THE TRANS-EUROPEAN AUTOMATED REAL-T IME GROSS SETT LEMENT EXPRESS TRANSFER SYSTEM

update 2003

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Published by:©European Central BankFrankfurt am MainJuly 2003

Concept and design:EURO RSCG THOMSEN RÖHLEDüsseldorf

Lithography:Color Service GmbHDüsseldorf

Printed by:Kern & Birner GmbH & Co. Frankfurt am Main

Photographs and pictures:Christian Stoll, Tony Stone, Zefa

ISBN 92-9181-377-X

Welcometo the world of TARGET

p.15 Future- TARGET 2- EU enlargement

access

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p.8 What are the advantages of using TARGET?1) Flexible liquidity

management2) Risk reduction3) Real-time

operation4) Interbank

straight-through processing

5) Operating times to suit everyone

6) Operating days7) EBA settlement

(EURO 1) via TARGET8) TARGET information

system9) TARGET is a

reliable system10) The cost of making

a payment

p.12 What recentdevelopmentshave there been in TARGET?1) Relations with

TARGET users2) Continuous linked

settlement and TARGET

3) TARGET release 20024) Migration from SWIFT

FIN to SWIFTNet FIN5) Facts and figures6) TARGET security7) TARGET contingency

measures8) Compensation scheme

p.16 How do users gainaccess to TARGET?- Multiple access points- TARGET payments can

be made via the followingsystems

- Further information on TARGET

p.4 What is TARGET?- Distinctive features

of the system - Why was TARGET

developed?

p.6 Who can useTARGET and which payments can be made?- The possibility of

reaching almost any EU credit institution

- All credit transfers are possible

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Distinctive features of the system

TARGET, which stands for the Trans-European Automated Real-time Grosssettlement Express Transfer system, is the real-time gross settlement (RTGS)system for the euro, which commencedoperation on 4 January 1999.

TARGET offers a premium payment service which transcends national borders between payment systems in the European Union (EU).

TARGET has a decentralised structurewhich consists of 15 national RTGSsystems and the ECB payment mechanism (EPM), which are interlinkedso as to provide a uniform platform for the processing of cross-border euro payments.

TARGET is a real-time system: paymentsgo directly to their destination, reachingit under normal circumstances within a couple of minutes, if not just a fewseconds, of being debited from the sending participant’s account.

TARGET is a gross settlement system in which each payment is handled individually. Acknowledgement of thesuccessful execution of each individualpayment order is sent in real time.

TARGET provides intraday finality: settlement is final for the receiving participant once the funds have beencredited. The money received is centralbank money. It is possible to re-usethese funds several times a day.

TARGET is accessible to a large numberof participants. Hence, most creditinstitutions are able to use TARGET tomake payments on their own behalf,independently of other participants. Evenindirect participants can be addresseddirectly.

TARGET is very easy to use. To initiate a cross-border payment via TARGET,participants simply send their paymentorders to the euro RTGS system in whichthey participate.

TARGET is an EU-wide system for euro payments. It provides individual real-time processing and intraday finality. TARGET is very easy to use and is accessible to a large number of participants.

Why was TARGET developed?

TARGET was developed to meet threemain objectives:

● to provide a safe and reliable mechanism for the settlement of euro payments on an RTGS basis;

● to increase the efficiency of cross-border payments within theeuro area; and, most importantly,

● to serve the needs of the monetarypolicy of the ECB.

Whatis TARGET?

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Who

It is possible to make credit transfers to almost all EU credit institutions via TARGET without any limitation on value. With its special emphasis on large-value payments related to interbank operations, TARGET contributes to reducing systemic risk.

The possibility of reaching almost any EU credit institution

There are 1,560 direct participants in TARGET and around 2,330 indirectparticipants. The overall number ofbanks (including their branches andsubsidiaries) accessible via TARGET is more than 40,000.

It is possible to reach almost all creditinstitutions established in the EU viaTARGET and, hence, all their accountholders. All credit institutions which are addressable through TARGET (i.e.direct or indirect participants) have to be identified by a Bank IdentifierCode (BIC). The BICs of TARGET participants are listed in the TARGETDirectory as well as in the SWIFT BICdirectories. TARGET obviates the needfor a service level agreement with otherparticipants. Furthermore, at the cross-border level, there is no longer any need for a bilateral exchange of SWIFTauthentication keys.

