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1 July 2010 Ireland s Payment and Securities Settlement Systems Infrastructure

2 IRELAND S PAYMENT AND SECURITIES SETTLEMENT SYSTEMS INFRASTRUCTURE

3 2 Ireland s Payment and Securities Settlement Systems Infrastructure Contributors Peter Hopkins John O Malley Helen Young Margaret Daly Paul O Brien Editor Paul O Brien Payment and Securities Settlement Systems Policy and Oversight Unit Central Bank of Ireland July 2010

4 Ireland s Payment and Securities Settlement Systems Infrastructure 3 Contents Foreword 7 1. Introduction and Overview 9 2. Oversight of the Domestic Retail Payment and Clearing System Oversight of the Large-value Payment System Oversight of Securities Settlement Systems Oversight of Other Market Infrastructures Market Infrastructure Developments 55 Annex 1: The ESCB-CESR Recommendations for Securities Settlement Systems 67 Annex 2: Glossary of Terms Related to Payment, Clearing and Settlement Systems 71 Note: Under impending legislation, a new Central Bank of Ireland will replace the Central Bank and Financial Services Authority of Ireland (CBFSAI). The new entity will have responsibility for all aspects of the supervision of the financial health and stability of Irish financial services institutions and will combine the existing roles of both the Central Bank and the Financial Regulator. The term Central Bank is used throughout this Report in describing the actions and responsibilities of both the Central Bank and the Financial Regulator.

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6 Ireland s Payment and Securities Settlement Systems Infrastructure 5 List of Abbreviations ATM BIS CCP CEBS CESR CLS CPSS CSD DvP EAPS ECB ECOFIN EEA EFT EPC ESA ESCB EU EUI FOP FX ICSD IOSCO IPCC IPSO IRECC IRISCo ISE NCB NPIP NTMA PE-ACH Automated Teller Machine Bank for International Settlements Central Counterparty Committee of European Banking Supervisors Committee of European Securities Regulators Continuous Linked Settlement Committee on Payment and Settlement Systems Central Securities Depository Delivery versus Payment Euro Alliance of Payment Schemes European Central Bank Economic and Financial Affairs Council European Economic Area Electronic Funds Transfer European Payments Council Euroclear SA/NV European System of Central Banks European Union Euroclear UK and Ireland Free of Payment Foreign Exchange International Central Securities Depository International Organisation of Securities Commissions Irish Paper Clearing Company Limited Irish Payment Services Organisation Limited Irish Retail Electronic Payments Clearing Company Limited Irish Real-time Interbank Settlement Company Limited Irish Stock Exchange National Central Bank National Payments Implementation Programme National Treasury Management Agency Pan-European Automated Clearing House

7 6 Ireland s Payment and Securities Settlement Systems Infrastructure PIPS PSD PSSC PSPWG RTGS SCF SCT SDD SEPA SIPS SITF SSP SSS SWIFT TARGET T2S WGO Prominently Important Payment System Payment Services Directive Payment and Settlement Systems Committee Payment Systems Policy Working Group Real-Time Gross Settlement SEPA Cards Framework SEPA Credit Transfer Scheme SEPA Direct Debit Scheme Single Euro Payments Area Systemically Important Payment System SEPA Implementation Task Force Single Shared Platform Securities Settlement System Society for Worldwide Interbank Financial Telecommunication Trans-European Automated Real-time Gross settlement Express Transfer TARGET2 Securities Working Group on Oversight

