TARGET2

Q&A on Twitter

Interview on Twitter with Philip R. Lane, Member of the Executive Board of the ECB, conducted and published on 9 July 2019

• Also and related, are you confident that macro models include the finance sector in a useful way?
• Lane: The Phillips Curve is a useful framework : it combines the dual influences of activity levels and inflation expectations in determining inflation outcomes.
• At the ECB, we look at many specifications of the Phillips Curve, rather than rely on a single version.
• #AskECB #askecb euro area unemployment is falling fast and service indicators point to strong employment growth in q2.
• Lane: While the euro area is doing well along some dimensions, inflation remains below target and there are downside risks to the growth outlook.
• Lane: Our policies support higher consumption and investment, even if there are differences across households and firms.
• Lane: While some households may save more, others will avail of low rates to increase consumption and household investment (home renovations etc.)
• #AskECB Does the continuation of negative rates (and inflation consistently below target) suggest that the Eurozone is entering a definitive Japanification era?
• Lane: Benot Cur, my colleague on the ECBs Executive Board, leads the G7 working group on stablecoins.
• @ecb Lane: The counter-cyclical (CCyB) is an important tool that can help avoid a credit squeeze in a future downturn.
• Lane: The optimal currency area (OCA) concept is very useful - but does not provide a precise roadmap.
• I would highlight the roles of macroprudential policies, banking and capital markets union and an effective fiscal framework.
• #AskECB #AskECB will Euro banknotes ever have elements like the Braille system?
• Lane: Euro banknotes already do: they come in different sizes - the higher the value, the bigger the banknote, for example.
• See here for more features for the visually impaired: https://www.ecb.europa.eu/euro/visually/html/index.en.html#AskECB Whats your favourite bird of prey and/or peace?
• #AskECB

• The survey, which was conducted in Q4 2018, gauged the views of over 18,500 suppliers on the Taulia network.
• Suppliers - ranging from large multinationals to small SMEs - were asked about a range of topics, from early payments to working capital challenges.
• Among the findings were some insights into why suppliers would choose to access early payments.
• Suppliers also cited that they take early payments in order to reduce their DSO and to meet their seasonal cash target.

• The European payments market generates more than 130 billion non-cash payments per year, representing approximately one-quarter of the global payments business.
• For more than 20 years, Europe has strived to improve the efficiency and competitiveness of the payments market.
• Like many of Europes other achievements, advances in retail payments are all too easily taken for granted.

Instant payments – a challenge and an opportunity for European payment stakeholders

• Well, I am convinced that instant payments are the new challenge currently facing payment stakeholders in Europe.
• And I firmly believe that only a pan-European solution for instant payments will turn this challenge into an opportunity for Europe.
• In fact, instant payments may well be the game changer in the payments market, paving the way for innovative European payment solutions.

Increasing efficiency in wholesale payments

• Let me now briefly turn to the area of wholesale payments and our plans to increase efficiency in this segment.
• I am referring here in particular to the two TARGET services: TARGET2-Securities (T2S) in the field of securities settlement and TARGET2 in the field of wholesale or large-value payments.

Conclusion

• Technological innovation and evolving user needs are reshaping the market infrastructure and payments landscape on a global scale.
• Current achievements, such as SCT Inst and TIPS, should facilitate future work towards increasing the efficiency of the European payments market.

Introduction

• TARGET was developed to meet three main objectives:
  1. to provide a safe and reliable mechanism for the settlement of euro payments on a real-time gross settlement (RTGS) basis;
  2. to increase the efficiency of inter-Member State payments within the euro area; and, most importantly,
  3. to serve the needs of the monetary policy of the Eurosystem.
• This is crucial for a sound currency, the conduct of monetary policy, market functioning, and financial stability.
• To this end, the Eurosystem operates the second-generation Trans-European Automated Real-time Gross settlement Express Transfer system[3] (TARGET2) for the euro.

The report and its structure

• This report is the 19th edition of the TARGET Annual Report.
• As in previous years, the report provides information on TARGET2 traffic, its performance and the main developments that took place in 2018.

TARGET2 activity

• In 2018 TARGET2 maintained its leading position in Europe, processing 90% of the total value settled by large-value payment systems in euro, and in the world as one of the biggest payment systems.
• Compared with the previous year, the total turnover processed remained stable, amounting to 432.5trillion.

