1 What model of governance for central bank’s operated systems? Denis BEAU Deputy Director Payment System and Market Infrastructure Directorate Banque.

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What model of governance for central bank’s operated systems?

Denis BEAUDeputy Director

Payment System and Market Infrastructure DirectorateBanque de France

World Bank Seminar30 May 2007

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Introduction

Governance arrangements are important because the interests of stakeholders in relation to risk and efficiency management are different and may conflict

Risk of underperformance in the fulfilment of public interest of safety and efficiency

Importance well recognized with dedicated international standard/recommendation for SIPS/SSS/CCP

Requirements to be met do not vary with the form of ownership: effective, accountable and transparent

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Introduction

What may differ are the challenges to be faced and the techniques to be used

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Outline

• Challenges with central-bank owned systems

• Solutions chosen forTARGET2

• new challenges raised with TARGET2 Securities

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Challenges with central-bank owned systems

• Decision management Identifying and balancing the needs of potential

users in a system where they have no ownership:• Composition and role of user groups in the design and operation

phases? Identifying and balancing « production » choices

with public policy objectives :• risk/efficiency trade-offs between operating a system in

full,outsourcing some of the function to be performed (to other central banks, to private service providers), providing only the settlement asset?

• Ensuring independence decision making process between operation and oversight:

• separation of functions in different organisational units?

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Challenges with central-bank owned systems

• Decision controlensuring independent control/oversight

over management:• Relationships between operations functions and

internal audit/oversight functions?• Role for an external audit?

Ensuring accountability to users:• Public disclosure of which types of information?

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TARGET2- solutions chosen

Interlinking via FINInterlinking via FIN

Bank A Bank B

Swift Net ServicesSwift Net Services

NCBs Ancillary ssystems

From TARGET to TARGET2

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TARGET 2 Governance - overview

• Overall management of T2

• Coordination of TARGET2

• Provision of the SSP• Support to Level 2

• Coordination of national migration

• Business relations

• Level 1-Governing Council of the ECB

• Level 2- CBs

• Level 3- 3CB• Level 3-3CB

• Central banks

• Central Banks

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TARGET 2: 3 governance levels

Level1: ECB Governing CouncilResponsible for the direction,

management and control of TARGET2

Level2: Participating central banksThey have a subsidiary competence

for issues left to their discretion by Level 1 and act as an advisory body to the GC in all matters relating to TARGET2 (PSSC)

Level3:  3 CBs (Banque de France, Bundesbank, Banca d’Italia)

These three central banks develop and manage the future system on the basis of a service level agreement with Level 2, within the general framework defined by Level 1

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TARGET2-involvement of users

• Public consultations:– 2002: invitation to comment on the principles and

structures of T2– 2004: invitation to comment on the GFS

• Working groups at European level:– TARGET Working Group– Joint TF on operation, risk and contingency– Joint TF on testing and migration

• User groups at national level

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TARGET2- « Production » choices

• The 3CB as service provider: – Expertise in payment service provisions:

• Well-established systems at national level with innovative features

• Account for about 65% of current TARGET traffic

– Optimal use of resources and expertise («building block approach », cutting-edge business continuity provision)

– Multicultural team fitted to European projects

• Separation of functions:– CB as operator vs CBs as users– Oversight vs operation

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TARGET2- controls

• 2 bodies are performing compliance checks:– internal ESCB auditors: 2 audits already

performed about the conduct of the project, at the European level, as well as the national level

– Eurosystem overseers : • specific arrangement put in place involving all CBs,

conducted by the ECB• a preliminary assessment done• a complete assessment against the core principles for

SIPS will be performed before the system goes live.

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CSD

Custody

Other…

Reporting

Lending

Coll. Mgmt

Settlement

CSD

Custody

Other…

Reporting

Lending

Coll. Mgmt

T2S

Settle-ment

T2S world

It provides a common settlement facility

T2S does not segregate custody

and settlement…

T2S does not segregate custody

and settlement…

CSD operations today

What’s new with TARGET2 Securities ?

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What’s new with TARGET2 Securities ?

The concept: securities and cash accounts in one platform

T2S

CSD A

CSD B

CSD C

T2S SETTLEMENT

ENGINE

SECURITIES TARGET2 CASH

CSD A ACCOUNTS

NCB C ACCOUNTSCSD C ACCOUNTS

CSD B ACCOUNTS NCB B ACCOUNTS

NCB A ACCOUNTS NCB A

NCB B

NCB C

TARGET2

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What’s new with TARGET2 Securities ?

Objectives and principles of the T2S project governance:

- Balance between efficiency and wide representation of all categories of stakeholders:

Central banks CSDs Users (mainly banks, others: e.g. CCPs)

- Maintain high level of openness and transparency

- Reflect financing and risk-taking in decision-making : T2S fully owned and operated by the Eurosystem

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What’s new with TARGET2 Securities ?

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Project GovernanceUser Requirements phase

Information Sessions

T2S Advisory Group

Co-ordination Group

Scope &

Schedule

National User Groups

ECB Governing Council

Lifecycle &

Matching

Settlement

FunctionalityStatic Data Interfaces

Non-functional

requirements

Executive Board PSSC

Information Sessions with all

Stakeholders

Six Technical Groups

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Conclusion- some lessons learned

• Need for a clear, structured and strong governance

• Key importance of transparent and accountable dialogue with users to balance absence of role in ownership/decision

• Key importance of organisational arrangements to handle potential conflicts of interest between the various roles of the Central Bank