Payments directly related to monetarypolicy operations involving theEurosystem, whether as the recipient or the sender, have to pass via TARGET.Cross-border large-value net settlementsystems operating in euro also settletheir end-of-day balances via TARGET.Thus, TARGET is used for the end-of-daysettlement of EURO 1, the system operated by the European BankingAssociation (EBA). TARGET is also usedfor euro payments between CLS Bankand its members.

Although TARGET is mainly intended forlarge-value payments, more and moreparticipants are using TARGET for alltheir cross-border euro payment business.In this way, even smaller institutions inthe EU are able to offer their customersan inexpensive cross-border paymentservice, as they are independent of correspondent banking.

• The average value of a cross-borderinterbank payment in 2002 was

15.9 million. However, during thelast hour of the working day (whencustomer payments are no longerpossible) the average payment sizereached 107.3 million.

• The average value of a customer payment in 2002 was 0.84 million.

can use TARGETand which payments can be made?

All credit transfers are possible

TARGET is available for all credit transfers in euro between EU countries,including those countries which have not yet adopted the euro as their currency(non-euro area countries). TARGET processes both interbank (MT-202) andcustomer payments (MT-100/103/103+)1).There is no upper or lower value limit for TARGET payments.

TARGET provides a highly efficient service,especially for time-critical large-value payments. Therefore, by using TARGET forall their large-value payments, in particularthose related to interbank operations, market participants not only receive a premium service, but also make a substantialcontribution to reducing systemic riskthroughout the EU.

1) The MT-100 will be withdrawn by SWIFT in November 2003.

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The system is capable of processing a significant number of large-value payments within short transmissiontimes. Even larger banks, which haveaccess to cheaper alternatives for processing their payments, use TARGETextensively for very high-value payments, since TARGET providesadvantages in terms of liquidity management and security.

Risk reduction

TARGET provides a firm foundation forthe management of payment system risks.It gives participants the possibility ofsettling payments in central bank moneywith immediate finality, thus eliminatingthe settlement risk between participants.

TARGET payments become final forreceiving participants once they havebeen credited to the participant’saccount held at the national centralbank (NCB). This means that participantsare, in principle, able to pass on third-party payments they receive tothe final beneficiary immediately and without credit risk.

TARGET facilitates liquidity management because liquidityis widely available and the turnover of funds can be high.Thus any risk of having liquidity trapped can be avoided.

Flexible liquidity management

Liquidity is widely available in TARGET.Minimum reserve holdings are availablefor settlement purposes during the dayand the Eurosystem provides unlimited(collateralised) intraday credit free ofinterest to its counterparties.

Incoming funds are available for immediate re-use. Furthermore, the full collateralisation of intraday credithas proved to operate smoothly.

The co-existence of several alternativepayment channels has required carefulmanagement of payment routing and of multiple liquidity positions in euro. In 1999 the European Banking Federation(EBF) and other European banking organisations established a set of usefulguidelines which, together with theexperience gained, have helped banks to manage their business in a moreefficient manner.

For example, liquidity management hasbeen facilitated by a reduction in thelate submission of payments. The effectsof the EBF guidelines on late payments –according to which interbank paymentsshould be executed before 5 p.m. C.E.T.,unless notified and agreed betweenparticipants in advance – have clearlychanged the intraday processing patternin TARGET by encouraging participantsto make payments earlier in the day.

Statistical data and feedback receivedfrom the banking community indicatethat TARGET is recognised as the stan-dard for large-value payments in euro.

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Whatare the advantages of using TARGET?

Real-time operation

The high speed at which payments inTARGET are processed facilitates andimproves cash management. Moreover,this enables participants to increasetheir turnover of funds.

For TARGET payments, under normalcircumstances, the time between thedebiting of the account of the sendingparticipant and the crediting of theaccount of the beneficiary participant is a couple of minutes, if not just a fewseconds. This rapid processing of funds,which are credited to the appropriateaccount with finality, yields directbenefits for participants.

With TARGET, international corporatecash management is also able to makesubstantial efficiency gains. The real-timeexecution of TARGET payments makes itpossible to optimise cash managementin euro. Participants’ corporate customerstherefore have a particular interest inhaving their financial payments made via TARGET.

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Interbank straight-through processing

Straight-through processing (STP) rules in TARGET are viewed as a way offacilitating further automation in theprocessing of payment messages, thusreducing the associated costs and risk.Since TARGET started operations, it has supported the fully automated processing of cross-border paymentsbetween banks within the EU (i.e. fromthe debiting of the ordering bank’saccount to the crediting of the receivingbank’s account). At present, TARGETfully supports STP standards for theSWIFT message types. This is reflectedin the very low rate of rejected paymentsat the cross-border level. In 2002 thisrate fell slightly to around 0.26 % of thetotal number of cross-border TARGETpayments (from 0.28 % in 2001).