1 Evolution of TARGET2 traffic

Table 1

1.1 TARGET2 turnover

• TARGET2 turnover in 2018 amounted to a total value of 432.5trillion, corresponding to a daily average of 1.7trillion.
• [7] Overall, after two years of stable figures, TARGET2 turnover on RTGS accounts fell by almost 15% between 2015 and 2017, following the launch of T2S.
• A comparison of the TARGET2 turnover and the euro areas annual GDP (around 11trillion) shows that TARGET2 settles the equivalent of the annual GDP in less than seven days of operations.
• Chart2 depicts the average daily turnover generated in TARGET2 for each month in 2017 and 2018, thus showing the seasonal pattern of the system.
• Chart3 displays the highest and lowest daily TARGET2 values for each month of 2018, as well as the average daily values for each month.
• Chart3 Monthly maxima and minima, troughs and averages of TARGET2 daily values in 2018
• Throughout 2018, the amplitude of TARGET2 turnover, expressed by the difference between the highest and the lowest value, was 48%,[9] compared with 50% in the previous year.
• However, the comparability of TARGET2 with other systems is hampered by the change in the TARGET2 statistical methodology in 2013, as well as by the migration of the securities settlement systems to T2S.

1.2 Volume of transactions in TARGET2

• Although the number of transactions never reached pre-crisis levels, the system attracted around 4 million transactions more over that period.
• Following the completion of the migration to SEPA, TARGET2 traffic stabilised at 88 and 89million transactions yearly.
• The exact volume settled in TARGET2 in 2018 amounted to 88,442,641transactions, corresponding to a daily average of 346,834payments.
• Box1 Traffic evolution in TARGET2 The Eurosystem has been carefully monitoring the development of TARGET2 volumes over time, especially given their relevance for TARGET2 revenues and cost recovery.
• Customer payments ranged between 4.1 and 4.8million transactions per month during 2018.
• Meanwhile, interbank payments ranged between 1.6 and 1.9million transactions per month during 2018, and were affected by similar seasonal trends.
• For more than half of 2018 months, average daily volumes in TARGET2 calculated on a monthly basis were below the levels recorded for the corresponding months of 2017 (Chart6).
• Chart6 Average daily TARGET2 volumes per month
• Chart7 depicts the peaks and troughs in terms of daily volume on RTGS accounts in TARGET2 in 2018 and the average daily volume for each month.
• The lowest daily volume was recorded on 1November (230,276transactions), i.e.a public holiday in most European countries (All Saints Day).
• Chart8 shows the yearly moving average of TARGET2 volumes (i.e.the cumulative volume processed in the preceding 12months) for each month.
• The variation of this cumulative volume from one year to the next is also presented as a percentage.
• The chart reveals that, with the exception of TARGET2 and EURO1,[14] the traffic of the main payment systems increased in this period.
• Chart9 Comparison of the changes in traffic in some major large-value payment systems and SWIFT between 2017 and 2018 (in percentages)

1.3 Interactions between TARGET2 and T2S

• At the start of each T2S business day, liquidity is sent from TARGET2 to T2S, while, towards the end of the day, any remaining liquidity on DCAs is swept back to the RTGS accounts in TARGET2.
• In 2018 an average of 581inbound liquidity transfers from TARGET2 to T2S and 648outbound liquidity transfers from T2S to TARGET2 took place every day.
• Around 16:00, there is a spike in the liquidity held in T2S, owing to participants sending liquidity to T2S to reimburse auto-collateralisation and ensure the settlement of remaining transactions.
• At 16:30 the liquidity in T2S decreases sharply as a consequence of the optional cash-sweep that brings liquidity back from T2S to TARGET2.

1.4 Interactions between TARGET2 and TIPS

• Before TIPS went live, TARGET2 was adapted to ensure its smooth interaction with TIPS, in a similar fashion to the adaptations required before T2S went live.
• Legally, the euro-denominated TIPS DCAs fall under the perimeter of TARGET2, and therefore, the rights and obligations of TIPS DCA holders are included in the TARGET2 Guideline.