8 Ireland s Payment and Securities Settlement Systems Infrastructure 7 Foreword Modern economies require reliable and effective mechanisms to give effect to everyday financial transactions. For corporates, government and individual citizens these mechanisms are collectively known as the payment system; this system comprises many components: notes and coin, paper and electronic payment instruments (such as cheques, standing orders, direct debits) and payment cards. Underlying these instruments are the settlement systems used by the banks to exchange funds wholesale between themselves to complete the retail transactions made by their customers. These systems are made up of a series of technical standards, rules, procedures, and payment and settlement cycles. In Ireland the retail systems are operated by the banking system, while the settlement system that facilitates wholesale transactions is operated by the Central Bank. The importance of the need for a reliable and effective payment system in modern economies is recognised by the authorities, in that responsibility for ensuring that such mechanisms and associated settlement systems exist and meet the needs of the users and citizens is given to central banks. In Ireland, at the domestic level this responsibility is conferred on the Central Bank by the Central Bank Act, 1997; at a Eurosystem level, this responsibility is covered in the relevant Treaty and Statute. The role is generally referred to as oversight of payment and settlement systems and is regarded as a core function of central banks. While the Central Bank s Annual Report has always covered current payment systems developments at a high level, to date little has been published on the Irish payment and securities settlement systems infrastructure in general, and on the Central Bank s role in relation thereto. The Report that follows is intended to explain how the Central Bank discharges its responsibilities in this field, and describes its role and work to date in the area of payment and settlement systems oversight. Patrick Honohan Governor July 2010

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10 Ireland s Payment and Securities Settlement Systems Infrastructure 9 1. Introduction and Overview 1.1 Introduction Payment and securities settlement systems are essential to the efficient functioning of all modern economies, which rely for their continued growth and overall well-being on the free and open trade of goods and services. Transactions of all types flow through payment and securities settlement systems on a daily basis; these can be large or small, ranging from high-value transfers between financial institutions reflecting their involvement in wholesale financial market activity, to low-value (or retail) payments made between individual customers whether personal or corporate of those same financial institutions. The efficient and effective operation of payment and securities settlement systems is essential to meet the general business needs of the economy and the personal banking requirements of the public at large. This section of the Report explains what payment and securities settlement systems are and why they are important; it also sets out the rationale underlying their oversight (or regulation) and indicates how this is carried out in Ireland. A broad overview of the country s current payment and securities settlement systems infrastructure is also provided. The individual systems that together comprise this infrastructure are described in Sections 2, 3 and 4 of this Report in greater detail. 1.2 Payment and Securities Settlement Systems defined and the importance of Oversight A payment is defined as a payer s transfer of a monetary claim on a party acceptable to the payee; in simple terms, a payment represents a transfer of value between two parties. Banknotes and coin can be regarded as a payment system, and cash remains an important medium of exchange in today s economy, particularly for smaller payments. However, in the modern context, a payment system is generally understood to be a set of instruments, banking procedures and interbank funds transfer systems that facilitate a transfer of value by means other than cash. Applying a similar rationale, a securities settlement system can be defined as one which permits the transfer and holding of securities; such systems comprise all of the institutional arrangements required for clearing and settlement of securities trades and the safekeeping of securities (in some instances, this can include a payment system embedded in the securities settlement system). The pyramid in Figure 1 provides an illustration of how a payment system is generally structured. The bottom layer represents transactions in the real economy in other words, the payments that we all make from day to day, whether as private citizens or as businesses. The next layer up represents the transactions that take place within the payment systems that are used by banks to give effect to the transactions in the bottom layer; this second layer also includes transactions between banks for their own account. The top layer is where the ultimate settlement of all of the transactions in the layers below takes place, generally in what is termed central bank money balances held by banks on settlement accounts at the central bank. For the purposes of payment systems policy and oversight, payment systems are normally grouped into two distinct categories: retail payment systems and wholesale payment systems. The former are used to process retail, or low-value, payments (e.g., utility bills, salaries) 1, and would generally be represented in the bottom layer of the pyramid diagram, while wholesale payment systems are used to process high-value payments 2 (generally 1 A retail payment is defined as a non-time-critical payment of relatively low value. (Glossary of terms related to payment, clearing and settlement systems, European Central Bank, December 2009). 2 High-value payments are defined as payments which are generally for very large amounts, are exchanged mainly between banks or between participants in the financial markets, and usually require urgent and timely settlement. (Glossary of terms related to payment, clearing and settlement systems, European Central Bank, December 2009).

