2Budapest, 28 November 2002
Developments in euro payment systemsChallenges for accession countries
Tom Kokkola,
Senior Policy Expert
European Central Bank
Budapest, 28 November 2002
Budapest, 28 November 2002
3
Introduction: The role of the ECB/Eurosystem
• Article 3.1 (Basic tasks of the ESCB):– definition and implementation of monetary policy
– conduct of foreign exchange operations
– holding and management of official foreign reserves of the Member States
– promotion of smooth operation of payment systems
• Article 22 (Clearing and payment systems):
“The ECB and national central banks may provide facilities, and the
ECB may make regulations, to ensure efficient and sound clearing and
payment systems within the Community and with other countries.”
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The role of the ECB/Eurosystem
• Maintaining systemic stability
• Ensuring efficiency of payment systems
• Maintaining public confidence in payment systems, instruments and currency
• Protecting the transmission channel for monetary policy
The objectives
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Introduction
Different roles to perform the same task of “promoting the smooth operation of payment systems” • Operational role
– for example, TARGET and provision of settlement facilities
• Catalyst role– for example, cross-border retail payment services
• Regulation
• Oversight
The Eurosystem’s role in payment systems
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Introduction
Contents:
1. Implications of the move to a common currency
2. Large-value payment systems, including future developments in TARGET
3. Retail payments issues
4. Securities settlement and collateral
5. The utmost importance of co-operation
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7
1. Implications of the move to a common currency
- Several currencies One single currency
- Autonomous national monetary policies
- Segmented money markets
- NCBs + European Monetary Institute
- National payment systems
One monetary policy
One money market
Eurosystem
An integrated payment system
Before Monetary Union (-> 1998) In Monetary Union (1999 ->)
-
-
-
-
-
The needs of the single currency
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• New borders: geographical borders no longer matter, but those of the single currency.
• Part of what was foreign activities becomes domestic (= euro area).
• Single European passport.
• Remote access.
• Strong foreign participation.
1. Implications of the move to a common currency
Budapest, 28 November 2002
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1. Implications of the move to a common currency
0%
10%
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Hu
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Euro Area
Foreign ownership (expressed as a % of total bank assets, end 2001)
Budapest, 28 November 2002
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2. Implications of the move to a common currency
R a n k in g B a n k C o u n try T o ta l A s s e ts( E U R b i l l io n )
S h a re o f to ta l a s s e ts o f fo re ig n b a n k s
1 K B C B E 2 4 .3 1 1 .3 %2 B a n k A u s t r ia / C r e d i ta n s ta l t* * A T 2 1 .6 1 0 .0 %3 E r s te B a n k A T 2 0 .4 9 .5 %4 U n ic r e d i to IT 1 8 .1 8 .4 %5 C i t ib a n k U S 1 4 .9 6 .9 %6 S o c ié té G e n é r a le F R 1 4 .7 6 .8 %7 IN G N L 1 2 .4 5 .8 %8 R a if f e i s e n A T 1 1 .1 5 .2 %9 B a n c a C o m m e r c ia le I ta l ia n a / In te s a IT 9 .9 4 .6 %
1 0 C o m m e r z b a n k D E 7 .8 3 .6 %* a s a t e n d -2 0 0 1 .
* * p a r t o f H y p o v e r e in s b a n k ( D E )S o u r c e : B a n k A u s tr ia (C o m p a r is o n o f b a n k s C e n tr a l a n d E a s te r n E u r o p e 2 0 0 1 ) .