1.5 Comparison with EURO1

• Thus, the market share of TARGET2 is defined as its relative share vis--vis EURO1, and this is depicted in Chart12.
• Chart12 Market share of volumes and values settled in TARGET2 vis--vis EURO1 (in percentages)

1.6 Value of TARGET2 payments

Chart 13 shows the evolution of the average value of a TARGET2 payment between 2008 and 2018.[17] The continuous decrease from 2015 to 2017 can be associated with the migration to T2S of securities settlement system traffic.[18] In 2017 and 2018 the average value of a payment stabilised at €4.8 million. Chart 13 Average value of a TARGET2 payment
• Chart14 illustrates the distribution of TARGET2 transactions per value band, indicating the shares, in terms of volume, that fall below a certain threshold.
• Chart14 Distribution of TARGET2 transactions across value bands in 2018
• Given the wide distribution of transaction values, the median payment in TARGET2 is calculated as 7,260, which indicates that half of the transactions processed in TARGET2 each day are for a value lower than this amount.
• Although the picture has changed slightly since the completion of the migration to SEPA, particularly as regards commercial payments, TARGET2 is still widely used for low-value payments, especially urgent customer transactions.
• Chart15 depicts the average value of TARGET2 payments executed at different times of the day.
• After the system opens at 07:00, the hourly average value of transactions fluctuates minimally throughout the day.

1.7 Night-time settlement in TARGET2

• Both figures are significantly lower than in 2017, due mainly to two events that occurred at the end of 2017: the migration of securities settlement systems to T2S and the processing schedule of a significant ancillary system, which moved parts of the bulk settlement from night-time settlement to daylight settlement.
• In December 2018 night-time settlement values and volumes reached historically low levels due to the move of TARGET2 night-time settlement activity to the daylight phase.

1.8 Payment types in TARGET2

• Charts17 and 18present the breakdown of TARGET2 volumes and turnover by type of transaction.
• More than 80% of the TARGET2 volume is made up of payments to third parties, namely payments between market participants.


Breakdown of TARGET2 turnover in 2018

• With regard to turnover, payments between participants represent only 44% of total value.
• The difference between the volume-based and value-based indicators across payment categories stems from the fact that the average sums involved in monetary policy transactions, ancillary system instructions and liquidity transfers are typically much larger than payments to third parties.

1.9 The use of prioritisation

• When submitting payments in TARGET2, participants can assign them a certain priority: normal, urgent or highly urgent.
• However, if this is not the case, payments that cannot be settled immediately are queued according to their priority.

1.10 Non-settled payments

• Chart20 shows the evolution of the daily average of non-settled payments on a monthly basis between 2009 and 2018 in terms of both volume and value.
• Due to its gross settlement model, some of its transactions were rejected, due either to liquidity shortage or cancellation, and reported as non-settled TARGET2 payments.


For the same reasons, the average daily value of non-settled payments also decreased drastically, falling to an average of just €4.5 billion for the whole year. Overall, non-settled payments in 2018 represented 0.08% of the total daily volume and 0.3% of the total daily turnover in TARGET2. The levels can be considered very low and confirm that the distribution of liquidity across participants was appropriate throughout that period.

1.11 Use of credit lines in TARGET2

• The intraday credit line is a facility in TARGET2 through which banks can overdraw their intraday account against eligible collateral.
• Overall, the level of TARGET2 intraday credit lines and their usage decreased after the launch of the asset purchase programme (APP) in March 2015, which created a high level of excess liquidity in the system (see Chart21).

1.12 Share of inter-Member State traffic

• The share of inter-Member State traffic in TARGET2 indicates the percentage of traffic that is exchanged between participants belonging to different banking communities.
• Chart22 Share of inter-Member State traffic in TARGET2
• The inter-Member State payments shown in Chart22 were identified based on the national banking communities of the sending and receiving direct participants on the platform.
• When calculating the inter-Member State shares based on the originator and beneficiary of the payment, the share of cross-border payments in 2018 amounted to 56% in terms of volume and 42% in terms of value.
• Therefore, taking into account the full payment chain leads to a significantly higher cross-border share in volume and a slightly higher one in terms of value.
• While, for customer payments, this difference is hardly noticeable, fluctuating between 2 and 5percentage points (pp), for central bank payments the difference can go up to 17pp.
• A significantly larger share of central bank transactions is already settled in the first hour of the day, and this difference persists through the day until 17:00.