11 10 Ireland s Payment and Securities Settlement Systems Infrastructure Figure 1 Central Bank Banks and Financial Institutions Households, Companies, State interbank payments payments made between banks for their own account or high-value payments effected by banks on behalf of their bigger corporate customers); these payments would usually take place in the upper layers of the pyramid. However, it should be noted that the transactions represented in the bottom layer percolate upwards, in that their underlying aggregate/system settlement payments are generally in the high-value category. Payment and securities settlement systems are essentially networks, and like all such structures are potentially susceptible to systemic risk, typified by the so-called domino effect, whereby any failure of one participant in the system can impact on other participants, also causing them, and ultimately perhaps the entire system, to fail. As the failure of a payment or securities settlement system could have significant implications for a country s economy as a whole, for its financial stability, and for public confidence in its currency and banking system, there is a clear rationale for an independent third party to either directly provide, or indirectly secure, the public good of stability in such systems. In some countries, this public good has been ensured by public sector bodies themselves providing and/or operating the payment and securities settlement infrastructure; in other countries, of which Ireland is one, some or all of the payment and securities settlement systems are provided by the private sector (e.g., the retail payment system in Ireland is operated by the commercial banks, but the large-value system is provided by the central bank), but with a public authority generally, the central bank, and specifically in Ireland s case, the Central Bank of Ireland (hereinafter referred to simply as the Central Bank) ensuring systemic stability and that risk is minimised and controlled. There is a general acceptance that the oversight of payment and securities settlement systems should be entrusted to central banks, with the aim of ensuring the proper functioning of such systems, thereby contributing to overall financial stability. According to the European Central Bank (ECB), oversight of payment systems is: a typical central bank function whereby the objectives of safety and efficiency are promoted by monitoring existing and planned systems, assessing them against the applicable standards and principles,

12 Ireland s Payment and Securities Settlement Systems Infrastructure 11 whenever possible, and, where necessary, fostering change. 3 A similar rationale can be applied to the oversight of securities settlement systems. This role for central banks in relation to payment and securities settlement systems could be said to arise naturally from their overall responsibility for the banking system, of which the payment system is an integral and vital component. In recent years, developments in financial markets have given rise to significant growth in large-value financial operations, which has been facilitated by parallel developments in technology. This has now come to the point where the overall stability of the financial infrastructure has become heavily dependent on the proper functioning of payment and securities settlement systems, particularly interbank clearing and settlement systems. Central banks are well placed to carry out the oversight role vis-à-vis payment and securities settlement systems, given that they provide what is generally accepted as the best means of discharging the settlement obligations that arise between system participants central bank money (i.e., balances on settlement accounts held by system participants at the central bank). The central bank is in effect the economy s settlement agent, and its liabilities its settlement assets. Central banks also have an operational role visà-vis payment and securities settlement systems, for example, providing commercial banks with settlement facilities and with their day-to-day liquidity requirements. 1.3 The legal basis for the Central Bank s Payment and Securities Settlement Systems Oversight role The principal aim of oversight of payment and securities settlement systems is to seek to ensure that these systems function at all times in an orderly manner, thereby minimising systemic risk. An effective oversight regime aims to protect a country s payment and 3 Glossary of terms related to payment, clearing and settlement systems European Central Bank, December securities settlement systems infrastructure as a whole from the possible domino effects that could occur if one or more of the credit institutions participating in these systems were to encounter credit or liquidity problems. The Central Bank s payment and securities settlement systems oversight role is defined in statute. The principal domestic legislation covering this area is the Central Bank Act, , Part II of which provides for the regulation by the Central Bank of all payment and securities settlement systems operating in the State, and for the approval of the rules under which they operate. It also permits the Central Bank to impose conditions on, and to revoke, such approvals. The Central Bank s payment and securities settlement systems oversight role is also reflected in Section 7 of the Central Bank and Financial Services Authority of Ireland Act, 2003, which includes the objective of promoting the efficient and effective operation of payment and settlement systems. Section 28 of the Economic and Monetary Union Act, 1998 is also relevant. 5 From an EU perspective, the legal basis for the Central Bank s oversight role is covered in the Treaty establishing the European Community 6, and also in the Statute of the European System of Central Banks and the European Central Bank 7. Article 105 (2) of the Treaty, and Article 3 of the Statute, both contain a clause to the effect that... the basic tasks to be carried out through the ESCB shall be... to promote the smooth operation of payment systems. While securities settlement systems are covered by the 1997 Central Bank Act, the Treaty and Statute are silent on the oversight of these systems. However, it is generally accepted throughout the Eurosystem (i.e., the European Central Bank and the national central banks of those EU countries that have adopted the euro) that the oversight role is also relevant to this field. As stated in the Eurosystem Oversight Policy Framework 8 document:... the Eurosystem has a keen interest in ensuring the proper functioning of securities clearing and settlement systems sec0028.html#zza38y1998s Eurosystem Oversight Policy Framework ECB, February 2009.

