Auto-collateralisation

Introduction

• TARGET was developed to meet three main objectives:
  1. Provide a safe and reliable mechanism for the settlement of euro payments on a real-time gross settlement (RTGS) basis;
  2. Increase the efficiency of inter-Member State payments within the euro area;
  3. Serve, most importantly, the needs of the monetary policy of the Eurosystem.
  • The market infrastructure for payments[1] consists of the set of instruments, networks, rules, procedures and institutions that ensure the circulation of money.
  • Its purpose is to facilitate transactions between economic agents and to support efficient resource allocation in the economy.
  • The Eurosystem has the statutory task of promoting the smooth operation of payment systems.
  • This is crucial for a sound currency, the conduct of monetary policy, market functioning, and financial stability.
  • A key instrument which the Eurosystem uses for carrying out this task[2] is the provision of payment settlement facilities.
  • To this end, the Eurosystem operates the second-generation Trans-European Automated Real-time Gross settlement Express Transfer system[3] (TARGET2) for the euro.
  • Taking branches and subsidiaries into account, almost 45,000banks worldwide (and thus all of the customers of these banks) can be reached via TARGET2.

The report and its structure

• This report is the 20th 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 2019.
• It is aimed mainly at decision-makers, practitioners and academics who need to reach an in-depth understanding of TARGET2.
• In addition to the core content, this report includes seven boxes on topics of particular relevance in 2019 and an in-depth analysis of a specific TARGET2 feature.
• NoteLiquidity transfers between TARGET2 and T2S/TIPS DCAs and payments processed on T2S/TIPS DCAs were not included when calculating the TARGET2 indicators presented in this report.

TARGET2 activity

• In 2019, TARGET2 maintained its leading position in Europe, processing 89% 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 increased slightly, reaching 441.3trillion.
• [6] The total volume of payments fell slightly by 0.8% to 87.8million transactions.
• In 2019, the availability of TARGET2s Single Shared Platform (SSP) stood at 100%.

1 Evolution of TARGET2 traffic

Table 1

1.1 TARGET2 turnover

• TARGET2 turnover in 2019 amounted to 441.3trillion, corresponding to a daily average of 1.7trillion.
• Chart1 shows the evolution of the value of TARGET2 traffic over the last eight years.
• [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.
• Chart1 TARGET2 turnover
• 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.
• This indicates the role and efficiency of TARGET2, which provides intraday finality for transactions and allows the funds credited to the participants account to become immediately available for other payments.
• Consequently, the same euro can be reused several times by several TARGET2 participants in the same day.
• Chart2 depicts the average daily turnover generated in TARGET2 for each month in 2018 and 2019, thus showing the seasonal pattern of the system.
• Chart2 Average daily TARGET2 turnover
• Chart3 displays the highest and lowest daily TARGET2 values for each month of 2019, as well as the average daily values for each month.
• This seasonal pattern was also visible in 2019, when the day with the largest turnover of the year with a total value of 2,524billion was 28June.
• Chart3 Monthly maxima and minima, troughs and averages of TARGET2 daily values in 2019
• Throughout 2019, the amplitude of TARGET2 turnover, expressed by the difference between the highest and the lowest values, was 52%, compared with 48% the previous year.
• Peaks and troughs in the systems values can also be influenced by other factors, such as TARGET2 holidays or the end of reserve maintenance periods.
• Some common patterns, including the effect of the financial crisis on the number of processed transactions, can be identified across systems.
• However, the comparability of TARGET2 with other systems has been hampered by the change in the TARGET2 statistical methodology in 2013, as well as by the migration of the securities settlement systems to T2S.
• [9] In the latter case, if the average daily volume in TARGET2 after 2015 is considered together with the average daily turnover for DCAs, which are technically held in T2S, total traffic continues to increase.

