July Ireland s Payment and Securities Settlement Systems Infrastructure

Transcription

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.

5

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

9

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

19

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.

21 20 Ireland s Payment and Securities Settlement Systems Infrastructure Figure 1: Oversight Retail Clearing Systems and Laser Scheme Central Bank of Ireland (Central Bank) Irish Payment Services Organisation Limited (IPSO) Irish Paper Clearing Company Limited (IPCC) Irish Retail Electronic Payments Clearing Company Limited (IRECC) Laser Card Services Limited (Laser) payments industry in Ireland. The two clearing companies mentioned above IRECC and IPCC operate under the auspices of IPSO, with each being responsible for its own operating rules, settlement procedures, standards and access criteria. Two payment schemes, namely the Laser debit card scheme and the Direct Debit Scheme (governed by IRECC), also operate under the IPSO umbrella. The Irish Real-time Interbank Settlement Company Limited (IRISCo), the owner of the original Irish real-time gross settlement (RTGS) system, was also originally part of the overall IPSO structure, but this company was wound up following the migration of the Irish banking community to the Eurosystem s TARGET2 RTGS system in February 2008 (see Section 3 of this Report for further details). The role of IPSO is mainly consultative and advisory. It can also decide to refer any issues of concern related to the payments industry in Ireland to the Central Bank in its role as payment systems overseer. All credit institutions that participate in IRECC and IPCC as ordinary members (see Section below) have the right to membership of IPSO. Regular contact is maintained by the Central Bank with IPSO and with the clearing companies and the Laser debit card scheme in order to promote co-operation and communications within the payments industry generally and to deal with any issues requiring the attention of the overseer. As mentioned previously, the Central Bank attends all board meetings of IPSO and its constituent companies. In each case, the Central Bank is present in its capacity as payment systems overseer and as an independent observer, and plays no active role in running the day-to-day affairs of any of the companies concerned Retail Clearing and Settlement System The Irish retail clearing system has evolved over time into a set of agreed procedures for the exchange and settlement by participating credit institutions of paper and electronic payment instruments, including cheques, credit

22 Ireland s Payment and Securities Settlement Systems Infrastructure 21 transfers and direct debits. It comprises IPCC, which clears paper payment instruments, mainly cheques, and IRECC, which clears retail electronic payment instruments (both debit and credit). The system is based on a series of bilateral arrangements between the participants rather than on a centralised clearing infrastructure in common ownership. The interbank liabilities that arise as a result of the daily exchange process carried out between IPCC and IRECC participants are netted bilaterally and thereafter multi-laterally for each payment stream (i.e., paper debits, paper credits, electronic debits and electronic credits), to produce single obligations to, or claims on, the other system participants as a group (again, for each payment stream). These positions are settled in central bank money across participants accounts in TARGET2. Further details of the clearing and settlement process for paper and electronic payment instruments are provided below. Clearing and Settlement Process for Paper and Electronic Payment Instruments Clearing and Settlement of Paper Payment Instruments The IPCC clearing system provides the mechanism through which participants exchange funds to honour cheques and other paper payment instruments used by their customers, both personal and corporate. The Rules for Clearing issued by IPCC to direct participants govern the process whereby these payment instruments are exchanged for value between clearing system participants. They also govern the processes for dealing with unpaid items and for rectifying errors. The clearing and settlement cycle starts when a bank branch (in this context, called the collecting bank branch) accepts a cheque or cheques in a lodgement from a customer. Each cheque will already have been pre-printed with magnetic ink on what is known as the MICR line ( MICR is an acronym for magnetic ink character recognition ) to identify the bank on which it is drawn (called the paying bank) and the account number of the relevant customer (referred to as the drawer). All of this information is read electronically at the collecting bank branch, and is captured and fed directly into the mainframe system at the collecting bank s clearing department. The latter gathers each day s cheques from all of that bank s branches and runs these through sorting machines. The sorting machines read the MICR line of each cheque, allowing them to be grouped according to the paying bank, thereby ultimately producing a listing of cheques drawn on each paying bank. The collecting banks clearing departments then exchange each day s cheques with the paying banks clearing departments. The underlying data is also exchanged in electronic form in some instances. The role of IPCC in this regard is to provide a centralised location for the physical exchange of cheques to take place, although more recently this facility has been used less and less, with most of the participants exchanging the material concerned bi-laterally. To the extent that centralised exchanges of cheques still occur, they take place in the Central Bank s premises in Dublin each morning. These exchanges consist of staff members from each of the participants handing over paper payment instruments (i.e., cheques, drafts, etc.) destined for the other banks and receiving paper payment instruments destined for their own bank. Once the paper payment instruments and the relevant payment data have been exchanged, the next step in the clearing and settlement process is the settlement of the related obligations arising between IPCC participants. The totals of all items for collection (by each collecting bank from each paying bank) are provided to the Central Bank by all IPCC participant credit institutions. This information is sent by fax daily between noon and 12.10, these being the official opening and closing times for the paper exchange. Once all of the faxes have been received, the relevant values are transcribed into a series of linked spreadsheets. These spreadsheets ultimately produce individual schedules for each participant, one each for credit items and debit items, showing details of their overall bilateral and multilateral net positions. These schedules are faxed by the Central Bank to all of the participants for their agreement by (each participant sees only its own position the overall schedule showing all of the banks settlement positions is seen only by the Central Bank). Correction of any errors in the settlement results must be notified to the Central Bank by The next step is the compilation by the Central Bank of an overall settlement advice sheet that shows each bank s final position for that day s

23 22 Ireland s Payment and Securities Settlement Systems Infrastructure exchange, also faxed to participants for their agreement. The daily settlement process is completed when, at 15.00, via the TARGET2 system, the participant banks are debited (in the case of those with an overall debit position on the day) and credited (for those system participants in an overall credit position on the day). The settlement result will always total to zero, and those participants with overall credit positions are not credited until all participants with overall debit positions have been debited. The Clearing and Settlement of Electronic Funds Transfer (EFT) Instruments The EFT clearing system, for which IRECC has overall responsibility, provides the mechanism through which participants exchange funds to give effect to the retail electronic payments made by their customers, both personal and corporate. The IRECC Rules for Clearing govern the process whereby these payments are effected, and value given, by system participants; the rules also govern the processes dealing with unpaid items and rectifying errors. The retail electronic payments cycle starts when a participating credit institution either accepts a file of electronic payment instructions from a customer (e.g., an employer might submit a file of salary payments to be made to its staff), or itself generates such a file (e.g., a file of standing order or direct debit payments due on a particular date). The payment instructions contained in these files are then sorted by destination bank and the resulting files exchanged once daily (by at the latest) between the participating credit institutions using a common proprietary computer software package. The next step in the clearing and settlement process is the settlement of the related obligations arising between IRECC participants. Details of each participant s liabilities in respect of electronic debits and credits are provided to the Central Bank by all IRECC participant credit institutions. This information is sent by fax daily and must be received by the Central Bank no later than The relevant values are transcribed into a series of linked spreadsheets, which as for the paper clearing process ultimately produce individual schedules for each participant, one each for electronic credit items and electronic debit items, showing details of the overall bilateral and multilateral net position of each of the participants. These schedules are faxed by the Central Bank to all of the participants for their agreement by the following morning. Correction of any errors in the settlement results must be notified to the Central Bank by The daily settlement process is completed when (at 10.30) each of the participants with an overall debit position on the day is debited, and those in an overall credit position are credited, via the TARGET2 system. As is the case in relation to the paper clearing system, participants with overall credit positions are not credited until all participants with overall debit positions have been debited. Credit institutions and other financial institutions can participate in the clearing process through either direct or indirect participation in IPCC and IRECC (the terms used by the companies themselves in this regard are ordinary and associate membership). Indirect participation is by means of an agency arrangement with a direct participant, governed by written contract approved by the Central Bank. In general, the direct participants eight in IPCC and seven in IRECC 13 have their own clearing departments and infrastructures, while all of the indirect participants use the clearing facilities of the direct participants under agency clearing 13 Allied Irish Bank, Bank of Ireland, Bank of Scotland (Ireland) Ltd, BNP Paribas, Danske Bank AS t/a National Irish Bank, Permanent tsb and Ulster Bank Ireland Ltd participate in both IPCC and IRECC, while the CBFSAI is a direct member of IPCC only. arrangements. Dealing with applications to participate in the Irish retail payment system is largely a matter for the companies responsible for the day-to-day operation of that system (i.e., IPCC and IRECC), the Rules for Membership of both companies having been approved by the Central Bank in its capacity as payments system overseer 14. The end-of-day settlement process is outsourced by IPCC and IRECC to the Central Bank. Each of the direct participants in each clearing company provides daily 14 The detailed rules and provisions for membership of IRECC and IPCC are set out in the Articles of Association and Rules for Membership documents for these companies. The rules and provisions regarding the clearing and settlement processes are set out in the respective Rules for Clearing. The Articles of Association, Rules for Membership and Rules for Clearing are available from IPSO to all applicant institutions on request.

24 Ireland s Payment and Securities Settlement Systems Infrastructure 23 Table 1: Principal payment methods used in Ireland Payment instruments other than Volume (million) Value ( billion) ATM and payment cards Cheques Electronic credit transfers Direct debits ATM and other payment cards ATM Laser Credit cards No. of cards in circulation (million) No. of terminals/outlets 15 2,944 3,396 50,000 80,000 50,000 80,000 Volume of transactions (million) Value of transaction ( billion) bilateral settlement figures against the other direct participants to the Central Bank. The Central Bank thereafter calculates the bilateral and multilateral figures and debits or credits, as appropriate, the settlement account of each direct participant within the TARGET2 system Payment Methods In contrast with most other EU/euro area countries, cheques are still widely used payment instruments in Ireland. While the use of credit and debit cards for making small-value payments has steadily increased in popularity, Ireland remains at the lower end of the EU spectrum in terms of cards per capita in issue. All of the main credit institutions here offer internet and telephone banking facilities to their personal and business customers, thereby facilitating ready access to routine banking services. The use of cheques is currently of the order of 70 per cent of the value of all non-cash payments in Ireland whereas the EU average is around 3 per cent. The volume of cheques issued declined from 132 million to 102 million in the period 2005 to 2009; the total value of cheques issued in the same period reduced from 829 billion to 545 billion. The use of electronic credit transfers and direct debits has shown significant growth in both volume and value terms in recent years, amid increasing efforts by the 15 This figure refers to bank-owned terminals only (excludes merchant and non-bank owned terminals and integrated POS (point of sale) systems). payments industry to promote paperless payment media and a reduction in cash usage. This trend is expected to continue. The number of ATMs (automated teller machines) in operation in Ireland at end was just under 3,400, with 4.8 million ATM-enabled cards in issue. The volume of transactions taking place at ATMs reached just over 186 million in 2009, with a total value of the order of 25 billion, up from 22 billion in The ATM network in Ireland comprises five proprietary networks that are owned and run by the main retail clearing banks. It does not use a centralised technical infrastructure in common ownership but is instead based on a series of bilateral arrangements between participating credit institutions for the use of each other s networks. Each bank s system produces figures for the amounts owed to, or due from, the other clearing banks as a result of customers withdrawals and lodgements via interlinked ATMs. The resulting interbank liabilities are settled through IPCC and IRECC. 2.3 The Retail Payment System: Oversight Role of the Central Bank Main Features The oversight of retail payments by the Central Bank is focused primarily on the IPCC and IRECC payment systems as a whole rather than on individual participants,

25 24 Ireland s Payment and Securities Settlement Systems Infrastructure operators and service providers 16. The Central Bank s role involves the gathering of relevant information about the payment systems and the business environment in which they operate, attendance at relevant meetings (i.e., meetings of the Boards of Directors of IPSO, IPCC, IRECC and Laser), discussions with the system operators, assessing the systems against international standards and best practice, reporting on the outcome of the assessment process and, where necessary, promoting and/or inducing change. The overall assessment process (discussed later) is similar to that conducted in other euro area countries in that it follows a harmonised approach that is co-ordinated at euro-area level via the ECB. Payment systems are at the core of financial infrastructures and thus it is important that participants should, at a minimum, have a clear understanding of, and also an ability to manage, the risk exposures inherent in their respective systems. Even where examination of a system s rules and procedures, and their application, indicate that participants are able to understand, manage and contain the risks that they bear, this may still be insufficient if these risks are exacerbated by, for example, the length of time it takes to settle or if the asset that participants obtain in final settlement itself were to carry material risk. In exercising its regulatory function, the Central Bank seeks to promote domestic payment systems that are safe and efficient, to ensure that access to such systems is not unfairly restricted and that the systems themselves do not cause, or add to, instability in the operation of financial markets. These are core oversight requirements which underpin public confidence in the retail clearing process and thereby also contribute to the maintenance of financial stability. The Central Bank s oversight also aims to be proportionate to the risks posed by the retail payment 16 Each of the participants in IRECC and the IPCC are supervised institutions. The scope of the oversight function also includes payment instruments, such as payment cards (discussed elsewhere in this Report), as they are an integral part of payment systems and their safety and efficiency has a direct bearing on the public s confidence in payment systems. systems and schemes under regulatory remit. It is important to note that the Central Bank s oversight role does not overtake or replace the primary responsibility of the system/scheme owners and operators to ensure the smooth functioning of their respective systems/schemes and their compliance with relevant oversight policies and standards. The Central Bank s oversight role in the retail payments area can be summarised under five broad areas as follows: overseer of the electronic and paper retail payment systems and of the two companies responsible for the operation of those systems; overseer of card payment schemes against Eurosystem oversight standards; collection and analysis of information, and statistics, necessary for payment systems oversight; acting in a catalyst role vis-à-vis the modernisation of the payments industry in Ireland and the implementation of NPIP and SEPA, and supporting the efforts of IPSO in this regard; and contributing to the development of relevant Eurosystem oversight policy, standards and requirements through participation in international fora, particularly the ESCB s Payment and Settlement Systems Committee (PSSC) and its associated subgroups. The key elements are explained in more detail below Overseer of the Retail Clearing System This involves the monitoring of the IPCC and IRECC systems against the relevant Eurosystem oversight standards. The latter are based on the ten Core Principles for Systemically Important Payment Systems which were published by the Bank for

26 Ireland s Payment and Securities Settlement Systems Infrastructure 25 International Settlements (BIS) in January 2001, and adopted subsequently by the Governing Council of the ECB as the major part of the Eurosystem s oversight standards to be applied to all systemically important payment systems in the euro area. A detailed oversight assessment of IPCC and IRECC was carried out by the Central Bank in 2004/2005. The assessment process and results are discussed later in this part of the Report. The Central Bank s oversight role also involves the prior approval of all rules and procedures governing the operations of IPCC and IRECC, and any changes relating thereto, before they are adopted by the companies. Within the last two years, for example, the IRECC Board conducted a full review of the EFT (electronic fund transfer) Rules for Clearing, which were subsequently approved by the Central Bank and adopted by IRECC. The Central Bank examined and approved individual agency clearing agreements via a direct participant, allowing a significant number of credit unions to have indirect access to EFT clearing arrangements. During the same period, the IPCC Board reviewed the inter-bank Debit and Credit Clearing Rules. The amended rules were approved by the Central Bank and subsequently adopted by the IPCC Board. Payment systems give rise to a wide range of risks for their participants (liquidity, credit, legal and operational) and the main concerns of an overseer are ensuring the safety and efficiency of both individual payment systems and of the payments infrastructure as a whole, in addition to ensuring appropriate rules on access for new participants /2005 Oversight Assessment of IPCC and IRECC against the BIS Core Principles In 2003, the ECB and the Eurosystem NCBs, as part of their payments oversight function, devised an agreed methodology for the classification of euro retail payment systems and their assessment against relevant standards. In June of that year, the ECB issued a policy statement regarding the oversight of retail payment systems entitled the Oversight Standards for Euro Retail Payment Systems 17. This policy statement explains the methodology to be followed by the Eurosystem in classifying retail payment systems and outlines the standards applicable to each classification. In line with this methodology, each NCB was required to classify its retail payment systems as being of systemic importance (i.e., systemically important payment system, or SIPS), or of prominent importance, (i.e., prominently important payment system, or PIPS); systems not categorised as SIPS or PIPS would be classified under the heading other. The broad determinants for classification are based upon the degree of disruption that problems occurring in these systems might cause to a country s financial markets and to its economy in general. Should it be the view that disruption in a retail payment system would threaten the stability of financial markets, the Eurosystem methodology requires that the retail payment system be deemed systemically important (i.e., classified as a SIPS) and thereby be required to comply with all ten of the BIS Core Principles. Should disruption in a retail payment system be unlikely to have systemic implications, but still have the potential to cause severe problems for the proper functioning of the economy of the country in which it operates, then that system would be classified as being of prominent importance (i.e., classified as a PIPS) and be required to observe a sub-set of the Core Principles, referred to as the Retail Standards. Regarding the other retail payment system category, the applicable standards are left to the discretion of national central banks. The full text of the Retail Standards is set out in Table 2. However, the Eurosystem welcomes any move on the part of operators of payment systems of prominent importance to exceed this sub-set of standards and to apply any or all of the other Core Principles at their own discretion. 17 Oversight standards for euro retail payment systems, ECB, June 2003.

27 26 Ireland s Payment and Securities Settlement Systems Infrastructure Table 2: Oversight Standards applied to Retail Payment Systems RETAIL STANDARDS BIS Core Criteria Brief explanation Principle I Legal basis The system should have a well-founded legal basis under all relevant jurisdictions. II Understanding Financial Risks The system s rules and procedures should enable participants to have a clear understanding of the systems impact on each of the financial risks they incur through participation in it. VII Security and operational risk The system should ensure a high degree of security and operational reliability and should have contingency arrangements for timely completion of daily processing. VIII Efficiency The system should provide a means of making payments which is practical for its users and efficient for the economy. IX Access Criteria The system should have effective and publicly disclosed criteria for participation, which permit fair and open access. X Governance The system governance arrangements should be effective, accountable and transparent. STANDARDS OTHER THAN THE RETAIL STANDARDS III Management of financial risks The system should have clearly defined procedures for the management of credit risks and liquidity 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 Prompt final settlement 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 Settlement in multilateral A system in which multilateral netting takes place should, netting systems 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 net settlement obligation. VI Settlement assets 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. In 2005, the Central Bank classified IPCC and IRECC as being of systemic importance. The rationale at that time for this was based on the country s dependence on the retail clearing system, market penetration, the perceived lack of alternative retail payment channels and on the fear that if a high number of retail payments were to go unprocessed this could undermine public confidence in the country s payment infrastructure and financial institutions. The assessment process was therefore undertaken against all ten of the BIS Core Principles. The results, which are summarised in Table 3 below, were subject to peer review (i.e., cross checking by another Eurosystem NCB) in order to ensure the consistent application of oversight standards and a level playing field approach. Both IPCC and IRECC were found to fully observe a majority of the Core Principles. They were deemed, however, to only broadly observe Core Principles 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) and 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

28 Ireland s Payment and Securities Settlement Systems Infrastructure 27 Table 3: Summary of IPCC and IRECC compliance with the Core Principles Core principle Level of compliance I Well-founded legal basis Broadly observed II Understanding system risks Broadly observed III Management of financial risks Broadly observed IV Prompt final settlement Observed V Settlement in multilateral netting system Partly observed VI Settlement asset (CB money) Observed VII Security & operational reliability Observed VIII Efficiency Observed IX Access criteria Observed X Effective, transparent and accountable governance Observed provide appropriate incentives to manage and contain those risks) on the grounds that their rules did not definitively cover the steps to be taken in the event of the insolvency of a participating credit institution. With regard to Core Principle 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), a rating of partly observed was deemed appropriate for both IPCC and IRECC, on the grounds that the companies did not have measures in place to ensure that full settlement would take place on the day in the event of a default by a participating credit institution. Following this Core Principles assessment exercise, the Central Bank in consultation with IPSO and the clearing companies planned to improve the position vis-à-vis the shortcomings identified in relation to Core Principles I, II, III and V. It was envisaged that this would be effected by execution of an agreement among the clearing system participants that would (a) outline a sound legal framework for the steps to be taken following a default event and (b) provide an effective mechanism to ensure completion of the settlement process in a default event situation on the day that any such event should occur. While a significant amount of work was undertaken in this area by the Central Bank, IPSO and the clearing companies in the period (ending in broad agreement on a set of measures that would ensure availability of funds for settlement of a defaulting participant s clearing system obligations), the Central Bank decided to reconsider the overall situation regarding the classification of IPCC and IRECC as systemically important before this solution was implemented. In this regard, it was noted that, on reflection and strictly speaking, neither system met the Eurosystem criteria for mandatory classification as SIPS 18 ; moreover, as already stated, the clearing process underpinning IPCC and IRECC is based on a series of bi-lateral arrangements between the clearing company participants, each of which operate their own separate clearing arrangements it does not involve a centralised common infrastructure or automated clearing house (ACH) 19 arrangement that can fail or become inoperative in any technical sense. With regard to the possible consideration that they might be deemed to be without alternatives in the event that one or the other was to encounter a significant problem, it was noted that these retail payment systems are used for the transmission and settlement of mainly lowvalue payments. In general, it is large-value payment systems that are classified as systemically important, not retail payment systems. 18 Oversight standards for euro retail payment systems, ECB, June This is an electronic clearing system in which payment orders are exchanged among participants, primarily via electronic media, and handled by a data processing centre.