T a b le 6 : T h e 1 0 la rg e s t in te rn a t io n a l b a n k s in c e n tr a l a n d e a s te rn E u ro p e *
11Budapest, 28 November 2002
2. Large-value payment systems, including future developments in TARGET
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Trans-European
Automated
Real-time
Gross-settlement
Express
Transfer
2. Large-value payment systems
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2. Large-value payment systems
Objectives
• To contribute to the smooth conduct of monetary policy and the singleness of the money market
• To improve the soundness of payment systems (risk reduction)
• To increase the efficiency of cross-border payments in euro
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2. Large-value payment systems
Guiding principles
• Market principle
• Decentralisation principle
• Minimum approach with regard to harmonisation of national RTGS systems
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2. Large-value payment systems
Market principle
• Use of TARGET not mandatory
• Only payments directly connected with central bank operations (in which the Eurosystem involved either on the receiving or the sending side) and settlement of large-value net settlement systems have to go through TARGET
• Other payment arrangements (Euro 1, PNS, correspondent banking) can operate in parallel to TARGET
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2. Large-value payment systems
Decentralisation principle
• Use of RTGS infrastructures in EU countries
• Banks settlement accounts at NCBs
• Direct exchange of payments between NCBs
• Some centralised functions undertaken by ECB (TARGET co-ordinator, end-of-day functions, helpdesk, test centre, settlement accounts for Euro 1 and CLS)
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2. Large-value payment systems
The decentralised structure
“The central bank correspondent banking model”
NCB
ECB
Bank
NCB NCB
NCB
NCB
Bank
Bank
Bank
Bank
Bank
InterlinkingInterlinking
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2. Large-value payment systems
Minimum approach
• Not entirely identical services offered by the different national RTGS systems
• Rationale: minimising time and cost for the establishment of TARGET
• Harmonisation only if necessary to ensure
- singleness of monetary policy or
- level playing field for banks
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2. Large-value payment systems
National RTGS National RTGSInterlinking systemTARGET
Cre
dit
inst
itu
tion
s
Cred
it institu
tions
100NCB (S)
100
R
DOMESTIC MESSAGE FORMAT
INTERLINKING MESSAGEFORMAT
DOMESTIC MESSAGE FORMAT
1
2
3
100
NCB (R)
100
S
Que
uing
+ c
ash
man
agem
ent f
acil
itie
s
Communication
NETWORK
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2. Large-value payment systems
Operating hours and days• Common operating hours, ECB time:
Customer payments from 7.00 am to 17.00Interbank payments from 7.00 am to 18.00
• Operating days calendar: in addition to Saturdays and Sundays TARGET closed on New Year’s Day, Good Friday, Easter Monday, 1 May, Christmas Day and 26 December
• On closing days: no standing facilities, no settlement of euro money market or FX transactions involving the euro, EONIA not published
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2. Large-value payment systems
• Capability of processing a high number of payments
• End-to end completion of payment execution within minutes in normal operating conditions
• No liquidity shortages• TARGET is de facto standard for large-value
payments in euro• Three objectives have been met
Practical experiences
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2. Large-value payment systems
• Better meet customers’ needs, inter-alia, by providing an extensive harmonised service level
• Cost-efficiency• Is prepared for swift adaptation to future
developments including the enlargement of the euro area and the Eurosystem
• But leave the responsibility for the business relations with the credit institutions with the NCBs
Challenges
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2. Large-value payment systems
1. Market principle
2. Decentralisation principle: business level,but less platforms than central banks
3. Broadly defined core service
4. Single price structure
5. Cost effectiveness
Principles for TARGET2
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1. Have an own platform that has to be cost recovery capable at the single price structure and compliant with all agreed TARGET2 features:• outside interface,• common services,• ...
2. Join the single shareable platform
2. Large-value payment systems
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2. Large-value payment systems
85.0%
68.5%
68.8% 68.8%69.4%
69.6% 69.6%70.3% 70.2%
72.0%
73.2%73.5%
81.1%
84.8%
66%
69%
72%
75%
78%
81%
84%
87%
1Q' 99 2Q' 99 3Q' 99 4Q' 99 1Q' 00 2Q' 00 3Q' 00 4Q' 00 1Q' 01 2Q' 01 3Q' 01 4Q' 01 1Q' 02 2Q' 02
TARGET market share in value (cross-border + domestic)
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Daily average volume
0
50,000
100,000
150,000
200,000
250,000
300,000
EURO 1
TARGET
TARGET cross-border
2. Large-value payment systems
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Daily average value
•
0200400600800
1,0001,2001,4001,6001,800
Jan-9
9
Apr-99
Jul-9
9
Oct-
99
Jan-0
0
Apr-00
Jul-0
0
Oct-
00
Jan-0
1
Apr-01
Jul-0
1
Oct-
01
Jan-0
2
Apr-02
Jul-0
2
EU
R b
illi
ons
TARGET
TARGET cross-border
EURO 1
2. Large-value payment systems
Budapest, 28 November 2002
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Average size of transactions
02468
101214161820
Jan-9
9
Apr-99
Jul-9
9
Oct-
99
Jan-0
0
Apr-00
Jul-0
0
Oct-
00
Jan-0
1
Apr-01
Jul-0
1
Oct-
01
Jan-0
2
Apr-02
Jul-0
2
EU
R m
illi
ons
TARGET cross-border
TARGET
EURO 1
2. Large-value payment systems
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2. Large-value payment systems
TARGET EURO 1 PNS SPI POPS
Participants 3830 73 24 37 9
Daily Øvolume
248,541 132,408 28,103 7,096 2,546
Daily Øvalue (bn
EUR)
1,533 190 78 1 1
Ø size oftransactions(mn EUR)
6.20 1.43 2.78 0.14 0.39
Figures as of May 2002
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EURO1 - Institutional set-up=> EURO 1 is a real cross-border system:• The EBA Clearing Company S.A., which is in
charge of the daily management and operation of EURO 1, is located in Paris,
• the legal basis and the clearing rules of EURO 1 are under German law,
• the netting centre (SWIFT) is incorporated in Belgium and
• the participants come from 20 different countries.