1.2 Volume of transactions in TARGET2

• After low transaction volumes resulting from the financial crisis, TARGET2 traffic recovered, posting a positive trend between 2010 and 2013 (Chart5).
• Although the number of transactions never reached pre-crisis levels, the system attracted around four million transactions more over that period.
• Following the completion of the migration to SEPA, TARGET2 traffic has stabilised at around 88 million transactions yearly.
• The exact volume settled in TARGET2 in 2019 amounted to 87,751,040transactions, corresponding to a daily average of 344,122payments.
• Compared with the previous year, the overall number of processed payments fell by around 0.8%.
• The decrease was driven mainly by the lower number of ancillary system-related transactions, which was not fully offset by the increase recorded in other segments, particularly customer and interbank.
• More detailed information on the evolution of the different traffic segments is provided in Box1.
• 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.
• In 2019, customer payments accounted for 60% of total TARGET2 traffic in terms of volume, followed by interbank payments (25%), ancillary system payments (8%) and other payments such as central bank operations (7%).
• These changes were largely due to UK-based credit institutions relocating their point of access to TARGET2 from the Netherlands to France and Germany in preparation for Brexit.
• 2019 saw a reduction of 5.55% in annual ancillary system volumes compared with 2018, with the largest traffic decline taking place in Germany.
• The drop followed the sharp year-on-year reduction of 36.13% in 2018, which reflected the impact of the last migration wave to T2S.
• However, this decrease was, to a large extent, counteracted by the above-mentioned positive developments in interbank payments, which account for the second-largest share of TARGET2 traffic.
• As a result, there was only a slight drop of 0.75% in overall TARGET2 volumes.
• There were between 4.0 million and 4.8million customer payment transactions per month during 2019.
• Meanwhile, interbank payments ranged from 1.6 million to 1.9million transactions per month during 2019, and were affected by similar seasonal trends.
• For more than six months in 2019, the average daily volumes in TARGET2 calculated on a monthly basis were below the levels recorded for the corresponding months in 2018 (Chart6).
• The biggest difference, amounting to 6%, was observed in June, and was largely due to a decrease in customer payments, as highlighted in Box 1.
• Chart6 Average daily TARGET2 volumes per month


The highest average daily volume was recorded in December, when it reached more than 390,000 transactions. A high figure such as this may be related to the high daily volumes normally observed at the end of the year. Chart 7 Monthly peaks, troughs and averages of TARGET2 daily volumes in 2019

• Chart7 depicts the peaks and troughs in terms of the daily volume on RTGS accounts in TARGET2 in 2019 as well as the average daily volume for each month.
• In 2019, the highest daily volume was recorded on 30September, when 525,075 transactions were processed.
• The lowest daily volume was recorded on 1November (225,314 transactions), which wasa 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 shows that the cumulative volume started to decline in the second half of 2008, when the financial crisis erupted.
• Chart9 compares the growth rate (between 2018 and 2019) of traffic in TARGET2 with the growth rates of the major payment systems worldwide, as well as with the growth rate of SWIFT payment-related FIN traffic (categories 1 and 2).
• The chart reveals that, with the exception of TARGET2,[14] traffic in 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 2018 and 2019 (in percentages)

1.3 Interactions between TARGET2 and T2S[15]

• The final migration wave was completed on 18 September 2017, thus making 2019 the second full year of operations.
• Although they are technically held on the T2S platform, euro-denominated DCAs are legally part of TARGET2.
• 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.
• During the day, liquidity can be freely transferred from TARGET2 to T2S and vice versa.
• In 2019, there were an average of 573inbound liquidity transfers from TARGET2 to T2S and 677outbound liquidity transfers from T2S to TARGET2 every day.
• There is a spike in the liquidity held in T2S before 16:00, owing to participants sending liquidity to T2S to reimburse auto-collateralisation and to ensure the remaining transactions are settled.
• 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.
• The next drop, to zero, is observed towards the end of the business day, and is related to the execution of the automated cash sweep from T2S to TARGET2 at 17:45, when all remaining liquidity on DCAs is pushed from T2S back to TARGET2.
• Chart11 illustrates the daily average value of auto-collateralisation in T2S by month in 2019.
• Auto-collateralisation is intraday credit granted by a euro area central bank and triggered when a T2S DCA holder has insufficient funds to settle securities transactions.
• On average, in 2019 19.37% of the total value of auto-collateralisation was represented by auto-collateralisation on stock and 80.63% by auto-collateralisation on flow.
• Chart11 Daily average value of auto-collateralisation for euro and Danish kroner activity (EUR billions)

1.4 Interactions between TARGET2 and TIPS

• TARGET Instant Payment Settlement (TIPS) is a harmonised and standardised pan-European service for the settlement of instant payments in central bank money.
• TIPS went live on 30 November 2018 with a high capacity and 24/7/365 availability.
• 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.
• At the end of 2019, there were 29active euro-denominated TIPS DCAs and 3,797 reachable parties in TIPS.

