EURO1 PFMI disclosure report by EBA CLEARING … PFMI disclosure report by EBA CLEARING S.A.S. 20th...

EURO1 PFMI disclosure report by EBA CLEARING S.A.S.

20th August 2015

Copyright © EBA CLEARING S.A.S. 2015. All rights reserved.

EURO1 PFMI disclosure report by EBA CLEARING S.A.S. 20

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Responding institution: ABE CLEARING S.A.S. à capital variable (EBA

CLEARING)

Jurisdiction(s) in which the FMI operates: EU Authority(ies) regulating, supervising or overseeing the FMI: EURO1 is overseen by the European Central Bank (ECB) as lead overseer, with the participation of National Central Banks of the Eurosystem.

EURO1 is classified as a Systemically Important Payment System (SIPS). The list of payment systems in the eurozone and their classification can be found at:

https://www.ecb.europa.eu/press/pr/date/2014/html/Paymentsystemclassification-yearofreference2012.pdf?beb6eb19a71eeecfc05f22ab90d141ba

The date of this disclosure is 20th August 2015. This disclosure can also be found at www.ebaclearing.eu/N=Reference-Documents.aspx. For further information, please contact [email protected]

I. Executive summary EURO1 is a large-value net settlement system for payments denominated in euro among participating banks with a registered office or branch within the European Union (EU). EURO1 became operational on 4th January 1999 and has been overseen by the ECB since its launch. Prior to the start of operations of the system, a comprehensive collective oversight assessment was conducted at the level of the European System of Central Banks (ESCB) against the then applicable Lamfalussy standards, and the conclusions of the oversight assessment were endorsed by the ECB Governing Council in December 1998. In January 2001, the Eurosystem adopted the Core Principles for Systemically Important Payment Systems (‘CPSIPS’) published by the Committee on Payments and Settlement Systems Market Infrastructures (CPSS)1 as the minimum standards for the Eurosystem’s common oversight policy on systemically important payment systems. EURO1 was classified as a SIPS falling under the CPSIPS. In 2001, the International Monetary Fund (IMF) conducted in cooperation with the ECB a comprehensive oversight assessment of the EURO1 system against the CPSIPS.

1 The CPSS changed its name into Committee on Payments and Market Infrastructures (CPMI)

effective 1st September 2014.



http://www.ebaclearing.eu/N=Reference-Documents.aspx


mailto:[email protected]


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EURO1 was found to have proven to be a reliable system and to observe all ten Core Principles in full. In 2010, a comprehensive oversight assessment of the EURO1 system against the CPSIPS was launched, which was concluded in 2011.2 In March 2015, the Eurosystem concluded the follow-up assessment of the implementation of the recommendations stemming from the 2011 comprehensive oversight assessment. EURO1 was found to be compliant with all ten CPSIPS in full. Over the years, detailed oversight assessments have also been carried out in relation to changes to the system. Functional changes to the system and changes to its rules typically attract an ex ante oversight assessment and the requirement for a nihil obstat to proceed from the Overseer. The ECB publishes the outcome of its oversight assessments in the Eurosystem oversight reports. In April 2012, the Principles for Financial Market Infrastructures (PFMIs) were published by the Committee on Payments and Settlement Systems Market Infrastructures (CPSS) and the International Organisation of Securities Commissions (IOSCO) as global standards for the safety and efficiency of FMIs. The PFMIs were adopted by the Governing Council of the European Central Bank (Governing Council) as Eurosystem oversight standards for all types of FMIs in the euro area in June 2013.3 On 23rd July 2014, the ECB Regulation 795/2014 on oversight requirements for systemically important payment systems (SIPS Regulation) was published in the Official Journal of the EU.4 The SIPS Regulation implements the CPSS-ISOCO PFMIs and applies to payment systems in the eurozone. On 21st August 2014, the ECB notified EBA CLEARING as SIPS Operator of EURO1 of the classification of EURO1 as a SIPS. The SIPS Regulation foresees a one-year transition period for SIPS to comply with the requirements as of the date of notification of their classification. The Eurosystem will conduct oversight assessments of the four systemically important payment systems of the euro area against the SIPS Regulation and will help usher the respective operators towards full compliance.5 This disclosure report describes the EURO1 system’s design and operations, its governance and legal framework, as well as the approach by EBA CLEARING as SIPS Operator to the enhancements that are required for continued full observance of the EURO1 system with the Eurosystem oversight requirements for SIPS.

2 In 2009, a comprehensive oversight assessment was conducted by the ECB as lead Overseer

of the business continuity arrangements of EURO1 against the then applicable revised implementation guidelines of the Eurosystem for Core Principle VII. The conclusions of the oversight assessment on the ‘Business Continuity Oversight Expectations for SIPS’ (BCOE) were subsequently included in the outcome of the comprehensive oversight assessment on EURO1 launched in 2010. 3 Eurosystem Oversight Report 2014.

4 Regulation ECB/2014/28 of the European Central Bank (EU) N° 795/2014 of 3 July 2014 on

oversight requirements for systemically important payment systems, OJ L 217, 23.7.2014, p.16 5 Eurosystem Oversight Report 2014.