2. Large-value payment systems
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EURO1 - Type of system
• EURO 1 is a net system, but not a netting system:
• “Netting” is a legal concept• “Net system” is an economic concept
2. Large-value payment systems
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EURO1 - Legal structure
• SOS (Single Obligation Structure)
=> Economically the SOS is equal to multilateral netting, but legally it is different!
=> The SOS foresees that a participant has always only one single claim or obligation towards the system (i.e. the community of other participants), payment orders become part of the single claim/obligation upon processing; no bilateral obligations exist at any time.
=> Due to the SOS an unwinding is not possible.
2. Large-value payment systems
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EBA Clearing System: Euro 1Features:1. Single obligation structure (SOS)
2. Bilateral credit lines (min EUR 5 million; max EUR 30 million) multilateral credit and debit limits (max. EUR 1 billion)
3. Cash liquidity pool
4. If failure > liquidity pool, surviving banks provide additional liquidity
5. Settlement at the ECB via TARGET at the end of business day
6. Role of the ECB: Settlement agent, holder of the liquidity pool and overseer
2. Large-value payment systems
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EURO1 - Types of transactions
• EURO 1 processes credit transfers (customer and interbank payments)
• At present: Division between interbank and customer payments: 35% interbank payments and 65% customer payments
• Processing of direct debits planned
2. Large-value payment systems
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EURO1 - Access criteria• Own funds of at least EUR 1.25 billion• Short-term credit rating of at least
P2 (Moody’s) or A2 (Standard & Poor)• Direct access to an EU RTGS system connected to
TARGET• Adequate technical and operational facilities
• =>Since 17 September 2001: 73 participants from all 15 EU countries and from Australia, Japan, Norway, Switzerland, USA (EU branches of the latter five countries)
2. Large-value payment systems
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Continuous Linked SettlementCLS is a project for establishing a multi-currency system for the
settlement of foreign exchange transactions on a PVP basis in the books of a private bank acting as settlement agent where all members will open multi-currency accounts.
Start of operations: September 2002
Eligible currencies from the start:euro, pound sterling, US dollar, Swiss franc, Canadian dollar, Japanese yen and Australian dollar.
Later on also: Norwegian krone, Hong Kong dollar, Danish krone, Swedish krona and New Zealand dollar.
2. Large-value payment systems
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You deliver the currency being sold
butbut
you do not receive the currency you bought
the full amount of each trade is at risk
= principal risk= principal risk
What is FX settlement risk ?
2. Large-value payment systems
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Settlement of one leg occurs if, if,
and only if,and only if,
the other leg settles
If you pay,
you will eithereither get paid
oror get a refund
No risk of losing principal amount of fx transactions
PvP mechanism
2. Large-value payment systems
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C LS Bank In te rnational(N ew York)
- Edge C orporation under U S law- chartered by Fed in 1999
C LS Services L td.(London)
- lim ited com pany under U K law- operational and back office support
C LS U K H old ings L td.(London)
C LS G roup H o ld ings AG(Zurich)
Shareho lders o f C LS:67 financia l institu tions (22 euro area)
loca ted in 17 countries
General Overview of CLSCorporate structure:
2. Large-value payment systems
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USD
EUR
JPY
GBP
CHF
CAD
AUS
CLSBank
Bank ofJapan
Bank of England
SwissNational Bank
Bank of Canada
Reserve Bankof Australia
NY Fed
ECB
Fedwire
TARGET
FEYCS/BoJ
NewChaps
SIC
LVTS
RITS
The CLS Bank... ...has settlement accounts with
…to receive andpay fundsthrough
2. Large-value payment systems
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Trends within the European Union:
Payment instruments
‘93 ‘99
Cheques 29 % 18 %
Card payments 12 % 18 %
Credit transfers 35 % 36 %
Direct debit 22 % 27 %
3. Retail payment issues
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Banknotes and coins in circulation outside credit institutions, as a percentage of GDP
1993 2000
European Union 5,6 % About 4 %
Highest (ES) 8.9 %Lowest (FI) 2.2 %
Accession countries Highest (LV) 9.9 %Lowest (SI) 3.0 %
3. Retail payment issues
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The current situation
• Relatively poor service level for cross-border retail payments
– in terms of pricing
– in terms of speed of payment execution
• Low volumes, but not necessarily low demand
3. Retail payment issues
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Too expensive– On average EUR 15.51 to transfer EUR 100– Double charging in 25% of the transfers– Total average price: EUR 17.10
Too slow execution– Average execution time 3.4 working days– Seven working days or more for 5% of the
transfers
3. Retail payment issues
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Standardisation some attempts...