1.5 Comparison with EURO1

• EURO1 is the only direct competitor of TARGET2 among large-value payment systems denominated in euro.
• Thus, the market share of TARGET2 is defined as its relative share vis--vis EURO1, as shown in Chart12.
• The two systems are different by design, since EURO1 operates on a net settlement basis and only achieves final settlement in central bank money (in TARGET2) at the end of the day.
• This helps to explain, in part, the relative share of TARGET2 vis--vis EURO1, as shown in Chart12, which only takes these two payment categories into account.
• 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 2019.[17] The continuous decrease from 2015 to 2017 could be related to the migration to T2S of securities settlement system traffic.[18] In 2019 the average value of a payment increased slightly to €5.2 million, from €4.8 million in 2018. 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.
• Generally, 70% of all TARGET2 transactions were for values of less than 50,000.
• Chart14 Distribution of TARGET2 transactions across value bands in 2019
• Given the wide distribution of transaction values, the median payment in TARGET2 is calculated as 7,404, which indicates that half of the transactions processed in TARGET2 each day are for a value lower than this amount.
• This figure confirms that TARGET2 offers a range of features attracting a high number of low-value transactions, especially those of a commercial nature.
• Although the picture has changed slightly since the completion of the migration to SEPA, particularly with regard to commercial payments, TARGET2 is still widely used for low-value payments, especially urgent customer transactions.
• Chart15 Intraday pattern: average value of a TARGET2 payment
• Chart15 depicts the average value of TARGET2 payments executed at different times of the day.
• The chart indicates that in 2019, as in previous years, TARGET2 settlement showed a strong intraday pattern.
• After the system opens at 07:00 CET, the hourly average value of transactions fluctuates minimally throughout the day.
• Between 09:00 CET and 13:00 CET, the average value increases slightly, owing to the settlement of CLS and other ancillary system transactions at this time.
• The average payment value in 2018 during the last TARGET2 opening hour was 14% lower than in 2017.

1.7 Night-time settlement in TARGET2[19]

• There are two night-time settlement windows: 19:30 CET to 22:00 CET and 01:00 CET to 07:00 CET.
• The two windows are separated by a technical maintenance window, during which no settlement operations are possible.
• This increase stemmed mainly from Spain and related to the liquidity transfer supporting the settlement of instant payments and cash operations.
• The increase in volume in November 2011 was because the SEPA Clearer ancillary system started to make use of the night-time settlement service in TARGET2.
• As indicated above, the changes in the night-time settlement pattern in this period can be attributed primarily to securities settlement systems that had migrated their operations to T2S.
• Since December 2018, night-time settlement values and volumes have reached historically low levels because some ancillary systems TARGET2 night-time settlement activity has moved to the day-trade phase.

1.8 Payment types in TARGET2

• Charts17 and 18present a 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, i.e.
• The volume of ancillary system settlement represents 8% of the total volume, 7% is generated through operations with the central bank, and the remaining 3% is linked to liquidity transfers.
• Overall, all these figures remained similar to those for the previous year.
• Chart17 Breakdown of TARGET2 volumes in 2019


Breakdown of TARGET2 turnover in 2019

• In terms of daily average TARGET2 traffic, the respondents represented around 60% of the value and 55% of the volume.
• Respondents were of different types, including commercial and universal banks, investment banks, public banks, specialised lenders, savings banks, credit unions and other types of institutions.
• Current activity As expected, respondents process a larger share of their euro-denominated interbank payment activity than their customer payment activity in TARGET2.
• Chart A shows the percentage of respondents total customer and interbank payment activity processed via TARGET2.
• This finding is consistent with the definition of TARGET2 as a Large-Value Payment System (LVPS) and the availability of alternative payment channels in addition to correspondent banks.
• Chart A Payments processed via TARGET2 as a percentage of banks total payment activity (Respondents, in percentages)
• More than two-thirds of respondents indicated their usage of one or more of the liquidity management features available in TARGET2.
• Intraday credit, priorities, reservations and warehoused payments are among the most widely used features across all respondents, irrespective of their business models.
• The two main reasons for not using such features are the current levels of liquidity and the availability of internal liquidity management systems.
• Respondents appreciate TARGET2 primarily for its speed, its reachability and the fact that it offers settlement in central bank money.
• At the same time, instant payments could impact the customer payment activity processed in TARGET2.
• A third of respondents indicated that they already offer instant payment services.
• In addition, several respondents who do not yet offer instant payment solutions indicated that they have plans to do so in the future.

