In modern monetary economies, banks, other financial institutions, general government, firms and the public carry out every day a huge number of transactions involving the transfer of funds, that is to say payments in which a payer (or debtor) extinguishes an obligation to a beneficiary (or creditor). Payment and settlement systems therefore play a key role in maintaining a stable and efficient financial system and in the economy as a whole. Reliable and efficient payment systems are also necessary for the conduct of monetary policy.
Depending on the type of transactions involved, payment systems can be divided into large-value and retail. The first handle mostly interbank transactions, such as money market contracts and FX trades, as well as commercial payments, generally for large amounts, which must be executed promptly and with certainty. Crucial for the effective conduct of monetary policy and for maintaining financial stability are the large-value payment systems that allow individual transactions to be settled on a gross basis in real time; they are used mainly for monetary policy operations and for transactions originating in ‘ancillary’ systems (retail, securities settlement, central counterparties).
Large-value payment systems include multi-currency settlement systems such as the Continuous Linked Settlement (CLS) system.
Retail payment systems enable the exchange, clearing and settlement of low-value payment orders (generally not more than €500,000) that are routinely transmitted in batches for settlement at various cut-off times during the day. Each retail payment transferring funds from debtor to beneficiary involves (i) a bank-client stage at the beginning (order) and end (receipt) of the payment, and (ii) an interbank stage when the funds are transferred from the debtor’s bank to the beneficiary’s. The interbank stage is when clearing and settlement take place. Clearing is carried out by private operators, in a system of free competition, while settlement is typically managed by central banks. In this last stage the multilateral balances of each participant (i.e. their debit/credit positions vis-à-vis all the other system participants) are calculated and settled on their accounts with the central bank.
The payment system market in Europe
In the euro area the large-value payments market is dominated by two systems, TARGET2 and EURO1, which are flanked by strictly national systems
TARGET2 (T2) is the pan-Eurosystem real-time gross settlement system developed by the Bank of Italy, Deutsche Bundesbank and Banque de France. The Eurosystem entrusted its day-to-day operational management to the Bank of Italy and Deutsche Bundesbank. T2 has evolved out of the former TARGET system launched in 1999 to support the effective conduct of the single monetary policy and improve the security and efficiency of payments in the euro area. T2 handles a very substantial share of large-value payments.
EURO1 is a private system, run by the company EBA Clearing and used by more than 60 major European banks. It enables the execution of large-value euro-denominated transactions 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. The platform is designed to remove the technical and operational barriers to cross-border settlement that continue to hinder the full integration of the European financial market. As with T2, the Bank of Italy and Deutsche Bundesbank are responsible for the operational management of T2S. The new platform was launched on 22 June 2015. The Italian central securities depository (CSD) Monte Titoli, together with the national financial marketplace, migrated on 31 August 2015.
The retail payment systems market generally uses the CSM (Clearing and Settlement Mechanism) model, in which one or more operators perform clearing (i.e. transmission, matching, confirmation of payments and calculation of a final settlement position) and settlement (extinction of the obligations that arose during clearing). For a CSM to run smoothly there must be rules governing its operation and participants’ access and exit criteria, as well as specific functionalities and technical standards for interconnection among participants and with other systems. In the case of euro payments, interconnection among national banking communities takes place in two ways:
- via a pan-European platform, STEP2, run by a private company, for the centralised settlement of payments by participating European banks (this is the PEACH – Pan-European Automated Clearing House - model);
- via multiple links between the CSMs of several countries, governed by common rules of technical and business interoperability (the EACHA - European Clearing House Association - model). The Italian CSM, ICBPI/BI-COMP, has used this model to set up links with the Austrian CSM, C.SI, and the Dutch CSM, EQUENS.
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.
Eurosystem payment system oversight
It is important for the financial markets and for corporate and private economic transactions that payment systems run smoothly. Central banks help to ensure this, in respect of both private and public systems, by performing oversight tasks according to internationally accepted principles and standards. In Europe, payment system oversight is a shared function within the Eurosystem as part of Eurosystem Oversight Policy Framework establishes objectives, scope of application and assignment of roles within the euro area. Eurosystem-level oversight can be supplemented by national policies where appropriate.
Regarding the conduct of oversight activities, the Eurosystem assigns primary responsibility to the central bank that is best placed to perform the task, either because of the duties specifically assigned to it by national law or because of its proximity to the system in question. This usually applies to payment systems with a clear national anchorage. For payment systems without a clear national anchorage, primary responsibility lies with the central bank of the country in which the system is legally incorporated. In the case of TARGET2, EURO1 and STEP2, being pan-European systems, that responsibility is assigned to the ECB; the other central banks may take part in oversight activity on a ‘no compulsion, no prohibition’ basis.
In Europe, payment system oversight is conducted according to the principles set out in:
- the Regulation of the ECB of 3 July 2014 on oversight requirements for systemically important payment systems, transposing the principles laid down by CPSS/IOSCO
- Revised oversight framework for retail payment systems.
These documents describe the different categories of payment system (classified, according to quantitative and qualitative criteria, into systemically important and other), the applicable oversight standards for each category (based on proportionality) and the organisation of oversight activity. Accordingly, the large-value payment systems TARGET2 and EURO1 and the retail systems STEP2 and the French CORE are classified as systemically important. The Italian retail systems that handle settlement via BI-COMP (SIA/BI-COMP, ICBPI/BI-COMP, ICCREA/BI-COMP, and CABI/BI-COMP) are classified as ‘non-systemic’ and are therefore within the competence of Bank of Italy supervision only (Article 146, Testo Unico Bancario – Consolidated Law on Banking) and the provisions on the supervision of retail payment services and systems.
The ECB Regulation applies to all payment systems, large-value and retail alike, that are classified as systemically important; it gives the supervisory authority power to issue sanctions and to oblige payment system operators to take corrective measures.