Individual payment systems


Individual payment systems (also known as large-value payment systems) are the bedrock of the payments infrastructure that is in place in the euro area. They are chiefly used for the same-day settlement of large, time-critical interbank and customer payments. These include payments relating to monetary policy operations or to money market, securities, forex and derivatives transactions as well as to urgent customer payments. Settlement may be effected either directly between system participants or it can serve to effect payment obligations aris-ing from ancillary systems dedicated to, say, securities settlement or retail payments.

Individual payments are generally settled individually, as the name would suggest, and in the full amount, using what are referred to as "gross settlement systems". The process does not entail any netting (ie the reconciling of credit and debit amounts) or offsetting of matching payments stemming from different participants. This transaction-based system of processing payments, which for the most part is carried out in real time, is generally subject to a strict cover principle. In other words, system participants are expected to have sufficient funds in their accounts to cover payments as they fall due. Hence, each individual payment has a bearing on the participant's liquidity management.

As an alternative, individual transactions can also be processed using net settlement systems. This approach reduces the impact on a participant's liquidity situation as incoming and outgoing payments are offset against one another, with the effect that a system participant only receives or has to pay the resulting net amount. While such amounts are sometimes de-termined and finally settled during an operating day, this step generally only occurs at the end of the day. Finality of settlement of individually submitted payments is therefore not a feature of most net settlement systems. Since it is not possible in advance to guarantee that the corresponding cost amounts will actually be settled when payment is due, nor to ensure that the customary security mechanisms (ie setting of limits or provision of collateral) are fully effective, net settlement systems harbour a certain risk of transactions being reversed. Con-sequently, any default on the part of a single system participant adversely affects all the other participants, possibly triggering further defaults and even causing the entire system to col-lapse.

Entities subject to oversight

TARGET2 is a real-time gross settlement system operated by the Eurosystem and based on a single shared technical platform. Its name is shorthand for the Trans-European Automated Real-time Gross settlement Express Transfer system, which is already in its second genera-tion. The system is used to settle submitted payments on a continuous transaction-focused basis using highly liquid and secure euro central bank money. TARGET2 represents an im-provement upon traditional gross settlement systems which often entail long queues of pay-ments waiting to be executed if the participating banks have insufficient liquidity, thus pre-venting the gross settlement systems from delivering on their promise of early finality of payments. By contrast, TARGET2 offers users liquidity-saving mechanisms, eg settlement of queued payments on a collateralised basis. It therefore combines the advantage of early fi-nality offered by a gross settlement system with that of liquidity conservation offered by a net settlement system.
Thanks to its in-built benefit of immediate finality, numerous European settlement systems such as EURO1, an array of retail payment systems, securities settlement systems and cen-tral counterparties now route their fund transfers via TARGET2. Moreover, all payments as-sociated with Eurosystem monetary policy operations are carried out using TARGET2. The system thus forms the backbone of euro liquidity management by credit institutions inasmuch as it guarantees access to central bank money, enables on-the-spot utilisation of incoming credit amounts and offers a variety of tools for pan-European liquidity management.

EURO1 is a privately-run multilateral euro net settlement system offered by EBA CLEARING and designed for effecting both cross-border and domestic payments between credit institu-tions operating in the European Union. Payments submitted to EURO1 and destined for other participants are converted into what is known as a "single obligation structure", ie a liability or a payment commitment on the part of the participant concerned vis-à-vis the system. These single obligation structures are then automatically adjusted each time a new payment is submitted. The end-of-day balances of each EURO1 participant are then settled in TARGET2 using central bank money at close of business. For the purpose of individually managing their own risk exposure, each EURO1 participant sets bilateral limits for its net position vis-à-vis all other participants in the system. In this context, the sum of each participant's limits, and therefore also the participant's credit or debit cap vis-à-vis the system may not exceed €1 million. This maximum amount is also safeguarded by a guarantee fund held at the ECB, financed in equal parts by all EURO1 participants.

If a credit institution appears likely to reach the ceilings set according to its bilateral limits, the institution in question is at liberty to enhance its debit status by channelling new liquidity to EURO1 via a bridge between the latter system and TARGET2 or to drain off excess liquidity from EURO1 and in so doing give itself capacity to execute new transactions.


It is in the interest of all EU central banks in which TARGET2 and EURO1 are used that these systems be properly monitored. The ECB plays a leading role in the oversight of both systems, and all interested central banks are able to take part in the tasks and decisions as-sociated with this activity. The Bundesbank is actively involved in overseeing both systems. It helps to evaluate the information provided by the two systems and takes part in dialogues with the operators, the findings of which are then used to compile an assessment of each system, aided by a set of Eurosystem oversight principles which are in turn based on the CPSS/IOSCO principles for financial market infrastructures (PFMIs). In addition, the Bun-desbank is involved in the decision-making process within the relevant working groups and committees at the Eurosystem level.

With respect to ongoing oversight, Europe's individual payment systems are assessed at regular intervals in line with the oversight standards that have to be observed. Here, system operators are first asked to complete a comprehensive questionnaire regarding oversight re-quirements. The answers provided are analysed by the central banks involved in overseeing that particular system and any ambiguities discussed with the system operator. Building on this, if necessary recommendations are made, possibly concerning improvements to the sys-tem or its manner of organisation, after which a final oversight report is produced. In the case of EURO1 and TARGET2, this assessment process was last performed in 2010 and 2013, respectively. In response to the introduction of the PFMIs and the ECB regulation on the oversight requirements for systemically important payment systems and the resulting need to adjust the oversight standards applied in the Eurosystem, both systems are soon to be as-sessed afresh.

Pursuant to the provisions contained in the PFMIs, it will be necessary to carry out regular stress tests in future. The relevant procedures are to be developed by the payment system operators on a stand-alone basis. These procedures and their results will then be evaluated by those charged with oversight.

Regarding ad hoc oversight activities, system operators are obliged to promptly report any severe malfunctions that may arise during live operations. When doing so, it is particularly important to state the extent of the problem, its cause and the way in which it was remedied. A copy of the resulting oversight report is sent to each of the national central banks involved in overseeing that system.

Over and above this, the individual system operators and the central banks tasked with overseeing them meet up twice a year for discussion purposes. Aside from looking at aspects of ongoing monitoring activity, these occasions are also used to analyse disruptions which occurred during the past period of observation and to discuss future company plans as well as any scheduled system updates.