1.9 The use of prioritisation

• When submitting payments in TARGET2, participants can assign them a certain priority: normal, urgent or highly urgent.
• In general, payments are settled immediately on a first in, first out basis, as long as sufficient liquidity is available in the participants RTGS account.
• However, if this is not the case, payments that cannot be settled immediately are queued according to priority.
• Participants can reserve a set amount of their liquidity for the priority classes urgent and highly urgent, and less urgent payments are made when excess liquidity is sufficient.
• It shows that more than 80% of transactions were assigned normal priority, with 9% highly urgent and the remainder urgent.

1.10 Non-settled payments

• Chart20 shows the evolution of the daily average of non-settled payments on a monthly basis between 2009 and 2019 in terms of both volume and value.
• Due to its gross settlement model, some of its transactions were rejected, either due to liquidity shortage or cancellation, and reported as non-settled TARGET2 payments.
• In 2019, the average daily number of non-settled transactions increased to 366.
• However, the average total value of these transactions more than halved, from 4.5 billion in 2018 to 2.0 billion in 2019.
• Chart20 Non-settled payments in TARGET2
• For the same reasons, the average daily value of non-settled payments also decreased drastically in 2018, falling to an average of just 4.5billion for the year and to 2.0 billion in 2019.
• Overall, non-settled payments in 2019 represented 0.1% of the total daily volume and 0.1% of the total daily turnover in TARGET2.
• The levels may be considered very low and confirm that liquidity was appropriately distributed across participants 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.
• The average maximum intraday credit line at participant level increased by 8.3% compared with 2018 to a value of 2.1 billion.
• Although the intraday credit value accessible by TARGET2 participants increased, its usage slightly decreased.
• Chart21 TARGET2 intraday credit line and its usage

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 shows that, in 2019, this share continued to increase, reaching 45% in value and 43% in volume.
• Chart22 Share of inter-Member State traffic in TARGET2
• In such a case, the payment flow will be considered to be cross-border, even though the payment is taking place between two entities located in the same country.
• 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 2019 amounted to 56% in terms of volume and 41% in terms of value.
• Therefore, taking the full payment chain into account leads to a cross-border share that is significantly higher in volume and slightly higher in value.
• Box3 Liquidity distribution in TARGET2 TARGET2 liquidity refers to the liquidity available on TARGET2 accounts.
• It represents a measure of central bank liquidity available[21] and is also commonly referred to as central bank reserves or balances at the central bank.
• In 2019, liquidity in TARGET2 stood, on average, at 1.74 trillion, a decline of 3.8% on the previous year (see Figure 1).
• Although this distribution looks almost the same as it did in 2018, with differences at country level being within one percentage point of 2014 figures, i.e.
• before APP implementation, there are some differences worth mentioning.
• France increased its share by 6.4 percentage points and Germany by 2.5 percentage points; Belgium and Luxembourg also increased their shares, but by fewer percentage points.
• This was balanced by a decrease in the share of Italy (-3.4 percentage points) and the Netherlands (-2.8 percentage points), as was the case in Finland and Spain, with less significant changes for the latter.
• Overall, these eight countries held more in relative terms in 2019 than in 2014.
• Among these countries, in particular, Germany decreased its share of liquidity holdings by 2.0 percentage points, while Italys increased by 2.4 percentage points.
• [25] The liquidity shift in TARGET2 indicates that at least part of the exempted allowances was filled cross-border.
• [26] Chart B TARGET2 liquidity distribution by country in 2019


Chart C Variation of TARGET2 liquidity distribution by country in 2019

• [27] Historically, claim countries have held more liquidity than liability countries, although the gap increased with APP implementation.
• At bank level, liquidity is distributed unevenly among TARGET2 participants.
• In 2019, more specifically, 25% of TARGET2 participants held 98.4% of the liquidity available in TARGET2.
• It is also notable that ten TARGET2 participants[28] held, on average, 22.6% of the total liquidity.
• Overall, there is a strong positive correlation between the total value of traffic generated and liquidity held.
• Table A shows the ratios between payments sent and liquidity held at jurisdiction level.