1.13 Tiering in TARGET2

• Close monitoring of the tiering level in TARGET2 is thus of paramount importance.
• [23] During 2018 the aggregate level of tiering on the sending side in TARGET2 reached around 5.7% in terms of value and 21.1% in terms of volume (see Chart23).


Chart 23 Tiering by sender in TARGET2 in 2018

• The largest indirect participant in terms of value sent (consolidated at banking group level) was ranked at around 54th out of all TARGET2 direct participants in 2018.
• Further analysis reveals that 57% of all direct participants in TARGET2 (consolidated at banking group level) did not conduct any business during the year on behalf of indirect parties.

1.14 Money market transactions in TARGET2

• Market participants use TARGET2 for settling unsecured money market transactions in central bank money.
• By applying the Furfine algorithm[24] it is possible to identify which TARGET2 transactions are related to money market loans, or, more precisely, to the unsecured overnight money market.
• Chart26 complements this analysis by showing the cumulative distribution in value of all money market transactions across the day in 2018.
• Chart26 Cumulative distribution of money market transactions during the day in 2018

1.15 Shares of national banking communities

The following two charts break down TARGET2 volumes and turnover according to the share of the biggest national banking communities contributing to its traffic. Chart 27
Chart 28
• Adding France, Italy, Spain, the Netherlands and Belgium, the share of transactions increases to 88%, which is also on a par with previous years.
• The concentration of turnover has changed slightly compared with the year before, owing also to the reduced Spanish share, by 2.5percentage points.

1.16 Pattern of intraday flows

• Chart29 shows the intraday distribution of TARGET2 traffic, i.e.the percentage of daily volumes and values processed at different times of the day in 2018.
• Chart29 Intraday distribution of TARGET2 traffic in 2018
• In terms of value, the path is typically very close to a linear distribution, indicating an even spread throughout the day, which in turn ensures the smooth settlement of TARGET2 transactions.
• By one hour before the system closes, almost 100% of the TARGET2 volume has already been processed.

2 TARGET2 service level and availability

• In 2018, as in the preceding year, all payments settled in the payments module of TARGET2 were processed in less than five minutes.
• Compared with the period before 2017, the figure improved as regards delivery of the service and processing times of payments, confirming the high performance level of TARGET2s SSP.
• In order to neutralise this effect, the first hour of operations is excluded when the TARGET2 processing times are calculated.
• In addition, attention should be drawn to the possibilities offered in TARGET2 to reserve funds for highly urgent and urgent payments (see Section1.8 The use of prioritisation).

2.1 Technical availability

• This is clearly underlined by the fact that the SSP of TARGET2 achieved 99.98%[28] technical availability over the last reporting period, i.e.slightly lower than in 2017, when the availability of TARGET2 was 100%.
• The availability measurement does not include systems or networks not directly managed by TARGET2 (in particular, the availability of the SWIFTNet services).

2.2 Incidents in TARGET2

The ECB publishes up-to-date information about the availability of TARGET2 via the Market Information Dissemination tool. All incidents relating to TARGET2 are followed up with a detailed incident report and risk management process. The aim of this approach is to learn from these events in order to avoid a reoccurrence of the incidents or incidents of a similar nature. Chart 31 TARGET2 incidents and delays in closing the system
• Owing to this incident, the overall TARGET2 availability indicator was slightly lower than in the previous year.
• Two other major incidents, which did not impact the availability of TARGET2 but led to some disturbances in its functioning, occurred in March and October 2018.

3 TARGET2 participants

3.1 RTGS accounts

In December 2018 the total number of RTGS accounts active in TARGET2 (encompassing the direct participants, the technical accounts, the ancillary system accounts and the special-purpose accounts) was 1,968, i.e. largely unchanged from the end of 2017. Chart 32

Internet-based participation

• In November 2010 internet-based participation was introduced to allow small banks to obtain a direct connection to TARGET2 without necessarily being connected to the SWIFT network.
• In December 2018 the overall number of internet-based participants was 594, 3% fewer than at the end of 2017.