BE
FR
DE
IT
UK
..have clearly failed...
3. Retail payment issues
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Future prospects
What is needed
IPISWIFT MT102+/103+
• Straight-through-processing– consistent routing mechanism --> IBAN/BIC––
• Common default interbank exchange fee
• Reduced balance of payments reportingrequirements
3. Retail payments issues
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How to achieve the single payment area?– Integrate national and cross-border activity– Clubs– ACH network– Single ACH– Technology jump a possibility?
3. Retail payments issues
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EURO1 - STEP 1
STEP 1:• EBA developed STEP 1 in order to offer cross-border retail
payment services• STEP 1 is operating since November 2000• It uses the technical platform of EURO 1• STEP 1 participants settle their balances via a EURO 1 participant
3. Retail payments issues
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3. Retail payments issues
Participants
• 5 rounds since 20th November 2000
• 81 Institutions • from 10 different EU countries
• 23 different Settlement Banks designated
• (to be opened to EEA based banks)
STEP 1:
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Regulation (EC) No 2560/2001:• establishes the principle of equal charges for domestic payments
and cross-border payments in euros
• requires banks to inform their customers in advance on the charges they apply for all payment services
• lays down standards to facilitate automation of payment systems (such as the International Bank Account Number and the Bank Identifier Code). Banks must indicate them on account statements and companies on their invoices
• national rules, such as statistical reporting obligations, which make practical distinctions between domestic and cross-border payments will be either eliminated or harmonised
• threshold to be increased from € 12,500 to € 50,000 on 1.1.2006.
3. Retail payments issues
Domestic payment areas
Cross-border
payments
+
Efficientdomestic
infrastructure
Inefficientcross-border
infrastructure
Efficientpan-Europeaninfrastructure
High volume
Low margin
+
&
High service level
Low prices
€ 0-3
&
High volume
Low margin
+
&
High service level
Low prices&
Low volume
High margin
+
&
Low service level
High prices
€ 17-24
&
5353Budapest, 28 November 2002
Domestic payments
Efficientpan-Europeaninfrastructure
payments
Cross-border
Profit margin
Processingcosts
Profit margin
Processingcosts
Cross-border
Loss
Processingcosts
Pan-European
payments
Profit margin
Processingcosts
payments
•Co-operation bodies
•Business practises
•STP standards
•Clearing&settlement
infrastructure
Transparency &
Competition
Price € 17-24
€ 0.1- 0.4
•“OUR”charging
•“Eurocred”
•MIF (cost based)
Price € 0-3
54Budapest, 28 November 2002
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Eurosystem/EPC co-operation
European Payments Council Co-ordination group
European Payments Council General Assembly
European Payments Council Working Groups
- customer requirements
- cash
- cards
- STP
- infrastructure
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STEP2 blueprinting: Objectives and principles
offering distribution of payment instructions to any bank
operating in the EU
a pan-European system with direct bank participation
highly automated, simple to use, based on broadly
accepted industry standards
open to progressive integration of domestic traffic
minimising bank internal costs related to processing
customer payments
3. Retail payments issues
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3. Retail payments issues
• STEP 2 is currently being built; it should go live in the beginning of 2003• Differences to STEP 1:
– will have its own technical platform– no single payment processing (i.e. transaction by transaction), but processing of
batches containing several payments – will offer sorting and clearing services (ACH functionalities): banks send one
batch, which will be split up; payments are sorted according to recipient bank; a new batch is compiled and forwarded to recipient
STEP 2
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Decision by EBA Board :Based on the analysis made by EBA of the differentproposals received and taking as key criteria
• the experience of the vendor in developing and operating a robust ACH platform,
• the commercial terms of the offering,• the outlook for volume build-up, achievement of
critical mass and successful enlargement
STEP2 vendor selection
the Board selected the offer made by SIA.