13 12 Ireland s Payment and Securities Settlement Systems Infrastructure across the euro area. This stems from the importance of securities clearing and settlement systems for the smooth conduct of monetary policy, from their close links to payment systems and from their relevance for the stability of financial systems in general. As well as being an important part of the overall financial infrastructure, securities settlement systems are also relevant in the arrangements for the provision of collateral to Eurosystem national central banks by their counterparties, an indispensible function of the ECB s monetary policy and liquidity operations. As already stated, central banks aim to minimize systemic risk in payment and securities settlement systems. A major malfunction in one system could, under certain circumstances, undermine the stability of a country s financial institutions and markets generally. In particular, the amounts processed in large-value payment systems are such that a malfunction could easily have the potential to provoke consequences for the wider financial markets, given that modern technology has the capacity to facilitate the very quick transmission of disruptions throughout the whole financial sector. In addition, central banks are concerned with the efficiency of payment and securities settlement systems, which is an objective that complements that of minimising systemic risk. Moreover, it is important that the users of these systems, and of the payment instruments and securities trades that settle in them, have confidence in these mechanisms, as this ultimately impacts on maintaining confidence in the financial system itself. In carrying out its oversight role, the Central Bank s primary focus is on promoting payment and securities settlement systems that are safe, effective and efficient, and that can be accessed on a fair and equitable basis by all credit institutions with a requirement to do so. The Central Bank also seeks to ensure that payment and securities settlement systems do not operate in such a way as to cause, or add to, instability in the operation of financial markets. The proper functioning of these systems is a core requirement for maintaining financial stability, and for meeting both the business needs of the economy generally and the personal banking requirements of the public at large. By virtue of Ireland s membership of the Eurosystem, the Central Bank s role in relation to payment and securities settlement systems oversight now has a wider dimension. The primary mandate of the ECB is to achieve price stability in the euro area. However, under the mandate of the Eurosystem, the ECB and the national central banks are also required to contribute to financial stability in the euro area as a whole. The payment systems infrastructures of the Eurosystem provide the distribution channels through which the ECB implements its monetary policy and liquidity operations. This makes oversight of the payment systems infrastructures a key task for the ECB and for all euro-area national central banks. 1.4 How the Central Bank s Payment and Securities Settlement Systems Oversight role is carried out Day-to-day responsibility for payment and securities settlement systems oversight in the Central Bank rests with the Payment and Securities Settlement Systems Policy and Oversight Unit (hereafter referred to simply as the Oversight Unit), which is part of the Payments and Securities Settlements Department. The payment systems/schemes in Ireland that are overseen by the Central Bank are as follows: The Irish Paper Clearing Company Limited (IPCC, which handles the clearing and settlement of cheques and other paper-based payment instruments); The Irish Retail Electronic Payments Clearing Company Limited (IRECC, which handles the clearing and settlement of electronic payments such as direct debits and credit transfers), and its associated Direct Debit scheme; and