29 28 Ireland s Payment and Securities Settlement Systems Infrastructure Examples of default scenarios that might happen within the Irish retail clearing and settlement process include the possibility that an individual participant institution could encounter serious solvency issues that put it in a position whereby it had to completely default on its settlement obligations; a lesser possibility might be that a participant experienced technical difficulties that rendered it temporarily incapable of meeting its settlement obligations to other clearing system participants. However, in either of these scenarios, all of the other IPCC and IRECC participants should be able to continue operating between themselves, by excluding the transactions of the participant encountering problems, whether these were temporary or more long-term. In the event, for example, that an IPCC or IRECC participant were to encounter a short-term systems problem, the settlement of its transactions could be postponed to the next business day and appropriate adjustments made between the banks affected. In a more serious default event scenario, each participant would ultimately be left to pursue resulting settlement/liability issues bi-laterally with the liquidator/receiver of the failed participant. Should a technical default event occur in the retail payment system (i.e., a temporary inability by a participant to meet its settlement obligations due to for example IT system problems), its impact would probably be relatively small certainly, it would be unlikely of itself to lead to an event that would have major systemic implications. Should an IPCC or IRECC participant bank fail, however, the direct impact could be expected to be confined at least in retail payment system terms to (a) customers of that bank making payments and (b) customers of other participating banks receiving payments from customers of the failed institution. In either case, not all citizens would be affected, nor would the clearing system as a whole be endangered. Additional factors influencing the change of policy line in this area (i.e., from SIPS to PIPS) included the current banking industry strategy aimed at reducing cheque usage, or perhaps even eliminating the use of cheques altogether (see discussion of the National Payments Implementation Programme initiative in Section 6.3 of this report). If a cheque reduction/elimination strategy were to prove successful, this would lead to significantly lower volumes being processed through IPCC, thereby making it more difficult to justify a status of systemically important for this system. A similar consideration applies with respect to the process of electronic clearing through IRECC. It is acknowledged that IRECC will be wound down when the Single Euro Payments Area project (SEPA see Section 6.1 of this Report) reaches a conclusion, although the timeframe for this has yet to be agreed. Once SEPA has been fully implemented, transactions currently being processed in IRECC will probably be cleared and settled within a Pan-European automated clearing house (or PE-ACH) 20 infrastructure. Such a PE-ACH would, of course, have to meet appropriate oversight standards. If the designation of SIPS was removed from IPCC and IRECC, they would then be classed as PIPS and as such would be required to meet the Retail Standards noted in Table 3 above. These standards do not include Core Principle V (A system in which multilateral 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 net settlement obligation). In late 2009, having considered all of the above issues, the Central Bank decided to re-classify IPCC and IRECC as PIPS. As such, the two clearing companies are required to develop and put in place detailed procedures as to how the default of a participant would be handled, with these being fully developed and clearly documented (i.e., to fully comply with the Eurosystem Retail Standards, i.e., I, II and 20 A business platform for the processing of euro payment instruments which is made up of governance rules and payment practices and supported by the necessary technical platform(s).

30 Ireland s Payment and Securities Settlement Systems Infrastructure 29 III, found to be not fully observed in the 2005 assessment). A working group was recently set up under the aegis of IPSO to examine the options available and to work out the relevant rules and procedures for approval by the Central Bank Oversight of Domestic Card Payment Schemes against Eurosystem Oversight Standards In January 2008, the Eurosystem published its Oversight Framework for Card Payment Schemes Standards, which lays down common oversight standards with regard to card payment schemes operating across the euro area. This framework was developed against the background of the growing use of card payments, which has rendered card security and infrastructures increasingly important. The objective is to underpin public confidence in card payments and to promote a level playingfield for all card schemes operating across the euro area. Card payment schemes offering services solely at national level are overseen by their respective NCBs, while international card payment schemes are subject to co-operative oversight carried out by joint assessment groups consisting of experts from NCBs and the ECB. The oversight framework for card payment schemes represents a key element in the application of harmonised Eurosystem oversight standards to payment instruments generally across the euro area. In line with these developments, the Central Bank extended its oversight role to the Irish banks Laser debit card scheme during The oversight regime in this regard is similar to that already in place for IPCC and IRECC and has included an assessment of the Laser scheme against relevant Eurosystem oversight standards covering the scheme s legal basis, transparency, operational reliability, good governance and sound clearing and settlement processes. The Central Bank is represented on the Laser board in an oversight capacity. A full assessment of the Laser scheme against the agreed Eurosystem oversight framework for card payment scheme standards was completed by the Central Bank in late This work, which is part of a Eurosystem-wide exercise and subject to a peer review process involving other Eurosystem NCBs, is expected to be concluded by the end of The Central Bank is currently building up its knowledge base on the governance arrangements and risk management procedure regarding ATM networks in Ireland, with a view to deciding whether or not it is necessary to put a more structured oversight regime in place. Oversight of the Irish banks ATM networks is currently indirect and informal, although in this regard it should be noted that the banks that operate ATMs are all supervised by the Central Bank Collection and Analysis of Information necessary for Payments Oversight A considerable amount of information is gathered by the Central Bank in order to support its oversight of the retail payment systems and the debit card scheme under regulatory remit. These data are also relevant in the context of the Central Bank s participation in the Eurosystem s Payment and Settlement Systems Committee (PSSC) and its associated subgroups. The core information falls into three broad categories: Underlying payment system/scheme documentation and operating procedures. As regards the retail clearing companies this includes the IPCC and IRECC Memorandum and Articles of Association, the Rules for Membership and the Rules for Clearing 21 ; similar documentation in respect of the Laser debit card 21 The following are the principal documents that comprise the legal foundations for IPCC and IRECC: (i) Central Bank Act 1997; (ii) Terms and conditions for the opening and operation of a Settlement Account at the Central Bank and Financial Services Authority of Ireland, November 2002; (iii) Memorandum and Articles of Association of the Irish Paper Clearing Company Limited; (iv) Memorandum and Articles of Association of the Irish Retail Electronic Payments Clearing Company Limited; (v) Irish Paper Clearing Company Limited Rules for Membership; (vi) Irish Retail Electronic Payments Clearing Company Limited Rules for Membership; Irish Paper Debit Rules for Clearing; (vii) Irish Paper Credit Rules for Clearing; and (viii) Irish Retail Electronic Payments Clearing Company Limited Rules for Clearing.

31 30 Ireland s Payment and Securities Settlement Systems Infrastructure scheme (comprising mainly the Memorandum and Articles of Association of Laser Card Services Limited and the Laser Scheme Rules); The collection, compilation and analysis of quarterly statistics covering retail as well as large-value payments 22. This enables the Central Bank to assess the importance of each payment system/scheme in the context of applying an appropriate oversight regime and also to fulfil the Central Bank s reporting obligations for the ECB s Blue Book, which provides comprehensive background information and statistics on payment and settlement systems in all EU countries. (The Blue Book data are published on the ECB s website.) Contributing to regular ESCB questionnaires and queries that assist the development of payments oversight across euro area countries. These cover a broad range of matters affecting the retail payments area, including the assessment by NCBs of card payment schemes noted earlier. They also involve, for example, NCB participation in the development and implementation of the ESCB s biannual surveys on correspondent banking relationships (whereby banks provide payment services and other related services on behalf of other banks, especially in cross-border transactions 23 ). With regard to the collection of statistical information, the Central Bank participates actively in a formal payment statistics working group together with representatives from the clearing banks and IPSO, which was set up in 2002 in order to monitor, review and update, as appropriate, the collection of quarterly payment statistics and to ensure commonality of understanding 22 Data collected and compiled mainly by IPSO. 23 In November 2004, the Governing Council decided to perform regular surveys in two-yearly intervals on correspondent banking arrangements in euro. The 6 th survey on correspondent banking in euro was completed in September 2007, and the 7 th survey is currently being carried out. among respondents of the data required by the ECB, the Central Bank and IPSO Contributing to the Development of Payment Systems and Oversight Policy It is recognised that retail payment systems across the euro area have entered a period of substantial transformation; payment methods are shifting dramatically from paper to electronic; payment processing is witnessing rapid technological change; nonbanks have become more prominent than heretofore in the payments chain and payments infrastructures are spreading their reach. These factors, which are central for example to the current rollout of new business rules and technical standards under SEPA, are having a major impact on the payments landscape across Europe. Accordingly, at national level, the Central Bank was represented on the National Payments Implementation Programme (NPIP) Advisory Group (see also Section 6.3 of this Report) that was established in 2005 with an objective of improving Ireland s payments systems infrastructure, moving away from using cash and paper instruments to more efficient and secure electronic alternatives, and improving access to payment systems for all groups in Irish society. At Eurosystem level, the Central Bank participates in the work of the ESCB s Payment and Settlement Systems Committee (PSSC) and its associated subgroups on all issues concerning the oversight of both large-value and retail payment systems and, in addition, related market infrastructure developments. 2.4 Priorities for future work on the Oversight of Retail Payments The primary aims of payment systems oversight will remain unchanged. As noted earlier, these include keeping abreast of developments affecting the payments industry and ensuring that all of the payment

32 Ireland s Payment and Securities Settlement Systems Infrastructure 31 systems and schemes under the Central Bank s regulatory remit continue to operate safely and efficiently. The Central Bank will also continue, where appropriate, to act as a catalyst for change where this proves necessary. The Central Bank s priorities in the short term in this area will continue to centre on the oversight of IPCC and IRECC. 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 development of new oversight standards and requirements. Issues for further consideration include co-operative arrangements at euro-area level regarding the oversight of card payment schemes, wider access to electronic fund transfer services by credit unions, the implications of SEPA and the Payment Services Directive 24 for payments oversight, and an assessment 24 The Payment Services Directive, or PSD, provides the legal foundation for SEPA by implementing a common legal framework for the delivery of payment services throughout the EU. These topics are both covered in detail later in this Report). of business continuity arrangements across the retail payments sector. The strengthening of the statistical base for payments oversight will remain a priority, especially in the context of meeting Eurosystem data requirements. The latter include the collection of oversight-relevant statistics for new payment instruments as well as the further development of the existing payments data series on the ECB website ( Statistics are also required at a national level for use inter alia by IPSO and the Central Bank, particularly in the context of the National Payments Implementation Programme (NPIP see Section 6.3 of this Report). Finally, the Central Bank will continue to liaise closely with IPSO on all matters affecting the payments industry, particularly the modernisation of payment methods in support of the National Payments Implementation Programme and also on the implications for IRECC of the eventual migration of electronic payment instruments to SEPA standards.

33

34 Ireland s Payment and Securities Settlement Systems Infrastructure Oversight of the Large-Value Payment System: RTGS/IRIS/TARGET/TARGET2 3.1 Introduction the background to RTGS Systems The mechanism preferred by central banks for the settlement of large-value payments, whether made between banks for their own account or on behalf of customers, is the realtime gross settlement (RTGS) system. In such systems, settlement payments are made from balances on accounts held with the central bank by payment system participants (i.e., banks) and are therefore made in what is termed central bank money, a risk-free asset. Of equal importance is the fact that payments are settled in real time (in accordance with the payment queue priorities and liquidity allocations decided upon by the paying banks), on an individual basis, instantaneously and continuously throughout the business day; RTGS systems provide for the immediate and irrevocable settlement and transfer of funds from the paying bank s account and for the immediate availability of funds in the payee bank s account. (The debiting and crediting of the respective customers accounts are at the discretion of the banks concerned.) The current developmental state of telecommunications networks is such that practically instantaneous funds transfers can now be achieved; furthermore, subject only to a payment system s opening and closing times, virtually unlimited further onward transfers can also be facilitated. In order for RTGS systems to function smoothly, participants need to have sufficient balances (the term commonly used is liquidity ) available in their settlement accounts to ensure that payments settle and gridlocks in the system are avoided. In most RTGS systems, participants may, on an intraday basis, use for payment system purposes the mandatory reserve balances that they are required to hold with the central bank ; they can also obtain intraday (and also overnight and longer-term) liquidity from the central bank. All such credit must be fully collateralised to protect the central bank, and the system as a whole, from loss. 3.2 RTGS in Ireland IRIS, TARGET and TARGET2 The first Irish real-time, gross settlement (RTGS) system, known as IRIS, commenced live operation in March This system was owned by the Irish Real-time Interbank Settlement Company Limited (IRISCo), but was managed and operated by the Central Bank on the participants settlement accounts at the central bank. In 1999, at the outset of the first stage of economic and monetary union (EMU), IRIS was interlinked with the Eurosystem s TARGET system. TARGET (an acronym for Trans-European Automated Real-time Gross settlement Express Transfer system), was an interbank payment system for the real-time processing of cross-border transfers in euro throughout the EU, created by interlinking national real-time gross settlement (RTGS) systems and the European Central Bank s own payment mechanism, the ECB Payment Mechanism, or EPM. Between November 2007 and May 2008, TARGET was replaced by TARGET2, an enhanced and streamlined version of the earlier system. 3.3 Overall Structure of the TARGET and TARGET2 Systems The original TARGET system was formed by interlinking individual national RTGS systems (see Figure 1), all of which operated using different technical platforms and standards, although using common messaging standards. In TARGET, domestic payments (i.e., payments made within national borders) took place within each participating country s own RTGS system, but cross-border payments were made from one national system into another via both the national system of the NCB and the TARGET interlinking mechanism (see Figure 2). The TARGET system operated

35 34 Ireland s Payment and Securities Settlement Systems Infrastructure Figure 1: The TARGET System (Source: ECB) successfully from its introduction in 1999 to its closedown/replacement in 2007/2008. The system supported the implementation of the Eurosystem s single monetary policy, contributed to reducing systemic risk and helped banks to manage their euro liquidity. While the TARGET system had operated satisfactorily, participants felt that the Eurosystem national central banks should offer an enhanced, completely harmonised service across the EU. Furthermore, the Eurosystem viewed TARGET s overall cost efficiency as unsatisfactory, with the level of cost recovery in particular being seen as problematic. These inherent weaknesses were directly attributable to the system s decentralised structure, with diverse national technical components and standards increasing its overall maintenance and running costs. Further EU enlargement could be expected to exacerbate this situation as new member states joined TARGET, increasing the number of connected national RTGS systems. In October 2004, having examined the available options, the ECB s Governing Council agreed the overall principles and structure of TARGET s replacement, to be known as TARGET2. TARGET2 operates on a completely different basis to its predecessor, offering harmonised core services based on a single technical platform (known as the single shared platform, or SSP see Figure 3). This approach allowed the Eurosystem to simultaneously reduce operating costs and improve cost recovery levels. Three euro-area national central banks (the Banca d Italia, the Banque de France and the Deutsche Bundesbank) jointly provide the SSP for TARGET2 and operate this on the Eurosystem s behalf.

36 Ireland s Payment and Securities Settlement Systems Infrastructure 35 Figure 2: Example of a Cross-Border TARGET Payment (Source: ECB) Figure 3: The Structure of TARGET 2 (Source: ECB)

37 36 Ireland s Payment and Securities Settlement Systems Infrastructure As already indicated, TARGET2 is established, and functions, on the basis of the SSP, and the Eurosystem specifies the latter s technical configuration and features. However, TARGET2 is legally structured as a multiplicity of payment systems composed of all of the TARGET2 component systems, which allows for the continuation of the important relationships that participating national central banks have always maintained with counterparties in their respective countries. The Irish component of TARGET2 is known as TARGET2-Ireland, which currently has 16 participants, namely 14 credit institutions, the National Treasury Management Agency (NTMA) and the Central Bank. The participating credit institutions at the time of writing are as follows: ACC Bank plc Allied Irish Banks plc Anglo Irish Bank Corp plc Bank of Ireland Treasury Bank of Scotland (Ireland) Ltd. Depfa Bank plc Depfa ACS Bank EBS Building Society Investec Bank plc (Irish Branch) Irish Life and Permanent plc Irish Nationwide Building Society National Irish Bank Royal Bank of Scotland N.V. Ulster Bank Ireland Ltd. The TARGET2 technical infrastructure has been developed using a modular approach, to allow individual participating national central banks to tailor the system to the needs of their individual countries banking communities in other words, not all modules are used by all countries. TARGET2 Modules Each module in the SSP is used to provide a specific TARGET2 service, the principal modules being the following: the Payments Module used for processing and settlement of TARGET2 payments; the Home Accounting Module used by some national central banks to offer country-specific TARGET2 services to their national banking communities; the Standing Facilities Module enables TARGET2 participants to manage overnight standing facilities (i.e., deposit and marginal lending facilities); the Reserve Management Module used by national central banks in connection with management of TARGET2 participants minimum reserves; and the Information and Control Module which gives system users access to a wide range of general information e.g., account balances, messages from their local national central bank, etc.. SWIFT 25 standards and services 26 are used to enable standardised communication between the TARGET2 system and its participants. 3.4 Business Continuity in TARGET2 Business continuity for TARGET2 is ensured by use of a multi-region/multi-site architecture. Payment processing and 25 SWIFT (i.e., the Society for Worldwide Interbank Financial Telecommunication) is an industry owned co-operative founded in 1973 that supplies secure messaging services to financial institutions. SWIFT operates under Belgian law and is controlled by its member banks and other financial institutions. 26 FIN, InterAct, FileAct and Browse. accounting services are fully supported in two separate regions, and each of these regions has two well-separated operating sites (see Figure 4). The principle of region rotation is applied so as to ensure that experienced staff members are at all times available in both regions. The TARGET2 system therefore aims to offer participants the highest possible levels of system reliability and resilience. Furthermore, in terms of capacity, the TARGET2 system provides for the processing of average and maximum daily payment transaction numbers of 380,000 and 500,000, respectively.

38 Ireland s Payment and Securities Settlement Systems Infrastructure 37 Figure 4: TARGET2 Two Regions, Four Sites (Source: ECB) 3.5 Participation in TARGET2 The following are eligible for direct participation in TARGET2: credit institutions established in the EEA 27 (including those acting through a branch established in the EEA); credit institutions established outside the EEA, provided that they act through a branch established in the EEA); national central banks of EU member states; and the European Central Bank (ECB). In addition, national central banks can, at their discretion, admit the following as direct participants: treasury departments of central or regional governments of EU member states that are active in money markets; public sector bodies of EU member states authorised to hold accounts for customers; 27 The EEA (i.e., European Economic Area) comprises the EU countries together with Iceland, Liechtenstein, Norway and Switzerland. investment firms established in the EEA; organisations established in the EEA providing clearing or settlement services, as long as they are subject to oversight by a competent authority; credit institutions or any other entities of the types listed where these are established in a country with which the EU has entered into a monetary agreement allowing access to EU payment systems. Direct participants in TARGET2 hold an RTGS account in the Payments Module of the SSP with access to real-time information and control features. They are therefore able to submit/receive payments directly to/from the system, and to effect settlement directly with their respective national central banks for those payments. Indirect participation in the system is also possible: indirect participants access TARGET2 via direct participants acting on their behalf, and their payments are settled in the direct participant s account in the TARGET2 Payments Module. Direct participants are responsible for all payments made to or from their account by any

39 38 Ireland s Payment and Securities Settlement Systems Infrastructure indirect participant registered through them. Only supervised credit institutions established within the EEA can become indirect participants in TARGET Processing Payments in TARGET2 As was the case with TARGET, TARGET2 offers settlement services in euro only. Any euro-denominated payment that participants want to process in real time and in central bank money can be executed in TARGET2. The system supports the SWIFTNet FIN message types (MT) MT103/103+, MT 202 and MT The list below provides a general indication of the types of transaction for which the TARGET2 system is used by the Irish participants: Interbank payments: interbank money market transactions (e.g., interbank loans); commercial interbank payments (e.g., customer payments, mainly largevalue); and settlement of interbank clearings (e.g., retail payment systems). Payments between the Central Bank, settlement account holders and government accounts held at the Central Bank: currency issue and withdrawal; intraday liquidity transactions; changes in minimum reserve requirements; Central Bank and government accounts at the Central Bank: clearings (e.g., tax, government expenditure); and government bond issues, redemptions and dividends. Monetary policy operations: open market operations; marginal lending facility; and overnight deposits. 28 All SWIFT messages are described using this format. There are many different SWIFT message types covering all types of financial transactions. The aggregate settlement payments of the Irish retail payment systems (i.e., those operated by IPCC and IRECC) are settled daily by the Central Bank debiting the settlement accounts in TARGET2 of those banks that are net payers, and then in turn crediting the settlement accounts of the banks that are net receivers. The settlement accounts of net receivers are not credited until those of all net payers have first been debited (see Section 2 of this Report covering retail payment systems for full details). Every payment can be assigned a priority in the TARGET2 system the available categories are normal, urgent and highly urgent. Payments can be input up to five working days in advance of their due date; however, unless participants have indicated a specific settlement time, payments are settled immediately provided that sufficient funds are available and any liquidity limits and reservations see below are not breached. For urgent and highly urgent payments, the first in, first out (or FIFO) principle applies in other words, payments are settled in chronological order. Payments categorised as urgent or normal are not settled when payments categorised as highly urgent are queued, the only exception being in cases where the settlement of payments with a lower priority will allow offsetting transactions to be settled, and the overall effect of this offsetting would result in an increased availability of liquidity in the system for the participant in question. The settlement of queued payments is made as efficient as possible by several optimisation procedures that are run on a continuous basis. TARGET2 participants can also change the order in which queued payments are processed by moving payment orders within queues or by assigning different priorities. 3.7 Liquidity Management The following can all be used as sources of liquidity in TARGET2:

40 Ireland s Payment and Securities Settlement Systems Infrastructure 39 balances on participants RTGS accounts, including mandatory reserve balances ; intraday liquidity provided to participants by their respective national central banks and funds provided via Eurosystem monetary policy operations; and off-setting payment flows (i.e., the use of algorithms or optimisation routines within the system to settle a number of queued payments simultaneously). As in the original TARGET system, intraday credit can be granted to TARGET2 participants by their respective national central banks; all such intraday credit must be fully collateralised. Direct participants can also control the use of available liquidity by means of reservation and limit systems, which can be combined as required. Participants can also set bilateral or multilateral limits vis-à-vis their counterparties to enable them to better control their use of liquidity in TARGET2. These limits determine the level of exposure that a participant is willing to bear in terms of its dealings with either another specific participant (in the case of bilateral limits) or to several other participants (in the case of multilateral limits) without having first received inward payments from those participants. Setting of these limits enables participants to prevent their liquidity from being reduced in an unbalanced manner, and to synchronise their payment flows to/from other system participants. All participants can reserve liquidity for payments categorised as urgent and highly urgent, as well as for the settlement of ancillary systems (e.g., national retail payment systems). Furthermore, participants that are part of the same corporate group can in some circumstances use a liquidity pooling facility in the TARGET2 system to make better overall use of liquidity within that group. 3.8 On-line Information and Control TARGET2 users have access, via the system s Information and Control Module (or ICM), to comprehensive on-line information and control of their account balances and payments. 3.9 Ancillary Systems and TARGET2 TARGET2 provides settlement services in central bank money for all kinds of ancillary systems, including, for example, retail payment systems and securities settlement systems. The system offers various alternative procedures for the settlement of ancillary systems, both real-time procedures and batch procedures TARGET2 Operating Timetable TARGET2 is open for business daily from 7 a.m. to 6 p.m. Central European Time (CET i.e., GMT + 1hour) except for the following: Saturdays, Sundays, New Year s Day, Good Friday, Easter Monday, 1 May, Christmas Day and 26 December. The cutoff time for processing of customer payments is 5 p.m. CET. TARGET2 starts each new business day on the evening of the previous day. There is a night-time window available from 7.30 p.m. to 6.45 a.m. CET on the following day, with a technical maintenance period lasting for three hours between 10 p.m. and 1 a.m. CET. The night-time window facilitates the overnight settlement of ancillary systems and also supports cross-system settlement during the night; transactions processed in this night-time window are deemed to have settled on the next business day. Participants/systems are free to decide whether or not to avail of this facility Statistical Data In 2009, the TARGET2 system as a whole had 800 direct participants and 3,687 indirect participants. TARGET2 processed a daily average of 345,768 payments, the peak day being 30 June 2009, when

41 40 Ireland s Payment and Securities Settlement Systems Infrastructure 539,336 payments were handled. In 2009, per cent of the payments settled on the TARGET2 SSP were processed in less than five minutes. The daily average value of all payments settled in TARGET2 during the year was 2,153 billion, the average transaction value being 6.2 million. TARGET2 s share of total large-value payment system traffic in euro in 2009 was 89 per cent in value terms and 60 per cent in volume terms. System availability averaged per cent over the year. The Irish TARGET2 component processed some 1.23 million payments in 2009, with a value of 7,749 billion Oversight of TARGET2 As well as being actively involved, along with the Irish banking community, in designing and building the IRIS RTGS system, the Central Bank was also directly responsible for the oversight of that system, and in this regard maintained regular close contact with IRISCo, the company that owned IRIS. The Central Bank was a shareholder in IRISCo, and a representative of the Oversight Unit attended all meetings of the board of directors of the company; this facilitated contact with the banks that participated in IRIS, as these were all represented on the board. The Oversight Unit also liaised closely with the operational area of the Central Bank responsible for the operation of IRIS (i.e., the Euro Settlements section of the Payments and Securities Settlements Department). A full assessment of the IRIS system against the BIS Core Principles for Systemically Important Payment Systems (see the Introduction and Overview section of this Report for further details of the Core Principles) was completed in 2004 as part of an overall Eurosystem initiative covering all of the euro-area large-value payment systems connected to TARGET. IRIS was given an observed rating in relation to all of the Core Principles except one Core Principle 7 (which covers security, operational reliability and contingency arrangements) was found to be only partly observed due to some shortcomings identified in relation to the IRIS system s contingency arrangements. These shortcomings were, however, subsequently resolved. In contrast with the situation that prevailed vis-à-vis IRIS and TARGET, the Central Bank is not, of itself, directly responsible for oversight of the TARGET2 system. This role is carried out primarily by the European Central Bank s TARGET2 oversight function, assisted by a small number of other Eurosystem national central banks (NCBs). While the Central Bank has not been directly involved to date in this ECB-led oversight of TARGET2, it is kept fully informed of the progress and content of all such activities. Moreover, the Oversight Unit maintains an active interest in the day-to-day operations of the Irish TARGET2 component, TARGET2- Ireland, and stays in close contact with the Central Bank operational area responsible for the system. In addition, the Oversight Unit continues to be involved in the ongoing work of the Eurosystem Committees and Working Groups involved in, and responsible for, TARGET2 oversight. Reflecting the fact that it is a new system, only the design of TARGET2 has thus far been comprehensively assessed against applicable standards, in an exercise conducted jointly by the ECB and a number of NCBs (i.e., Deutsche Bundesbank, Banco de Espana, Banque de France, Banca d Italia and De Nederlandsche Bank). The assessment exercise was conducted on the basis of the Eurosystem s published Terms of Reference for the oversight assessment of euro systemically and prominently important payment systems 29 against the BIS Core Principles; these terms of reference were complemented with the Eurosystem s business continuity oversight expectations for systemically important payment systems 30. The formal oversight assessment of the TARGET2 design started in 2006 with a 29 pscc terms pdf businesscontinuitysips2006comments.pdf.

42 Ireland s Payment and Securities Settlement Systems Infrastructure 41 review of all relevant system documentation available at that time. In the first phase of the assessment process, the assessors concentrated on identifying any potential shortcomings in the system s design, and their preliminary findings and recommendations in this regard were discussed and agreed with the builders of the TARGET2 system. In the next phase, the interim results of the assessment were reported to the Governing Council of the ECB in April While the interim results indicated that TARGET2 was likely to observe all relevant Core Principles, some issues were highlighted for follow-up by the system builders on the basis of an agreed action plan. The Governing Council took note of the interim assessment results and decided that these should be updated and finalised in the light of the follow-up action taken by the TARGET2 function. This assessment exercise was concluded with the publication by the ECB of a full oversight assessment report on the design of TARGET2 in May 2009, the system having commenced operations in the period November 2007 to May Throughout the assessment process, oversight concerns and recommendations were brought to the attention of the three national central banks building and providing, and subsequently operating, the TARGET2 system. Most of the issues identified were fully addressed by the time that the assessment report was finalised, although some findings require further action to be taken in due course by the TARGET2 system operator. These findings include the following areas (none of which were considered by the assessors to be critical for attention): technical options for real-time synchronisation between the two TARGET2 processing regions; provision of additional collateral in contingency processing; the need to reduce operational overhead costs; 31 assessmenttarget2designagainstcoreprinciples200905en.pdf. management of updates to the system; involvement of system users in the future development of TARGET2. The report noted that the overall design of TARGET2 was well-established, and fully compliant with the BIS Core Principles; furthermore, the experience to date with the live operation of the system has been satisfactory. TARGET2 operates in a stable manner and the system s technical infrastructure, rules and procedures are considered to meet the relevant oversight standards. Nonetheless, TARGET2 will remain subject to an ongoing oversight regime to ensure the system s continued compliance with all applicable oversight standards. The ECB s TARGET2 oversight function will continue to play a lead role in the ongoing oversight of the system, coordinating the TARGET2 oversight activities carried out centrally by the ECB and at a local level by the oversight functions of the NCBs participating in TARGET TARGET2 in the recent Financial Crisis Like all payment and securities settlement systems, TARGET2 has been affected to some extent by the recent financial crisis. However, the system has continued to operate in a satisfactory manner throughout this period, and thus far has not recorded any significant increase in settlement time, despite a noticeable increase in transaction volumes and the ongoing general liquidity pressures being experienced throughout the financial system. In this regard, it is notable that TARGET2 has highly effective liquidity management mechanisms, which include a set of optimisation algorithms ; these allow participants to reduce their liquidity needs while at the same time speeding up the settlement process. As already explained (see Section 3.7 above), the ability of participants to set bilateral or multilateral limits vis-à-vis their counterparties has also enabled them to better control their use of liquidity in TARGET2.

43

44 Ireland s Payment and Securities Settlement Systems Infrastructure Oversight of Securities Settlement Systems 4.1 General Securities clearing and settlement systems are a key component of the financial system. As a consequence, they are generally subject to oversight because weaknesses in such systems can be a source of risk for the financial system as a whole. Disruptions in securities settlement systems can impact on the payments systems to which they are linked, either directly through a spill-over effect, or because they are used to receive collateral backing the provision of intraday credit to participants in payment systems. Similarly, disruptions in a securities settlement system could impact on central banks monetary policy operations if the system concerned is used for receipt of collateral. Settlement of securities trades whereby securities are transferred by the seller to the buyer and funds are transferred from the buyer to the seller are typically made by bookentry in Securities Settlement Systems 32 operated by Central Securities Depositories 33. Settlement generally takes place on the basis of Delivery versus Payment 34 (DvP) which means that delivery of securities takes place if, and only if, the corresponding payment takes place. DvP addresses principal risk the risk that a seller delivers a security but does not receive payment, or that a buyer makes payment but does not receive delivery of the security. In securities and derivatives markets in which a central counterparty 35 (CCP) operates, the CCP 32 Securities settlement system (SSS) A system which permits the transfer of securities, either free of payment (FOP) or against payment (delivery versus payment DvP). 33 Central securities depository (CSD) An entity that: 1) enables securities transactions to be processed and settled by book entry and; 2) plays an active role in ensuring the integrity of securities issues. Securities can be held in a physical (but immobilised) or dematerialised form (i.e. so that they exist only as electronic records). 34 Delivery versus payment (DvP) A mechanism which links a transfer of securities (or other financial instruments) and a funds transfer in such a way as to ensure that delivery occurs if, and only if, payment occurs. 35 Central counterparty (CCP) An entity that interposes itself between the counterparties to contracts traded in one or more financial markets, becoming the buyer to every seller and the seller to every buyer. interposes itself between the buyer and the seller of a trade, becoming the buyer to every seller and the seller to every buyer. CCPs are usually introduced into a market for the purpose of reducing participants exposure to counterparties, facilitating anonymous trading, or post-trade anonymity, and providing multilateral netting of trades. As part of its oversight activities the Central Bank monitors developments in securities clearing and settlement that have the potential to impact on the infrastructure for clearing and settlement of Irish securities. 4.2 Settlement of Irish securities Trades in Irish securities Government Bonds, equities and other securities are all settled in infrastructures physically located outside Ireland. Irish Government Bonds are settled in Euroclear Bank in Belgium and equities and other securities are settled in the Euroclear UK and Ireland CREST system in the United Kingdom Irish Government Bonds The register for Irish Government Bonds, which are issued by the National Treasury Management Agency (NTMA), is maintained by the Central Bank. This consists of the capital register for each issue, which is the record of the total capital outstanding; and the accounts of the individual holders of each issue. The majority of individual accounts on the register represent the holdings of private investors, with the holdings of institutional investors largely represented in an omnibus account in the name of Euroclear Nominees. At end-2009, holdings in the Euroclear Bank (EB) system represented more than 99 per cent of the outstanding capital of Irish Government Bonds. Irish Government Bonds are settled in EB, which is the International Central Securities

45 44 Ireland s Payment and Securities Settlement Systems Infrastructure Figure 1: Issue, settlement and registration of Irish Government Bonds Central Bank (Registrar) Euroclear Bank NTMA (Issuer) Approved Agents Private individuals Euroclear Participants Depository 36 (ICSD) located in Brussels. EB is a wholly-owned subsidiary of Euroclear SA/NV, in relation to which additional information is provided later in this chapter. The settlement of trades in Irish Government Bonds in EB is governed by a legal agreement between the Central Bank and EB and an associated service description. Transactions between participants in the EB system (i.e., banks, broker/dealers, custodians and other institutions professionally engaged in securities markets) take place by means of book-entry 37, under Belgian law, either on a delivery versus payment (DvP) or free of payment 38 (FOP) basis. Settlement is in commercial bank money 39 with participants having cash accounts with EB, which typically provides the 36 International central securities depository (ICSD) A central securities depository (CSD) which was originally set up to settle Eurobond trades and which is now also active in the settlement of internationally traded securities from various domestic markets, typically across currency areas. At present, there are two ICSDs located in EU countries: Clearstream Banking Luxembourg and Euroclear Bank Brussels. 37 Book-entry system An accounting system which enables the transfer of securities and other financial assets without the physical movement of paper documents or certificates (e.g. the electronic transfer of securities). 38 Free of payment delivery A delivery of securities which is not linked to a corresponding payment of funds. 39 Commercial bank money Commercial bank liability that takes the form of deposits at a commercial bank which can be used for settlement purposes. participants with intraday credit to facilitate settlement. Such transactions are not reflected individually on the register maintained by the Central Bank, as they do not affect the overall balance on the Euroclear Nominees omnibus account on that register. However, these changes in ownership are reflected in the securities accounts of these participants in EB. Transactions between accounts on the register in the Central Bank are effected on foot of instructions by bond holders using stock transfer forms submitted to the Central Bank via approved agents banks, stockbrokers or solicitors. Cash settlement in respect of such transactions involving private individuals, or other non-eb participants, takes place between the parties themselves outside the EB system, i.e., there is no DvP settlement. The Central Bank, in maintaining the capital register for Irish Government Bonds, is responsible for ensuring that the total of individual holdings on the register in a particular bond issue corresponds at all times to the amount recorded in the capital register for that issue. Arrangements are also in place

46 Ireland s Payment and Securities Settlement Systems Infrastructure 45 Figure 2: Clearing and settlement of Irish equities and corporate bonds Registrars Bank of England RTGS System (GBP) Eurex Ag (CCP) Euroclear UK & Ireland (CREST system) Settlement Banks CCP Clearing Members CREST members Central Bank TARGET2 (euro) to facilitate changes to the outstanding capital of all bond issues resulting from new issues/tranches of existing issues and cancellation transactions by the issuers, and to record these in the EB system. A daily reconciliation process is carried out between the Central Bank, in its role as Registrar, and EB, and a full reporting system is also in place. Irish Government Bonds transferred by counterparties to the Central Bank as part of the collateral arrangements connected with Eurosystem monetary policy operations, or for the purposes of obtaining intraday credit in the TARGET2 RTGS system see Section 3 of this Report are recorded in the Central Bank s name within the EB system. Investments in Irish Government Bonds by the Central Bank for ECB reserves management purposes are also held in EB Irish Equities Irish equities that are dealt on ISE XETRA 40, and also certain Irish corporate bonds, are settled in the CREST system operated by the Euroclear UK & Ireland (EUI) central securities 40 ISE Xetra is the electronic order book of the Irish Stock Exchange. depository. EUI, which is incorporated in the United Kingdom, is also a wholly-owned subsidiary of Euroclear SA/NV. EUI provides DvP settlement in central bank money 41 via a number of settlement banks 42, and also FOP settlement. Each CREST participant appoints a settlement bank to settle the cash leg of securities transactions. These settlement banks extend intraday credit to their customers to facilitate settlement; all institutions currently acting as euro settlement banks in EUI are located in the UK (i.e., there are currently no settlement banks located in Ireland providing settlement facilities in euro for Irish trades in Irish securities). Prior to April 2008, the Bank of England acted as cash settlement agent for both euro and Sterling transactions in EUI. Following the Bank of England s decision not to participate in TARGET2 (as a consequence of which the Bank of England no longer had direct access 41 Central bank money Liabilities of a central bank that take the form of banknotes or of bank deposits at a central bank and which can be used for settlement purposes. 42 Settlement bank The entity that maintains accounts with the settlement agent in order to settle payment obligations arising from securities transfers, both on its own behalf and for other market participants.

47 46 Ireland s Payment and Securities Settlement Systems Infrastructure to euro liquidity) the Central Bank agreed to take over the role of euro cash settlement agent for the EUI settlement banks, at least until the implementation of the Euroclear Single Platform for Settlement (see later in this chapter). Initially it was anticipated that this interim arrangement would be required for a period of approximately 18 months. With this relatively short timeframe in mind, rather than developing a new process it was decided to implement a largely manual arrangement. Bilateral and multilateral contractual arrangements were put in place between EUI, the Central Bank and the CREST settlement banks to cover these new euro payment arrangements, and also the account relationship between the Central Bank and the settlement banks. Since their implementation in April 2009, these new euro cash arrangements have operated smoothly. Transactions in Irish securities in the CREST system take place under Irish law, EUI being approved as an operator under the Irish Companies Act, 1990 (Uncertificated Securities) Regulations, As a condition of such approval EUI is required to submit an annual report to the Minister for Enterprise, Trade and Innovation in respect of its activities relating to Irish securities. Figure 2 illustrates the main players in the clearing and settlement of Irish equities and corporate bonds. 4.3 Central Counterparty Clearing for the Irish Stock Exchange In December 2005, a central counterparty clearing (CCP) 43 service was introduced for Irish securities traded on the ISE Xetra electronic order book that settle in CREST. This service is provided by Eurex Clearing AG (EACG) 44, which is based in Germany and is a subsidiary of Eurex Frankfurt AG and ultimately owned by Deutsche Börse AG and Six Swiss Exchange AG. Under the service, EACG becomes the counterparty to all eligible trades at the time they are executed. CCP-eligible 43 Central counterparty (CCP) An entity that interposes itself between the counterparties to contracts traded in one or more financial markets, becoming the buyer to every seller and the seller to every buyer. 44 EUREX Clearing AG is licensed as a credit institution in Germany and is subject to supervision by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) and to the (non-statutory) oversight of the Deutsche Bundesbank. securities traded on the ISE Xetra platform are generally equities; however, the service also applies to the ISEQ 20 exchange-traded funds. Use of the CCP service is mandatory for eligible trades, which are fed automatically to the CREST system from the ISE Xetra system. In order to clear trades through EACG, trading firms must be either a Clearing Member or a Non-clearing Member of the CCP. A Clearing Member is entitled to perform the clearing of eligible trades and is responsible for the payment and securities delivery arising from such trades. A Non-clearing member does not clear its own trades and must instead use the services of a General Clearing Member, which is a clearing member that is permitted to clear trades on behalf of other market participants. In addition to clearing, the CCP provides optional settlement netting for eligible trades. 4.4 Oversight of Securities Clearing and Settlement Systems As the settlement infrastructures for Irish securities are located outside Ireland, the Central Bank does not have primary oversight responsibility for the relevant settlement systems. Rather it relies on co-operation with the relevant authorities in Belgium and the UK (the countries in which the relevant systems are located) in order to ensure that, where necessary, it can be appropriately involved in the oversight of the systems concerned. To date, the focus has been on ensuring that the Central Bank has access to information on oversight activities, an opportunity to comment on proposed activities and a channel for communication in the event of a major incident. Euroclear Bank (in which Irish Government Bonds are settled), which is located in Belgium, is subject to oversight by the National Bank of Belgium (NBB). Reflecting the importance of the role played by Euroclear Bank vis-à-vis Irish Government Bonds, the Central Bank cooperates with the NBB in relation to the oversight of Euroclear Bank, in accordance with the provisions of a Memorandum of Understanding agreed in this regard in As part of its oversight activities the NBB assesses the EB system against the CPSS-

48 Ireland s Payment and Securities Settlement Systems Infrastructure 47 Figure 3: The Euroclear Group Euroclear plc Euroclear SA/NV Euroclear Bank Euroclear France Euroclear UK & Ireland Euroclear Nederland Euroclear Belgium Euroclear Holding Euroclear Sweden Euroclear Finland IOSCO recommendations for securities settlement systems and reports on the outcome of this assessment exercise in its Financial Stability Review. In addition, as a system that is eligible for use in Eurosystem credit operations, the Euroclear system is assessed against user standards developed by the Eurosystem. The EUI CREST system (in which Irish equities and other securities are settled) is subject to supervision by the Financial Services Authority (FSA) in the United Kingdom; in addition, the Bank of England (BoE) oversees the payment arrangements of the CREST system. The Central Bank has entered a tri-party MoU with the FSA and the BoE regarding the oversight of the CREST system. Until recently, the BoE s oversight role was nonstatutory. However, the Banking Act, now provides a statutory framework for the BoE to oversee payment systems designated as recognised systems by H.M. Treasury. The inter-bank payment system operated by CREST en 1. has been so designated by H.M. Treasury and in light of these changes, the above-mentioned MoU with the UK authorities is currently being reviewed. 4.5 Co-operative Oversight of Euroclear SA/NV 46 In addition to being the parent of Euroclear Bank and Euroclear UK and Ireland, Euroclear SA/NV (ESA) owns the CSDs of Belgium, Finland, France, the Netherlands and Sweden. An MoU is in place between the various national and European authorities responsible for the supervision and oversight of the individual entities of the Euroclear group. This MoU provides a co-operative framework for the monitoring and assessment of common services and other issues of common interest to regulators, and recognises the Belgian authorities as a single entry point to ESA for matters covered by the MoU. As the Central Bank is not the primary overseer of the system settling Irish Government Bonds (i.e., Euroclear 46 Euroclear SA/NV is a company (societeanonyme/naamlosevennootschaap) organized under the laws of Belgium.