1.13 Tiering in TARGET2

• Tiered participation arrangements occur in a payment system when a direct participant of that system provides services that allow other participants to access the system indirectly.
• The indirectly connected participants benefit, in turn, from the clearing and settlement facility services offered by direct participants.
• Close monitoring of the tiering level in TARGET2 is thus of paramount importance.
• [29] The image below shows the map of TARGET2 flows based on the location of the payment originators and final beneficiaries.
• This shows that, when considering the institutions at both ends of the payment chain, TARGET2 has global reach.
• During 2019 the aggregate level of tiering on the sending side in TARGET2 reached around 6.13% in terms of value and 20.61% in terms of volume (see Chart23).
• This meant that, on average, of every euro sent by direct participants in TARGET2 during the year, only 6.13cents were settled on behalf of indirectly connected parties outside their banking group perimeter.
• More than 75% of the tiered business (consolidated at banking group level) comes from outside the EEA, showing that TARGET2 makes it possible for institutions around the world to access the euro market.
• Chart23 Tiering by sender in TARGET2
• The largest indirect participant in terms of value sent (consolidated at banking group level) was ranked approximately 53rd out of all TARGET2 direct participants in 2019.
• Further analysis reveals that 57.66% of all direct participants in TARGET2 (consolidated at banking group level) did not conduct any business during the year on behalf of indirect parties.
• Overall, these statistics for 2019 point to a relatively stable and contained level of tiered participation in TARGET2.
• At the other end of the spectrum, around 81direct participants act as a settlement bank for more than 100tiered banking groups.

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[30] it is possible to identify which TARGET2 transactions are related to money market loans, or, more precisely, to the unsecured overnight money market.
• [31] This unique dataset is updated regularly to obtain the latest information about the money market.
• Overall, TARGET2 transaction data provide a rich source of information for both the analysis of monetary policy implementation and TARGET2 operations.
• Chart25 Unsecured overnight money market activity in TARGET2
• Chart26 complements this analysis by showing the cumulative distribution in value of all money market transactions across the day in 2019.
• This confirms the assumption that the last hours of TARGET2 operations are particularly important for the interbank market.
• Chart26 Cumulative distribution of money market transactions during the day

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 on a par with previous years.
• [33] In addition, the drop in the Netherlands was due to some customer payment transactions shifting to instant payments (see Box 1).
• With regard to turnover, Germany is the main contributor, followed by France, the Netherlands and Luxembourg.
• The top four countries by turnover generated over three-quarters of the total value settled in TARGET2 in 2019.

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 2019.
• Ideally, the value/volume distribution should be as close as possible to linear to avoid liquidity and operational risk.
• Chart29 Intraday distribution of TARGET2 traffic in 2019
• 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.
• A comparison with previous years shows no significant deviations.

2 TARGET2 service level and availability

• In 2019, all payments settled in the payments module of TARGET2 were processed in less than five minutes.
• Service delivery times and payment processing times also remained stable in 2019, confirming the high performance level of TARGET2s SSP.
• It should be noted that this excellent performance is very advantageous for the banking community, particularly for its real-time liquidity management.
• In practice, around 30% of all TARGET2 payments fall into these three categories of exceptions, meaning that the statistics on processing times apply to around 70% of the systems traffic.
• The chart shows that on this day 50% of transactions were settled within 26seconds and 90% within 39seconds, thereby confirming the systems high level of performance.
• A specific phenomenon worth reporting in the context of TARGET2 performance is the morning queue effect.
• On peak days, more than 100,000transactions may be processed in the first hour, which affects the average settlement time during this period.
• This huge volume of transactions normally takes around 30 to 45minutes to process and, to neutralise this effect, the first hour of operations is excluded when 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 100% technical availability in 2019.
• Technical availability is measured on TARGET2 business days during the day-trade phase (including end-of-day processing), from Monday to Friday between 07:00 and 18:45 (19:00 on the last day of the minimum reserve period), including extensions required to complete the operational day (e.g.delayed closing owing to a technical problem in TARGET2 or in T2S, which has an effect on TARGET2, or to major problems in ancillary systems settling in TARGET2).
• The availability measurement does not include systems or networks not directly managed by TARGET2 (in particular, the availability of the SWIFTNet services).
• Technical availability is not intended to measure the impact of partial outages involving TARGET2s SSP.