14 Ireland s Payment and Securities Settlement Systems Infrastructure 13 Laser Card Services Limited (this company maintains and operates the Laser debit card scheme). In addition, the Central Bank is involved in cooperative oversight arrangements for the following payment and securities settlement systems: TARGET2 (previously IRIS/TARGET); Euroclear Bank; Euroclear UK and Ireland (i.e., the CREST securities settlement system). The Central Bank s current oversight arrangements are summarised in Table 1 below for ease of reference. All of the systems/entities referred to are described in detail elsewhere in this Report. The practical foundation on which the Central Bank s day-to-day oversight of Irish payment systems is built is the BIS Core Principles for Systemically Important Payment Systems 9, which were published by the Committee on Payment and Settlement Systems (CPSS) of the Bank for International Settlements (BIS) in January The Core Principles, of which there are ten, provide a universal set of 9 guidelines that promote the design and operation of safe and efficient payment systems. Each Core Principle covers a different aspect of the operation of a payment and settlement system; however, all are to some degree interdependent, with some being very closely related. The Governing Council of the European Central Bank (ECB) has adopted the Core Principles as part of the Eurosystem s oversight standards to be applied to euro-area payment systems. In terms of securities clearing and settlement systems, the CPSS-IOSCO Recommendations for Securities Settlement Systems and Recommendations for Central Counterparties are the broad equivalent of the BIS Core Principles. The CPSS of the BIS and the Technical Committee of the International Organization of Securities Commissions (IOSCO), an international body that brings together the regulators of the world s securities and futures markets, published these standards jointly in November The CPSS-IOSCO recommendations have been adapted to the European environment by the ESCB and the Committee of European Securities Regulators (CESR) into the ESCB-CESR recommendations, which are dealt with in Section 4 of this Report covering securities clearing and settlement systems. Table 1: Central Bank of Ireland Oversight Arrangements System Overseer CBI CBI participates in co-operative oversight arrangement IPCC IRECC Laser TARGET2 CLS Euroclear Bank Euroclear UK and Ireland SWIFT Retail payment systems X X Card payment schemes X Large-value payment systems Securities settlement systems Service providers X X X X X

15 14 Ireland s Payment and Securities Settlement Systems Infrastructure The BIS Core Principles for Systemically Important Payment Systems The following is the full text of the BIS core principles for systemically important payments systems: I. The system should have a well-founded legal basis under all relevant jurisdictions. II. The system s rules and procedures should enable participants to have a clear understanding of the system s impact on each of the financial risks they incur through participation in it. III. The system should have clearly defined procedures for the management of credit risks, which specify the respective responsibilities of the system operator and the participants and which provide appropriate incentives to manage and contain those risks. IV. The system should provide prompt final settlement on the day of value, preferably during the day and at a minimum at the end of the day. V. A system in which multi-lateral netting takes place should, at a minimum, be capable of ensuring the timely completion of daily settlements in the event of an inability to settle by the participant with the largest single settlement obligation. VI. Assets used for settlement should preferably be a claim on the central bank; where other assets are used, they should carry little or no credit risk and little or no liquidity risk. VII. The system should ensure a high degree of security and operational reliability and should have contingency arrangements for timely completion of daily processing. VIII. The system should provide a means of making payments that is practical for its users and efficient for the economy. IX. The system should have objective and publicly disclosed criteria for participation, which permit fair and open access. X. The system s governance arrangements should be effective, accountable and transparent. In recent years, the principal Irish payment systems have all been assessed by the Oversight Unit against the above-mentioned Core Principles in the course of Eurosystemwide exercises in this regard. These systems, and the assessment exercises, are treated more fully in Sections 2 and 3 of this Report. In carrying out its ongoing payment systems oversight function, the Oversight Unit attends board meetings of IPCC, IRECC and Laser Card Services Limited. The Oversight Unit attendee is in each case not a member of the board, but a representative of the Central Bank in its capacity as payment systems overseer. (It should be noted that the Central Bank is also a participant in IPCC and in this capacity separately attends board meetings of the company.) These companies all operate under the auspices of the Irish Payment Services Organisation (IPSO), the representative body for the payments industry in Ireland. The Oversight Unit holds review meetings with IPSO at regular intervals throughout each year to review progress on current issues and to consider general payment systems developments; in addition, the Oversight Unit attends board meetings of IPSO in its capacity as payment systems overseer. In terms of securities clearing and settlement systems, there is no infrastructure of this type located in Ireland. Rather, trades in Irish government bonds are generally settled in Euroclear Bank, located in Belgium, while trades in equities and other Irish securities are settled in the UK-located CREST system operated by Euroclear UK and Ireland (or EUI). The Oversight Unit therefore co-operates with the National Bank of Belgium in relation to the oversight of Euroclear Bank in accordance with the provisions of a Memorandum of