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II. Summary of changes since the last update of the disclosure

The most recent comprehensive oversight assessment of the EURO1 system was conducted in 2010 and 2011 against the CPSIPS, and the report can be found at:

https://www.ecb.europa.eu/pub/pdf/other/oversightassessment201111en.pdf?3f5bcb303c8823d9e4aa919febcbc39chttps://www.ecb.europa.eu/pub/pdf/other/oversightassessment201111en.pdf?3f5bcb303c8823d9e4aa919febcbc39c

On the basis of the assessment conducted by the Eurosystem regarding the EURO1 system’s compliance with the CPSIPS and the BCOE, the conclusion was that “the Euro System of the EBA CLEARING Company (EURO1) complies with CPSS Core Principles I to IX, and due to the absence of a dedicated risk management function within the company, broadly complies with Core Principle (CP) X (Governance). In September 2011, the Board of EBA CLEARING decided to implement a fully-fledged risk management function in the Company, and a dedicated Risk Committee of the Board was created in November 2011. During 2012, an enterprise risk management framework was developed. The risk management function and framework became fully operational as from 2nd January 2013, under the management of a newly hired Chief Risk Officer. In March 2015, the Eurosystem concluded the follow-up assessment of the implementation of two pending recommendations, namely the update of the country legal opinions for the jurisdictions relevant to participation in EURO1 (under CP I – Legal Basis) and the conduct of an external audit review of EBA CLEARING’s risk management function (under CP X – Governance). The follow-up assessment concluded that both recommendations had been satisfactorily implemented. More concretely, it was confirmed that EURO1 has a well-founded legal basis, and the implementation of a dedicated risk management function was confirmed by an external audit on the design and operating effectiveness of the risk management framework. EURO1 being compliant with the former CPSIPS in full, preparations for compliance with the PFMIs focused on those areas where the PFMIs complement the CPSIPS in line with the objectives of the CPSS and IOSCO in setting forth the PFMIs. Guidance was sought from the ECB and Eurosystem during the transition period of the SIPS Regulation on enhancements required for EURO1. The present report is the first disclosure report responding to the CPSS-IOSCO Disclosure framework for financial market infrastructure of December 2012, as per Article 20 of the SIPS Regulation. Particularly in relation to EURO1 and EBA CLEARING as SIPS Operator of EURO1, noteworthy activities in preparation for compliance with the SIPS Regulation implementing the PFMIs include the following:

The rules governing the EURO1 system have been amended to create a legal basis for new requirements stemming from the PFMIs compared to the CPSIPS, in particular in relation to critical participants and tiered participation arrangements.





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During 2014 and 2015, a fit-for-purpose governance framework has been implemented in line with the new standards introduced by the SIPS Regulation. In particular, a Board nomination policy and Board evaluation policy and methodology were developed and introduced, and a thorough exercise was undertaken to formalise existing governance policies, processes and practices into a comprehensive set of documented codes and policies.

A Board Nomination and Governance Committee was created to assist the Board in implementing the Board nomination and evaluation processes, and in monitoring the effectiveness of the corporate governance framework.

An independent external audit on the design and operating effectiveness of the Risk Management Framework was conducted.

To enhance the risk tolerance and strategy statement of the Company, a Risk Strategy Statement is being developed to complement the Risk Tolerance Statement of the Company.

The EURO1 system will be changed at the occasion of the first next functional release scheduled for November 2015 to implement the “cover 1” and “cover 2” minimum requirements for respectively liquidity and credit risk on a per-group basis. A bank group shall only have one EURO1 ‘main’ participant in the system. Other entities of the same group will use a status that does not require them to grant or receive bilateral limits.

To implement the cover 2 minimum requirement for credit risk as per the guidance received from the Overseer, the amount of the liquidity pool in EURO1 will be set at twice the amount of the single largest exposure (Maximum Debit Cap) in the system.

The system shall evolve from a cover 1 to a cover 2 minimum for liquidity risk; the liquidity pool shall serve to ensure timely settlement, within the normal constraints of the money markets, in case of a default, under extreme but plausible market conditions, of the two participants which, together with their affiliates, have the largest aggregate payment obligation.

Stress testing scenarios and stress testing have been further developed, inter alia to cover the relevant scenarios for liquidity risk as per Principle 7 (Article 8 of the SIPS Regulation).

An abridged version of the default rules is published on the EURO1 section of the website of EBA CLEARING providing an overview of the system’s features and functioning.

The Company has identified the amount of, and maintains, sufficient liquid net assets to cover potential general business losses.

The Company has prepared a recovery and orderly wind down policy, and is developing a comprehensive recovery and orderly wind down plan which has been submitted in draft to the Overseer.

Criteria for the identification of critical participants have been developed, and designated critical participants have been invited to complete a self-certification on compliance with the requisite resilience requirements.

An analysis has been conducted on tiering in EURO1.

A service availability report for publication to stakeholders has been prepared.

Detailed self-assessments are submitted to the Overseer, addressing each of the questions for the assessment of payment systems as comprised in the Eurosystem Assessment methodology for payment systems.

Relevant updates of the publicly available pages on the website of EBA CLEARING, as well as the present disclosure report, have been prepared.


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III. General background on the FMI

General Description of the FMI and the markets it serves The EURO1 system is a key payment infrastructure, which plays an important role in the processing of large-value payment transactions in euro, and has systemic relevance in the euro area payment landscape.6 EURO1 has been designed to provide a robust, secure and efficient liquidity-saving processing of single payments at low cost among banks operating from the EU. EURO1 became operational on 4th January 1999, and was developed for handling interbank payments denominated in euro alongside TARGET as from the start of Stage III of Economic and Monetary Union, and now co-exists as a Europe-wide large-value payment system alongside TARGET2. EURO1 is the only private-sector large-value payment system for single same-day euro transactions at a pan-European level. The EURO1 system processes transactions of high priority and urgency, and primarily of large amount, both at a domestic and at a cross-border level. It has been the specific intention of the users to have at their disposal a system that is simple, predictable and easy to use. Today, the system counts 60 participant banks and processes on average over 200,000 payments a day with an average total daily value of around 200 billion euro. More than 8,000 participant BICs and over 18,000 additional BICs are reachable via the EURO1/STEP1 Participants as listed in the EURO1/STEP1 Directory. The service provides a unique RTGS-equivalent multilateral net settlement arrangement, providing finality of payments upon processing of each individual payment message in real time. EURO1 is based on SWIFT FIN payments messaging and the use of SWIFTNet Browse, InterAct and FileAct. The system is developed and maintained by SWIFT. Settlement of participants’ interbank positions (single obligation, single claim) takes place with the ECB using the Ancillary System Interface of TARGET2-ECB. EURO1 is geared at assisting banks in keeping cost down by enabling them to optimise their liquidity use. The system is equipped with a liquidity bridge, which makes it possible for banks to withdraw excess liquidity from the system through four liquidity distribution windows. The liquidity bridge also enables the banks to inject additional funds into EURO1 in order to allow for additional payments to be processed. The functionality supports the banks in resolving any on-hold queues more easily. Given these characteristics, EURO1 enables its participants to send and receive payment messages in a technological and legal environment that fulfils the banks' requirements for efficiency and security in transaction processing and liquidity usage.