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 to avoid a recurrence of the incidents or incidents of a similar nature. Chart 31 TARGET2 incidents and delays in closing the system Chart 28
In 2019, TARGET2 experienced some technical issues which, in one case (on 5 July), led to a delay in the delivery of outgoing messages from TARGET2. In addition to this incident and a number of less significant issues affecting TARGET2 operations on a few occasions, the closing of the interbank payment cut-off at 18:00 was delayed twice in 2019[35] due to problems related to the repatriation of funds from T2S back to TARGET2 RTGS accounts.

3 TARGET2 participants

3.1 RTGS accounts

In December 2019, 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 1,943, i.e. largely unchanged from the end of 2018. 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.
• Another increase during the second half of 2016 was driven by some banks opening TARGET2 accounts via internet-based access solely for the purpose of settling the long-term refinancing operations.
• In December 2019, the overall number of internet-based participants was 554, which portrays a gradual decline in this type of participation since the end of 2016.
• The largest share of internet-based participants is in Germany, followed by France and Italy.

3.2 Participation types

At the end of December 2019, 1,050[37] direct participants held an account on the SSP of TARGET2 and were registered as such in the TARGET2 directory. Through these direct participants, 597 indirect participants from the EEA, as well as 4,194 correspondents worldwide, were able to settle their transactions in TARGET2. Table 2
• Participants and institutions addressable via TARGET2 are listed in the TARGET2 directory, which is available to all direct participants for information and routing purposes.
• Eurosystem open market operations or to fulfil reserve obligations in countries where reserves are computed on RTGS accounts.
• There were 514 of these accounts, also called unpublished BICs, at the end of 2019 (550 in 2018).
• This means that there would be no automatic suspension or termination of the account of an entity in resolution.
• At the same time, the TARGET2 operator retains its discretion to suspend or terminate an account holders participation, in accordance with Article 34.2 of the TARGET2 Guideline, following an assessment of the particular circumstances of each situation on a case-by-case basis.
• The TARGET2 Guideline does not automatically trigger any legally binding rights, obligations or procedures related to a participant entering into resolution.

3.3 Ancillary systems

• At the end of 2019, a total of 82[38]ancillary systems were using the TARGET2 SSP for settlement purposes, including 32retail payment systems, 20securities settlement systems and 17clearing houses (including four central counterparties).
• Of the 76ancillary systems using the SSP for settlement purposes, 57 made use of the Ancillary System Interface (ASI), a feature which was developed to facilitate and harmonise the cash settlement of these systems in TARGET2[39].
• The number of times each of the six available ASI models was used at the end of the year is shown in Table3.

4 TARGET2 financial performance

4.1 Cost recovery objectives

• This included its development costs, running costs, overhead costs and capital costs.
• 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 rate
• At the time of TARGET2s development, a number of assumptions were made about the volume of operations in relation to cost recovery.
• Since TARGET2s launch, the system has seen an average annual decrease in billed traffic of 0.8%, which largely explains why cost recovery, for the first few years of operation, was only around 90%.
• In 2013 the amended pricing scheme helped to bring cost recovery close to 100%.
• This lifted cost recovery to more than 100% these annual profits are used to offset the losses accumulated over the first years of operation.
• While TARGET2 has generated annual profits since 2014, the level of cost recovery has fluctuated considerably on an annual basis.
• Second, T2S migration had an effect on TARGET2 from both a cost and a revenue perspective.
• However, annual cost recovery remained constant at 105.8% between 2018 and 2019.

4.2 Financial performance of TARGET2 in 2019

• In 2019, the total annual costs to be recovered for the provision of the core services of TARGET2 amounted to 41.7million.
• On the revenue side, TARGET2 participants were billed for 85.9million transactions which, together with the fixed monthly fees, generated total revenues of 44.2million.
• This resulted in a cost recovery rate of 105.8% and an annual profit of 2.4million.
• At the end of 2019, the loss accumulated since the launch of TARGET2 had therefore decreased by the same amount, and stood at 8.1million.