TARGET1 and TARGET2 & Implementation of monetary policy Bernard de Groes Payments and Securities 13 April 2007.

TARGET1 and TARGET2&

Implementation of monetary policy

Bernard de GroesPayments and Securities

13 April 2007

1. General overview TARGET2

2. Implementation of monetary policy

Agenda

1. General overview TARGET2

Back to TARGET1

• TARGET2 platform

• Participation in TARGET2

• Liquidity Management

• Timeline and status for TARGET2

•Decentralised system built under tight constraints for being ready on 2 January 1999.

Back to TARGET1

TARGET1

Domesticnetwork

• Decentralised system built under tight time constraints for being ready on 2 January 1999.

Back to TARGET1

• One of the two biggest systems in the world, very high market share in euro large value payments.

On Central Banks’ side

• Adaptability problems

• Cost recovery problems

• EU enlargement process

• Credibility of the Euro system

On Participants’ side

• Non harmonised services

• Non harmonised prices

• Multiple accesses

• Fragmentation of liquidity

but…

What changes with TARGET2

• Full technical consolidation on a single shared platform

• Same core services for all participants

• Single price structure

• Advanced liquidity saving features available EU-wide

• Harmonised technical interface for the connection

• Enhanced robustness and resilience

For payment activities in generalFor payment activities in general

What changes with TARGET2

• Settlement of ancillary systemsSingle interface for ancillary systems settlement based on 6 different models.Settlement of participants’ positions in different systems settled via a single RTGS account.

Night time settlement possible from 7:30pm until 6:45am.

For specific settlement operationsFor specific settlement operations

• Central Banks operationsOptional modules for home accounting, reserve management and standing facilities.

Possibility to keep payment activities in proprietary home account systems for 4 years after the start of TARGET2

What remains with TARGET2

• Holding of RTGS accounts and business relationship remain with National Central Banks.

• Execution of monetary policy operations and collateral management remain decentralised.

• Granting of intraday liquidity, holding of reserves and access to standing facilities still via National Central Bank.

Overview of core and optional services offered by the SSP

Optional services for CBs(CRISP, CRAKS1, CRAKS3)

ParticipantInterface(Y-copy)

TARGETInterlinking

Ancillarysystemsinterface

Payment processing

Monitoring

Information and Control Module

(ICM)

PaymentsModule(PM)

mandatory services for CBs (CROSS)(Storage,

Archiving, Files forbilling

calculation)

HomeAccounting

Module (HAM)

Standard interfaces

Standing Facilities(SF)

Reserve Management

(RM)

CBs

(internal accounting, collateral management,

proprietary home accounts, etc.)

Credit

institutions(CI)

Ancillary

systems (AS)

Static DataManagement

(SD)

ContingencyModule

(CM)

Participation: business overview

Sources of liquidity in T2

The availability of sufficient liquidity is of high importance for the execution of payments

The following sources of liquidity can be used:•balances on RTGS accounts

•provision of intraday liquidity•offsetting payment flows (ie using algorithms to settle a number of queued payments)

Provision of intraday liquidity

• Intraday credit will be granted to the single accounts of credit institutions against eligible collateral by the respective CB

• Depending on the decision of the CB the following procedures can be used:– Implementing credit lines on RTGS accounts– Implementing credit lines on proprietary home

accounts– DVP-processing of intraday repo transactions

Group composition aimed at minimising project risk, reducing effect on level playing field and limiting the costs for central banks and users

Group 1 Group 2 Group 3 Group 4

Austria Belgium Denmark

Germany

Finland Estonia

Lithuania

France ECB Reserved

Luxembourg

Ireland Greece for

Slovenia

Netherlands Italy contingency

Portugal Poland

Spain

Cyprus

Malta

Latvia

Migration group allocation

19 Nov 2007 18 Feb 2008 19 May 2008 15 Sep 2008

2. Implementation of monetary policy

Reserve Management Module

• Standing Facilities Module

• From a technical point of view, RM is fully integrated in the SSP operational environment (SWIFTNet interface)

• RM can interact with PM, HAM and proprietary home accounts

• RM does not manage any kind of accounts

• Management of indirect reserve

• Pool of reserve accounts of a MFI

Reserve Management Module

HAM /PM

Module

Reserve

Management

Module

End-of-day balances

€

NCB

Entry of minimum reserve

Entry of remuneration rates

Entry of penalties

Payment order (at the end of

the maintenance period)

• interest

• penalties for infringements after CB validation process

Reserve Management Module

• The RM offers the possibility of managing indirectly the reserve requirement (the minimum reserve of a credit institution is deposited by another credit institution)

• On the basis of this information the RM is able to verify the fulfilment of minimum reserves.

Indirect reserve

Indirect reserve

• The central banks can manage:

- the list of banks that decide to fulfil indirectly minimum reserves

- the indication of the bank selected for its management

• The function "pool of reserve accounts of Monetary Financial Institutions (MFI)" envisages the fulfilment of reserve requirements for a group of participants (which are part of the same MFI).