6 Oversight Assessment of the Euro System of the EBA Clearing Company (EURO1) against

the CPSS Core Principles, November 2011, Executive Summary.


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The EURO1 system has been designed and evolves as a result of requirements from (potential) users and related market needs, and is intrinsically user defined. Practicality and costs for the users are prime considerations underlying the design of the system, without compromising on the resilience and robustness of the system and its compliance with oversight requirements. The level of usage of EURO1 for the processing of large-value single payments in euro, and its position vis-à-vis other large value euro payment systems i.e. in particular TARGET2, both current and past, indicate that the system is considered as an efficient means to make interbank payments. This may be illustrated by the following charts: EURO1/STEP1 vs TARGET2 (volume)

Source: http://www.ecb.int/stats/payments/payments/html/13_table1.en.html

http://www.ecb.int/stats/payments/payments/html/13_table1.en.html


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EURO1/STEP1 vs TARGET2 (value)


EURO1/STEP1 – TARGET2: monthly change in processed values from 2011 to 2015





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General organisation of the FMI EBA CLEARING has been created in the form of a société par actions simplifiée under French law and its head offices are located in Paris, France. The by-laws of EBA CLEARING are publicly available on the website of EBA CLEARING at www.ebaclearing.eu/N=Reference-Documents.aspx. EBA CLEARING currently has 60 shareholders. The shareholders of EBA CLEARING are those financial institutions that are participants in its large-value payment system EURO1 and close to all shareholders are users of STEP2-T. Each shareholder holds one share and has one vote at the Shareholders Meeting. The list of shareholders is publicly available on the website of EBA CLEARING at www.ebaclearing.eu/N=Shareholders.aspx. The Board is responsible for setting the strategic direction, overseeing management and adequately controlling the Company, with the ultimate aim of directing the Company towards the fulfilment of its strategic aims and long-term objectives. The Board is assisted by five Board Committees in carrying out its functions:

the Audit & Finance Committee (AFC);

the Board Risk Committee (BRC);

the Strategy and Policy Committee (SPC);

the Remuneration Committee (RemCo); and

the Nomination and Governance Committee (NGC). The mission and activities of the Board Committees are set forth in the Annual Report of the Company. In addition, the Board receives reports from the Operations and Technical Committee, chaired by a Board member and composed of user representatives, and from the Legal Advisory Group. The responsibility for the day-to-day management rests with the Chief Executive Officer (CEO). The CEO reports to the Board. Heads of Units have delegated powers for managing the activities relating to their units. The roles attributed to the various Units coincide with the functions required for carrying out the activities of EBA CLEARING. An overview of the management is included in the Annual Report 2014. Effective 21st July 2015, a single Service Development and Management Unit is entrusted with the management of the EURO1/STEP1 and STEP2 Services, with dedicated senior managers being assigned to the two service lines respectively as well as to Marketing and the relation with the users, and to New Initiatives. EBA CLEARING applies a three-lines-of-defence approach for its risk management, ensuring different levels of control. The Chief Risk Officer and the Internal Audit function are independent and have a dotted direct reporting line to the Board Risk Committee and to the Audit and Finance Committee respectively. In order to ensure that all types of users are considered in the design and evolution of its systems and offerings, the Company maintains a broad range of communication


http://www.ebaclearing.eu/N=Shareholders.aspx


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channels. To make best use of expert knowledge and facilitate frequent and constructive dialogue with its users, the Company has established user groups and expert fora. There are also regular country or regional user meetings, and the company organises individual user visits and information campaigns. A dedicated corporate governance section, setting forth the governance arrangements, lines of responsibility, Board and management role and composition, and relations with stakeholders is included in the Annual Report. A report on the risk management and internal control functions is equally included in the Annual Report. The Annual Report is publicly available on the website of the Company at www.ebaclearing.eu/N=Reference-Documents.aspx. Further, the composition of the Board and mission of the Board Committees are published on the website of EBA CLEARING at www.ebaclearing.eu/N=Governing-bodies.aspx and www.ebaclearing.eu/N=Board-committees.aspx.

Legal and regulatory framework EBA CLEARING, the SIPS Operator of EURO1 and of STEP2-T, is a limited liability company incorporated under French law in the form of a société par actions simplifiée à capital variable. EBA CLEARING has branches in Belgium and in Germany and representative offices in Italy, Finland, and the United Kingdom. EBA CLEARING’s role is primarily the role of a ‘business administrator’. EBA CLEARING does not incur any rights or obligations arising from the sending and receiving of payment messages, and at no time does EBA CLEARING hold any funds or deposits in relation to the operation of its systems. The EURO1 system is governed by a set of EURO1 System Documentation, including in particular the EURO1 Rules. The EURO1 Rules comprehensively cover the rights and obligations arising from participation in the system. The EURO1 System Documents, including the provisions governing the settlement operations and the collateral arrangements, are all governed by one single governing law, German law. The legal basis of the EURO1 system is known as the ‘Single Obligation Structure’. Under the Single Obligation Structure, the participants agree that the rights and obligations resulting from the processing of payment messages sent to or by any one participant are, from the outset, on a net basis. At each moment a payment message is processed, the calculation of the balance of the participants concerned constitutes the establishment of a single obligation, or, as applicable, a single claim of the relevant participant owed to, respectively owed by, the community of all other participants. Country opinions, in a form satisfactory to the System Operator and to the Overseer, have been obtained under the laws of all jurisdictions relevant to participation in the system. Further, capacity opinions must be provided by each EURO1 Participant in order to be admitted to the EURO1 system. The country opinions, as well as the


