The European Central Bank (ECB) has flexed its muscles in the payment systems oversight area for the first time through the exercise of new powers by identifying 4 payment systems that it feels are systematically important, which places them under stricter oversight standards than other payment systems, with sanctions and corrective measures for system operators in case of non-adherence.
The four systems are now under the new ECB Regulation on oversight requirements
for systemically important payment systems (SIPS), which came into force on 12 August 2014. In this article, Tim Wright, Partner at Pillsbury, discusses aspects of the ECB’s move – writes Tim Wright, Partner, Pillsbury Winthrop Shaw Pittman LLP.
The criteria for identifying payment systems
Given their critical importance to the Eurozone payments infrastructure, it is not surprising that the four payment systems identified are TARGET2, EURO1, STEP2-T and CORE(FR). TARGET2 is the real time gross transfer system of the central banks of the Eurosystem (the unofficial term used to describe the ECB and the national central banks of Member States that have adopted the euro).
EURO1 is a multilateral large value net payment system for payments denominated in euro which operates alongside TARGET2. And STEP2-T is the pan-European Automated Clearing House for bulk payments in the Single Euro Payments Area. Both EURO1 and STEP2-T are operated by EBA CLEARING, although they are overseen separately by the ECB. The CORE(FR) system is a payment platform run by STET, which is a joint initiative between six major French banks. The list will be reviewed annually by the Eurosystem, based on updated data.
The systems were identified because they met at least two of four main criteria applied by the ECB:
- The value of payments settled – a total daily average value of euro-denominated payments processed in excess of EUR 10 billion,
- Market share – at least one of:
- 15% of total volume of euro-denominated payments;
- 5 %of total volume of euro-denominated cross-border payments;
- 75 % of total volume of euro-denominated payments at the level of a Member State whose currency is the euro;
- Cross-border relevance (that is activity which involves participants established in a country other than that of the SIPS operator and/or cross border links with other payment systems which involves five or more countries and generates a minimum of 33% of the total volume of euro-denominated payments processed by that SIPS), and
- Provision of services to other infrastructures (i.e. the system is used for the settlement of other financial market infrastructures).
The ECB says that it implements and is consistent with the ‘Principles for financial market infrastructures’1 (PFMIs), introduced in April 2012 by the Committee on Payment and Settlement Systems of the Bank for International Settlements and the International Organization of Securities Commissions. Ultimately, the PFMIs are meant to apply to at least five key types of financial market infrastructures: SIPS, central securities depositories (CSDs) and securities settlement systems (SSSs), central counterparties (CCPs) and trade repositories (TRs).
Competent authorities, i.e. Eurosystem central banks with primary oversight responsibilities for one or more payment systems, are expected to regularly assess compliance of these systems with the SIPS Regulation, focusing on the efficient management of risk including legal, credit, liquidity, operational, general business, custody and investment, as well as ensuring that there are sound governance arrangements within the systems. Payment systems that don’t meet the criteria mentioned above will be exempt from the regulation. Instead, the PFMIs, or a limited sub-set thereof, will apply.
The new regulation covers large-value and retail payment systems in the euro area operated by both central banks and private entities. The ECB says that it aims to ensure the ‘efficient management of legal, credit, liquidity, operational, general business, custody, investment and other risks as well as sound governance arrangements’ with a view towards promoting the smooth operation of safe and efficient payment systems in the euro area. Whilst the tightening of regulatory compliance on financial services is ongoing and expected by many to increase, whether or not these objectives are achieved remains to be seen given that criminals active in areas such as of terrorist financing and money laundering often seem to be able to act with impunity whilst it is the banks that fall foul of the regulations and are hit with punitive fines on a regular basis.
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