3. Retail payments issues
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Liquidity in TARGET• Minimum reserves = liquidity available intraday
for payment activity
• Unlimited intraday credit free of interest
– Broad range of assets eligible as collateral for both
payment systems and monetary policy
operations
– Easy substitution of collateral
– Cross-border use of collateral
• 100% collateralisation of any credit
4. Securities settlement and collateral
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4. Securities settlement and collateral
TARGET and Securities Settlement Systems
• All ESCB lending operations (intraday andovernight) have to be fully collateralised
• “Standards for the use of EU SSSs inESCB credit operations”
• Overall objectives:– avoidance of inappropriate risks
– same safety level for all central banks’operations, regardless of settlement method
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4. Securities settlement and collateral
Risk aspects:minimum standards for SSSs
• Content of the standards • Scope of the standards
- domestic SSSs
- international SSSs
- links between SSSs
Eligible in Eurosystem operations:
- 20 SSSs (17 + 3)- 66 Links
- settlement risk- custodian risk- legal aspects- operational aspects
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Consolidation
Monte Titoli (IT)
Horizontal consolidation of SSSs at a domestic level
Monte Titoli
CAT
LDT
Iberclear (ES)CADE
SCLV
4. Securities settlement and collateral
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4. Securities settlement and collateral
CIK (BE)
Euroclear (ICSD)
Sicovam (FR)
Necigef (NL)
CBISSO (IE)
Euroclear
ClearstreamDBC (DE)
CEDEL (ICSD)
Crest (UK)
Horizontal consolidation of SSSs at a European level
Interbolsa (PT) ?
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SBF (FR)
BXS (BE)
AEX (NL)
Clearnet
BCC (FR)
Consolidation of CCPs for securities at a European level
4. Securities settlement and collateral
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4. Securities settlement and collateral
Trade Execution
CentralCounter -party
Settlement
DBAG
CLEARSTREAM
Eurex Clearing
Vertical consolidation at domestic level:
Stock Exchanges MEFF-AIAF-SENAF
IBERCLEAR
MEFF
Borsa Italiana
MONTE TITOLI
Italian CCP
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4. Securities settlement and collateral
Trade Execution
CentralCounter -party
Settlement
EURONEXT
EUROCLEAR
CLEARNET
Vertical consolidation at European level:
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1 2000 International, FR, IE2 2000 International, LU, DE3 2000 UK, IE4 2000 ES5 2000 IT6 2000 SE7 2000 UK8 2000 DK9 2000 BE
10 2000 GR… … …25 2001 HU… … …
Year CountryValue of transaction
(EUR billions)Euroclear 130,600Clearstream nav CREST 79,893 CADE 30,455 Monte Titoli 30,210 VPC 8,974
1,081
CMO 3,946 VP 3,028
Name of the system
KELER 84… …
… …
NBB clearing 2,372 BOGS
4. Securities settlement and collateral
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5. The utmost importance of co-operation
Payment and Settlement Systems Committee
Eurosystemcomposition
Extendedcomposition
Securities Settlement Working Group
Payment SystemsPolicy Working Group TARGET Management
Working Group
Among central banks
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Eurosystem: TARGET issues
PSSC
TMWG
NCBs
COGEPS (large value)
Ad hoc Meetings
TMWG-TWG
TARGET user groups
Ad hoc groups of
banks
TWG
National banking
communities
5. The utmost importance of co-operation
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Eurosystem/EPC co-operation
PSSC
ECB Observer
COGEPS (Retail)
EPC Co-ordination group
EPC General Assembly
EPC Working Groups
- customer requirements
- cash
- cards
- STP
- infrastructure
ECBS
5. The utmost importance of co-operation
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Securities Clearing and Settlement Systems (SCSS)
PSSC COGESI
Groups of banks
(custodians and users)
CSDs & ICSDs
5. The utmost importance of co-operation
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5. The utmost importance of co-operation
Constructive co-operation between
• central bank, market participants and systems operators
• EU and accession countries
- Banking associations
- Banks and system operators
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Summary
• Move to integrated (and consolidated) euro payment and settlement infrastructures
• Transition strategy
• Active co-operation