http://www.ebaclearing.eu/N=Governing-bodies.aspx


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capacity opinions, are issued based upon terms of reference established by the System Operator, which are in conformance with the terms of reference applied for oversight of large value payment systems. Country opinions are regularly updated. Capacity opinions are updated when relevant. Albeit the legal basis for EURO1 was designed without reliance on the Settlement Finality Directive, EURO1 benefits from the protection of the Settlement Finality Directive (SFD) and is included in the list of designated systems under the SFD. The validity and enforceability of the EURO1 System Documentation is also confirmed, even in the event of insolvency proceedings, under the laws of non-EU/European Economic Area (EEA) jurisdictions that are relevant to participation in the system. The use of networks for the sending and receiving of payment and other messages is outside of the scope of the EURO1 system. Entities participating in the system contract directly with the provider of the communication network on a bilateral basis. The SIPS Regulation applies to and is binding on EURO1, which meets the criteria laid down in Article 1(3) of the SIPS Regulation. The EURO1 system is overseen by the ECB as lead Overseer, with the participation of National Central Banks of the Eurosystem.

System design and operations 1. Architecture The operation of EURO1 is based upon the use of a messaging infrastructure and processing service provided by the Society for Worldwide Interbank Financial Telecommunication scrl (SWIFT). EURO1 is based on SWIFT FIN payments messaging and the use of SWIFTNet Browse, InterAct and FileAct for the operational management of the system.


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The EURO1 system settles same day in central bank funds in TARGET2-ECB using Ancillary System Interface module 4 (ASI4). EBA CLEARING, in its role as System Operator, is responsible for the continuous monitoring of payment processing and the settlement operations of the system. This role includes the daily monitoring of alert management, real-time monitoring of the status of processed EURO1 payments, end-to-end monitoring of the liquidity bridge processing and completion of the settlement in TARGET2.

2. Payment message processing Payment messages sent by participants for processing in EURO1 must carry the tag “EBA” in field 103 of the message header. Messages with this tag are automatically copied (Y-Copy) to the central computer via SWIFT’s FIN-Copy service. The system supports the following message types: MT103 (CORE, PLUS, REMIT), MT202 (including MT202COV), MT400 and, provided limits authorising receipt have been set, MT204.


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Payment messages are sent on the FIN network provided by SWIFT, partially copied to a central computer in view of being processed, and immediately on-sent through the FIN network to the receiving bank if and once they are processed. Payment messages are processed on an individual basis. The technical features of the system are such that payment messages are only processed by the central computer after it has been checked that these meet the criteria for being processed. These criteria include, in particular, that a payment message can only be processed if this does not lead to breaching binding intra-day limits – corresponding to the debit caps and credit caps of the respective participants – as are built in the system. Payment messages that cannot be processed at the time they are sent are queued. These queues are revisited on a regular basis to allow processing of the queued payment messages. Queues are revisited each time a payment message in relation to the sending or receiving bank, as applicable, is processed to check whether the adjusted balance allows for further processing of payment messages that are held in a participant's on-hold queue. To that effect, the system follows the principle of "by-passing FIFO7". A payment message can be revoked or cancelled by the sending participant as long as it is not processed. Once processed, payment messages cannot be revoked. The Interactive Workstation provides real-time access to the position of a participant at any given time in the day, and enables participants, inter alia, to monitor and manage payments and queues. The System Operator also has real-time monitoring tools at its disposal including the Business Administration Workstation (BAWS) providing (among others) functionality to monitor overall positions and limits of the Participants. To address potential gridlock situations, an automated functionality (‘circles processing’) allows for simultaneous processing of a number of payment messages from different participants which, if processed simultaneously, will not breach the applicable debit caps and credit caps. Payment processing starts at 7:30 CET. Cut-off time for processing presently stands at 16:00 CET. 3. Immediate finality of processed payments The legal basis of the system, the Single Obligation Structure, entails that at any time on any given business day, each participant only has one single obligation/ claim towards the community of all other participants, which is automatically adjusted every time a payment that is sent or received by this participant is duly processed. Through this real-time adjustment of the participants’ positions, EURO1 provides immediate finality for every processed payment. It thereby offers an RTGS-equivalent system operating on a multilateral net basis. A bank’s position in EURO1 cannot be unwound.

7 First In First Out


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4. Legal basis The EURO1 system is based on a unique system design. EURO1 is a system that achieves continuous intraday finality; the system provides immediate intraday finality for each payment upon processing thereof. In addition, the time of irrevocability of each payment message coincides with the point in time at which the payment becomes final (i.e. irrevocable and unconditional fund transfer). The EURO1 system is a notable exception to a common large-value payment system design where the settlement asset (in the case of large-value payment systems, mostly a claim on a central bank) is transferred at the same time as finality is achieved. In EURO1, the transfer of the settlement asset (central bank fund transfers across the Settlement Account held in TARGET2-ECB using ASI4) takes place after the time of finality of the payment messages. Discharge of individual payments does not require a transfer of monies, and the related payment obligations are discharged upon the adjustment of the single obligation or single claim of the respective participants. Under the Single Obligation Structure, the participants agree that the rights and obligations resulting from the processing of payment messages sent to or by any one participant are, from the outset, on a net basis. The Single Obligation Structure entails that at each and any moment throughout the operating day – from the moment the first payment message is processed until cut-off time for processing (and beyond such time until settlement) –, each participant only has one single claim (in the case of a positive number) or one single obligation (in the case of a negative number) towards the community of all other participants. At each time a payment message is processed, the calculation of the balance of the participants concerned constitutes the establishment of a single obligation or, as applicable, a single claim of the relevant participant owed to, respectively owed by, all other participants in the system. The balances of each of the participants are calculated automatically and in real time by the central computer immediately upon the processing of each payment message, and, equally, the single claim or single obligation of each participant is recomputed automatically upon the processing of each payment message sent by or to any such participant. Since the processing entails, on the one hand, the calculation of the balance of each participant, and, on the other hand, the simultaneous establishment of a legal obligation or claim of each Participant towards all other Participants in the amount of the so calculated balance, there is at any time during the day a valid and enforceable obligation or claim of each participant towards all other participants in the amount of its balance. The Single Obligation Structure does not allow unwinding or partial unwinding. In addition, and importantly, the Single Obligation Structure achieves real-time finality of payments. The adjustment of the single obligation or single claim of a sending and a receiving participant upon processing of a payment message (sent in performance of a payment obligation arising outside of the system and owed by the sending participant to the receiving participant) shall result in the discharge of the payment obligation as between the sending and the receiving participant; the fund transfer so made shall be irrevocable and unconditional upon processing of the payment message.