49 48 Ireland s Payment and Securities Settlement Systems Infrastructure Bank) it is not a signatory to the MoU, but has been granted observer status on the technical committee that undertakes the co-operative oversight and, most importantly, is included in the communication framework that would be used in the event of a crisis impacting any of the (I)CSDs of the group. Figure 3 illustrates in schematic form how the CSDs of the Euroclear Group are related. 4.6 ESCB-CESR Recommendations for Securities Clearing and Settlement in the European Union Prior to 2009, the main tools for the oversight of securities clearing and settlement systems in the EU were the recommendations issued by the CPSS and IOSCO in 2001 and 2004 respectively for securities settlement systems and central counterparties. In May 2009, the ESCB and CESR published their Recommendations for Securities Settlement Systems and Recommendations for Central Counterparties. The ESCB-CESR recommendations were adapted to the European context from the CPSS-IOSCO recommendations, and cover all aspects of the design, operation and oversight of securities clearing and settlement systems, and promote the implementation of measures that improve the safety and efficiency of such systems. The ESCB-CESR recommendations cover both individual systems and cross-border securities settlement arrangements and in each case the headline recommendation is supplemented by a list of key issues, an explanatory memorandum and a methodology for assessing compliance. The headline recommendations are set out in Annex 1. Work on adapting these requirements had stalled in October 2005 when authorities failed to agree on a number of issues, in particular the extent to which the proposed ESCB-CESR standards should apply to CSDs with a banking licence and the application of the standards to custodian 47 banks. On the basis of compromise principles agreed 47 Custodian An entity, often a credit institution, which provides custody services to its customers. by the ECOFIN 48 in June 2008, this work was re-activated and in May 2009 the ESCB-CESR Working Group finalised its report for submission to the decision-making bodies of the ESCB and CESR. The compromise principles were that recommendations would be addressed to public authorities rather than standards being addressed to systems operators; that custodian banks would be excluded from scope and that for Recommendation 9 (regarding CSD risk controls) the original CPSS-IOSCO wording recommendation would be retained. Furthermore, the Committee of European Banking Supervisors (CEBS) 49 was invited to review, in co-operation with CESR, the risks borne by custodians. Later, in December 2009, ECOFIN requested ESCB-CESR to adapt the recommendations for CCPs to address the risks of OTC derivatives. Regarding OTC derivatives, the group found that the risks did not differ in nature from those of clearing on-exchange transactions and that, in general, the headline recommendations themselves did not need to be changed. It is expected that securities regulators and overseers in the EU will adopt the ESCB-CESR recommendations for the oversight of systems in their jurisdictions. The Central Bank supports the use of the ESCB-CESR recommendations for the oversight of systems that clear and settle Irish securities, although as mentioned earlier it does not have primary responsibility for the oversight of such systems; any assessment of these systems would be undertaken by the authorities in the relevant jurisdictions. 4.7 Securities Market Infrastructure Developments TARGET2-Securities In July 2008, following two years of analysis by the Eurosystem in co-operation with securities market infrastructures and their users, the 48 ECOFIN The Economic and Financial Affairs Council is composed of the Economics and Finance Ministers of the Member States of the European Union. It is commonly known as the ECOFIN Council, or simply ECOFIN. The ECOFIN Council covers EU policy in a number of areas including: economic policy coordination, economic surveillance, monitoring of Member States budgetary policy and public finances, the euro (legal, practical and international aspects), financial markets and capital movements and economic relations with third countries. 49 CEBS The Committee of European Banking Supervisors is composed of high level representatives from the banking supervisory authorities and central banks of the European Union.

50 Ireland s Payment and Securities Settlement Systems Infrastructure 49 Governing Council of the European Central Bank decided to launch TARGET2-Securities (T2S), a single technical platform for the settlement of securities trades in central bank money. The T2S platform is due to be delivered in CSDs participating in T2S will outsource the operation of their customers securities accounts to the platform and central banks will similarly outsource the operation of cash accounts. The platform will provide settlement in euro and in other EU currencies in respect of which the relevant central bank agrees to outsource its cash accounts. EUI has confirmed its intention to participate in T2S for settlement of euro-denominated securities. As part of the governance arrangements for T2S, national user groups (NUGs) have been established in the countries including Ireland that may be served by T2S. The Irish NUG is chaired by a representative of the Central Bank and includes participants from the Central Bank, Euroclear, banks, brokers, registrars/issuers and the Irish Stock Exchange. While T2S is not considered to be a system, it is generally agreed that, due to its critical nature, it should be subject to an oversight framework. At the time of writing, the development of a co-operative oversight framework is the subject of discussions between central banks, including the Central Bank, and securities regulators in a forum hosted by the ECB. In the meantime, it has been agreed that a preliminary review of the T2S design from an oversight perspective should take place during the project s current development phase. From a domestic oversight perspective the development is monitored in light of its impact on the CREST system for Irish securities and, potentially, the settlement of Irish Government Bonds in Euroclear Bank (see the T2S website index.en.html for further information on this topic) Euroclear s Single Platform Since Euroclear first started the process of consolidation (i.e., since its takeover of the CSDs of France, Belgium, The Netherlands and the UK, the company has been working on a project for the harmonisation of the custody and settlement services of its group CSDs, with the ultimate aim of delivering a single platform for the markets that it serves (the so-called Single Platform ). A phased approach has been taken to this process of harmonisation. The implementation of a single settlement engine for the CSDs that were then part of the group was completed in 2007, while a single custody and settlement platform for the CSDs - Euroclear Belgium, Euroclear France, and Euroclear Nederland that service the Euronext markets (i.e., the Paris, Amsterdam, Brussels and Lisbon stock exchanges, as well as the NYSE Liffe derivatives markets in London, Paris, Amsterdam, Brussels and Lisbon) was implemented in January This development, known as Euroclear Settlement for the Euronext Markets (ESES), was to form the basis of the Single Platform which would be implemented in two phases, one for custody and one for settlement. The Central Bank, as a potential provider of central bank money for CREST settlement banks, has been involved in discussions with Euroclear and the other central banks of the markets served by Euroclear (which have now expanded to include the CSDs of Finland and Sweden the Nordic CSDs ) on the development of the central bank money model for the Single Platform. In the light of developments relating to T2S, Euroclear revised its strategy on implementation of its Single Platform. According to the new strategy, the custody functionality will be delivered in full but implementation of the settlement functionality will be limited as the ESES markets will retain their platform at least until T2S goes live.

51

52 Ireland s Payment and Securities Settlement Systems Infrastructure Oversight of Other Market Infrastructures 5.1 Foreign-Exchange Settlement Continuous Linked Settlement Foreign exchange (FX) transactions involve the sale by one of the counterparties of an agreed quantity of a particular currency against the purchase from the other counterparty of an agreed quantity of a second currency, with settlement taking place on a date agreed between the two counterparties. Up to September 2002, no infrastructure or mechanism (such as payment-versus-payment PvP 50 ) existed to make payment of each leg of an FX transaction dependent upon payment of the other leg. Consequently, participants in such transactions were subject to FX settlement risk, which is defined as being the risk that one party to a foreign exchange transaction will pay the currency it sold but not receive the currency it bought. When a foreign exchange trade is agreed, each of the parties to the trade has an obligation to pay out funds denominated in one currency and expects to receive funds denominated in a different currency. Each of the parties to the trade is open to settlement risk, i.e., the risk that one of the parties would pay out funds but not receive the funds due from the other party. This situation is exacerbated when the parties are located in different time zones; in such circumstances, settlement of the trade also crosses two time zones, and one party will have to pay away its side of the trade before the market, and settlement system, of the country in which the other counterparty is located has opened. The possibility of the latter counterparty becoming insolvent after the first has paid away its side of the trade was, and remains, one of the predominant risks (usually referred to as 50 Payment versus payment (PvP) A mechanism which ensures that the final transfer of a payment in one currency occurs if and only if the final transfer of a payment in another currency or currencies takes place. Herstatt risk 51 ), and the principal impetus for change. Concern over risk in foreign exchange settlement was highlighted in a 1996 report by the G10 Committee on Payment and Settlement Systems (CPSS), which proposed action by individual banks, industry groups and central banks to reduce systemic risks associated with FX transactions. The Continuous Linked Settlement (CLS) system is a subsequent response of the private sector to this report s findings. CLS Bank was incorporated in September 1999 in the US. It is an Edge corporation, i.e., a limited purpose bank, regulated by the US Federal Reserve. CLS Bank provides the CLS system s settlement service and, in order to do so, maintains an account with the central bank for each of the currencies that the system settles. CLS Services is a related company, organised under the laws of England and Wales, which provides the technical and operational infrastructure for the CLS system. From the start-up date for CLS in September 2002, settlement services were provided for seven currencies including the euro. Currently the CLS system provides settlement for the following 17 currencies: Mexican Peso Canadian Dollar Pound Sterling Israeli Shekel Japanese Yen Korean Won 51 Herstatt risk Cross-currency settlement risk that arises where the working hours of inter-bank fund transfer systems do not overlap due to time zone differences. In this situation, failure by one counterparty to settle its side of the deal starts a chain reaction of cross-defaults. It is named after a small German bank (Bankhaus Herstatt) which failed in June 1974 during the period it was supposed to settle a contract after having received the payment from the counterparty. That failure caused a string of cascading defaults in a rapid sequence in the international banking sector.

53 52 Ireland s Payment and Securities Settlement Systems Infrastructure Danish Krone Euro US Dollar Hong Kong Dollar Singapore Dollar Norwegian Krone Australian Dollar New Zealand Dollar South African Rand Swedish Krona Swiss Franc CLS currently settles payment instructions related to trades executed in six main instruments listed below: FX spot FX forwards FX option exercises FX swaps Non deliverable forwards Credit derivatives At the time of writing there were 60 CLS settlement bank members and a total of 7,520 participants using the CLS Bank service. The types of participation in CLS are Settlement Members, User Members, Third Parties and Third Party Service Providers CLS Settlement Mechanism When an FX trade is agreed, each of the parties to the trade has an obligation to pay out funds denominated in one currency and expects to receive in return funds denominated in another currency. Each of the parties to the trade is open to settlement risk, i.e., the risk that that one of the parties would pay out funds but not receive the funds due from the other party. From the outset, CLS was designed to serve a single purpose: the multi-currency settlement of FX trades in its books on a payment-versuspayment basis, thereby synchronising the two legs of an FX transaction and thus eliminating FX settlement risk. This PvP process entails both parties to the trade transferring the relevant funds to CLS, which then effects payment to the two parties. The settlement risk is eliminated, as CLS does not transfer funds to either party until both parties have transferred the relevant funds to CLS. Further system security is provided by the fund transfers being effected in central bank money through realtime gross settlement (RTGS) systems, such as TARGET2. The CLS system operates on the basis of FX transactions being settled individually in the books of CLS on a gross basis. However, individual participants are only required to pay into CLS the difference between what they have sold and what they have bought in each currency. This value is paid into CLS by individual participants between and (CET) in the case of eligible European and North American currencies, and between and (CET) for the remaining (Asian/Pacific) currencies. These timing arrangements allow for a narrow overlap of the opening times of the national real-time gross settlement (RTGS) systems of the eligible currencies. This overlap is necessary to ensure that simultaneous settlement in each of the eligible currencies is possible. All euro CLS payments are processed by the ECB s Payment Mechanism (EPM), which is part of the TARGET2 system (CLS Bank has an account with the ECB to facilitate this); transactions in other currencies are processed in their relevant national RTGS systems Oversight of CLS The legal structure of CLS, with infrastructure and related companies in a number of jurisdictions and the involvement of multiple currencies, necessitated a comprehensive assessment of the respective roles of the various authorities. In accordance with the Lamfalussy principles 52, which define a 52 Lamfalussy standards The six minimum standards for the design and operation of cross-border and multi-currency netting schemes or systems see the Report of the Committee on Interbank Netting Schemes of the central banks of the Group of Ten countries (Lamfalussy Report), BIS, November 1990; updated in the report on Central Bank Oversight of Payment and Settlement Systems, BIS, May 2005.

54 Ireland s Payment and Securities Settlement Systems Infrastructure 53 framework for cooperative central bank oversight of cross-border and multi-currency netting and settlement schemes, CLS is overseen by the G10 central banks and other central banks of issue of the currencies settled in CLS. Within this cooperative arrangement, the Federal Reserve is the primary overseer of CLS. All central banks whose currencies are settled in CLS participate in the CLS Oversight Committee. The operating arrangements for this Committee are set out in the Protocol for the Cooperative Oversight Arrangement of CLS 53. The ECB is the overseer for the settlement of the euro in CLS. Today, CLS settles 17 of the world s mosttraded currencies and is the largest payment infrastructure settling the euro outside the euro area. According to the CPSS report Progress in reducing foreign exchange settlement risk of May 2008 There has been a major reduction in aggregate FX settlement exposures per cent, or $2.1 trillion, of surveyed obligations were settled through CLS Bank (CLS), which was launched in 2002 and is now the dominant settlement method for FX trades However that report goes on to say that... substantial FX settlement exposures remain. 32 per cent of surveyed obligations were settled through traditional correspondent banking arrangements and subject to settlement risk. Half of the value of these obligations were at risk overnight, not just intraday. Some bilateral settlement exposures were large relative to capital and not well controlled, with 63 per cent of surveyed firms underestimating their 53 Protocol for the Cooperative Oversight Arrangement of CLS November 2008 The Federal Reserve Board. bilateral FX settlement exposures... The ECB has set up a High Level Group on the Oversight of CLS which includes all members of the Eurosystem, and in which the Central Bank participates. 5.2 SWIFT SWIFT is the Society for Worldwide Interbank Financial Telecommunication. The company operates a secure communications network to facilitate the exchange of payment messages between financial institutions (including brokerdealers and securities companies) throughout the world. In addition to handling payment messages, the SWIFT system is used as a messaging system to pass instructions relating to securities transactions (e.g., orders, confirmations, transfers, statements of holdings, etc.). SWIFT is a co-operative society operating under Belgian law and is owned and controlled by its member-shareholders (which are mostly banks, although brokers and dealers, central depositories and clearing institutions, corporates and payment system participants, among others, are also involved). A SWIFT payment message is an instruction to transfer funds or assets; the actual exchange of funds (and other actions connected with settlement) subsequently takes place via a payment system or through correspondent banking relationships SWIFT itself does not effect payments. As at June 2009 there were over 9,000 SWIFT users in over 200 countries. Daily messages averaged over 14 million in the year to June SWIFT offers a secure, provable and trusted end-to-end messaging service to financial institutions, based on the concepts of integrity, non-repudiation and confidentiality. Operationally SWIFT has full sites in Europe and the US. Although SWIFT is a messaging system rather than a payment system, it is nonetheless a vital component of payment systems such as TARGET2 given that SWIFT messages are used to communicate the instructions to effect

55 54 Ireland s Payment and Securities Settlement Systems Infrastructure payments. Central banks in general, and in Eurosystem terms the ECB and all NCBs, therefore have a vested interest in ensuring the reliability and safety of the SWIFT system. To do this, it is necessary to have an oversight regime analogous to that for payment systems. In January 2004, the G10 central bank Governors agreed that SWIFT would be overseen by a group of G-10 central banks in cooperation with the National Bank of Belgium (NBB) as the lead overseer, given that as mentioned above SWIFT is incorporated in Belgium. The relationship between the NBB and the cooperating central banks is reflected in bilateral MoUs. The SWIFT Cooperative Oversight Group (OG) is composed of all the G-10 central banks, the ECB and the chairman of the G-10 Committee on Payment and Settlement Systems (CPSS), and is the forum through which central banks conduct cooperative oversight of SWIFT. The NBB publishes periodic reports on its oversight of SWIFT. In terms of oversight, the SWIFT Cooperative Oversight Group has developed a specific set of principles, different from the Core Principles, that it applies to SWIFT; these are the five High Level Expectations (HLEs). Two HLEs focus on the management of risks (HLE 1, Risk Identification and Management; HLE 5, Communication with Users) and three HLEs deal in more detail with specific types of risk that should be managed (HLE 2, Information Security; HLE 3, Reliability and Resilience; HLE 4, Technology Planning). The full text of the five HLEs can be found in the NBB s Financial Stability Review The Central Bank is not a member of the G-10 OG; however, via the ECB s Payment & Settlement Systems Committee (PSSC), the non-g10 NCBs of the Eurosystem are kept informed of the work taking place vis-à-vis SWIFT oversight under the aegis of the G-10 CPSS. This is facilitated by the ECB sitting on all relevant G-10 Committees and Working Groups. Furthermore, the ECB has set up its own High Level Group on the Oversight on SWIFT, which includes all members of the Eurosystem, and in which the Central Bank participates. This group facilitates the sharing of information relevant for the oversight of SWIFT from the perspective of its importance as the vital messaging component of the TARGET2 system.

56 Ireland s Payment and Securities Settlement Systems Infrastructure Market Infrastructure Developments 6.1 The Single Euro Payments Area (SEPA) The Origins of SEPA The origins of the Single Euro Payments Area initiative (SEPA) lie in the introduction of the euro in Once the euro cash changeover took place in 2002, citizens of all of the participating countries shared common banknotes and coins, thereby rendering it unnecessary, for example, to avail of foreign exchange facilities when travelling across national boundaries in the euro area. Likewise, in those countries participating in the single currency, efficient infrastructures (i.e., the original TARGET system, now replaced by TARGET2, and the EBA s 54 EURO1 system) were introduced to facilitate the making of large-value payments cross-border; however, the situation was somewhat different in the area of low-value (or retail) payments. Each national retail payments market remained isolated from those of other euro-area member states, with levels of efficiency and service varying sometimes significantly from one country to another. Cross-border retail payments in euro were generally slower, more expensive and less efficient than comparable payments made within any one country. A transfer within any national system could usually be completed on the same day, or at the very latest by the end of the next business day; making a cross-border payment could take much longer, mainly because payment systems rules, procedures and technical standards varied widely from country to country. As a result, while goods and services could be traded freely across the euro area, the underlying payments were still restricted by national borders, thereby hampering the completion of the so-called internal market. The integration of Europe s currently quite 54 EBA Clearing is a private sector body established in June 1998 by 52 major European and international banks to own and operate the EURO1 system. EURO1 is a high-value payment system for cross-border and domestic transactions in euro between banks operating in the EU. diverse retail payments infrastructures is seen by both the EU Commission and the ECB as essential for the full implementation of the internal market concept; this concept dates from 1993, and envisages the EU as an area without internal frontiers in which the free movement of goods, persons, services and capital is facilitated. In a first attempt to improve the situation vis-àvis the provision of standardised retail payment services throughout the euro area, in 2001 the EU Commission adopted Regulation 2560/ on cross-border payments in euro. This legislation was aimed at reducing the bank charges applicable to low-value, cross-border payments in euro by bringing these into line with those applying to equivalent payments at a national level; as well as reducing costs for consumers, this measure also put pressure on banks to develop efficient (i.e., electronic) solutions for cross border payments. In June 2002, to some degree prompted by the implementation of Regulation 2560/2001, the European banking industry launched an initiative aimed at moving towards the introduction of more efficient cross-border payment systems by creating the European Payments Council (EPC). The EPC is an alliance of European banks and banking associations, the aim of which is to bring about a harmonised, open and fully interoperable European payments market through industry self-regulation. The EPC s commitment to SEPA is summarised in its so-called Crowne Plaza Declaration of March 2005, which was subsequently incorporated into the EPC s Charter: We, the European banks and European Credit Sector Associations: share the common vision that Euroland payments are domestic payments, 55 OJ:L:2001:344:0013:0016:EN:PDF.