Operating times to suit everyone

To meet the needs of its customers andthose of financial markets in general,TARGET operates for 11 hours on eachof its working days. The system is availablefrom 7 a.m. to 6 p.m. C.E.T., with a cut-off time for customer payments of 5 p.m.

The long TARGET operating hours helpto reduce foreign exchange settlementrisk substantially because they overlapwith those of the Fedwire system in theUnited States completely and with thoseof the Bank of Japan Payment Systemduring the first operating hours in themorning, thus enabling simultaneoussettlement of CLS positions.

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6 If all short banks have paid in and sufficient funds have been received on the settlement account at the ECBto cover the aggregate long banks’positions, the EBA instructs the ECB to pay the clearing banks with a creditbalance via a cross-border TARGETpayment. This brings the balance of the settlement account back to zero.

Upon confirmation that the payment hasbeen credited to the beneficiary, the ECBnotifies the EBA that the payment hasbeen successfully performed. On receiptof all confirmation messages, the EBAsends confirmation to the clearing banksand the ECB that the settlement has beencompleted.

Operating days

TARGET operating days are, de facto,the settlement days for the financialmarkets in euro, as well as foreignexchange transactions involving theeuro. As from 2002 and until furthernotice, TARGET – including all thenational RTGS systems – will be closed,in addition to Saturdays and Sundays,on New Year’s Day, Good Friday, EasterMonday, 1 May (Labour Day), ChristmasDay and 26 December.2)

EBA settlement (EURO1) via TARGET

The ECB provides EURO 1 with an accesspoint to TARGET. Through the EPM, EBAclearing banks are able to settle theirpositions in a final and irrevocable way.

As settlement service provider, the ECBis informed (at around 4 p.m. C.E.T.) ofthe final balances of the EBA clearingbanks. Before the deadline defined bythe EBA, banks with a short position senda cross-border TARGET payment to theirNCB in favour of the EBA’s settlementaccount at the ECB; the ECB then sendsconfirmation to the EBA that the clearingbank has covered its position.

TARGET information system

The TARGET information system (TIS) is a common information tool that allows all TARGET participants to gainsimultaneous access to standardisedinformation on the status of the TARGET system via the information providers Reuters, Telerate/Bridge andBloomberg.3) In accordance with theexperience gained and the requests of TARGET users, a new version of theTIS went live in May 2003.

TARGET is a reliable system

TARGET was developed by the EuropeanSystem of Central Banks (ESCB), mostof whose members have a long andproven track record in building and running RTGS systems.

The Eurosystem continues to improveTARGET availability. In 2002 the overallavailability of TARGET was 99.77%, as compared with 99.75% in 2001(TARGET availability is defined as theaverage availability of the RTGS systems belonging to TARGET).

SWIFT, which has nearly 30 years’ experience in financial messaging services, is the network service providerfor TARGET. Special agreements havebeen concluded with SWIFT with a view to providing the best possible support in terms of speed, capacity,availability and security.

The cost of making a payment

The use of TARGET is supported by atransparent pricing structure, wherecross-border payments are subject tothe following degressive transactionfees:• 1.75 for each of the first 100

transactions per month;• 1.00 for each of the next 900

transactions per month;• 0.80 for each subsequent transaction

in excess of 1,000 per month.

For extensive users, the average fee per payment is in the region of 0.85.The cross-border fee depends on neither the destination nor the value of thepayment and is charged by the sendingNCB only. Domestic transaction fees(including entry and periodical fees) are not harmonised.

2) In February 2002 the Governing Council of theECB approved an exceptional derogation from the long-term calendar applicable in Greece for a three-year period. The Greek RTGS system (HERMES) is operational on Catholic/ProtestantEaster Fridays and Mondays which do not coincidewith the Greek Orthodox Easter Fridays and Mondays,but only for a limited range of operations. TheBank of Greece does not offer access to standingfacilities on these days and it is only granted ifabsolutely necessary, e.g. to avoid a failure in thesettlement of an ancillary system. Following thisthree-year period, Greece's situation will be reassessed.

3) Reuters (page ECB46), Telerate/Bridge (pages 47556-47557), Bloomberg (page ECB17).