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5. Settlement The EURO1 system settles same day in central bank funds via a settlement account opened with the ECB in TARGET2-ECB using settlement procedure 4 of the Ancillary System Interface (“ASI4”). Settlement of the EURO1 system concerns the settlement of the Single Amount, i.e., as applicable, the single claim or the single obligation of each Participant towards the community of all other Participants. Individual payments are discharged and settled with finality in real time upon adjustment of the Single Amounts at each time a payment message is processed. After the cut-off time for processing, the participants having a single obligation will pay the amount thereof by means of a transfer via direct debit from their account held in a component system of TARGET2 for crediting to the settlement account. After all amounts so due have been received, the single claim of the (long) participants shall be satisfied by means of a transfer from the settlement account to their account in TARGET2. Completion of settlement is notified to all participants upon receipt of confirmation that the TARGET2 account of each of the long participants has been credited. The average settlement completion time since settlement takes place using ASI4 is 16:08 CET. Additional liquidity is available (i.e. a liquidity pool, and, beyond, binding obligations of the surviving participants to transfer funds) to ensure completion of settlement even in the event of a shortfall due to the inability of one or more participants to satisfy their settlement obligations. EURO1 is designed to ensure completion of settlement in the case of a default by any number of participants based on the liquidity pool and loss-sharing arrangements. The liquidity pool maintained for EURO1 serves to ensure timely settlement, within the normal constraints of the money markets, in the case of a default of any number of participants with an aggregate position not exceeding the amount of the liquidity pool. The size of the readily available liquid assets allows to cover multiple failures by up to all participants in relation to whom risk assessment has given rise to reduction of limits to the minimum amount. Also, should there be multiple failures occurring during the same day for an aggregate amount exceeding the liquidity pool, liquidity reserves to complete settlement are in place in the form of binding obligations of the surviving participants (towards the other surviving participants) to transfer funds. 6. Decentralised liquidity and credit risk management

Liquidity in EURO1 is generated by the mutual giving and receiving of bilateral limits between the participants. The bilateral limits granted by a EURO1 Participant to each of the other participants in total provide the multilateral net receiving limit (Credit Cap) of the grantor. Similarly, the total of the bilateral limits received by a EURO1 Participant from all the other participants provide the multilateral net sending limit (Debit Cap) of the grantee. Each EURO1 participant must set mandatory minimum limits on each other EURO1 Participant. The sum of mandatory limits for each EURO1 Participant corresponds to


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the amount of a share in the liquidity pool. EURO1 Participants are free to also set a discretionary limit in an amount between euro 0 and 50 million. The limits that EURO1 participants grant to each other can be changed according to their assessment of the creditworthiness of the EURO1 participants to which they were granted. Discretionary limits can be revised up to 7:00 CET on day D. The bilateral limits are unrelated to the bilateral payment flows between the individual participants. Participants can send payments to any of the other participants, and payments will be processed within the constraints of their Debit Cap taking into account incoming payments. With this system of bilateral limits and the Single Obligation Structure, counterparty exposure in EURO1 is managed directly by the participants themselves:

All participants contribute in equal shares to a liquidity pool of at least EUR 1 billion (which constitutes the maximum possible exposure from any one participant, and as from November 2015, the two largest possible exposures) in the form of cash deposits held with the ECB.

Participants are granted by each of the other participants a mandatory limit, and the sum of the mandatory limits received is equal to a participant’s share in the liquidity pool. The amount of the mandatory limit is set by dividing the liquidity share amount of a participant by the number of participants less one. Each Participant grants a security interest on the amount of it share in the liquidity pool (‘defaulter pay’).

EURO1 Participants can adjust the discretionary element of their limits to the other participants up until 07:00 CET on the same day, allowing banks to quickly react to changing circumstances.

The risk of a participant in case of a single failure is capped at the amount of its limits on the failing participant.

The overall risk a participant can bring to the system is limited by its Debit Cap.

At no time can the Debit Cap of any Participant exceed the amount of the Maximum Debit Cap set at system level (EUR 1 billion, and as from November 2015 this amount shall be set at EUR 500 million).


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7. Liquidity management tools

By operating on a net basis, EURO1 enables banks to significantly reduce the liquidity required to support their payments business; thanks to the binding intra-day limits in EURO1, individual payments do not need to be fully covered beforehand, as in a real-time gross system. Consequently, there is no requirement to pre-fund at the start of the day. The availability of a Debit Cap allows participants to have immediate sending capacity and to send payments without having to wait for incoming funds. This considerably lowers the liquidity and capital support costs for banks in the light of the Basel III capital adequacy legislation. In order to further recycle liquidity, EBA CLEARING offers a liquidity bridge, which enables banks to proactively and independently manage their liquidity in EURO1:

Participants that have reached the maximum level of their Debit Cap can pay in funds from their TARGET2 account (pre-fund), against which their position in EURO1 is adjusted. The participant has, as a result, acquired increased sending capacity against pre-funded liquidity.

Participants that have incoming payments queued because they have reached the maximum level of their Credit Cap can authorise EBA CLEARING to


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withdraw liquidity from their long position in EURO1 (liquidity distributions), which is then credited to the banks’ TARGET2 accounts.

Pre-funding takes place throughout the day and liquidity distributions take place at the six most critical times to ensure the release of the maximum number of queued payments (see graph below).

The liquidity distribution algorithm allows for almost 100 percent of the pre-funded liquidity to be recycled.