16 Ireland s Payment and Securities Settlement Systems Infrastructure 15 Understanding agreed in this regard in Likewise, the Central Bank has entered a triparty Memorandum of Understanding with the UK Financial Services Authority and the Bank of England regarding oversight of the CREST system. At Eurosystem level, the Oversight Unit participates in the ESCB s (i.e., European System of Central Banks) Payment and Settlement Systems Committee (PSSC) and its associated sub-groups, the bodies through which the Central Bank contributes to the work of the ECB s Payments and Market Infrastructure Directorate. These sub-groups are the Payment Systems Policy Working Group (PSPWG) and the Working Group on Oversight (WGO). All of the companies, systems and related oversight activities mentioned above are described in more detail later in this Report. In addition to its specific oversight role, the Central Bank is also involved from what might be termed a broader policy perspective in payment and securities settlement systems developments. Current examples of this would be the Single Euro Payments Area (SEPA) and National Payments Implementation Programme (NPIP) initiatives, both of which are covered fully later in this Report. 1.5 Future Oversight activities The main goal of the Central Bank s oversight regime will remain unchanged, i.e., to keep upto-date with developments in the fields of payments and securities settlements generally, and to promote the continued safe and secure operation of the payment and securities settlement systems that come within its regulatory remit. Priorities in the short term will continue to centre on the day-to-day oversight of the retail payment systems operated by IPCC and IRECC. It is expected that the National Payments Implementation Programme (see Section 6.3 of this Report for details) will bring about a significant reduction in cheque usage, thereby diminishing the importance of IPCC to the Irish payment systems infrastructure, and also the fact that IRECC is expected to cease operations as the development and implementation of the Single Euro Payments Area (SEPA) initiative progresses (see Section 6.1 of this Report in this regard). In addition, given that it attends all board meetings of IPCC and IRECC (and also Laser) on an ongoing basis, the Central Bank is always fully informed of any proposed changes to the operations of these companies and can therefore assess any such proposals against the relevant Core Principles at any time. In relation to the Laser debit card scheme in particular, the Central Bank will further develop its oversight work in this area in line with Eurosystem requirements, which see payment systems overseers taking a greater interest in payment schemes and payment instruments in addition to their existing interest in payment systems. With regard to the oversight of the Eurosystem s TARGET2 realtime gross settlement (RTGS) system (see Section 3 of this report for a full discussion of RTGS systems in Ireland), the Oversight Unit will continue to monitor Eurosystem developments in this area (noting that TARGET2 oversight is organised on a cooperative basis at this level), and also maintain its contact with the Central Bank s own TARGET2 operational area and local TARGET2 participants (the latter via the board of IPSO). On a broader front, the Central Bank will continue to monitor the implementation of the Single Euro Payments Area initiative (SEPA see Section 6.1 of this Report) in Ireland, and liaise as necessary with the Department of Finance in relation to payment systems developments arising from the transposition of the EU Commission s Payment Services Directive (PSD) 10 into Irish law on 1 November 2009 (see Section 6.2 of this Report). It is also expected that tasks associated with the National Payments Implementation Programme will continue to represent an important strand of the Unit s work. In general, a broadening of oversight activities is envisaged, amid changes in payments behaviour, the emergence of new payment instruments and payment channels and the 10 LexUriServ.do?uri=OJ:L:2007:319:0001:01:EN:HTML.

