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THE CENTRAL BANKING SYSTEM OF THE EURO AREA
WHY TARGET2-SECURITIES?
Under current arrangements, European central securitiesdepositories (CSDs) normally settle the central bank moneyleg of securities transactions that are denominated in eurothrough the local real-time gross settlement (RTGS)component of the TARGET system (see Char t 1). To facilitatethis, par ticipants in a CSD (whether direct or indirectparticipants) must also participate (directly or indirectly) in thenational RTGS system of the country where the CSD islocated. With the introduction of TARGET2, it will be possiblefor each par ticipant in TARGET2 to settle, through a singleTARGET2 account, transactions effected via any CSD that
provides for settlement in central bank money in euro.With its single technical platform replacing the multiplicity ofplatforms of the current TARGET system, TARGET2 hasincreased the pressure for a common European platform forthe settlement of securities transactions.
TARGET2-Securities may be this common securitiessettlement platform if the Governing Council of the EuropeanCentral Bank (ECB) decides to implement it. A decision isexpected by early 2007. The label “TARGET2-Securities”reflects the main objective of optimising interactions betweenTARGET2 and securities settlement systems.
TARGET2 - S E CUR I T I E S
The Eurosystem is working in cooperation with CSDs and theirpar ticipants to determine whether the project is feasible andto identify the market’s preferences in relation to the featuresof TARGET2-Securities.
BENEFITS
The implementation of such a facility, which would be fullyowned and operated by the Eurosystem, would potentially
bring large cost savings as a result of the high level of efficiencyand technical harmonisation that it would entail for marketpar ticipants, par ticularly in the field of cross-border business.TARGET2-Securities would represent a major step towards asingle Eurosystem interface with the market. In addition, itcould facilitate the cross-border management of collateral and,thereby, pan-European liquidity management. Synergies withother systems operated by the Eurosystem – in par ticularTARGET2 and solutions for the cross-border use of collateral– could be expected.
HOW WOULD IT WORK IN PRINCIPLE?
Like TARGET2,TARGET2-Securities would settle only in euro.At the star t of the operating day, the participating CSDs wouldtransfer the securities account positions to TARGET2-Securities.1 During operating hours, real-time gross settlement(on a DVP model 1 basis) in central bank money would takeplace on the TARGET2-Securities platform (see Char t 2). This
1 With TARGET2, the national central banks will retain their relationships with thebanks. Similarly, with TARGET2-Securities, CSDs would retain their relationshipswith participants, in particular with regard to the securities accounts.
Cha r t 1 : C u r ren t ma rke t i n f r a s t r u c t u re w i t h TARGET
TARGET
Euroclear FR (BE, NL*)
Securitiesaccounts
Cash accounts
TBF
accounts
Clearstream DE
Securitiesaccounts
Monte TitoliSecuritiesaccounts
IberclearSecuritiesaccounts
APK Securitiesaccounts
NBB SSS
Securitiesaccounts
Interbolsa
Securitiesaccounts
BOGS
Securitiesaccounts
OeKB
Securitiesaccounts
NTMA
Securitiesaccounts
RTGS+Cash
accountsBIRELCash
accounts
SLBECash
accounts
BOF-RTGSCash
accounts
TOPCash
accounts
EllipsCash
accounts
SPGTCash
accounts
HermesCash
accounts
ARTIS
IRIS Cash accounts
LIPS Cash accounts
Other CSDs
Securitiesaccounts
Cash
mainlyDvP
Cashaccounts
*planned for BE and NL
would enable the new facility to benefit from the efficiency ofthe so-called integrated model, whereby the settlement ofsecurities and cash takes place on the same technical platform.
TARGET2-Securities would only provide settlement serviceswhile other CSD functions (such as corporate actions, custodyfunctions, safekeeping and administration) would continue tobe offered by the CSDs. Non-settlement activities affecting thesecurities positions of par ticipants would be carried outoutside the operating hours of TARGET2-Securities. At the endof each day’s TARGET2-Securities operations, the par ticipatingCSDs and TARGET2 would run their end-of-day procedures,including accounting.
ISSUES UNDER CONSIDERATION
In order to evaluate the feasibility of TARGET2-Securities, theEurosystem is currently consulting market par ticipants, CSDsand other market infrastructure providers on a number ofissues, which include the following:
Scope of assets: should TARGET2-Securities cover all typesof securities currently settled by CSDs or should CSDs
continue to offer settlement in central bank money for someassets?
Scope of services: does TARGET2-Securities need to offerservices such as matching, securities lending or collateralmanagement?
Settlement frequency: in addition to real-time settlementwith optimisation mechanisms and self-collateralisation, shouldTARGET2-Securities also offer batch settlement?
Cha r t 2 : Ma rke t i n f r a s t r u c t u re w i t h TARGET2 -S e cu r i t i e s ( du r i n g op e r a t i n g hou r s )
TARGET2
Cash accounts
OeNB, NBB, BBK, BdE, BoF, BdF, BoG, CBFSAI, BdI, BcL, DNB, BdP
TARGET2-Securities
Sub-cash accounts
Clearstream DE
Monte Titoli
Iberclear
APK
NBB SSS Interbolsa BOGS
NTMA Securitiesaccounts
Other CSDs
Euroclear (BE, FR, NL)
DvP
OeKB
Account structure: what is the most feasible accountstructure for TARGET2-Securities, both in terms of securitiesand central bank money?
Communication: what role should CSDs play in the routingof settlement instructions to TARGET2-Securities?
Separation of custody and settlement functions: are thereany legal or other obstacles in a given country to separationof the entity providing custody services (the CSD) and theentity providing settlement services (TARGET2-Securities)?
Timing: what timeframe is realistic for the Eurosystem todevelop and launch TARGET2-Securities, and coulddeployment be gradual (e.g. cer tain services star ting earlierthan others or a phased country migration)?
INFORMATION ON TARGET2-SECURITIESMore information and hard copies of this brochure can beobtained from any of the national central banks or from theECB at the following address:European Central BankPress and Information DivisionKaiserstrasse 2960311 Frankfur t am MainGermanyFax: +49 69 1344 7404