57 56 Ireland s Payment and Securities Settlement Systems Infrastructure join forces to implement this vision for the benefit of European customers, industry and banks and accordingly, launch our Single (Euro) Payments Area. The EPC aims to define common standards for core payment services within a competitive marketplace, provides strategic guidance for standardisation, formulates best practices and supports and monitors the implementation of all decisions taken. This is done in such a way that banks can maintain self-regulation and meet regulators and stakeholders expectations as efficiently as possible The Overall Goal of SEPA SEPA seeks to foster the integration of the payments market in the euro area, and to stimulate efficiency and innovation in this field through removal of the infrastructural barriers to payments that previously hampered competition in the single market. SEPA will help to make payment services comparable and transparent to users by introducing new harmonised electronic payment instruments and payment services, which can be offered by all banks in the euro area and thus make increased competition possible. Paper payment instruments (such as cheques) are outside the scope of the SEPA initiative. The SEPA project aims to ensure that all consumers throughout the euro area, whether individual citizens or corporate entities, have available to them common, standardised electronic retail payment instruments. When the project has been fully delivered, it will be as easy for a consumer to make a low-value payment from Dublin to Frankfurt as one from Dublin to Cork. However, in the final analysis, SEPA is not just about making cross-border payments SEPA is about making borders for payments obsolete by creating an integrated EU-wide payments market in euro. It is expected that the greatest beneficiaries of SEPA will be consumers in the euro area, whether individuals or corporate bodies, who make cross-border payments; consumers making national payments within member states where these are still relatively costly should also benefit. Consumers making national payments in member states where these are currently both fast and cost-effective will notice fewer, if any, differences. However, opening up national markets in all goods and services to competition from other member states by making cross-border payments more efficient and less costly can potentially bring significant benefits to consumers across the entire euro area. In principle, once the SEPA project has been fully implemented, consumers will be able to use their bank accounts to make payments in euro to payees with bank accounts in other countries in the euro area in exactly the same way as they would make a payment to a payee resident in their own country. For cross-border payments, there will no longer be a need for them to use payment instruments that differ from those used to make payments in their own countries; from the consumers perspective, everything will be done in exactly the same way, no matter where in the euro area the payee resides. All euro-area bank customers will be able to use one payment account in one country, and one set of payment instruments, to conduct all of their euro payments business. All such payments will, in effect, become domestic payments the location of payer and payee within the euro area will become completely irrelevant. For example, an Irish resident with a property in France could pay a French electricity bill by direct debit from an Irish bank account, without having to open a bank account in France. It is also, of course, conceivable that this notional consumer might find that a French bank was offering a better overall package than the Irish bank, and end up paying Irish electricity bills from a French bank account. That is what SEPA is aiming to provide real choice for the European consumer, and real competition between its banks, on a level playing-field, to the ultimate benefit of all. To take another example, in a SEPA environment it will be feasible for an Irish consumer to open a Belgian bank account, to pay for goods in Dublin with a debit card

58 Ireland s Payment and Securities Settlement Systems Infrastructure 57 issued by that Belgian bank and to pay utility bills (whether due in Ireland or elsewhere in the EU) via direct debit from this account, in exactly the same way as if the bank concerned was situated in Ireland The Scope of SEPA SEPA will involve substantial investments for euro-area banks. Estimates of these costs have ranged from 0.5 billion to 5 billion 56 ; these are, however, once-off investments and should be viewed in the context of the potentially much greater gains and savings that can be made every year in the euro-area economy as a whole. In this regard, a study carried out by Cap Gemini for the EU Commission in suggested that the benefits arising from SEPA could exceed 123 billion over the following six years, and as much as an extra 238 billion if SEPA could be used as a platform for further payments-related developments such as e-invoicing 58. Although the primary focus of SEPA is on the euro area, it also covers payments denominated in euro made throughout the EU and the EEA countries (i.e., the EU member states together with Iceland, Liechtenstein, Norway and Switzerland); it should therefore be possible to use SEPA-compliant payment instruments to effect euro-denominated payments within all of these countries national borders as well as for cross-border payments. Furthermore, whether or not they are located in the euro-area, all banks will be free to develop SEPA-compliant payment instruments and offer these to consumers. SEPA should, therefore, foster competition between payment service providers from the standpoint that consumers of payment services, whether individual or corporate, should have a choice between payment service providers offering SEPAcompliant products, regardless of where these payment service providers might be located Responsibility for SEPA While firmly rooted in ECB and EU Commission 56 Source: Boston Consulting Group, Global Payments market/payments/docs/sepa/sepacapgemini study-final report en.pdf. 58 e-invoicing, or electronic invoicing, is an internet-based solution for the secure exchange of electronic invoices between suppliers and buyers. policy, and strongly supported and promoted by both of these institutions, the European authorities view SEPA first and foremost as a market-driven project. Since its formation in 2002, the EPC as the European banking industry s decision-making and co-ordination body for SEPA has made significant progress towards making the project a reality and creating a solid foundation upon which it can be built. In practical terms, the EPC is the body responsible for defining the rules, procedures and standards that will apply to the new SEPA-compliant payment instruments and schemes that the banks will use to develop competitive products to offer to their customers. The body with primary responsibility for the implementation of SEPA in Ireland is the Irish Payment Services Organisation Limited (IPSO), the representative body for the Irish payments industry. In this regard, IPSO has established a SEPA Implementation Task Force (SITF), consisting of representatives of all of the IPSO member banks; the Central Bank, in its capacity as payment systems overseer, is a member of the SITF. The SITF was responsible for drawing up the Irish national SEPA migration plan, which was agreed in December The SITF s national plan covers the steps necessary to ensure that all aspects of the SEPA project agreed at EPC level, or mandated by the EU Commission and/or the ECB, are implemented successfully in Ireland, and that this takes place in accordance with the specified deadlines. The plan will be updated by IPSO as required to take account of developments in the intervening period, and will in due course incorporate a more broadly-focussed communications programme aimed at creating an awareness of the SEPA project among the general public The Delivery of SEPA General Background In delivering SEPA at a practical level, the EPC has developed two new pan-european payment schemes for electronic payments, one for credit transfers and the other for direct

59 58 Ireland s Payment and Securities Settlement Systems Infrastructure debits, respectively known as the SEPA Credit Transfer Scheme (SCT) and the SEPA Direct Debit Scheme (SDD). The EPC has also agreed a SEPA Cards Framework (SCF), which sets out its vision of how an integrated European payment cards market can be delivered. SCT and SDD are payment schemes that operate on the basis of rulebooks published by the EPC, the terms and conditions of which all participants in the schemes must fully observe. The SCF is more in the nature of a set of highlevel principles to which euro-area and EU payment card schemes should adhere. SEPA officially went live on 28 January 2008, with the formal launch by Europe s banks of the SCT. The SCT was launched first because it was by far the most straightforward of the new payment mechanisms to implement, given that most countries existing credit transfer schemes already operated in a broadly similar manner. SDD required more work, because there was a much greater diversity in how direct debit schemes were both structured and operated; in addition, because of this diversity, SDD was more dependent on implementation of the EU Commission s Payment Services Directive (or PSD see Section 6.2 of this Report for more details), and the delays encountered in finalising this legislation also impacted on the new direct debit scheme. The PSD provides the legal foundation for SEPA by putting in place a common legal framework for the delivery of payment services throughout the EU, thereby protecting and reinforcing the rights of all payment systems users. The Directive was due to be transposed into national law throughout the EU by 1 November 2009, and Ireland along with the majority of other EU member states met this deadline (some member states will transpose the PSD during 2010). However, transposition of the PSD did not lead to the widespread introduction of SDD services from 1 November 2009 as had initially been expected, as other factors have impacted on this aspect of SEPA, principally the various issues addressed by the EU Commission s Regulation 924/2009 (this Regulation is a revision of Regulation 2560/2001 on cross-border payments, following a review process that was completed in February 2008). The Department of Finance is currently preparing legislation to implement Regulation 924/2009 in Ireland. With regard to payment cards, the SEPA Cards Framework (SCF) has been in force since 1 January This framework outlines highlevel principles and rules that will allow European consumers to use payment cards to make payments and cash withdrawals throughout the euro-area on the same basis as in their home countries. Like the Laser scheme offered by the Irish banks, European debit card schemes have traditionally provided a very efficient and cost-effective payment solution to their local markets. The Eurosystem would, however, like all euroarea payment card schemes to be SEPAcompliant (in effect, useable in all euro-area countries), and while it sees no problem with the many current national schemes achieving this reach initially by co-branding with the international schemes (i.e., VISA and MasterCard) as Laser has done for some time now this is not seen by the ECB as the most efficient long-term solution. The ECB s preference would be for at least one new European payment card scheme to emerge over the next few years to compete with the two international schemes for cross-border payment cards business; this might be a completely new scheme, one formed through development of an existing national scheme, or by an alliance of several such schemes. Thus far, three European payment cards initiatives are progressing, albeit slowly. The first of these, the Euro Alliance of Payment Schemes (EAPS), is as its name implies an alliance between existing domestic payment cards schemes that would be expected in time to grow to the extent that it would provide SEPA-wide reach. The second, known as Monnet, is a pan-european debit card initiative backed by major French and German banks, while the third, Payfair, is a proposal by retailers to develop a payment card scheme to compete with bank-sponsored equivalents.

60 Ireland s Payment and Securities Settlement Systems Infrastructure The Delivery of SEPA in Ireland As has already been mentioned, IPSO s SITF SEPA Implementation Task Force (SITF) has overall responsibility for the implementation of SEPA in Ireland. In this section, the progress made to date here in relation to the three principal areas covered by SEPA, namely SCT, SDD and the SCF, is outlined. The related topic of SEPA communications (i.e., increasing public awareness about the SEPA initiative generally) is also mentioned. (a) SEPA Credit Transfer Scheme (SCT) The Irish banks have been processing SCT payments successfully since early 2008, but overall volumes remain low (this is in line with the experience to date in other euro-zone countries). Most of the Irish banks SCT payments thus far have been cross-border, both incoming and outgoing, with little use of the scheme to make national payments. (b) SEPA Direct Debit Scheme (SDD) All of the IPSO member banks active in the retail payments market are reporting good progress on their internal SDD projects; however, in common with many other European banking communities, the Irish banks did not meet the 1 November 2009 target date originally specified for SDD introduction. While it remains the general intention of the IPSO member banks to offer SDD services to their customers from the earliest possible date, some may not be fully SDD-ready until 1 November 2010, the deadline for full SDD reachability mandated by the EU Commission in Regulation 924/2009. (c) SEPA Cards Framework (SCF) (i) Credit cards Card issuers in Ireland issue both VISA and MasterCard credit cards, and these international payment card schemes have themselves taken responsibility for making their cards SEPA-compliant. (ii) Debit card (Laser) In order for Laser to become fully SEPAcompliant in its own right, the scheme must ensure that (a) Laser payment cards are usable by cardholders throughout the SEPA area and (b) any bank in this area could join the scheme and issue Laser cards to its customers, and acquire/process Laser transactions. In this regard, all Laser cards issued since 1 January 2008 are co-branded with an international payment card scheme (i.e., MasterCard, under the Maestro brand), which ensures that condition (a) is met. With regard to condition (b), it is possible for any bank in the SEPA area, regardless of location, to join the scheme, although settlement with the other participating banks might be more complex for a bank located outside Ireland. Thus far, there does not appear to be any interest from banks outside Ireland joining the scheme. However, Laser is SEPA-compliant for the time being, in that the Eurosystem view is that co-branding is an acceptable avenue to SEPA compliance pending implementation of a more long-term solution. The future development of the payment cards landscape in Ireland, including the future of the Laser scheme, is therefore a subject for further industry discussion and decision Progress on Implementing SEPA The general perception of the Eurosystem and one which is broadly shared by its constituent national central banks is that SEPA is being implemented rather more slowly than had originally been expected. This is evidenced by the low take-up of SCT, the delays in launching SDD, and the slow progress with regard to the emergence of a new European payment card scheme. There is also a fear that SEPA might ultimately prove to be an initiative applicable only to cross-border payments, leading to the creation of what has anecdotally become known as the mini-sepa, in which SCT, SDD and the SCF will co-exist in the long term with legacy national payment instruments and schemes. This is considered by the authorities to be an undesirable outcome, with significant costs having been incurred, and significant effort expended, for no real gain in terms of either streamlining or modernising the European payment systems landscape. There now appears to be a general acceptance among all stakeholders that (a) a

61 60 Ireland s Payment and Securities Settlement Systems Infrastructure more high-profile, definitive and prescriptive roll-out plan for SEPA is required, and that if this were in place, SEPA implementation could progress more quickly and (b) that a definitive end-date should be set by the EU Commission and/or the ECB for the completion of the SEPA migration process. To assist in moving the project forward, the ECB and the EU Commission recently established the SEPA Council, which is tasked with promoting a more open dialogue between all SEPA stakeholders and fostering consensus on how to bring the SEPA project to a successful conclusion. The new body complements existing SEPA structures, rather than replacing or duplicating them. The Council, which met for the first time on 7 June 2010, is chaired jointly by the ECB and the EU Commission, and will meet twice a year. Members of the council are drawn from both the supply and demand sides of the payments market, and are appointed by the joint Chairs based on nominations received from the different sectors involved with various aspects of the SEPA project (e.g., the EPC, banks, public authorities, corporates, etc.). The SEPA Council s role is to identify issues of concern, to foster consensus in addressing these, and to promote common understanding between all payment systems stakeholders. The SEPA Council will sit initially for a period of 3 years, after which its usefulness will be evaluated. 6.2 The Payment Services Directive (PSD) Background to the PSD The introduction of the euro as a currency in 1999, and of euro notes and coins in 2002, established a common area for cash payments across the 12 participating EU member states; likewise, the countries participating in the new single currency put in place efficient infrastructures to facilitate large-value payments throughout the euro area (i.e., the original TARGET system, now replaced by TARGET2). However, the situation was not as satisfactory in the area of retail (or low-value) payments, with each country in effect retaining its national retail payments market, with levels of efficiency and service varying between all EU member states. Cross-border retail payments in euro were in general slower, more expensive and less efficient than comparable payments made within national borders. The Single Euro Payments Area (SEPA) initiative (described in Section 6.1 of this Report) was therefore introduced to bring about the integration of the euro area s diverse national retail payments markets, and to stimulate generally efficiency and innovation in the retail payments field by removing obstacles hampering competition. The lack of integration in the field of retail payments was not particularly surprising, given the low volume of cross-border retail payments (it has been estimated that up to 97 per cent of all retail payments are made within national borders); individual national banking communities had little incentive to invest in technical inter-operability with payment systems in other countries. As a result, EU retail payment systems evolved within individual member states and tended to operate using only national standards; consolidation at the infrastructure level between national and cross-border payment systems was not seen as a priority by the banking industry. In just the same way that euro-area payment systems evolved using national standards, each euro-area member state s laws in relation to payments business also evolved differently. Recognising that a less fragmented payment system would benefit from increased economies of scale and thereby reduce transaction costs (particularly for cross-border payments), and that lower transaction costs could encourage greater cross-border trade and increased competition across the entire euro area, the EU Commission adopted a legislative proposal for a Directive on payment services in the internal market in December This Directive the Payment Services Directive (PSD) has put in place a harmonised legal environment for payments, thereby facilitating the integration of national

62 Ireland s Payment and Securities Settlement Systems Infrastructure 61 payments markets and improving overall competitiveness in the EU. The PSD provides the legal foundation for SEPA by implementing a common legal framework for the delivery of payment services throughout the EU, thereby protecting and reinforcing the rights of all payment systems users. The integration of Europe s diverse retail payments infrastructures that SEPA will ultimately bring about is seen by both the EU Commission and the ECB as essential for the completion of the so-called internal market, the concept dating from 1993 that envisages the EU as an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured. With the PSD, the EU Commission is also seeking to address a number of other payment systems issues. In the first place, the Commission is of the view that there is a degree of inefficiency still present in EU payment systems, arguing that significant price differences for payment services between member states, and also variations in service levels, demonstrated the differences between the best and worst systems in terms of overall efficiency. The Commission considers that these inefficiencies have a substantial negative impact on the general business environment, with both cash flow and working capital requirements being affected. Estimates of the aggregated cost for payment systems in the EU range between 2 per cent and 3 per cent of GDP, which compares poorly with those countries that have more efficient payment systems (e.g., the Nordic countries), where the comparable estimated costs are believed to be in the region of per cent of GDP. In particular, where electronic means have been widely adopted for retail payments again, for example, in the Nordic countries payment systems operate at much lower cost levels, as fully automated electronic payments can pass through a payment system virtually without manual intervention. The EU Commission also considers that a general lack of competition in the provision of payment services remains across the EU, and that as a consequence, the extent to which market forces are able to determine prices and efficiency levels in the area of payment services is unsatisfactory. Competition between existing providers of payment services (mostly credit institutions) was perceived as low, with few new entrants seeking to come into this market. With the PSD, the EU Commission s ultimate goal is to improve the competitiveness of the EU through integrating national payment markets, and to provide support for the European payments industry in building the infrastructure necessary for a single payments market. To achieve this goal, the PSD focuses on three main objectives: enhancement of competition by opening up the market in provision of payment services to greater competition, and the creation of a level playing field for new entrants; increased transparency in the payment services market both for providers and users of these services; and standardising the rights and obligations of EU payment services providers and users, with a particular emphasis on consumer protection. By delivering an improved market in payment services, the Commission is seeking to allow all users of such services, whether private citizens or corporate bodies, to make payments across the single market as easily, efficiently and inexpensively as they do today within national borders. In this regard, the PSD: creates a new, EU-wide, licensing regime for a new category of payment service provider to be known as payment institutions (i.e., providers of payment services that are neither credit institutions nor e-money institutions). Significant differences had existed between the regulatory regimes for payment services providers in EU Member States, these licensing regimes not being harmonised; and introduces common rules for all payment service providers (including credit

63 62 Ireland s Payment and Securities Settlement Systems Infrastructure institutions and e-money institutions) for the conduct of business involving all payments under 50,000 in value The Main Provisions of the PSD The main provisions of the PSD are outlined in general terms in this section; in summary, they can be grouped into two main categories the authorisation and prudential regulation of payment institutions and setting out what might best be termed performance standards for the European payments industry. In the latter category, the PSD also contains significant consumer protection measures. In terms of the first category, the Directive defines the new category of payment service provider known as payment institutions and sets out in detail the regulatory regime to which they should be subject, covering such areas as authorisation requirements and limitations on their activities for example, these entities are restricted to providing payment services, and are not permitted to take deposits and advance loans. To facilitate access to the payment systems infrastructure by payment institutions, and thereby open up the market in provision of payment services to greater competition, the PSD prohibits payment systems from imposing any access conditions on payment institutions beyond those needed to safeguard against risk and protect financial stability. At the time of writing, seven payment institutions have been authorised by the Financial Regulator (the responsible authority in this regard) to operate in Ireland. These are as follows: Blue Foreign Exchange Limited Chase Paymentech Europe Limited FEXCO Corporate Payments Limited First Merchant Processing (Ireland) Limited First Merchant Processing (UK) Limited Hilfulfujul Limited Western Union Payment Services Ireland Limited Moving to the performance standards and consumer protection aspects of the legislation, the PSD introduces conduct of business rules that apply to payment service providers when dealing with consumers. Transparency and information requirements that must be met by payment service providers at each stage of a payment transaction are set out in the Directive. In addition, the PSD sets out the rights and obligations of payment service providers and users, including rules for the authorisation of payment transactions (e.g., what constitutes authorisation to make a payment and what happens in the event of unauthorised payments being made from a customer s account); the rights of payment service users in relation to refunds are also set out in detail. In addition, rules relating to payment orders and amounts transferred are also specified in the Directive; in this regard, the stage at which a payment is considered to have been received by a payment services provider is defined, and requirements imposed in terms of ensuring that the full amount of any payment is received by the intended payee. The maximum execution time for all payment transactions is covered in the PSD, along with rules applicable to how quickly funds must be made available to the payee by the relevant payment service provider. Other matters covered in the Directive include remedies in the event of defective or non-execution of a payment transaction, penalties, complaint and redress procedures and data protection issues. The EU Commission also intends the PSD to provide an incentive for the banking industry to deliver on SEPA by setting common standards throughout the euro area for delivery of payment services (e.g., in areas such as maximum execution times). For example, in some countries retail payments are executed on a same-day basis, while in others similar transactions can take up to three business days PSD Transposition in Ireland The Oversight Unit was involved from the outset in work related to the PSD, having participated in the EU Commission s PSD Transposition Working Group along with the Department of Finance. In addition, the

64 Ireland s Payment and Securities Settlement Systems Infrastructure 63 Oversight Unit took part in both an IPSO PSD Working Group and an internal Central Bank PSD Working Group. The Irish authorities transposed the Directive into national law by the required date of 1 November 2009 by means of a Statutory Instrument, the work in this regard having been carried out by the Department of Finance in conjunction with IPSO and the Central Bank (the Statutory Instrument No. 383 of 2009 was signed by the Minister for Finance on 25 September 2009). The transposition of the PSD into Irish law was also the subject of a Department of Finance public consultation aimed at ensuring that the views of all relevant stakeholders on the Directive and its likely impact were taken into account. The Central Bank is the responsible authority for ensuring compliance with the provisions of the PSD by Irish financial institutions. The legislation transposing the PSD into Irish law provides for redress mechanisms and appropriate penalties in the event that its provisions are not observed. 6.3 Ireland s National Payments Implementation Programme (NPIP) The need for modernisation of the Irish retail payment system can be traced back to a seminar organised by the Information Society Commission in 1998, which highlighted the fact that Ireland was falling behind competing countries in terms of the growing trend favouring the use of electronic payment instruments over their paper equivalents. Payment systems modernisation was subsequently covered in the Action Plan on Implementing the Information Society in Ireland launched by the Department of the Taoiseach in January 1999, following which the banks were requested to propose appropriate new systems; consultation mechanisms were also put in place to ensure that an inclusive approach was adopted vis-à-vis payment systems development. The Action Plan allowed for payment systems proposals to be considered by a Steering Group that would liaise with the Department of the Taoiseach, and two consultative panels were established to provide input into what were at the time seen as the key areas: bill payments and payments by the public sector. Government departments, credit institutions, business and consumer organisations and trade unions were all represented on these panels. In the same timeframe, AIB and Bank of Ireland retained the Boston Consulting Group to help them prepare proposals for systems to facilitate payment of utility bills and government disbursements such as grants and welfare payments. In its report to AIB and Bank of Ireland, the consultant noted that: there was a global trend towards use of electronic payments; Ireland had made some progress in this regard, but still lagged behind competing countries; and moving to electronic payments could bring benefits to all sectors of society, not least in such important areas as access to payment systems, security and fraud prevention, cost, convenience and competitiveness. To enable the necessary reform of the retail payment system, it was suggested by the Boston Consulting Group that changes would be needed to the information technology platforms and standards supporting the country s payment systems infrastructure; some legislative changes might also be required, as would significant modification of payments behaviour on the part of all payment systems users. Furthermore, it was seen as vital that the benefits of moving to electronic payments would be shared by all, and that all stakeholder groups co-operate fully to bring about the best possible outcome. Public sector involvement was also seen as essential to any project aimed at payment systems reform. The next step came in 2003, when the Department of the Taoiseach acting on behalf of the Information Society Commission engaged Accenture to help develop recommendations for the Government s National e-payment Strategy. Accenture