17 16 Ireland s Payment and Securities Settlement Systems Infrastructure development of new oversight standards and requirements. At Eurosystem level, the Oversight Unit will continue to participate in the ESCB s Payment and Settlement Systems Committee (PSSC) and its associated sub-groups, and with other international bodies (e.g., the EU Commission) as required. It will also maintain its involvement in the co-operative oversight of the securities settlement systems relevant to Ireland s financial infrastructure. 1.6 Payment Systems in the recent Financial Crisis In the course of the recent financial crisis, the payment and securities settlement systems on which Ireland s payment and settlement infrastructure depends have, like all others, had to cope with operating conditions characterised by liquidity pressures, high volumes of activity and market volatility; this turbulence in financial markets has presented challenges to the systems concerned. However, even though most of the country s larger financial institutions have faced widely-reported difficulties, payment and settlement systems themselves have continued to function in a stable manner and, in so doing, demonstrated a satisfactory level of resilience. To look at this topic in the broader international context, payment and securities settlement systems have had to meet significant challenges as a result of the global financial crisis, which has brought about an operating environment marked in particular by liquidity pressures, and has also encompassed the default of high-profile financial institutions that participated in multiple systems worldwide (e.g., Lehman Brothers). The resulting challenges to payment and securities settlement systems can arise in two principal areas: on a purely technical level, the systems must have the capacity to cope with unexpectedly high transaction volumes, while their mechanisms for facilitating the provision of liquidity to participants by in the euro area the ECB and the Eurosystem national central banks, and allowing participants to manage that liquidity effectively, must also be able to cope with unexpected demands. In spite of current and recent events in the global banking arena, payment and securities settlement systems have consistently continued to function well; this represents a positive outcome, given the importance of these infrastructures to overall financial stability. This result can in large part be explained by the improvements to payment and securities settlement systems that have been made in recent years and in particular to the widespread use of real-time, gross settlement systems. The quality of the mechanisms put in place for managing risk and liquidity has also, as already suggested, been of critical importance. The financial crisis has also highlighted the extent to which it is vital that payment and securities settlement systems are in all instances supported by robust legal frameworks. The impact of recent and current events on payment and securities settlement systems of direct relevance in an Irish context is examined in more detail in the appropriate sections of this Report. 1.7 Further content of the Report The remaining chapters in this Report cover, inter alia, the following topics in detail: The Irish retail payment system IPCC, IRECC and Laser The overall structure of the retail payment system and its constituent companies are fully described. The system s day-to-day operation is also covered. Information about the Central Bank s oversight role vis-à-vis the retail payment system, and IPSO, is also provided. TARGET2 the real-time, gross settlement (RTGS) system for largevalue payments The importance of RTGS systems in general, and the evolution of systems of this type in an Irish context, are both considered. A description of TARGET2, the Eurosystem s real-time, gross settlement system for large-value payments, is also provided, together with

