The Eurosystem operates two systems that form the backbone of the financial market infrastructure in Europe – TARGET (the real-time gross settlement (RTGS) system for the euro) and TARGET2-Securities, or T2S (the single securities settlement platform).
TARGET, launched 17 years ago, enables payment transactions to be settled immediately in central bank money and supports the implementation of monetary policy – writes Sylvain Debeaumont and Antonia Hamova, European Central Bank – in this article which first appeared in the EPC Newsletter.
T2S was launched last year to address the fragmentation and lack of harmonisation in the securities settlement landscape in Europe. It is an integrated, pan-European IT platform which processes the real-time settlement of securities transactions against central bank money across Europe.
TARGET facts and figures
The first generation of the TARGET system linked together the existing national RTGS systems of the euro area countries and began its operations on 4 January 1999. In May 2008 it was fully replaced by TARGET2, which offers harmonised core services on a single technical platform. Although the system was originally intended to process large-value payments in euro, it is also widely used for other types of transaction, including commercial payments.
Today, TARGET2 is synonymous with efficiency, reliability and resilience. With an average daily turnover of €1.8 trillion (91% of the total value settled by large-value payment systems in euro), it is one of the largest payment systems in the world. More than 1,700 credit institutions in Europe use it to make payments and more than 55,000 banks worldwide, and all of their customers, can be reached via TARGET2.
Where are we heading?
Technical innovation is changing every aspect of our lives, and the financial industry is no exception. As a market infrastructure operator, the Eurosystem strives to ensure that its infrastructure meets the needs and requirements of the market.
With efficiency and innovation at the heart of the Eurosystem’s vision for the future of financial market infrastructure, four action points have been put forward:
- Technical consolidation of TARGET2 and T2S
- Development of new RTGS services
- Support for instant payments settlement
- Harmonisation of Eurosystem arrangements and procedures for collateralisation
Concrete action has already been taken in the form of a consultative report seeking the views of market participants on the future of RTGS services (published on 15 February 2016). It aimed to review the key drivers for change and gather opinions on the opportunities arising from the possible technical consolidation of TARGET2 and T2S. Fully fledged migration to ISO 20022 standards with enriched payments data, a single gateway to access Eurosystem market infrastructure services, openness to new technologies and enhanced cyber resilience were among the tangible technical opportunities analysed. Regarding the services offered by TARGET2, its users may benefit from multi-currency capabilities, extended operating hours and the development of business intelligence and analytical services.
To encourage proactive interaction with market participants, the ECB hosted an information session to shed more light on the key prospects outlined in the consultation.
123 institutions from 22 European countries responded to the consultation by 4 April 2016. Their valuable feedback is currently being analysed, but we can already observe some trends taking shape.
The respondents welcomed the opportunity to participate in the discussion from an early stage and now expect further cooperation throughout the lifetime of the project. Most of them believe that the technical consolidation of the TARGET2 and T2S platforms will bring clear benefits in terms of service efficiency and cost savings. Market participants are also supportive of the concrete proposals outlined in the consultation, such as a single gateway to payments and securities settlement via a harmonised user interface, and the increased cyber resilience and multi-currency capabilities of the new system. Concerning the enhancement of TARGET2 services, there was strong interest in new tailor-made analytical services, which have the potential to help banks comply with certain regulatory obligations. At the same time, we observed a positive attitude towards investigating the opportunities provided by new technologies in the financial sector, such as ‘blockchain’ and distributed ledger technology.
However, most respondents stated that they are very satisfied with the high quality of current TARGET2 services and would only support innovation if it does not hamper the stability of the system. Some recommendations called for careful consideration of the new platform’s governance and the provision of simple and affordable access solutions for small participants. Migrating to ISO 20022 message standards and extending TARGET2 operating hours garnered mixed feedback. The strongest support for these two points came from participants planning to use TARGET2 to process commercial payments.
What about instant payments?
Although the issue of retail payments was not raised in the consultation, it will certainly play an important role in shaping the future of RTGS services. Customer payments represent a large share of overall TARGET2 traffic. In 2015, 55% of all payment transactions settled in TARGET2 were initiated by or for the benefit of end users. The question of whether the emergence of instant payments would eventually affect the RTGS traffic is therefore of high importance to us.
Increased end-user expectations for instant payments that are available in real time, 24/7/365, across Europe has inspired the emergence of national solutions, but none of them yet have a pan-European reach. As part of its vision for the future of financial market infrastructure, the Eurosystem has the ambition to address this new demand and support pan-European instant payments. The payment industry, represented by the European Payments Council, has been invited by the Euro Retail Payments Board, a multi-stakeholder group chaired by the ECB, to develop an instant payment scheme by November 2016, based on the current SEPA credit transfer scheme, and to implement it by November 2017. Whether or not TARGET2 will enhance its services to support the settlement of instant payments needs is currently being assessed.
As you can see, exciting times lie ahead for Europe’s financial market infrastructure. In the upcoming years, the Eurosystem will continue to use innovation to work towards increased safety and efficiency and deepen integration in the European financial market. We invite you to join our journey.
This article was written by Sylvain Debeaumont and Antonia Hamova, European Central Bank and published in the EPC Newsletter – June 2016
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