Overseers assess safety and efficiency of euro area payment systems

MIP OnLine - 2018

May 2018

Payment systems enable the transfer of funds between credit institutions, which makes them an essential tool for the circulation of money and an important aspect of financial stability. That is why promoting the smooth operation of payment systems is among the main tasks of the ECB. To ensure that the payment systems in the euro area are safe, efficient and resilient, the ECB and the national central banks (NCBs) of the euro area countries – collectively known as the Eurosystem – oversee their operations.

To fulfil this task, the Eurosystem relies on regulations and standards, in particular the ECB Regulation on oversight requirements for systemically important payment systems (the SIPS Regulation) and the CPSS-IOSCO Principles for financial market infrastructures (PFMIs).

The SIPS Regulation differentiates between systemically important payment systems (SIPS) and non-systemically important payment systems (non-SIPS) on the basis of size, market share, cross-border activity and the provision of settlement services for other financial market infrastructures. The Eurosystem’s internal oversight guidelines recommend that the compliance of each SIPS with the Regulation’s provisions be assessed every three years on the basis of methodology developed by the Eurosystem to facilitate a consistent and harmonised application of the SIPS Regulation and the PFMIs.

Comprehensive assessment of SIPS

There are currently four payment systems in the euro area classified as SIPS, namely TARGET2, EURO1, STEP2-T and CORE(FR), which need to comply with the provisions of the SIPS Regulation. The ECB oversees TARGET2, EURO1 and STEP2-T, owing to their euro area-wide relevance, while the Banque de France oversees CORE(FR), on account of its national anchor.

The latest comprehensive assessments show that as at 31 January 2016, all four SIPS demonstrated a high level of compliance with the SIPS Regulation. Most of them were fully compliant with the provisions related to:

• the legal soundness and governance of the systems;
• the management of credit and liquidity risk;
• the management of operational risk;
• final settlement of payments;
• participant-default rules and procedures;
• the efficiency and effectiveness of the systems.

The identified shortcomings were mainly linked to aspects of:

• implementing a sound and comprehensive risk management framework;
• public disclosure of systems’ rules, procedures and fee structures;
• access and participation criteria;
• the management of general business risks.

While infringements of the SIPS Regulation were identified in certain areas for all systems, none of the shortcomings was assessed as posing a serious risk if not addressed promptly, and there were no major concerns regarding the functioning or stability of the SIPS. Since the assessment, the SIPS operators have taken appropriate measures to remedy most of the identified infringements and to implement the recommendations.

Comprehensive assessment of non-SIPS

Non-SIPS are overseen by their respective NCB. They are mainly retail payment systems that typically handle lower-value payments in high volumes and are generally used for payments between individuals and between individuals and corporates. Non-systemically important retail payment systems are divided into prominently important retail payment systems (those with a national market share equal to or above 25%) and other retail payment systems (those with a national market share below 25%).

Eight prominently important and sixteen other retail payment systems were assessed by NCBs against the applicable PFMIs with assessment reference dates ranging from the end of 2015 to the end of 2016.

The results showed that, overall, euro area retail payment systems function in a safe and efficient manner and in line with the applicable oversight standards and expectations. They comply with most of the applicable PFMIs, such as those regarding:

• legal basis;
• governance of the system;
• final settlement;
• participant-default rules and procedures;
• efficiency and effectiveness of the system;
• requirements on access and participation.

Where issues of concern were identified, these were mainly linked to:

• implementation of a sound and comprehensive risk management framework;
• management of operational risk and of general business risks;
• public disclosure of the system’s rules, procedures and fee structures.

Although some of the assessed systems had difficulty in achieving full compliance, overseers noted that the majority of the shortcomings identified concerned systems with limited payment activity and low systemic importance and therefore do not pose a serious threat to the financial system.

Following the assessment exercise, the overseers provided a list of recommendations to the system operators. A large number of measures have already been implemented in order to move closer to full compliance with the oversight standards.

The Eurosystem is constantly monitoring the progress of the overseen payment systems and is working together with the system operators to ensure that full compliance with applicable oversight standards is reached and that payment systems continue to operate in a safe and efficient manner.