18 Ireland s Payment and Securities Settlement Systems Infrastructure 17 information in relation to the oversight of this important component of the Irish and European payment systems infrastructure. Securities settlement systems of relevance to Ireland Euroclear Bank and Euroclear UK and Ireland (CREST) The Euroclear systems are described in broad outline, and their role as the Irish securities settlement infrastructure explained. The co-operative oversight arrangements entered into by the Central Bank with the primary overseers of these systems are also covered. Other relevant infrastructures SWIFT and CLS SWIFT (the Society for Worldwide Interbank Financial Telecommunication, which provides payment messaging services) and CLS (the Continuous Linked Settlement system for foreigncurrency trades) are described in outline. Although these are not of primary importance in the context of the oversight of Irish payment systems, SWIFT in particular plays a role that ensures that payment systems operate in a safe and secure manner. General developments in the field of payment and securities settlement systems, namely: the Single Euro Payments Area (SEPA) and the related Payment Services Directive (PSD) Ireland s national payments strategy (the National Payments Implementation Programme, or NPIP) TARGET2-Securities (T2S) the settlement of euro trades in Euroclear UK and Ireland All of these developments will have an impact on the Irish payment and securities settlement systems landscape over the next few years. SEPA and the PSD (the latter puts in place a common EU-wide legal framework that will support the development of the former) have a broad European focus, while the NPIP initiative is concerned specifically with modernising and streamlining Ireland s own payment systems infrastructure. All of these topics are covered fully in this Report Sections 6.1 and 6.2 respectively cover SEPA and the PSD, which are closely related, while Section 6.3 deals with NPIP. T2S is an important Eurosystem securities settlement infrastructure development embracing the entire European securities market, which is described in more detail in Section

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20 Ireland s Payment and Securities Settlement Systems Infrastructure Oversight of the Domestic Retail Payment and Clearing Systems 2.1 Introduction Payment systems regulation (oversight) in Ireland has been an evolutionary process since the enactment of the Central Bank Act, The Central Bank s build up in expertise was targeted, for the most part, on those payment systems that were deemed to be important to the economy. The oversight experience gained vis-à-vis the operation of these payment systems provided a platform for the recent extension of regulatory oversight to the Laser debit card scheme, albeit in a manner proportionate to the relatively modest size of this scheme. Looking forward, a broadening of oversight activities is expected, having regard to the emergence of new payment instruments and payment channels and the ongoing development of Eurosystem oversight standards and requirements. The Eurosystem approach to payment systems oversight is followed by the Central Bank. This approach has two broad elements: defining, implementing and ensuring compliance with principles and standards established to promote safe, sound and efficient payment and settlement systems, whether they are operated by the central banks themselves or by private operators; and monitoring developments in the field of payment and settlement systems in order to assess the nature and scale of the risks inherent in these systems and ensuring the transparency of the arrangements concerning payment instruments and services. 11 The role of the Central Bank is to keep abreast of all significant developments affecting the payments industry in Ireland and to promote the operation of safe and efficient domestic 11 Role of the Eurosystem in the field of payment systems oversight, ECB, June retail payment systems and schemes under its regulatory remit. This chapter is structured as follows: in Section 2.2, the institutional arrangements that underpin the oversight of the retail payments infrastructure are outlined; an overview of the retail payment systems and payment methods used in Ireland is also provided. In Section 2.3, the nature of the oversight role of the Central Bank is examined, having particular regard to the application of the Eurosystem s oversight standards as approved by the ECB s Governing Council. In Section 2.4, priorities for future work on retail payment systems oversight are discussed. 2.2 Retail Payments institutional arrangements The general legislative background governing payment systems in Ireland has already been outlined in Chapter 1 of this Report. To turn to specifics, Section 9(6) of the Central Bank Act, 1997 requires that all payment systems established in Ireland be companies incorporated under the Companies Acts, 1963 to In order to comply with this legislation, three retail clearing companies were formed in June 1997 for the collective governance of the Irish retail payment systems and the related rules and procedures 12. These comprised the Irish Retail Electronic Payments Clearing Company Limited (IRECC), the Irish Paper Credit Clearing Company Limited and the Irish Paper Debit Clearing Company Limited. With effect from 1 December 2002, the latter two companies were amalgamated to form the Irish Paper Clearing Company Limited (IPCC). In addition, the Irish Payment Services Organisation Limited (IPSO) was incorporated in 1997 to act as the representative body of the 12 Previously the clearing process operated under the aegis of the Dublin Bankers Clearing Committee within the Irish Bankers Federation.

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