to ensure an efficient, secure and harmonised domestic and international payment system with a close network of interconnected financial intermediaries.

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Oversight of markets relevant for monetary policy and financial stability and of post-trading facilities

Banks manage liquidity by trading funds on the money markets, including to make unexpected payments, and adjust their portfolios by buying and selling financial instruments on securities markets, mostly wholesale. Turbulence on these markets, which affects the transmission of monetary policy, or a malfunction of post-trading facilities (for settling and guaranteeing transactions) can spread suddenly, with potentially devastating effects on the stability of individual banks or of the whole financial system.

For the oversight of wholesale markets in government securities, multilateral trading facilities for euro-denominated deposits and post-trading facilities (centralised management, securities settlement, central counterparties) the Bank of Italy is empowered by law to issue regulations, authorise to engage in business, approve rules of operation, conduct inspections and issue sanctions in the event of serious irregularities. Accordingly, the Bank:

  • verifies the sound and prudent management of the companies providing post-trading facilities,
  • verifies that trading and settlement are conducted securely and efficiently by supervising flows on a daily basis and analysing the activity of operators,
  • monitors continuously the measures in place to limit systemic risk.

The Bank assists the Ministry for Economy and Finance to evaluate the performance of specialists in government securities operating on the secondary wholesale market.

With the entry into force of the European regulations on short selling (Regulation (EU) No 236/2012 of the European Parliament and of the Council, Short Selling Regulation – SSR) and on central counterparties (Regulation (EU) No 648/2012 of the European Parliament and of the Council, European Market Infrastructure Regulation – EMIR) the Bank’s responsibilities in the fields of financial markets and post-trading systems have increased. Following the relevant amendments to Italian legislation, the Bank, as competent authority alongside the Ministry for Economy and Finance and Consob, has been given new powers to monitor government securities markets to ensure compliance with the provisions of the SSR. The law implementing the EMIR also empowers to the Bank to set up and manage supervisory boards for central counterparties based in Italy.

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Supervision of payment systems

Payment systems, payment instruments and technologies are the areas on which supervision focuses. Policies and action affecting them are decided according to the relative importance of the aims pursued.

Payment systems dealing with large-value payments, including the settlement of transactions in financial instruments, are key to the smooth operation of the markets, and any malfunction could prevent banking and financial intermediaries from honouring their payments, with repercussions for the conduct of monetary policy and for financial stability. Retail payment systems offer interbank settlement of end-user operations; they are important for the smooth conduct of commercial transactions and so help to maintain the public’s confidence in money and in non-cash electronic means of payment.

Efficient and secure retail payment instruments (credit transfers, standing orders, cheques, payment cards and innovative means of payment) bring immediate benefits to end-users (consumers, firms, government departments and agencies) in terms of costs and solutions for different payment needs.

Technology plays a major role in ensuring the smooth operation of payment systems and business continuity.

Major changes have been made to retail payment systems and payment instruments to accommodate the Single Euro Payments Area. SEPA is an important step in European integration and it opens up new opportunities for standardised and innovative payments, both private and public, that are particularly important for Italy.

The tasks of the supervisory function include analysis and monitoring of relevant phenomena based on information collected; assessment of compliance with oversight standards and recommendations; and, where assessment has brought to light a departure from established reliability and efficiency targets, intervention in one of the forms available, ranging from moral suasion and the role of catalyst in discussions with stakeholders, to official statements and the issue of sanctions.

Within the Eurosystem, the Bank shares with the other central banks the task of overseeing the systemically important large-value payment systems TARGET2 and Euro1, the first run by the Eurosystem itself and the second by EBA Clearing, as well as the retail payment system STEP2, a pan-European euro-denominated clearing system run by EBA Clearing.

At national level, the Bank of Italy supervises the domestic component of TARGET2 (TARGET2-Banca d’Italia). Among other tasks, this involves monitoring levels of activity, financial and operational risks, efficiency, and satisfaction of end-user needs.

As ‘competent national authority’ the Bank can also exercise the option offered by several European and national laws regarding the provision of payment services.

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International standards and cooperation agreements

Supervision and oversight have a significant international dimension that stems from the increasing interconnectedness of national systems and the strong presence of central banks and market supervisors at international cooperation fora, where they endeavour to draw up shared international principles and standards with a view to:

  • guaranteeing the reliability of markets and payment securities settlement systems and ensuring their smooth operation even in the event of financial or technical and operational shocks,
  • promoting the efficient provision of payment and settlement services in order to cut costs for operators and end-users and encourage process and product innovation.

The Bank of Italy is a member of the Bank for International Settlements (BIS) Committee on Payments and Market Infrastructures (CPMI) and Committee on the Global Financial System (CGFS), which is mandated to promote the stability and efficiency of the financial markets.

The Bank also participates in the international Financial Action Task Force (FATF), set up to establish guidelines for combatting money laundering and terrorism financing, phenomena linked particularly to the rapid growth and increasing worldwide use of new means and methods of payment.

Ad hoc cooperation agreements with authorities at home and abroad are an important tool for ensuring effective and efficient supervision and oversight.

Holding public consultations is now a well-established practice in deciding the action to be take in various areas of market and payment system supervision. It is specifically envisaged by the regulations in the case of provisions issued by the Bank of Italy.

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