As a result of the liquidity management tools available, the EURO1 system is able to achieve a high Liquidity Efficiency Ratio (LER). Participants can further exploit the liquidity-saving benefits of EURO1 by including branches as well as consolidated affiliates within the EEA under the single liquidity position of the participant.


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8. Operational robustness and resilience

EURO1 is at the forefront of the industry in terms of safety, security and resilience. The processing services of EURO1 are provided by SWIFT. EURO1 benefits from the state-of-the-art resilience of SWIFT. EBA CLEARING runs three Operations Centres for system monitoring in different countries with rotation of staff and machines taking place on a regular basis. Specific dedicated procedures with critical service providers, including in particular SWIFT and the ECB as provider of settlement services, are ready for activation in case of abnormal events. All operational procedures, including the resilience arrangements of all EURO1 participants, are reviewed at regular intervals. In co-operation with its major infrastructure partners, including the ECB and SWIFT, EBA CLEARING is engaged in a continuous process geared at testing, revising and further enhancing the resilience arrangements and procedures around its services. 9. Admission In order to fulfil the legal, financial and operational criteria to be able to participate in the EURO1 Service, a bank has to:

be authorised to conduct banking business;

have its registered address in an OECD country or in an EU Member State;

participate in the EURO1 system from its registered address or a branch located in the EU;

have direct access to TARGET2;

be a direct settlement participant in one payment system;

have own funds of at least EUR 1.25 billion (within the meaning of Capital Requirements Directive 2006/48/EC);

have a short-term credit rating of at least P2 (Moody's) or A2 (S&P) or equivalent;

undertake to comply unconditionally with the rules of the system and the operational and technical requirements for participation;

be a member of the Euro Banking Association. In addition, the laws of all the jurisdictions from where a participant accesses the system must recognise the Single Obligation Structure, which forms the legal basis of the system.


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The system design allows a EURO1 Participant to have multiple access points to the system, and a EURO1 Participant can have up to 99 sub-addresses under its main BIC address that it can assign to its branches or to entities incorporated in the same consolidated accounts as the EURO1 Participant. Entities (i.e. excluding branches) included as sub-addresses are often referred to as ‘sub-participants’. In order to qualify as a sub-participant in EURO1, a bank has to be

a consolidated affiliate of a participant in the EURO1 system, as evidenced by the accounts of the participant;

established in an EEA country. A full list of all participants and their sub-participants is published on the website of EBA CLEARING both in alphabetical order and on a per country basis. The lists are available at www.ebaclearing.eu/N=EURO1-Participants.aspx and www.ebaclearing.eu/N=EURO1-Sub-Participants.aspx. 10. Basic statistical data The average daily volumes and values on a monthly basis are published on the website and available at www.ebaclearing.eu/N=EURO1-Statistics.aspx. A monthly statistical report, including on the usage of the liquidity bridge, is available to all participants on the website pages with restricted access. A dedicated statistical report on operational reliability for distribution to stakeholders has been prepared.

11. Envisaged changes to the system At the occasion of the next following functional release of the EURO1 system in November 2015, the following planned changes will be implemented:

group aggregation for the cover one (liquidity risk) and cover two (credit risk) minimum requirements of the PFMIs;

setting of liquidity pool amount at twice the amount of the Maximum Debit Cap;

the amount of the Maximum Debit Cap will be set at EUR 500 million;

speed and performance enhancement to the circles processing functionality;

the Pre-fund Participant status shall be made available for entities that are part of the same group as a EURO1 Participant.

The Board and the Management of the Company are currently analysing potential changes in relation to the following aspects:

review of admission criteria;

processing of payment messages sent by participants in XML format;

assessment of the governance arrangements for decision making on EURO1. The above-mentioned potential changes have not yet resulted in proposals at the decision-making level.

http://www.ebaclearing.eu/N=EURO1-Participants.aspx

http://www.ebaclearing.eu/N=EURO1-Sub-Participants.aspx

http://www.ebaclearing.eu/N=EURO1-Statistics.aspx

EURO1 disclosure report by EBA CLEARING S.A.S. 20th August 2015

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IV. Principle-by-principle summary narrative disclosure

Principle 1: Legal basis An FMI should have a well-founded, clear, transparent, and enforceable legal basis for each material aspect of its activities in all relevant jurisdictions.

SIPS Regulation Article 3

Summary EURO1 is compliant with the former CPSIPS in full. EURO1 has a well-founded legal basis under all relevant jurisdictions. The EURO1 system is governed by a set of EURO1 System Documentation, which is governed by one single governing law, German law. The validity and enforceability of the EURO1 System Documentation, including the Single Obligation Structure, is confirmed by means of reasoned legal opinions issued, and updated from time to time, under the laws of all jurisdictions relevant to participation in the system. Each Participant must provide a capacity opinion for being admitted to participate in the system. EURO1 is a designated system under the Settlement Finality Directive.

Status The rules governing the EURO1 system have been amended to create a legal basis for new requirements stemming from the PFMIs compared to the CPSIPS, in particular in relation to critical participants and tiered participation arrangements.

Principle 2: Governance An FMI should have governance arrangements that are clear and transparent, promote the safety and efficiency of the FMI, and support the stability of the broader financial system, other relevant public interest considerations, and the objectives of relevant stakeholders.


Summary EURO1 is compliant with the former CPSIPS in full. The governance arrangements are effective, accountable and transparent. The involvement of stakeholders in decisions as well as the objectives of the

Status During 2014 and 2015, a fit-for-purpose governance framework has been implemented in line with the new standards introduced by the SIPS Regulation. In particular, a Board nomination policy and Board evaluation


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system are specified in an unambiguous and transparent manner.

policy and methodology were developed and introduced, and a thorough exercise was undertaken to formalise existing governance policies, processes and practices into a comprehensive set of documented codes and policies. A Board Nomination and Governance Committee was created to assist the Board in implementing the Board nomination and evaluation processes, and in monitoring the effectiveness of the corporate governance framework. A specific section setting forth the mission and strategic objectives of the Company has been included in the Annual Report.