65 64 Ireland s Payment and Securities Settlement Systems Infrastructure prepared a report indicating that the cost to the economy of continued heavy use of cash and cheques was between 330m and 640m per annum. These costs made financial transactions more expensive for consumers, reduced the competitiveness of the financial sector in particular and the business sector generally, and also resulted in higher than necessary transaction costs for public sector payments. The Accenture Report concluded that: there was a strong economic rationale for developing a national e-payment strategy, which would also allow the Government to address some strategic national social and economic objectives; the level of investment would be a key determinant of the success or failure of any such strategy; and to be successful, any national e-payment strategy would require effective leadership in order to co-ordinate effectively the work and objectives of all stakeholders, and the public sector was seen as best-equipped to perform this leadership role. In 2005, a formal National Payments Implementation Programme (NPIP) was established; NPIP was jointly chaired by the Department of the Taoiseach and by the Irish Payment Services Organisation (IPSO), the representative body of the payments industry in Ireland. From the outset, the NPIP process sought to encompass as many payment systems stakeholders as possible, and has included representatives from the following organisations: Central Bank Chambers Ireland Combat Poverty Consumers Association of Ireland Department of Agriculture, Fisheries and Food Department of Finance Department of Social and Family Affairs Department of the Taoiseach Enterprise Ireland IBEC Irish Banking Federation (IBF) Irish League of Credit Unions (ILCU) Irish Payment Services Organisation (IPSO) Railway Procurement Agency Revenue Commissioners RGDATA The stated objective of the NPIP was to deliver a best in breed payments environment which delivers efficiencies to all sectors of the economy, is inclusive of all sectors of society, and shares the benefits universally. In 2006, three broadly-based working groups were established by the Department of the Taoiseach and IPSO to examine the following aspects of the Irish payment systems infrastructure: Universal Access (i.e., how to make payment systems more accessible to those sections of society at the time termed the unbanked ); cash; and cheques IPSO also established three parallel banking industry groups to support the activities of the above-mentioned working groups. This phase of the NPIP concluded with the holding of a National Payments Conference in Dublin Castle in December 2006, jointly sponsored by the Department of the Taoiseach and IPSO. Following this conference, it was agreed to develop the earlier working group structure into a voluntary and broadly-based NPIP Advisory Group, the membership of which was identical to the previous NPIP group but with the addition of the Small Firms Association. Chaired by the Department of the Taoiseach, the NPIP Advisory Group s primary function was to facilitate progress in the following areas: research into the same three key

66 Ireland s Payment and Securities Settlement Systems Infrastructure 65 payment systems infrastructure areas: universal access, cash and cheques; arrange a further conference to engage as many stakeholder constituencies as possible in the work to modernise the Irish payment systems infrastructure; invite payment service technology providers, on an ad hoc basis, to demonstrate emerging solutions; and explore similar developments and experiences in comparable countries. A second National Payments Conference was held in April , at which inter alia the need for a national plan to modernise the retail payment system in Ireland and a governance structure to ensure delivery of this plan were agreed by all participants. The scope of the matters that need to be addressed is perhaps best illustrated by some facts and figures relating to payments in Ireland in 2008: Ireland was one of the four highest cheque users in the EU, with an average of 29 cheques written per capita per annum; cheques represented over 78 per cent of the value of all non-cash payments in Ireland, whereas the EU average was less than 4 per cent; Irish consumers withdrew the most cash from ATMs per person per annum in the EU at 6,454; by comparison the EU average was 2,579 per person. Per capita ATM withdrawals in Ireland were more than 12 times the best performing country, Denmark, where 526 per person per annum was withdrawn; the total number of ATMs in Ireland had increased from 1,914 in 2003 to 3,404 in 2008; Ireland was at the lower end the scale among EU countries in terms of the number of debit and credit cards per capita (1.2 in 2008 compared to an EU Average of 1.38); and 59 The proceedings of both National Payments Conferences can be found on the IPSO website at Ireland had 41 transactions by debit card per annum per capita, whereas the best-performing countries Finland, Denmark and Sweden had in excess of 100 such transactions. The conference was ultimately of the view that a fundamental restructuring of the NPIP programme would be required, and that the payment system modernisation process would benefit from the appointment of a body tasked with setting out a strategic long-term vision for the payments industry in Ireland. This new body would need to have the capacity to (i) oversee the preparation of a national plan containing specific actions, targets and milestones and (ii) allocate clear responsibility for the achievement of key objectives Proposals for the Future Despite the fact that significant progress has been made in recent years both in developing the national payments infrastructure and in modernising payment methods (e.g., debit cards, electronic payments and internet banking have become widely available and are more extensively used), Ireland continues to perform poorly in these areas vis-à-vis comparator countries. In Budget 2009 (October 2008), the Minister for Finance indicated the need to establish new governance arrangements to further promote the use of electronic payments throughout the economy. The Minister also indicated that the Government would move to establish a highlevel group to direct the preparation and implementation of a national payments implementation plan to achieve a decisive shift towards greater use of electronic payments. Arising from the Minister s Budget Statement, the NPIP Advisory Group provided recommendations in a report to the Minister on the possible mechanisms and mandate that would be required in order to further promote the development of electronic payments. The Minister is currently considering these recommendations and it is expected that the proposed high-level group will be established this year.

67

68 Ireland s Payment and Securities Settlement Systems Infrastructure 67 Annex 1: The ESCB-CESR recommendations for Securities Settlement Systems and Central Counterparties The following is a list of the headline recommendations for securities settlement systems: 1. Securities settlement systems, links between them or interoperable systems should have a well founded, clear and transparent legal basis for their operations in the relevant jurisdictions. 2. Confirmation of trades between direct market participants should occur as soon as possible after trade execution, but no later than trade date (T+0). Where confirmation of trades by indirect market participants (such as institutional investors) is required, it should occur as soon as possible after trade execution, preferably on T+0, but no later than T+1. Settlement instructions should be matched as soon as possible and, for settlement cycles that extend beyond T+0, this should occur no later than the day before the specified settlement date. 3. Rolling settlement should be adopted in all securities markets. Final settlement should occur no later than T+3. The benefits and costs of EU-wide settlement cycles shorter than T+3 should be evaluated. The operating hours and days of CSDs should be open at least during the operating time of the relevant payment system (at least during TARGET2 operating times for transactions denominated in euro). 4. The benefits and costs of establishing a CCP should be evaluated. Where a CCP mechanism or guarantee arrangement has been introduced, it should be assessed against the ESCB-CESR Recommendations for CCPs or against the checklist for guarantee arrangements respectively. 5. Securities lending and borrowing (or repurchase agreements and other economically equivalent transactions) should be encouraged as a method for avoiding settlement failures and expediting the settlement of securities. Barriers that inhibit the practice of lending securities for this purpose should be removed. The arrangements for securities lending should be sound, safe and efficient. 6. Securities should be immobilised or dematerialised and transferred by book entry in CSDs to the greatest possible extent. To safeguard the integrity of securities issues and the interests of investors, the CSD should ensure that the issue, holding and transfer of securities are conducted in an adequate and proper manner. 7. Principal risk should be eliminated by linking securities transfers to funds transfers in a way that achieves delivery versus payment. 8. Intraday settlement finality should be provided through real-time and/or multiplebatch processing in order to reduce risks and allow effective settlement across systems. 9. CSDs that extend intraday credit to participants, including CSDs that operate net settlement systems, should institute risk controls that, at a minimum, ensure timely settlement in the event that the participant with the largest payment obligation is unable to settle. The most reliable set of controls is a combination of collateral requirements and limits. 10. Assets used to settle payment obligations arising from securities transactions should carry little or no credit or liquidity risk. If central bank money is not used, steps must be taken to protect the participants in the system from potential losses and liquidity pressures arising from the failure of the cash settlement agent whose assets are used for that purpose. 11. Sources of operational risk arising in the clearing and settlement process should be identified, monitored and regularly assessed. This risk should be minimised through the development of appropriate systems and effective controls and procedures. Systems and related functions

69 68 Ireland s Payment and Securities Settlement Systems Infrastructure should (i) be reliable and secure, (ii) be based on sound technical solutions, (iii) be developed and maintained in accordance with proven procedures, (iv) have adequate, scaleable capacity, (v) have appropriate business continuity and disaster recovery plans that allow for the timely recovery of operations, and (vi) be subject to frequent and independent audits. 12. Entities holding securities in custody should employ accounting practices and safekeeping procedures that fully protect customers securities. It is essential that customers securities be protected against the claims of the creditors of all entities involved in the custody chain. 13. Governance arrangements for CSDs should be designed to fulfil public interest requirements and to promote the objectives of owners and relevant market participants. 14. CSDs should have objective and publicly disclosed criteria for participation that permit fair and open access. Rules and requirements that restrict access should be aimed at controlling risk. 15. While maintaining safe and secure operations, securities settlement systems should be cost-effective in meeting the requirements of users. 16. CSDs and participants in their systems, should use or accommodate the relevant international communication procedures and standards for messaging and reference data in order to facilitate efficient clearing and settlement across systems. This will promote straight-through processing (STP) across the entire securities transaction flow. 17. CSDs should provide market participants with sufficient information for them to identify and accurately evaluate the risks and costs associated with securities clearing and settlement services. 18. CSDs and securities settlement systems should be subject to transparent, consistent and effective regulation, supervision and oversight. In both a national and a cross-border context, central banks and securities regulators should cooperate with each other and with other relevant authorities regarding the CSD and the securities settlement systems it operates. Central banks and securities regulators should also ensure a consistent implementation of the recommendations. 19. CSDs that establish links to settle crosssystem trades should design and operate such links so that they effectively reduce the risks associated with cross-system settlements. They should evaluate and mitigate the potential sources of risks that can arise from the linked CSDs and from the link itself. The following is a list of the headline recommendations for central counterparties 20. CCPs, linked or interoperable CCPs should have a well-founded, transparent and enforceable legal framework for each aspect of their activities in all relevant jurisdictions. 21. A CCP should require participants to have sufficient financial resources and robust operational capacity to meet obligations arising from participation in the CCP. A CCP should have procedures in place to monitor that participation requirements are met on an ongoing basis. A CCP s participation requirements should be objective, publicly disclosed, and permit fair and open access. Rules and requirements that restrict access should be aimed at controlling risk. 22. A CCP should measure its credit exposures to its participants at least once a day. Through margin requirements and other risk control mechanisms, a CCP should limit its exposures to potential losses from defaults by its participants so that the operations of the CCP would not be distributed and non-defaulting participants would not be exposed to losses that they cannot anticipate or control. 23. A CCP should to the greatest extent feasible impose margin requirements to limit its credit exposures to participants. These requirements should be sufficient to cover potential exposures that the CCP estimates to occur until the liquidation of the relevant positions. The models and

70 Ireland s Payment and Securities Settlement Systems Infrastructure 69 parameters used in setting margin requirements should be risk-based and reviewed regularly. 24. A CCP should maintain sufficient available financial resources to cover potential losses that exceed the losses to be covered by margin requirements. For this purpose, the CCP should develop plausible scenarios and conduct stress tests accordingly. At a minimum, a CCP should be able to withstand a default by the participant to which it has the largest exposure in extreme but plausible market conditions. 25. A CCP s default procedures should be clearly stated, and they should ensure that the CCP can take timely action to contain losses and liquidity pressures and to continue meeting its obligations. Key aspects of the default procedures should be publicly available and tested regularly. 26. A CCP should hold assets in a manner whereby risk of loss or of delay in its access to them is minimised. Assets invested by a CCP should be held in instruments with minimal credit, market and liquidity risks. 27. A CCP should identify sources of operational risk, monitor and regularly assess them. The CCP should minimise these risks through the development of appropriate systems, and effective controls and procedures. Systems and related functions should be (i) reliable and secure, (ii) based on sound technical solutions, (iii) developed and maintained in accordance with proven procedures and (iv) have adequate, scalable capacity. The CCP should have appropriate business continuity and disaster recovery plans that allow for timely recovery of operations and fulfilment of a CCP s obligations. Systems should be subject to frequent and independent audits. 28. A CCP should employ money settlement arrangements that eliminate or strictly limit credit and liquidity risks. If central bank money is not used, steps must be taken to strictly limit cash settlement risks, that is, credit and liquidity risks stemming from the use of banks by a CCP to effect money settlement with its participants. Funds transfers to a CCP should be final when effected and rely on efficient and safe payment systems. 29. A CCP should clearly state its obligations with respect to physical deliveries. The risks from these obligations should be identified and managed. 30. CCPs that establish links either crossborder or domestically to clear trades should design and operate such links so that they effectively reduce the risks associated with the link. It should evaluate the potential sources of risks that can arise from the linked CCP and from the link itself. It should ensure that the risks are managed prudently on an ongoing basis. There should be a framework for co-operation and co-ordination between the relevant regulators and overseers. 31. While maintaining safe and secure operations, CCPs should be cost-effective in meeting the requirements of participants. 32. Governance arrangements for a CCP should be clear and transparent to fulfil public interest requirements and to support the objectives of owners and relevant market participants. In particular, they should promote the effectiveness of a CCP s risk management procedures. 33. A CCP should provide market participants with sufficient information for them to identify and evaluate accurately the risks and costs associated with using its services. 34. A CCP should be subject to transparent, consistent and effective regulation, supervision and oversight. In both a national and a cross-border context, central banks and securities regulators should cooperate with each other and with other relevant authorities regarding the CCP. Such cooperation should also ensure a consistent implementation of the recommendations.

71

72 Ireland s Payment and Securities Settlement Systems Infrastructure 71 Annex 2: Glossary of Terms Related to Payment, Clearing and Settlement Systems (Source: ECB) Note: These are definitions of terms as they are used by market participants, not legal definitions. The objective is for the glossary to have a broad, general scope, rather than being system or infrastructure-specific. The use of these terms and definitions may be subject to limitations on account of the diversity of European infrastructure and legal systems. Acceptance: this term has two meanings: 1) in the field of transfer systems, it refers to the inclusion of a transfer order for funds or securities in a system s operations for further processing, potentially following various checks (e.g., regarding technical standards or the availability of funds), as specified in the rules of the system; 2) in the field of cards, it refers to the process whereby a particular brand of card is accepted by a terminal, merchant or other entity. Acceptor: a merchant or other entity that accepts a payment instrument presented by a client in order to transfer funds to that merchant or other entity. ACH: see automated clearing house. Acquirer (card acquirer): in point-of-sale (POS) transactions, the entity (usually a credit institution) to which the acceptor (usually a merchant) transmits the information necessary in order to process the card payment. In automated teller machine (ATM) transactions, the entity (usually a credit institution) which makes banknotes available to the cardholder (whether directly or via the use of third-party providers). Advisory netting: see position netting. Agency relationship: a contractual relationship whereby one party (the agent) acts on behalf of another (the principal). Ancillary system: a system in which payments or securities are exchanged and/or cleared. Meanwhile, the ensuing monetary obligations are settled in another system, typically an RTGS system. See also real-time gross settlement (RTGS) system. Asset servicing: administration services provided by a central securities depository (CSD) or custodian in connection with the custody and/or safekeeping of financial instruments (e.g., the processing of corporate events or the handling of taxes). ATM: see automated teller machine. Authentication: a security mechanism for verifying: 1) the identity of an individual or other entity (including verification by means of a computer or computer application); and 2) the level of authority of that person or entity (i.e., the ability of that person or entity to perform specific tasks or activities). Authorisation: the consent given by a participant (or a third party acting on behalf of that participant) in order to transfer funds or securities. Auto-collateralisation: a credit operation that is or can be triggered when a buyer does not have sufficient funds to settle a securities transaction in order to improve its cash position for the next settlement cycle. The credit provided can be secured using securities already held by the buyer ( collateral stocks ) or the securities that are being purchased ( collateral flows ). Automated clearing house (ACH): an electronic clearing system in which payment orders are exchanged among participants (primarily via electronic media) and handled by a data processing centre. See also clearing, clearing house. Automated teller machine (ATM): an electromechanical device that allows authorised users, typically using machinereadable plastic cards, to withdraw cash from their accounts and/or access other services (allowing them, for example, to make balance enquiries, transfer funds or deposit money). See also cash dispenser. Automatic linking: a process whereby trading members may automatically link buy and sell

73 72 Ireland s Payment and Securities Settlement Systems Infrastructure trades by marking the respective securities trades. See also linked trade. Backup system: a system designed to replace the primary system in the event of the primary system being unable to function for whatever reason. See also business continuity. Bank Identifier Code (BIC): an International Organization for Standardization (ISO) technical code that uniquely identifies a financial institution. SWIFT is the registration authority for BICs. A BIC consists of eight or eleven characters, comprising a financial institution code (four characters), a country code (two characters), a location code (two characters) and, optionally, a branch code (three characters). Batch (bulk payments): a group of orders (payment orders and/or securities transfer orders) to be processed together. Beneficiary: a recipient of funds (payee) or securities. Depending on the context, a beneficiary can be a direct participant in a payment system and/or a final recipient. BIC: see Bank Identifier Code. Bilateral exposure: one party s exposure to another party. See also exposure. Bilateral net settlement system: a settlement system in which every individual bilateral combination of participants settles its net settlement position on a bilateral basis. See also net settlement system. Bilateral netting: an arrangement whereby two parties net their bilateral obligations. See also multilateral netting, netting, net settlement system. Bill of exchange: a written order from one party (the drawer) to another (the drawee) instructing it to pay a specified sum on demand or on a specified date to the drawer or a third party specified by the drawer. These are widely used to finance trade and, when discounted with a financial institution, to obtain credit. Blocking: a process preventing the transfer of a specified amount of funds or a specified quantity of a security. Book-entry system: a system which enables transfers of securities and other financial assets which do not involve the physical movement of paper documents or certificates (e.g., the electronic transfer of securities). See also dematerialisation, immobilisation. Book-entry transaction: this term has two meanings: 1) in the field of securities, it refers to a transaction which is processed without the movement of physical certificates, being effected instead by means of credit and debit entries; 2) in the field of payments, it refers to a credit or debit entry made by a credit institution on the account of a customer in accordance with a general instruction issued by the customer (e.g., for a dividend payment or bank fees). Brand: a particular payment product (especially a card) that has been licensed by its owner for use in a given territory. Bulk payments: see batch. Business continuity: a state of uninterrupted business operations. This term also refers to all of the organisational, technical and staffing measures employed in order to: 1) ensure the continuation of core business activities in the immediate aftermath of a crisis; and 2) gradually ensure the continued operation of all business activities in the event of sustained and severe disruption. See also backup system. Cap (limit): a quantitative limit on the funds or securities transfer activity of a participant in a system. Limits may be set by each individual participant or imposed by the entity managing the system. Limits can be placed on system participants net debit and/or net credit positions. Card (payment card): a device that can be used by its holder to pay for goods and services or to withdraw money. Card acquirer: see acquirer. Cardholder: a person to whom a payment card is issued and who is authorised to use that card. Card issuer: a financial institution that makes payment cards available to cardholders, authorises transactions at point-of-sale (POS) terminals or automated teller machines (ATMs) and guarantees payment to the acquirer for

74 Ireland s Payment and Securities Settlement Systems Infrastructure 73 transactions that are in conformity with the rules of the relevant scheme. Card scheme: a technical and commercial arrangement set up to serve one or more brands of card which provides the organisational, legal and operational framework necessary for the functioning of the services marketed by those brands. See also threeparty card scheme, four-party card scheme. Card with a cash function: a card enabling the cardholder to withdraw cash from a cash dispenser and/or deposit cash. The cash function is usually combined with a payment function. See also cash card. Card with a credit function: see credit card. Card with a debit function: see debit card. Cash card: a card which has only a cash function. See also card with a cash function. Cash dispenser: an electromechanical device that permits authorised users to withdraw banknotes, typically using machine-readable plastic cards. See also automated teller machine. Cash settlement agent: the entity whose assets or liabilities are used to settle the payment obligations arising from funds transfer systems or from securities transfers within a central securities depository (CSD). Commercial banks and central banks are typical cash settlement agents. CCBM: see correspondent central banking model. CCBM2: see Collateral Central Bank Management. CCP: see central counterparty. Central bank money: liabilities of a central bank, in the form of either banknotes or bank deposits held at a central bank, which can be used for settlement purposes. Central counterparty (CCP): an entity that interposes itself, in one or more markets, between the counterparties to the contracts traded, becoming the buyer to every seller and the seller to every buyer and thereby guaranteeing the performance of open contracts. Central counterparty (CCP) link: an arrangement between two central counterparties (CCPs) that allows the provision of central counterparty services for trades performed by the participants of those two CCPs, without requiring those participants to become members of both CCPs. Central securities depository (CSD): an entity that: 1) enables securities transactions to be processed and settled by book entry; 2) provides custodial services (e.g., the administration of corporate actions and redemptions); and 3) plays an active role in ensuring the integrity of securities issues. Securities can be held in a physical (but immobilised) form or in a dematerialised form (whereby they exist only as electronic records). Chaining: a method used in certain transfer systems for the processing of orders. This involves altering the sequence in which transfer orders are processed in order to increase the number or value of transfers that can be settled with the available funds and/or securities balances (or the available credit or securities lending lines). See also optimisation routine. Charge card: see delayed debit card. Cheque: a written order from one party (the drawer) to another (the drawee; normally a credit institution) requiring the drawee to pay a specified sum on demand to the drawer or a third party specified by the drawer. Chip card (smart card): a card with an embedded microprocessor (chip) loaded with the information necessary to enable payment transactions. Clearing: the process of transmitting, reconciling and, in some cases, confirming transfer orders prior to settlement, potentially including the netting of orders and the establishment of final positions for settlement. Sometimes this term is also used (imprecisely) to cover settlement. For the clearing of futures and options, this term also refers to the daily balancing of profits and losses and the daily calculation of collateral requirements. See also settlement. Clearing fund: a fund composed of assets contributed by participants in a central counterparty (CCP) or by providers of guarantee arrangements that may be used to

75 74 Ireland s Payment and Securities Settlement Systems Infrastructure meet the obligations of a defaulting CCP participant. In certain circumstances, it may also be used to settle transactions and cover losses and liquidity pressures resulting from such defaults. A clearing fund serves as insurance against unusual price movements not covered by the margin calculation in the event of a member defaulting. Clearing house: a common entity (or a common processing mechanism) through which participants agree to exchange transfer instructions for funds, securities or other instruments. In some cases, a clearing house may act as a central counterparty for those participants, thereby taking on significant financial risks. Clearing member: a member of a clearing house. See also direct clearing member, general clearing member, non-clearing member. Clearing system: a set of rules and procedures whereby financial institutions present and exchange data and/or documents relating to transfers of funds or securities to other financial institutions at a single location (e.g., a clearing house). These procedures often include a mechanism for calculating participants mutual positions, potentially on a net basis, with a view to facilitating the settlement of their obligations in a settlement system. See also clearing, netting, clearing house. Close-out netting: a special form of netting which follows certain contractually agreed events (such as the opening of insolvency proceedings), whereby all existing obligations are accelerated such that they become due immediately. See also netting, default. Co-branding: an arrangement whereby a product or service is associated with more than one brand. Collateral: an asset or third-party commitment that is used by a collateral provider to secure an obligation vis-à-vis a collateral taker. See also pledge, collateral pool, repurchase agreement. Collateral Central Bank Management (CCBM2): a common platform for Eurosystem collateral management, establishing efficient collateral mobilisation and management procedures for both domestic and cross-border collateral. Collateral management: collateral management includes the process used to control the correspondence between the market value of the relevant collateral and the required value of that collateral. It generally also includes the generation and processing of collateral transfers. Collateral pool: a collateralisation technique that enables an institution to make collateral available to a counterparty without allocating it to a specific transaction. Antonym: earmarking. Commercial bank money: commercial bank liabilities that take the form of deposits held at a commercial bank which can be used for settlement purposes. See also loro account, nostro account. Committed facility: a facility (e.g., a credit line or a repo facility) whereby the provider is contractually required to advance funds in specified circumstances. See also collateral pool, loss-sharing agreement. Common depository: an entity, usually a credit institution, that provides the two international central securities depositories (ICSDs) with safekeeping and asset servicing for physical papers ( global notes ) covering all or part of an issue of international debt instruments (e.g., Eurobonds). See also specialised depository. Confirmation (trade confirmation): a process whereby the terms of a trade are verified either by directly involved market participants or by a central entity. Contractual settlement date accounting: a contractual commitment by a custodian to credit and debit a customer s cash and securities accounts, as appropriate, on the date on which the customer s contract with its counterparty is due for settlement (i.e., the contractual settlement date), regardless of whether settlement has actually occurred. Such crediting and debiting is normally provisional and does not become final if settlement does not occur within a time period established by the custodian.

