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

1. General overview TARGET2 2. Implementation of monetary policy Agenda

1. General overview TARGET2  Back to TARGET1 TARGET2 platform Participation in TARGET2 Liquidity Management Timeline and status for TARGET2

Decentralised system built under tight constraints for being ready on 2 January Back to TARGET1 TARGET1 Domestic network

Decentralised system built under tight time constraints for being ready on 2 January Back to TARGET1 One of the two biggest systems in the world, very high market share in euro large value payments. On Central Banks’ side Adaptability problems Cost recovery problems EU enlargement process Credibility of the Euro system On Participants’ side Non harmonised services Non harmonised prices Multiple accesses Fragmentation of liquidity but…

What changes with TARGET2 Full technical consolidation on a single shared platform Same core services for all participants Single price structure Advanced liquidity saving features available EU-wide Harmonised technical interface for the connection Enhanced robustness and resilience For payment activities in general

What changes with TARGET2 Settlement of ancillary systems  Single interface for ancillary systems settlement based on 6 different models.  Settlement of participants’ positions in different systems settled via a single RTGS account.  Night time settlement possible from 7:30pm until 6:45am. For specific settlement operations Central Banks operations  Optional modules for home accounting, reserve management and standing facilities.  Possibility to keep payment activities in proprietary home account systems for 4 years after the start of TARGET2

What remains with TARGET2 Holding of RTGS accounts and business relationship remain with National Central Banks. Execution of monetary policy operations and collateral management remain decentralised. Granting of intraday liquidity, holding of reserves and access to standing facilities still via National Central Bank.

Overview of core and optional services offered by the SSP Optionalservices forCBs (CRISP, CRAKS1, CRAKS3) Participant Interface (Y-copy) TARGET Interlinking Ancillary systems interface Paymentprocessing Monitoring Information andControl Module (ICM) PaymentsModule(PM) mandatory services for CBs (CROSS ) (Storage, Archiving, Filesfor billing calculation) Home Accounting Module (HAM) Standardinterfaces Standing Facilities(SF) Reserve Management (RM) CBs (internalaccounting, collateralmanagement, proprietaryhomeaccounts, etc.) Credit institutions (CI) Ancillary systems (AS) Static Data Management (SD) Contingency Module (CM)

Participation: business overview

Sources of liquidity in T2 The availability of sufficient liquidity is of high importance for the execution of payments The following sources of liquidity can be used: balances on RTGS accounts provision of intraday liquidity offsetting payment flows (ie using algorithms to settle a number of queued payments)

Provision of intraday liquidity Intraday credit will be granted to the single accounts of credit institutions against eligible collateral by the respective CB Depending on the decision of the CB the following procedures can be used: –Implementing credit lines on RTGS accounts –Implementing credit lines on proprietary home accounts –DVP-processing of intraday repo transactions

Group composition aimed at minimising project risk, reducing effect on level playing field and limiting the costs for central banks and users Group 1 Group 2 Group 3 Group 4 Austria Belgium Denmark Germany Finland Estonia Lithuania France ECB Reserved Luxembourg Ireland Greece for Slovenia NetherlandsItaly contingency Portugal Poland Spain Cyprus Malta Latvia Migration group allocation 19 Nov Feb May Sep 2008

2. Implementation of monetary policy  Reserve Management Module Standing Facilities Module

From a technical point of view, RM is fully integrated in the SSP operational environment (SWIFTNet interface) RM can interact with PM, HAM and proprietary home accounts RM does not manage any kind of accounts Management of indirect reserve Pool of reserve accounts of a MFI Reserve Management Module

HAM /PM Module Reserve Management Module End-of-day balances € NCB Entry of minimum reserve Entry of remuneration rates Entry of penalties Payment order (at the end of the maintenance period) interest penalties for infringements after CB validation process Reserve Management Module

The RM offers the possibility of managing indirectly the reserve requirement (the minimum reserve of a credit institution is deposited by another credit institution) On the basis of this information the RM is able to verify the fulfilment of minimum reserves. Indirect reserve

The central banks can manage: -the list of banks that decide to fulfil indirectly minimum reserves -the indication of the bank selected for its management