Principle 3: Framework for the comprehensive management of risks An FMI should have a sound risk-management framework for comprehensively managing legal, credit, liquidity, operational, and other risks.


Summary The Company has established an independent risk management function, and maintains a comprehensive risk management framework.

Status An independent external audit on the design and operating effectiveness of the Risk Management Framework was conducted. To enhance the risk tolerance and strategy statement of the Company, a Risk Strategy Statement is being developed to complement the Risk Tolerance Statement of the Company.

Principle 4: Credit risk An FMI should effectively measure, monitor, and manage its credit exposure to participants and those arising from its payment, clearing, and settlement processes. An FMI should maintain sufficient financial resources to cover its credit exposure to each participant fully with a high degree of confidence. In addition, a CCP that is involved in activities with a more-complex risk profile or that is systemically important in multiple jurisdictions should maintain additional financial resources sufficient to cover a wide range of potential stress scenarios that should include, but not be limited to, the default of the two largest participants and their affiliates that would potentially cause the largest aggregate credit exposures to the CCP in extreme but plausible market conditions. All other CCPs should maintain, at a minimum, total financial resources sufficient to cover the default of the one participant and its affiliates that would potentially cause the largest aggregate credit exposures to the CCP in extreme but plausible market conditions.


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Summary EURO1 is compliant with the former CPSIPS in full. The system has clearly defined procedures for the management of credit risks, which specify the respective responsibilities of the system operator and the participants and provide appropriate incentives to manage and contain those risks.

Status To implement the cover 2 minimum requirement for credit risk as per the guidance received from the Overseer, the amount of the liquidity pool in EURO1 will be set at twice the amount of the single largest exposure (Maximum Debit Cap) in the system. The EURO1 system will be changed at the occasion of the first next functional release scheduled for November 2015 to implement the “cover 1” and “cover 2” minimum requirements for respectively liquidity and credit risk on a per-group basis. A bank group shall only have one EURO1 ‘main’ participant in the system. Other entities of the same group will use a status that does not require them to grant or receive bilateral limits.

Principle 5: Collateral An FMI that requires collateral to manage its or its participants’ credit exposure should accept collateral with low credit, liquidity, and market risks. An FMI should also set and enforce appropriately conservative haircuts and concentration limits.


Summary ‘Defaulter pay’ arrangements are supported by Deposits maintained by each of the EURO1 participants in the form of cash deposits at the European Central Bank.

Status No changes are envisaged.

Principle 7: Liquidity risk An FMI should effectively measure, monitor, and manage its liquidity risk. An FMI should maintain sufficient liquid resources in all relevant currencies to effect same-day and, where appropriate, intraday and multiday settlement of payment obligations with a high degree of confidence under a wide range of potential stress scenarios that should include, but not be limited to, the default of the participant and its affiliates that would generate the largest aggregate liquidity obligation for the FMI in extreme but plausible market conditions.


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Summary EURO1 is compliant with the former CPSIPS in full. The system has clearly defined procedures for the management of liquidity risks, which specify the respective responsibilities of the system operator and the participants and provide appropriate incentives to manage and contain those risks. As part of the continuation of a reform program for EURO1, the sum of the mandatory limits to any Participant has been set at the amount of the share of each Participant in the liquidity pool. The size of the readily available liquid assets covers failures by any number of participants whose limits have been reduced to the minimum amount.

Status In November 2015, and exceeding the minimum requirement of the PFMIs, the system shall evolve from a cover 1 to a cover 2; the liquidity pool shall serve to ensure timely settlement, within the normal constraints of the money markets, in the case of a default, under extreme but plausible market conditions, of the two participants which, together with their affiliates, have the largest aggregate payment obligation. The EURO1 system will be changed at the occasion of the first next functional release scheduled for November 2015 to implement the “cover 1” and “cover 2” minimum requirements for respectively liquidity and credit risk on a per-group basis. A bank group shall only have one EURO1 ‘main’ participant in the system. Other entities of the same group will use a status that does not require them to grant or receive bilateral limits. Stress testing scenarios and stress testing have been further developed, inter alia to cover the relevant scenarios for liquidity risk as per Principle 7 (Article 8 of the SIPS Regulation).

Principle 8: Settlement finality An FMI should provide clear and certain final settlement, at a minimum by the end of the value date. Where necessary or preferable, an FMI should provide final settlement intraday or in real time.


Summary EURO1 is compliant with the former CPSIPS in full. Each payment is irrevocable and final upon processing. Payments are settled with finality in real time on a continuous basis.



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Principle 9: Money settlements An FMI should conduct its money settlements in central bank money where practical and available. If central bank money is not used, an FMI should minimise and strictly control the credit and liquidity risk arising from the use of commercial bank money.


Summary EURO1 is compliant with the former CPSIPS in full. Money settlements among participants take place in TARGET2, i.e. in central bank money.


Principle 13: Participant-default rules and procedures An FMI should have effective and clearly defined rules and procedures to manage a participant default. These rules and procedures should be designed to ensure that the FMI can take timely action to contain losses and liquidity pressures and continue to meet its obligations.


Summary EURO1 is compliant with the former CPSIPS in full. Exit criteria are objective, clearly and explicitly defined in the system’s rules, and adequately disclosed to the participants.

Status An abridged version of the default rules is published on the EURO1 section of the website of EBA CLEARING providing an overview of the system’s features and functioning.

Principle 15: General business risk An FMI should identify, monitor, and manage its general business risk and hold sufficient liquid net assets funded by equity to cover potential general business losses so that it can continue operations and services as a going concern if those losses materialise. Further, liquid net assets should at all times be sufficient to ensure a recovery or orderly wind-down of critical operations and services.


Summary Activities have been undertaken to complement existing arrangements in relation to the new requirements of Article 13 of the SIPS Regulation implementing Principle 15.