3.2 Participation types

At the end of December 2018, 1,056[31] direct participants held an account on the SSP of TARGET2 and were registered as such in the TARGET2 directory. Through these direct participants, 659 indirect participants from the EEA were able to settle their transactions in TARGET2, as well as 4,091 correspondents worldwide. Table 2
• The prospect of Brexit has prompted British institutions that currently access TARGET2 directly via a euro area NCB (i.e. remote access) to find alternative ways to connect. At the end of 2018, some 39 UK-based participants had direct access to seven national component systems of TARGET2. As part of their preparation for Brexit, these institutions were presented with a number of options with respect to their TARGET2 participation, as follows:
  • Use or establish a subsidiary in the EEA from which they can conduct their euro payment business. From a TARGET2 perspective, those credit institutions would be seen as regular banks, established in a euro area country, that hold an account with a euro area NCB.
  • Use or establish a branch in the EEA from which they can conduct their euro payment business. The direct participation of such entities would nevertheless require the provision of a conclusive country opinion.
  • Terminate their direct participation in TARGET2 and have recourse to the service of another direct participant for sending or receiving euro payments on their behalf (i.e. becoming an addressable BIC holder). In contrast to direct access, any of the direct participant’s customers can become an addressable BIC holder as there are no specific territorial or administrable criteria.
• Participants and institutions addressable via TARGET2 are listed in the TARGET2 directory, which is available to all direct participants for information and routing purposes.
• There were 550 of these accounts, also called unpublished BICs, at the end of 2018 (567 in 2017).

3.3 Ancillary systems

• At the end of 2018 a total of 85ancillary systems were settling on the TARGET2 SSP, including 31retail payment systems, 21securities settlement systems and 23clearing houses (including four CCPs) and others.
• Additionally it should be noted that, despite the migration of many securities settlement systems to T2S, the number of ancillary systems participating in TARGET2 is relatively stable, due mainly to the fact that the systems that migrated to T2S left a portion of their activities in TARGET2 (e.g.non-securities settlement-related activity, such as processing of corporate actions, issuance services, repo transactions or transactions specific to the local market).
• TARGET2 offers participants the possibility of setting aside (“dedicating”) part of their available liquidity in:
  • Dedicated Cash Accounts (DCAs) for settlement in T2S and TIPS (the latter as of end-November 2018);
  • Sub-accounts dedicated to specific ancillary systems (ASI settlement procedure 6 interfaced);
  • Technical accounts managed by ancillary systems (ASI settlement procedure 6 real-time).
• Out of the 85ancillary systems settling on the SSP, 58 made use of the ASI, a feature which was developed to facilitate and harmonise the cash settlement of these systems in TARGET2 (the other ancillary systems use the Participant Interface, which was developed mainly for the participants, i.e.financial institutions).
• Box4 Dedicated liquidity for ASI settlement procedure 6real-time This means that the dedicated liquidity cannot be used for other settlement purposes.
• ChartB shows the monthly funding and defunding of ASI6 real-time in value terms in 2018.
• The sum of all the liquidity pushed from the accounts of settlement banks to the technical accounts of the ACHs (i.e.the funding transactions) increased from 225.7million in January to 1.6billion in December 2018.
• In particular, when funding was higher than defunding, liquidity accumulated on the technical accounts.
• ChartC shows the monthly traffic of ASI6 real-time in volume terms in 2018.


Combined with the values shown in Chart B, the average transfer value fell from €1.4 million in January to €0.7 million in August 2018, whereas from August onward it steadily increased, reaching a peak of €2.0 million in December 2018.

4 TARGET2 financial performance

4.1 Cost recovery objectives

• The evolution of TARGET2s cost recovery rate since the finalisation of its migration phase in 2008 is shown in Chart34 below.
• Chart34 TARGET2 annual cost recovery
• This largely explains why cost recovery, for the first few years of operation, was only around 90%.
• Overall, the annual cost recovery fell slightly, to 105.8%, in 2018, as compared with 107.1% in 2017.

4.2 Financial performance of TARGET2 in 2018

• In 2018 the total annual costs to be recovered for the provision of the core services of TARGET2 amounted to 42.8million.
• At the end of 2018, the loss accumulated since the launch of TARGET2 had therefore decreased by the same amount and stood at 10.5million.