• The fulfilment is evaluated on the basis of the total balance, irrespective of the distribution of the balances among the different accounts of the same MFI in PM, in HAM or in PHA.

Pool of reserve accounts of a MFI

Pool of reserve accounts of a MFI

• Participants using the pooling functionality cannot use the indirect reserve management

• No consolidation is envisaged on a cross-border basis

• At the end of the maintenance period the accrued interest is credited on the account associated to the minimum reserve indicated by the MFI

• CIs have access (via ICM) to the following information:– Amount of minimum reserve– End-of-day balances of the previous business day– Running average up to the previous business day– Balance necessary to fulfil the minimum reserve

Interaction and Administration

Interaction and Administration

• CBs access the same information and are able to:

- Manage the list of banks subject to minimum reserve

- Enter the value of compulsory reserve

- Manage the validation process for infringements

- Enter minimum reserve remuneration and penalties rates

- Access summarised information (monitoring)

• From a technical point of view, SF is fully integrated in the SSP operational environment (SWIFTNet interface)

• SF is able to manage:– overnight deposit accounts

– marginal lending “on request”, in general needed for the fulfilment of minimum reserve

– automatic marginal lending, available only in connection with PM since no intraday credit is available in HAM

• CI with account both in PM and HAM have to indicate the account to be used for the settlement of SF operations

Standing Facilities Module

End-of-day transfers to SF (day d)

€

NCB

Overnight Deposit

Account

Overnight Deposit

Account

Marginal Lending

Account

Transfers of capital and interests

to HAM/PM (start of day d+1)

Standing Facilities

Module

HAM /PM

Marginal Lending

Transfers to SF and debiting of interest in HAM/PM (start of day d+1)

Transfers to HAM/PM (day d)

Collateral Management

for Marginal Lending

Standing Facilities Module

SSP

ICM

PM(HAM)

CI

SF

Refunding + Interests(at Start of Day)

SSP

ICM

PM(HAM)

CI

SF

Reverse Transaction[SF debits the Overnight Deposit Account]

SSP

ICM

PM(HAM)

CI

SF

Setting Up[SF credits the Overnight Deposit

Account]

Overnight Deposit Overnight Deposit

MT900

4

ACK

4

DirectDebit

3

TransferOrder

2

MT910

4

ACK

4

LiquidityTransfer

3

TransferOrder

2

MT910

2

ACK

2

LiquidityTransfer

1

Modify

1

Modify

1

Marginal Lending Facility Marginal Lending Facility - “On Request- “On Request” -” -

SSP

ICM

PM(HAM)

CM

SF

Setting Up[SF debits the Marginal Lending Account]

CI

SSP

ICM

PM(HAM)

CM

SF

Refunding + Interests(at Start of Day)

CI

MT910

4

ACK

4

LiquidityTransfer

3

TransferRequest

2

Modify

1

DirectDebit

1

ACK

2

MT900

2Notify

refunding

3

Automatic Marginal Lending FacilityAutomatic Marginal Lending Facility

SSP

PM

SF

Setting Up[SF debits the Marginal Lending Account]

CI

SSP

PM

SF

Refunding + Interests(at Start of Day)

CI

MT910

3ACK

3

Credit transfer and

decrease credit limit

2a

Directdebit and increase

credit limit

1

Notifyintraday

credit not returned

1

ACK

2

MT900

2

ICM ICM

Notify decrease credit limit and setting up of

marginal lending

3

CB

Notify spillover

2b

Notify increase credit limit and

refunding marginal lending

2

MT900

3

ColletaralManager

ColletaralManager

• CI have access (via ICM) to the following services:– Liquidity transfers with PM/HAM– Information on the current balance of the overnight

deposit– Information on the current balance of available liquidity

of the marginal lending account • Transaction processing

Interaction and Administration

Interaction and Administration

• CBs access the same information and are able to:− Manage the list of participants eligible to make use of standing facilities − Access summarised information (monitoring)

Questions?

Customer Information about TARGET2General Functional Specifications

Only fo

r centra

l banks

•General concept of the Single Shared Platform

•„Order book“ for the three central banks developing the Single Shared Platform

•Publication August 2004

For Centra

l banks o

nly

Customer Information about TARGET2User Detailed Functional Specifications

Detailed description ofthe Single Shared Platform's features

OperationalTechnical

Basis for preparing participation in theSingle Shared Platform

Current version 2.2, published February 2007

Customer Information about TARGET2User Detailed Functional Specifications

• Book 1 - Core Services

• Book 2 - Optional Services

• Book 3 - For Central Banks only

• Book 4 - XML-specifications

• ICM Book 1 - User guide ICM

• ICM Book 2 - For Central Banks only

TARGET2 websites

ECB-website• Address: https://target2.ecb.int/• User: t2user• Password: VBjmspRR7

DNB-website• Address: http://www.dnb.nl

Payments / Non cash-payments / TARGET2