Status The Company has identified the amount of, and maintains, sufficient liquid net assets to cover potential general business losses. The Company has prepared a recovery and orderly wind down policy, and is developing a comprehensive recovery and orderly wind down plan which has


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been submitted in draft to the Overseer.

Principle 16: Custody and investment risks An FMI should safeguard its own and its participants’ assets and minimise the risk of loss on and delay in access to these assets. An FMI’s investments should be in instruments with minimal credit, market, and liquidity risks.


Summary EBA CLEARING does not incur any rights or obligations arising from the sending and receiving of payment messages, and at no time does EBA CLEARING hold any funds or deposits in relation to the operation of its systems.

Status No changes have been made to the policy applied for investments of own assets.

Principle 17: Operational risk An FMI should identify the plausible sources of operational risk, both internal and external, and mitigate their impact through the use of appropriate systems, policies, procedures, and controls. Systems should be designed to ensure a high degree of security and operational reliability and should have adequate, scalable capacity. Business continuity management should aim for timely recovery of operations and fulfilment of the FMI’s obligations, including in the event of a wide-scale or major disruption.


Summary EURO1 is compliant with the former CPSIPS and the Eurosystem Business Continuity Oversight Expectations for Systemically Important Payment Systems (‘BCOE’) in full. The system ensures a high degree of security and operational reliability and has contingency arrangements for the timely completion of daily processing.

Status Criteria for the identification of critical participants have been developed, and designated critical participants have been invited to complete a self-certification on compliance with the requisite resilience requirements.

Principle 18: Access and participation requirements An FMI should have objective, risk-based, and publicly disclosed criteria for participation, which permit fair and open access.


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Summary EURO1 is compliant with the former CPSIPS in full. The system has objective and publicly disclosed criteria for participation, which permit fair and open access.

Status As from the implementation of the planned system changes at the occasion of the functional release in November 2015, and to implement the “cover 1” and “cover 2” minimum requirements for respectively liquidity and credit risk on a per-group basis, only one ‘main’ participant status shall be available on a per group basis. The Pre-fund Participant status shall be made available for entities that are part of the same group as a EURO1 Participant.

Principle 19: Tiered participation arrangements An FMI should identify, monitor, and manage the material risks to the FMI arising from tiered participation arrangements.


Summary Activities have been undertaken to address the new requirements of Article 17 of the SIPS Regulation implementing Principle 19.

Status An analysis has been conducted on tiering in EURO1.

Principle 21: Efficiency and effectiveness An FMI should be efficient and effective in meeting the requirements of its participants and the markets it serves.


Summary EURO1 is compliant with the former CPSIPS in full. The system provides a means of making payments which is practical for its users and efficient for the economy.

Status A service availability report for publication to stakeholders has been prepared.

Principle 22: Communication procedures and standards An FMI should use, or at a minimum accommodate, relevant internationally accepted communication procedures and standards in order to facilitate efficient payment, clearing, settlement, and recording.


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Summary EURO1 uses internationally accepted communication procedures and standards.

Status No changes are envisaged in relation to compliance with the requirements of Article 19 of the SIPS Regulation implementing Principle 22.

Principle 23: Disclosure of rules, key procedures, and market data An FMI should have clear and comprehensive rules and procedures and should provide sufficient information to enable participants to have an accurate understanding of the risks, fees, and other material costs they incur by participating in the FMI. All relevant rules and key procedures should be publicly disclosed.


Summary EURO1 is compliant with the former CPSIPS in full. The system’s rules and procedures enable participants to have a clear understanding of the system’s impact on the risks they incur through participation in it.

Status Relevant updates of the publicly available pages on the website of EBA CLEARING, as well as the present disclosure report, have been prepared.

EURO1 disclosure report by EBA CLEARING S.A.S. 20

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V. List of publicly available resources EBA CLEARING and EURO1:

“About EBA CLEARING” section on website: www.ebaclearing.eu/N=About-

EBA-CLEARING.aspx

By-laws of EBA CLEARING: www.ebaclearing.eu/N=Reference-

Documents.aspx

EBA CLEARING Shareholders: www.ebaclearing.eu/N=Shareholders.aspx

EBA CLEARING Board: www.ebaclearing.eu/N=Governing-bodies.aspx

EBA CLEARING Board Committees: www.ebaclearing.eu/N=Board-

committees.aspx

EBA CLEARING Annual Report 2014:

https://www.ebaclearing.eu/N=Reference-Documents.aspx

EURO1 section on EBA CLEARING website:

www.ebaclearing.eu/N=EURO1.aspx

EURO1 Statistics: www.ebaclearing.eu/N=EURO1-Statistics.aspx

EURO1 Participants: www.ebaclearing.eu/N=EURO1-Participants.aspx

EURO1 Sub-Participants: www.ebaclearing.eu/N=EURO1-Sub-

Participants.aspx

E-book “EURO1: The liquidity-saving channel”: https://www.ebaclearing.eu/E-

Books/EURO1-Service/

Oversight report with the results of oversight assessment on EURO1 published by the ECB:

“Oversight assessment of the euro system of the EBA Clearing company

(EURO1) against the CPSS Core Principles”, November 2011:

https://www.ecb.europa.eu/pub/pdf/other/oversightassessment201111en.pdf

?3f5bcb303c8823d9e4aa919febcbc39chttps://www.ecb.europa.eu/pub/pdf/ot

her/oversightassessment201111en.pdf?3f5bcb303c8823d9e4aa919febcbc3

9c

http://www.ebaclearing.eu/N=About-EBA-CLEARING.aspx

http://www.ebaclearing.eu/N=About-EBA-CLEARING.aspx



http://www.ebaclearing.eu/N=Shareholders.aspx




https://www.ebaclearing.eu/N=Reference-Documents.aspx

http://www.ebaclearing.eu/N=EURO1.aspx

http://www.ebaclearing.eu/N=EURO1-Statistics.aspx

http://www.ebaclearing.eu/N=EURO1-Participants.aspx



https://www.ebaclearing.eu/E-Books/EURO1-Service/

https://www.ebaclearing.eu/E-Books/EURO1-Service/





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