76 Ireland s Payment and Securities Settlement Systems Infrastructure 75 Core Principles for Systemically Important Payment Systems (CPSIPS): international standards for systemically important payment systems developed by the G10 central banks in order to guide the oversight activities of central banks with regard to payment systems of systemic importance. For details, see the report Core Principles for Systemically Important Payment Systems, BIS, January Corporate action (corporate event): an action or event decided by the issuer of a security which has an impact on the holders of that security. This may be optional, in which case those holders have a choice (for example, they may have the right to purchase more shares, subject to conditions specified by the issuer). Alternatively, it may be mandatory, whereby those holders have no choice (e.g., in the case of a dividend payment or stock split). Corporate actions can relate to cash payments (e.g., dividends or bonuses) or the registration of rights (subscription rights, partial rights, splits, mergers, etc.). Corporate event: see corporate action. Correspondent banking: an arrangement whereby one bank (the settlement or serviceproviding bank) makes or receives payments (potentially performing other banking services in addition) on behalf of another bank (the customer or user bank). See also loro account, nostro account, tiering arrangement. Correspondent central banking model (CCBM): a mechanism established by the European System of Central Banks with the aim of enabling counterparties to use eligible collateral in a cross-border context. In the CCBM, national central banks act as custodians for one another. This means that each national central bank has a securities account in its securities administration for each of the other national central banks and the ECB. Counterparty risk: the risk that between the time a transaction is agreed and the time it is actually settled, the counterparty to that transaction will fail to fulfil its obligations. CPSIPS: see Core Principles for Systemically Important Payment Systems. Credit cap: see credit limit. Credit card (card with a credit function): a card that enables cardholders to make purchases and/or withdraw cash up to a prearranged credit limit. The credit granted may be either settled in full by the end of a specified period, or settled in part, with the balance taken as extended credit (on which interest is usually charged). Credit institution: a credit institution is a company duly authorised to carry out banking transactions on a regular basis (i.e., to receive deposits from the public, carry out credit transactions, make funds available and manage means of payment). Credit limit (credit cap): a limit on the credit exposure which a payment system participant incurs either vis-à-vis another participant (a bilateral credit limit ) or vis-à-vis all other participants (a multilateral credit limit ) as a result of receiving payments which have not yet been settled. Credit line: a commitment, made in advance by a given entity, to grant credit on demand to another entity subject to agreed terms. Credit risk: the risk that a counterparty will not settle the full value of an obligation neither when it becomes due, nor at any time thereafter. Credit risk includes replacement cost risk and principal risk. It also includes the risk of the settlement bank failing. See also replacement cost risk, principal risk. Credit transfer: a payment instrument allowing a payer to instruct the institution with which its account is held to transfer funds to a beneficiary. Cross-border payment: a payment where the financial institutions of the payer and the payee are located in different countries. Cross-border settlement: settlement that takes place in a country (or currency area) in which one or both parties to the transaction are not located. Antonym: domestic settlement. Cross-currency settlement risk: see foreign exchange settlement risk. Cross-margining agreement: an agreement between two central counterparties (CCPs) which makes it possible to limit the margin

77 76 Ireland s Payment and Securities Settlement Systems Infrastructure requirements for institutions participating in both CCPs by regarding the positions and collateral of such participants as one portfolio. Cross-system settlement: the settlement of a payment or securities transaction through a link between two separate payment systems or securities settlement systems. CSD: see central securities depository. CSD link: a set of technical and legal arrangements between two central securities depositories (CSDs) for the cross-system transfer of securities. See also investor CSD, issuer CSD, relayed link, direct link, indirect link. Custodian: an entity, often a credit institution, which provides securities custody services to its customers (cf. depository). Custody: the holding and administration, by an entity entrusted with such tasks, of securities and other financial instruments owned by a third party. Custody risk: the risk of a loss being incurred on securities in custody as a result of a custodian s insolvency, negligence, misuse of assets, fraud, poor administration or inadequate record-keeping. Cut-off time: the deadline set by a system (or an agent bank) for the acceptance of transfer orders for a given settlement cycle. Daily processing: the complete cycle of processing tasks which need to be completed in a typical business day, from start-of-day procedures to end-of-day procedures. This sometimes includes the backing-up of data. Daylight credit: see intraday credit. Debit card (card with a debit function): a card enabling its holders to make purchases and/or withdraw cash and have these transactions directly and immediately charged to their accounts, whether these are held with the card issuer or not. See also card, delayed debit card. Default: an event stipulated in an agreement as constituting a default. Generally, such events relate to a failure to complete a transfer of funds or securities in accordance with the terms and rules of the system in question. A failure to pay or deliver on the due date, a breach of agreement and the opening of insolvency proceedings all constitute such events. See also failed transaction. Defaulter pays : a loss-sharing arrangement whereby each participant is required to collateralise any exposures it creates for other participants. As a result, losses resulting from a party s default are borne by the defaulting party. Antonym: survivors pay. Deferred net settlement system: a system which settles on a net basis at the end of a predefined settlement cycle (typically at the end of but sometimes during the business day). See also net settlement system. Delayed debit card (charge card): a card enabling its holders to make purchases and/or withdraw cash and have these transactions charged to an account held with the card issuer, up to an authorised limit. The balance of this account is then settled in full at the end of a predefined period. See also card. Delivery: the transfer of financial instruments or commodities by means of book entry or physical exchange. Delivery versus delivery (DvD): a securities settlement mechanism which links two securities transfers in such a way as to ensure that the delivery of one security occurs if and only if the other security in the other transfer is delivered. Delivery versus payment (DvP): a securities settlement mechanism which links a securities transfer and a funds transfer in such a way as to ensure that delivery occurs if and only if the corresponding payment occurs. Dematerialisation: the elimination of physical certificates or documents of title indicating ownership of financial assets, such that the financial assets exist only as accounting records. Deposit facility: a standing facility of the Eurosystem which counterparties may use to make overnight deposits at a national central bank. Such deposits are remunerated at a prespecified interest rate. See also standing facility. Depository: an agent with the primary role of recording (direct or indirect) holdings of

78 Ireland s Payment and Securities Settlement Systems Infrastructure 77 securities. A depository may also act as a registrar (cf. custodian). Derivative: a financial contract whose value depends on the value of one or more underlying reference assets, rates or indices, on a measure of economic value or on factual events. Designated system: a system governed by the law of an EEA Member State and designated to the European Commission by the competent national authorities in accordance with Directive 98/26/Extended Composition of the European Parliament and of the Council of 19 May 1998 on settlement finality in payment and securities settlement systems. Digital signature: see electronic signature. Direct clearing member: a member of a clearing house that clears on its own behalf and on behalf of its customers. See also clearing member, general clearing member, non-clearing member. Direct debit: a payment instrument for the debiting of a payer s payment account whereby a payment transaction is initiated by the payee on the basis of authorisation given by the payer. Direct holding system: an arrangement for registering ownership of securities (or similar interests) whereby each and every final investor in the security is registered with a single entity (e.g., the issuer itself, a central securities depository (CSD) or a registry). In some countries, the use of direct holding systems is required by law. Antonym: indirect holding system. Direct link: an account opened by a central securities depository (CSD), referred to as the investor CSD, in the books of another CSD, referred to as the issuer CSD, in order to facilitate the transfer of securities from participants in the issuer CSD to participants in the investor CSD. See also investor CSD, operated direct link, relayed link. Antonym: indirect link. Direct participant: a participant in a transfer system that can perform all activities allowed in the system without using an intermediary (including, in particular, the direct inputting of orders in the system and the performance of settlement operations). Antonym: indirect participant. Domestic settlement: settlement which takes place in the country (or currency area) in which both parties to the transaction are located. Antonym: cross-border settlement. Double-entry bookkeeping: an accounting principle whereby for each credit/debit entry made in one account, there is a corresponding entry in another account. DvD: see delivery versus delivery. DvP: see delivery versus payment. Earmarking: a technique for identifying collateral whereby assets provided as collateral are attributed to individual transactions. Antonym: collateral pool. EBPP: see Electronic Bill Presentment and Payment. EDI: see electronic data interchange. EFTPOS terminal: a terminal which captures payment information by electronic means and transmits such information either online or offline. EFTPOS stands for electronic funds transfer at point of sale. See also point-ofsale (POS) terminal. Electronic Bill Presentment and Payment (EBPP; electronic invoicing): services which enable the electronic transmission, browsing and payment of invoices. Electronic data interchange (EDI): the exchange between commercial entities (in some cases also public administrations), in a standardised electronic format, of data relating to a number of message categories, such as orders, invoices, customs documents, remittance advices and payments. EDI messages are sent through public data transmission networks or banking system channels. Any movement of funds initiated by EDI is reflected in payment instructions fl owing through the banking system. UN/CEFACT, a United Nations body, has established a set of standards relating to electronic data interchange for administration, commerce and transport (EDIFACT). Electronic invoicing: see Electronic Bill Presentment and Payment. Electronic money: a monetary value,

79 78 Ireland s Payment and Securities Settlement Systems Infrastructure represented by a claim on the issuer, which is: 1) stored on an electronic device (e.g., a card or computer); 2) issued upon receipt of funds in an amount not less in value than the monetary value received; and 3) accepted as a means of payment by undertakings other than the issuer. Electronic money institution (ELMI): a term used in EU legislation to designate credit institutions which are governed by a simplified regulatory regime because their activity is limited to the issuance of electronic money and the provision of financial and non-financial services closely related to the issuance of electronic money. Electronic purse: see multi-purpose prepaid card. Electronic signature (digital signature): a string of data, generated by a cryptographic method, which is attached to an electronic message in order to guarantee its authenticity, identify the signatory and link the content to that signatory (thereby protecting the recipient against repudiation by the sender). Eligible assets (eligible collateral): assets which can be used as collateral in order to obtain credit from the Eurosystem. Eligible collateral: see eligible assets. ELMI: see electronic money institution. EMV: an acronym describing the set of specifications developed by the consortium EMVCo, which is promoting the global standardisation of electronic financial transactions in particular the global interoperability of chip cards. EMV stands for Europay, MasterCard and Visa. Exchange-for-value settlement system: a general term referring to systems which simultaneously exchange the two assets involved in a foreign exchange transaction or a securities transaction. See also delivery versus delivery, delivery versus payment, payment versus payment. Exit criteria: criteria determining whether an existing participant in a system should cease participation or not. The participant s exit may be voluntary, or it may be compulsory (e.g., following the opening of insolvency proceedings). Exposure: the loss that would be incurred if a certain risk materialised. See also bilateral exposure. Face-to-face payment: a payment where the payer and the payee are in the same physical location. Antonym: remote payment. Fail: see failed transaction. Failed transaction (fail): a transaction that does not settle on the contractual settlement date. Such a transaction may be retained and may settle thereafter. Final investor: the ultimate recipient of rights in securities held on a securities account (e.g., ownership rights, voting rights or dividends). Final settlement (final transfer): a settlement or transfer is final when it is unconditional, enforceable and irrevocable, even in the framework of insolvency proceedings opened against a participant (except in the case of criminal offences or fraudulent acts, as determined by a competent court). In the European context, a distinction is made between: 1) the enforceability of a transfer order which is binding on third parties and protected from insolvency risks, provided that the transfer order was entered in the relevant system, in accordance with the rules of that system, prior to the opening of insolvency proceedings (with transfer orders entered in a system following the opening of insolvency proceedings being legally enforceable only in exceptional circumstances); and 2) the irrevocability of a transfer order which cannot be revoked by the participants as of the point in time laid down in the rules of that system. A distinction should be made between the finality of the transfer order and the finality of the transfer, which indicates the moment at which entitlement to the asset in question (be it cash or securities) is legally transferred to the receiving entity. Final transfer: see final settlement. Foreign exchange settlement risk (crosscurrency settlement risk): the risk that a party to a foreign exchange transaction will transfer the currency it has sold, but not receive the currency it has bought. This is a form of principal risk. See also principal risk, payment versus payment.

80 Ireland s Payment and Securities Settlement Systems Infrastructure 79 Four-party card scheme: a card scheme where the stakeholders involved are: 1) the issuer; 2) the acquirer; 3) the cardholder; and 4) the card acceptor. (In the case of automated teller machine (ATM) transactions, it is usually the acquirer that offers its services via the ATM.) By contrast, in a three-party card scheme, the issuer and the acquirer are always the same entity. See also card scheme, threeparty card scheme. Free-of-payment (FOP) delivery: a delivery of securities which is not linked to a corresponding transfer of funds. FTS: see funds transfer system. Funds transfer system (FTS): a formal arrangement based on a private contract or legislation, with multiple membership, common rules and standardised arrangements, for the transmission, clearing, netting and/or settlement of monetary obligations arising between its members. See also interbank funds transfer system, payment system. Fungibility: a characteristic of securities which are substitutable on account of their being identical. General clearing member: a member of a clearing house that clears on its own behalf, on behalf of its customers and on behalf of other market participants. See also clearing member, direct clearing member, nonclearing member. Global certificate: a single physical certificate that covers all or part of an issue of securities. See also global note. Global custodian: a custodian that provides its customers with custody services in respect of securities traded and settled in several countries around the world. Global note: the term used when a global certificate relates to fixed income instruments (e.g., bonds). See also global certificate. Governance: procedures through which the objectives of a legal entity are set, the means of achieving them are identified and the performance of the entity is measured. This refers, in particular, to the set of relationships between the entity s owners, board of directors, management, users and regulators, as well as other stakeholders that influence these outcomes. Gridlock: a situation that can arise in a funds or securities transfer system in which a failure to execute one or more transfer orders prevents the execution of a substantial number of orders submitted by other participants. See also queuing, systemic risk. Gross margining: a mechanism whereby the margin that a participant posts in a central counterparty (CCP) for its customers positions is the sum of the requirements for individual customers. Gross settlement: the settlement of transfer orders one by one. See also net settlement. Gross settlement system: a transfer system in which transfer orders are settled one by one. See also net settlement system, real-time gross settlement (RTGS) system. Guarantee fund: a fund which compensates non-defaulting participants for losses which they suffer in the event that one or more participants default on their obligations. See also clearing fund, collateral pool. Haircut: a risk control measure applied to underlying assets whereby the value of those underlying assets is calculated as the market value of the assets reduced by a certain percentage (the haircut ). Haircuts are applied by a collateral taker in order to protect itself from losses resulting from declines in the market value of a security in the event that it needs to liquidate that collateral. Home banking: banking services which retail customers of credit institutions can access using various kinds of telecommunication device (e.g., telephones, mobile phones, television sets, terminals or personal computers). Hybrid system: a system that combines the characteristics of RTGS systems (e.g., the continuous processing and clearing of transfer orders) and net settlement systems (the operation of several settlement cycles per day, some form of netting procedure for transfer orders, etc.). See also net settlement system, real-time gross settlement (RTGS) system. IBAN: see International Bank Account Number.

81 80 Ireland s Payment and Securities Settlement Systems Infrastructure ICSD: see international central securities depository. IFTS: see interbank funds transfer system. Immobilisation: the placement of physical certificates for securities and financial instruments in a common depository or a central securities depository so that subsequent transfers can be made by book entry (i.e., by debiting and crediting holders accounts at the depository). Indirect holding system: a multi-tiered arrangement for the custody and transfer of ownership of securities (or the transfer of similar interests therein) in which investors are identified only at the level of their custodian. Antonym: direct holding system. Indirect link: a link between two central securities depositories (CSDs) through a non- CSD intermediary. See also relayed link. Antonym: direct link. Indirect participant: a participant in a funds or securities transfer system with a tiering arrangement that uses a direct participant as an intermediary in order to perform some of the activities allowed in the system (particularly settlement). See also tiering arrangement. Antonym: direct participant. Initial margin: for instruments cleared by a central counterparty (CCP), the amount of collateral that each participant is required to provide to the CCP (or the clearing member) in order to cover potential losses in the event of that participant defaulting. The initial margin is calculated on the basis of a formula set by the CCP. See also haircut, margin. Integrity: in the context of data, the quality of being protected against accidental or fraudulent alteration in transmission or in storage. Alternatively, the quality of indicating whether or not such alteration has occurred. Integrity of a securities issue: the result of legal requirements and securities accounting procedures ensuring that the number of securities issued is, at all times, equal to the total number of securities in circulation (i.e., validly booked in investors accounts). Interbank funds transfer system (IFTS): a funds transfer system in which all (or almost all) participants are credit institutions. Interchange fee: a transaction fee payable between the payment service providers involved in a transaction. Internal settlement: settlement that is effected through transfers of securities and/or funds on the books of a bank or investment firm, as opposed to settlement via an interbank funds transfer system or a central securities depository (CSD). International Bank Account Number (IBAN): an International Organization for Standardization (ISO) technical code that is an expanded version of the basic bank account number (BBAN). Intended for use internationally, the IBAN uniquely identifies an individual account at a specific financial institution in a particular country. The IBAN also includes the bank identifier of the financial institution servicing that account. International central securities depository (ICSD): a central securities depository (CSD) which was originally set up to settle Eurobond trades and is now active also in the settlement of internationally traded securities from various domestic markets, typically across currency areas. At present, there are two ICSDs located in EU countries: Clearstream Banking in Luxembourg and Euroclear Bank in Belgium. Interoperability: the set of arrangements/procedures that allows participants in different systems to conduct and settle payments or securities transactions across systems while continuing to operate only in their own respective systems. Intraday credit (daylight credit): credit extended and reimbursed within a single business day. Intraday finality: final settlement achieved continuously or at various times in the course of the settlement day. Intraday finality can be provided through real-time settlement procedures and/or the settlement of the results of batch processing during the settlement day. Intraday liquidity: funds which are available or can be borrowed during the business day in order to enable financial institutions to effect payments/settlement. Repayment of the funds borrowed should take place before the end of

82 Ireland s Payment and Securities Settlement Systems Infrastructure 81 the business day. See also intraday credit, same-day funds. Investment firm: any entity whose regular occupation or business is the provision of one or more investment services to third parties and/or the performance of one or more investment activities on a professional basis. Investor CSD: a term used in the context of central securities depository (CSD) links. An investor CSD or a third party acting on behalf of the investor CSD opens an account in another CSD (the issuer CSD) so as to enable the cross-system settlement of securities transactions. See also CSD link, central securities depository, issuer CSD. Issuer CSD (issuing CSD): a central securities depository (CSD) in which securities are issued (or immobilised). The issuer CSD opens accounts allowing investors (in a direct holding system) and/or intermediaries (including investor CSDs) to hold these securities. See also direct link, investor CSD, relayed link, direct holding system, indirect holding system. Issuing CSD: see issuer CSD. Lamfalussy standards (minimum standards of the Lamfalussy report): the six minimum standards for the design and operation of cross-border and multi-currency netting schemes or systems. For details, see the Report of the Committee on Interbank Netting Schemes of the Central Banks of the Group of Ten Countries (the Lamfalussy report ), BIS, November See also Core Principles for Systemically Important Payment Systems. Large-value funds transfer system (wholesale funds transfer system): a funds transfer system through which large-value and/or high-priority funds transfers are made between participants in the system for their own account or on behalf of their customers. Although, as a rule, no minimum value is set for payments made in such systems, the average size of such payments is usually relatively large. Large-value payment: large-value payments are generally for very large amounts, are exchanged mainly between banks or between participants in financial markets, and usually require urgent and timely settlement. Antonym: retail payment. L/C: see letter of credit. Legal risk: the risk of a loss being incurred on account of the unexpected application of a law or regulation, or because a contract cannot be enforced. Letter of credit (L/C): an irrevocable commitment by a bank (the issuing bank) or other issuer made at the request of a customer (the applicant third party) to pay a specified sum of money to a third party upon request, subject to terms and conditions drawn up in accordance with uniform customs and practices. Limit: see cap. Linked trade: a trade where securities are released for delivery only if they become available from another trade. Liquidity risk: the risk that a counterparty will not settle an obligation in full when it becomes due. Liquidity risk does not imply that a counterparty or participant is insolvent, since it may be able to effect the required settlement at some unspecified time thereafter. Loro account (vostro account): in correspondent banking, an account held by one bank on behalf of another bank (the customer bank ); the customer bank regards this account as its nostro account. Antonym: nostro account. Loss-sharing agreement: an agreement among participants in a clearing or settlement system regarding the allocation of any losses arising from the default of either a participant in the system or the system itself. See also losssharing rule. Loss-sharing rule: the rule or formula stipulating the way in which losses arising from the default of either a participant in the system or the system itself are to be shared among the various parties in the event that a loss-sharing agreement is activated. See also loss-sharing agreement. Mandate for direct debits: the authorisation given by a payer to a payee (and/or the institution with which the payer s account is held) consenting to the debiting of the payer s account. See also direct debit.