The function "pool of reserve accounts of Monetary Financial Institutions (MFI)" envisages the fulfilment of reserve requirements for a group of participants (which are part of the same MFI). The fulfilment is evaluated on the basis of the total balance, irrespective of the distribution of the balances among the different accounts of the same MFI in PM, in HAM or in PHA. Pool of reserve accounts of a MFI

Participants using the pooling functionality cannot use the indirect reserve management No consolidation is envisaged on a cross-border basis At the end of the maintenance period the accrued interest is credited on the account associated to the minimum reserve indicated by the MFI

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

CBs access the same information and are able to: -Manage the list of banks subject to minimum reserve -Enter the value of compulsory reserve -Manage the validation process for infringements -Enter minimum reserve remuneration and penalties rates -Access summarised information (monitoring)

From a technical point of view, SF is fully integrated in the SSP operational environment (SWIFTNet interface) SF is able to manage: –overnight deposit accounts –marginal lending “on request”, in general needed for the fulfilment of minimum reserve –automatic marginal lending, available only in connection with PM since no intraday credit is available in HAM CI with account both in PM and HAM have to indicate the account to be used for the settlement of SF operations Standing Facilities Module

End-of-day transfers to SF (day d) € NCB Overnight Deposit Account Overnight Deposit Account Marginal Lending Account Transfers of capital and interests to HAM/PM (start of day d+1) Standing Facilities Module HAM /PM Marginal Lending Transfers to SF and debiting of interest in HAM/PM (start of day d+1) Transfers to HAM/PM (day d) Collateral Management for Marginal Lending Standing Facilities Module

SSP ICM PM (HAM) CI SF Refunding + Interests (at Start of Day) SSP ICM PM (HAM) CI SF Reverse Transaction [SF debits the Overnight Deposit Account] SSP ICM PM (HAM) CI SF Setting Up [SF credits the Overnight Deposit Account] Overnight Deposit MT900 4 ACK 4 Direct Debit 3 Transfer Order 2 MT910 4 ACK 4 Liquidity Transfer 3 Transfer Order 2 MT910 2 ACK 2 Liquidity Transfer 1 Modify 1 1

Marginal Lending Facility - “On Request” - SSP ICM PM (HAM) CM SF Setting Up [SF debits the Marginal Lending Account] CI SSP ICM PM (HAM) CM SF Refunding + Interests (at Start of Day) CI MT910 4 ACK 4 Liquidity Transfer 3 Transfer Request 2 Modify 1 Direct Debit 1 ACK 2 MT900 2 Notify refunding 3

Automatic Marginal Lending Facility SSP PM SF Setting Up [SF debits the Marginal Lending Account] CI SSP PM SF Refunding + Interests (at Start of Day) CI MT910 3 ACK 3 Credit transfer and decrease credit limit 2a Direct debit and increase credit limit 1 Notify intraday credit not returned 1 ACK 2 MT900 2 ICM Notify decrease credit limit and setting up of marginal lending 3 CB Notify spillover 2b Notify increase credit limit and refunding marginal lending 2 MT900 3 Colletaral Manager Colletaral Manager

CI have access (via ICM) to the following services: –Liquidity transfers with PM/HAM –Information on the current balance of the overnight deposit –Information on the current balance of available liquidity of the marginal lending account Transaction processing Interaction and Administration

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

Questions?

Customer Information about TARGET2 General Functional Specifications Only for central banks General concept of the Single Shared Platform „Order book“ for the three central banks developing the Single Shared Platform Publication August 2004

For Central banks only Customer Information about TARGET2 User Detailed Functional Specifications Detailed description of the Single Shared Platform's features  Operational  Technical Basis for preparing participation in the Single Shared Platform Current version 2.2, published February 2007

Customer Information about TARGET2 User Detailed Functional Specifications Book 1 - Core Services Book 2- Optional Services Book 3- For Central Banks only Book 4- XML-specifications ICM Book 1- User guide ICM ICM Book 2- For Central Banks only

TARGET2 websites ECB-website Address: User: t2user Password:VBjmspRR7 DNB-website Address: Payments / Non cash-payments / TARGET2