83 82 Ireland s Payment and Securities Settlement Systems Infrastructure Margin: highly liquid collateral required in order to cover adverse market price movements. The initial margin is calculated on the basis of a formula set by the counterparties to a trade or by a central counterparty (CCP). A market participant is called upon to provide additional collateral if the collateral that has been deposited is no longer sufficient (with this margin call indicating a shortfall in the margin coverage). Marginal lending facility: a standing facility of the Eurosystem which counterparties may use to receive overnight credit from a national central bank at a pre-specified interest rate against eligible assets. See also standing facility. Market infrastructure: systems used for the trading, clearing and settlement of payments, securities or derivatives. Market risk (price risk): the risk of losses (in both on and off-balance sheet positions) arising from movements in market prices. See also replacement cost risk. Marking to market: the practice of revaluing securities and financial instruments using current market prices. See also haircut, variation margin. Matching: the process used for comparing the trade or settlement details provided by parties in order to ensure that they agree on the terms of the transaction. Means of payment: assets or claims on assets that are accepted by a payee as discharging a payment obligation on the part of a payer vis-à-vis the payee. See also payment instrument. Member: a participant in a system which also owns a stake in that system. Merchant service charge (MSC): a fee paid by the acceptor/merchant to the acquirer. Minimum reserves: the minimum amount of reserves that a credit institution is required to hold with the Eurosystem. Minimum standards of the Lamfalussy report: see Lamfalussy standards. Mobile payment (m-payment): a payment where a mobile device (e.g., a phone or personal digital assistant (PDA)) is used at least for the initiation of the payment order and potentially also for the transfer of funds. Money order: an instrument used to transfer money remotely, often used where the payer and/or the payee do not have a current account with a financial institution. Money remitter: a payment service provider that accepts funds from a payer for the purpose of making them available to a payee, without necessarily maintaining an account relationship with the payer or payee. M-payment: see mobile payment. MSC: see merchant service charge. Multilateral net settlement system: a settlement system in which each settling participant settles its own multilateral net settlement position (typically by means of a single payment or receipt). See also multilateral netting, net settlement system. Multilateral netting: an arrangement among three or more parties for the netting of obligations and the settling of multilateral net settlement positions. See also bilateral netting, netting. Multi-purpose prepaid card (electronic purse): a prepaid card which can be used at the outlets of several service providers for a wide range of purposes. See also prepaid card. Net credit cap: a limit placed on the credit exposure which a participant is allowed or willing to take on vis-à-vis all other participants or a given participant in the system as a result of sending/ receiving payments which have not been settled. See also cap. Net margining: a mechanism whereby the margin that a participant posts in a central counterparty (CCP) for its customers positions is the net total of the requirements for the individual customers. See also gross margining. Net settlement: the settlement of transfer orders on a net basis. See also gross settlement. Net settlement system: a funds or securities transfer system which settles net settlement positions during one or more discrete periods, usually at pre-specified times in the course of

84 Ireland s Payment and Securities Settlement Systems Infrastructure 83 the business day. See also gross settlement system. Netting: in the context of clearing or settlement systems, the agreed offsetting of mutual obligations by participants in a system. This process involves the calculation of net settlement positions and their legal reduction to a (bilateral or multilateral) net amount. Netting may take several legal forms. See also bilateral netting, multilateral netting, position netting, netting by novation, unwind. Netting by novation: an agreement whereby obligations derived from individual transfer orders are netted and replaced by a new obligation. The parties to the new obligation may be the same as the parties to the existing obligation. Alternatively, in the context of some clearing house arrangements, there may be some substitution of parties. Antonym: position netting. Nominee: a person or entity named by another to act on its behalf. Nominees are commonly used in securities transactions to register and obtain legal ownership of securities. Non-clearing member: a member of a regulated market that uses a general clearing member to access a clearing house s services. All trades must be settled through a clearing member. See also clearing member, direct clearing member, general clearing member. Non-repudiation: mechanisms providing evidence of: 1) the identity of the sender of a payment message; and 2) the integrity of that message. These are sufficient to prevent the sender of a message from successfully denying the submission of the payment message or the integrity of its contents. Nostro account: in correspondent banking, an account held by a customer bank on the books of another bank acting as a service provider. The other bank regards this account as a loro account. Antonym: loro account. Offline card transaction: a card transaction which is authorised without contacting the issuer at the time of the transaction. Antonym: online card transaction. Online card transaction: a card transaction which is authorised following explicit approval by the issuer at the time of the transaction. Antonym: offline card transaction. Operated direct link: a direct link between two central securities depositories (CSDs) where a third party, typically a custodian bank, operates the account in the issuer CSD on behalf of the investor CSD. See also direct link. Operational risk: the risk that deficiencies in information systems or internal controls, human error or management failures will result in unexpected losses. This relates to both internal and external events. Optimisation routine: a procedure determining the order in which transfer orders are to be processed and settled in a transfer system in order to increase settlement efficiency. See also queue management, chaining. OTC (over-the-counter) trading: a method of trading that does not involve a regulated market. In over-the-counter markets, participants trade directly with each other, typically through telephone or computer links. Oversight: the 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 whenever possible and, where necessary, fostering change. Oversight activities increasingly relate also to securities clearing and settlement systems. Pan-European automated clearing house (PE-ACH): a business platform for the processing of euro payment instruments which is made up of governance rules and payment practices and supported by the necessary technical platform(s). Participant: an entity which is identified/recognised by a transfer system and either directly or indirectly is allowed to send transfer orders to that system and is capable of receiving transfer orders from it. See also direct participant, indirect participant, remote participant. Payer: the party to a payment transaction which issues the payment order or agrees to the transfer of funds to the payee.

85 84 Ireland s Payment and Securities Settlement Systems Infrastructure Payment: in a strict sense, a payment is a transfer of funds which discharges an obligation on the part of a payer vis-à-vis a payee. However, in a technical or statistical sense, it is often used as a synonym for transfer order. See also transfer order. Payment card: see card. Payment instrument: a tool or a set of procedures enabling the transfer of funds from a payer to a payee. The payer and the payee can be one and the same person. See also means of payment. Payment lag: see settlement lag. Payment order: an instruction sent by a payer or a payee to a payment service provider requesting the execution of a payment transaction. Payment scheme: a set of interbank rules, practices and standards necessary for the functioning of payment services. See also card scheme. Payment system: this term has two meanings: 1) in some cases, it refers to the set of instruments, banking procedures and interbank funds transfer systems which facilitate the circulation of money in a country or currency area; 2) in most cases, it is used as a synonym for funds transfer system. See also funds transfer system. Payment versus payment (PvP): a mechanism which ensures that the final transfer of a payment in one currency occurs if and only if the final transfer of a payment in another currency or currencies takes place. See also exchange-for-value settlement system. PE-ACH: see pan-european automated clearing house. Personal identification number (PIN): a personal and confidential numerical code which the user of a payment instrument may need to use in order to verify his/her identity. In electronic transactions, this is seen as the equivalent of a signature. See also electronic signature. Physical delivery: settlement of a derivatives transaction through the delivery of the underlying asset in exchange for payment. PIN: see personal identification number. Pledge: the delivery of assets in order to secure the performance of an obligation by one party (the debtor) vis-à-vis another (the secured party). For the secured party, a pledge creates a security interest (a lien ) in the assets delivered, while ownership of the assets remains with the debtor. Point-of-sale (POS) terminal: a device allowing the use of payment cards at a physical (not virtual) point of sale. The payment information is captured either manually on paper vouchers or by electronic means. See also EFTPOS terminal. Position netting (advisory netting): netting of orders in respect of obligations between two or more parties which neither satisfies nor discharges those original individual obligations. Also referred to as payment netting in the case of payment orders. Antonym: netting by novation. Postal order: money order in which the drawee is a postal institution. Prenotification: in the field of direct debits, the advance notification provided by the creditor to the debtor as regards: 1) the amount of the next direct debit; and 2) the date of collection. Prepaid card: a card on which a monetary value can be loaded in advance and stored either on the card itself or on a dedicated account on a computer. Those funds can then be used by the holder to make purchases. See also multi-purpose prepaid card. Price risk: see market risk. Primary site: the place where systems operators locate the infrastructure and/or staff necessary to run their normal daily business operations. Principal: an entity that acts on its own behalf, with its own funds and at its own risk. Principal risk: the risk that the seller of a financial asset (e.g., securities or currency) will deliver, but not receive payment, or the risk that the buyer will pay, but not receive delivery. In such a situation, the full value of the securities or funds transferred is at risk. See also delivery versus payment, payment versus payment.

86 Ireland s Payment and Securities Settlement Systems Infrastructure 85 Processing: the performance of all of the actions required in accordance with the rules of a system for the handling of a transfer order from the point of acceptance by the system to the point of discharge from the system. Processing may include clearing, sorting, netting, matching and/or settlement. Provisional settlement: the discharging of an obligation by means of a transfer of funds and/or a transfer of securities which is dependent on the fulfilment of certain conditions and can therefore be rescinded by one or more parties. See also settlement. Antonym: final settlement. Provisional transfer: a transfer order is provisional as long as it can be revoked by the originator or as long as it can be reversed subject to certain conditions. Antonym: final settlement. PvP: see payment versus payment. Queue management: rules and procedures that determine the order in which transfer orders are released from the queue and processed e.g., first in, first out (FIFO). Optimisation routines may or may not be used. See also queuing, optimisation routine. Queuing: an arrangement whereby transfer orders are held in a queue by the sending participant or by the system until they can be processed in accordance with the rules of the system. In an RTGS system, payments are typically queued because of a lack of funds or insufficient access to intraday credit. In netting systems, payments are queued in order to prevent caps from being exceeded. See also cap, real-time gross settlement (RTGS) system. Reachability: a credit institution is reachable if it can execute a credit transfer order and/or a direct debit instruction sent by any other bank in a particular currency area. Realignment: the transfer of assets from the account of one investor central securities depository (CSD) to the account of another investor CSD, both of which are held with the issuer CSD, in order to reflect the transfer of assets between participants in those investor CSDs. See also investor CSD, issuer CSD. Real-time gross settlement (RTGS) system: a settlement system in which processing and settlement take place on a transaction-bytransaction basis in real time. Reconciliation: a procedure to verify that two sets of records issued by two different entities match. Refund: in the field of direct debits, a claim made by a debtor for the reimbursement of debits effected from its account (with or without a specific reason being indicated by that debtor). Refusal: in the field of direct debits, an instruction issued by a debtor prior to settlement, for whatever reason, to the effect that the debtor bank should not make a direct debit payment. Registrar: see registry. Registration: the documenting of the ownership of securities in the records of the issuer, in a registry or in a central securities depository (CSD). Registry (registrar): an entity that records the ownership of securities on behalf of the issuer. Reject: in the field of payments, a payment transaction whose normal execution is prevented by the payment service provider of either the payer or the payee prior to settlement. Relayed link: a contractual and technical arrangement that allows issuer and investor central securities depositories (issuer and investor CSDs) to hold and transfer securities through an account with a third CSD (a middle CSD ), which acts as an intermediary. Remote access: direct access by an institution established in one country to a system (e.g., a payment system, a securities settlement system or a central counterparty (CCP)) established in another country. Remote participant: a participant in a system which operates from a country other than that in which the system in question is located. Remote payment: a payment made from a distance, without the payer and payee being present at the same physical location. Antonym: face-to-face payment.

87 86 Ireland s Payment and Securities Settlement Systems Infrastructure Replacement cost risk: the risk that, owing to a party to a transaction failing to meet its obligation on the settlement date, its counterparty may have to replace the original transaction at current market prices ( replacement cost ). See also market risk. Repurchase agreement: the process of borrowing money by combining the sale of an asset (usually a fixed income security) with the subsequent repurchase of that same asset for a slightly higher price (which reflects the borrowing rate). Retailer card: a card issued by a merchant for use at specified merchant outlets. Retail funds transfer system: a funds transfer system which typically handles a large volume of payments of relatively low value in forms such as cheques, credit transfers and direct debits. Retail payment: a non-time-critical payment of relatively low value. These payments are typically made outside of the financial markets and are both initiated by and made to individuals and non-financial institutions. Antonym: large-value payment. Returns: funds sent back by the payee to the payer following settlement of the original payment instruction. The term return is used in connection with both direct debits and credit transfers. RTGS system: see real-time gross settlement (RTGS) system. Safekeeping services: the holding of physical securities on behalf of other parties. Same-day funds: funds which the recipient is entitled to transfer or withdraw from an account on the day of receipt. See also intraday liquidity. Scheduling: technique for managing payment queues by determining the order in which payments are accepted for settlement. See also queuing. Secondary site: a location other than the primary site which systems can use to resume their business operations and other functions in the event of a disaster. Securities settlement system (SSS): a system which allows the transfer of securities, either free of payment (FOP) or against payment (delivery versus payment). Segregation: a method of protecting a client s assets by holding them separately from those of the custodian (or other clients, as the case may be). SEPA: see Single Euro Payments Area. Settlement: the completion of a transaction or of processing with the aim of discharging participants obligations through the transfer of funds and/or securities. A settlement may be final or provisional. See also final settlement, rovisional settlement, gross settlement, net settlement. Settlement account: an account held at a central bank or a central securities depository, or with a central counterparty or any other institution acting as a settlement agent, which is used to settle transactions between participants in a system. Settlement agent (settlement institution): the institution across whose books transfers between participants take place in order to achieve settlement within a settlement system. See also bilateral net settlement system, multilateral net settlement system, settling participant. Settlement asset: an asset or a claim on an asset that is accepted by a beneficiary in order to discharge a payment obligation. Settlement bank: see settling participant. Settlement cycle (settlement interval): in the field of securities, the time period that elapses between the trade date and the settlement date. Settlement date: see settlement day. Settlement day (settlement date): the day on which settlement actually takes place. Settlement failure: the inability of a participant to meet its settlement obligations in a system. This inability may be temporary or permanent. See also failed transaction, default. Settlement institution: see settlement agent. Settlement interval: see settlement cycle.

88 Ireland s Payment and Securities Settlement Systems Infrastructure 87 Settlement lag (payment lag): in a transfer system, the time lag between the acceptance of the transfer order by the system and its final settlement. In an exchange-for-value system, the time lag between entering into a trade/bargain and finally exchanging the financial asset for payment. Settlement obligation: the requirement, as a result of the settlement process, that a participant in a settlement system effect payment or deliver assets. Settlement risk: the risk that settlement in a transfer system will not take place as expected, usually owing to a party defaulting on one or more settlement obligations. This risk includes, in particular, operational risks, credit risks and liquidity risks. Settlement system: a system used to facilitate the settlement of transfers of funds, assets or financial instruments. See also funds transfer system, securities settlement system. Settling member: see settling participant. Settling participant (settlement bank; settling member): a participant which maintains one or more accounts with a settlement agent in order to settle funds or securities transfers on its own behalf or, potentially, for other market participants. See also tiering arrangement, settlement agent. Single Euro Payments Area (SEPA): a process initiated by European banks and supported, inter alia, by the Eurosystem and the European Commission with a view to integrating retail payment systems and transforming the euro area into a true domestic market for the payment industry. Smart card: see chip card. Specialised depository: an entity, usually a credit institution, that provides international central securities depositories (ICSDs) with safekeeping and asset servicing for physical certificates ( individual notes ) that represent shares in international debt instruments (e.g., Eurobonds). See also common depository. SSS: see securities settlement system. Standing facility: a central bank credit facility available to counterparties at their own initiative. The Eurosystem offers two overnight standing facilities: the marginal lending facility and the deposit facility. Standing order: an instruction from a customer to its bank to make a regular payment of a fixed amount to a named beneficiary. STP: see straight-through processing. Straight-through processing (STP): the automated end-to-end processing of trades/payment transfers including, where relevant, the automated completion of confirmation, matching, generation, clearing and settlement of orders. Substitution of securities: a situation in which an institution which has provided securities as collateral recalls them and replaces them with other securities of equivalent market value. Survivors pay : a loss-sharing arrangement which, in the event of a participant s inability to settle, requires losses to be borne by the other (non-defaulting) participants in accordance with a pre-determined formula. Antonym: defaulter pays. Systemically important payment system: a payment system which has the potential to trigger systemic risks in the event of it being insufficiently protected against the risks to which it is exposed. Systemic risk: the risk that the inability of one participant to meet its obligations in a system will cause other participants to be unable to meet their obligations when they become due, potentially with spillover effects (e.g., significant liquidity or credit problems) threatening the stability of or confidence in the financial system. That inability to meet obligations can be caused by operational or financial problems. T2S: see TARGET2-Securities. TARGET2: the real-time gross settlement system for the euro. TARGET2 settles payments in euro in central bank money and functions on the basis of a single IT platform, to which all payment orders are submitted for processing. This means that all payments are received in the same technical form. TARGET2 is legally structured as a multiplicity of RTGS systems (TARGET2 component systems).

89 88 Ireland s Payment and Securities Settlement Systems Infrastructure TARGET2-Securities (T2S): the Eurosystem s single technical platform enabling central securities depositories (CSDs) and national central banks to provide core, borderless and neutral securities settlement services in central bank money in Europe. T2S is scheduled to go live in Three-party card scheme: a card scheme involving the following stakeholders: 1) the card scheme itself, which acts as issuer and acquirer; 2) the cardholder; and 3) the accepting party. This contrasts with a four-party card scheme, where the issuer and the acquirer are separate entities and are separate from the card scheme itself. See also card scheme, four-party card scheme. Tiering arrangement: an arrangement whereby indirect participants in a system require the services of direct participants in order to carry out their transactions. See also indirect participant, settling participant. Trade confirmation: see confirmation. Transaction reference number (TRN): a unique reference number used to identify individual payment or securities settlement instructions (e.g., SWIFT payment messages or credit card authorisations). Transfer order: an order or message requesting the transfer of assets (e.g., funds, securities, other financial instruments or commodities) from the debtor to the creditor. See also payment. Transfer system: a set of legal, technical and procedural arrangements for the transfer of assets such as money or securities. Tri-party repo: repurchase agreement in which a third party (e.g., a custodian bank, a clearing house or a central securities depository (CSD)) is responsible for the management of the collateral during the life of the transaction. TRN: see transaction reference number. Truncation: a procedure in which a paperbased transfer order or other financial instrument is replaced, in whole or in part, by an electronic record of the content of that instrument for the purposes of further processing and transmission. Underlying asset: the asset (i.e., the financial instrument or security) upon which a derivatives contract is based. Unwind: the process used to recalculate obligations in some net settlement systems where transfers between the accounts of participants are provisional until all of them have finally discharged their settlement obligations. If a particular participant fails to settle, some or all of the provisional transfers involving that participant are deleted from the system and the settlement obligations of the remaining participants are recalculated. See also zero-hour rule. Value date: the date on which it is agreed to place a payment or transfer at the disposal of the receiving user. The value date is also used as a point of reference for the calculation of interest on the funds held on an account. Variation margin: profits and losses calculated on a daily basis in open futures contracts and options, resulting in the counterparty to the bilateral trade making a payment to the relevant clearing house or vice versa. Vostro account: see loro account. Wholesale funds transfer system: see largevalue funds transfer system. Zero-hour rule: a provision in the insolvency law of some countries whereby the transactions conducted by an insolvent institution after midnight on the date the institution is declared insolvent are automatically ineffective by operation of law. See also unwind.

90 T F [email protected] PO. Box No 559, Dame Street, Dublin 2, Ireland