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7 a.m. 8 a.m. 9 a.m. 10 a.m. 11 a.m. 12 p.m. 1 p.m. 2 p.m. 3 p.m. 4 p.m. 5 p.m. 6 p.m.0

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Relations with TARGET users

The performance of and developmentsin TARGET have benefited from the very active and fruitful dialogue withTARGET users. This dialogue is maintainedat the national level and further intensifiedat the European level, and has ensuredthat users and operators have a reciprocalunderstanding of the system and themarket requirements. The co-operationhas proved to be very beneficial for allparties in respect of the preparationsand implementations for CLS operations,the strengthening of TARGET contingencymeasures, TARGET’s single compensationoffer and market demands on the currentand future TARGET system.

Continuous linked settlement and TARGET

In September 2002 the continuous linked settlement (CLS) system, a systemdesigned for the settlement of foreignexchange transactions, started live operations. CLS largely eliminates foreign exchange settlement risk bysettling the transactions in its books on a payment-versus-payment (PVP)basis. The remaining balances of CLSsettlement members in the books ofCLS Bank are squared by pay-ins andpay-outs in central bank money foreach of the eligible currencies (USD,EUR, JPY, GBP, CHF, CAD and AUD)4). For the euro, the pay-ins and pay-outsin central bank money are made viaTARGET. For this purpose, CLS Bankholds an account with the ECB and

certified to TARGET 2002 specificationsbefore the new release went live. The MT103/MT103+ supports improvedtransparency and efficiency in cross-border payments. The MT103+, a subsetof the core MT103, supports STP byimposing stricter usage rules.

Migration from SWIFT FIN to SWIFTNet FIN

The Eurosystem is preparing TARGET’smigration from SWIFT FIN to SWIFTNetFIN. The migration of FIN from X.25technology to IP technology usingSWIFTNet is mandatory for the entireSWIFT community, as SWIFT will endsupport for X.25 technology at the endof 2004. The implementation of SWIFTNetFIN is a technical migration. Althoughthe FIN functionality and messagestandards remain untouched, migratingaccess to SWIFTNet FIN requires adaptations to the local SWIFT users’operational environment. For TARGET, a phased approach has been chosen. The migration to SWIFTNet FIN startedin the first quarter of 2003 and will be completed by the end of 2004.

Whatrecent developments have there been in TARGET?

Intraday distribution of TARGET cross-border traffic (cumulative figures in percentages)

the CLS settlement members or theirnostro agents hold an account in theirrespective national RTGS system. The banks fund a debit position in euro by transferring money from their RTGS account to the CLS Bank account held with the ECB and vice versa if CLS Bank has to fund a euro creditposition of a bank.

TARGET release 2002

In line with other major system providers and to ensure that systemupgrades are managed in a professionaland structured way, it was decided that any enhancements to the TARGETsystem should be introduced in yearlyreleases. The changes implemented bythe TARGET release 2002 consistedmainly of the introduction of the mandatory validation that MT103+customer transfers contain a correctIBAN. All RTGS systems were fully

Facts and figures

• There are 1,560 direct participants in TARGET and the overall number ofbanks (including their branches andsubsidiaries) accessible via TARGET is more than 40,000, meaning thatalmost all EU credit institutions areaccessible via TARGET.

• TARGET as a whole processed 64.5million domestic and cross-borderpayments in 2002, representing avalue of more than 395 trillion.These figures show that – in terms of value – TARGET is the largest payment system in the world.

• The number of customer payments in cross-border TARGET traffic quadrupled from 1999 to 2002.

In 2002 the number of payments processedin TARGET as a whole, i.e. cross-borderand domestic payments taken together,amounted to more than 253,000 as adaily average (of which 54,000 werecross-border). The average daily valueprocessed in TARGET as a whole in 2002reached 1,552 billion (with cross-borderpayments totalling 485 billion), whichis equivalent to an 85% share of thetotal value processed by all large-valuepayment systems operating in euro.

TARGET cross-border payments are submitted early, with nearly 50% of the volume processed in the first threehours of operations (between 7 a.m.and 10 a.m.). By 2 p.m. almost four out

of five payments have been processed.The significant volume in the morningseems to be related to the release of ahigh number of warehoused paymentsfrom previous dates. In 2002 TARGETprocessed a daily average of nearly 10,800cross-border payments in the first hourof operations (equally distributed betweeninterbank and customer payments).

With regard to the value of TARGET cross-border payments, the highest values areprocessed between 10 a.m. and middayand between 4 p.m. and 5 p.m. 21% ofthe cross-border turnover is processedby 10 a.m., while 53% is processed by 1 p.m. At 5 p.m. 93% of the total valuehas already been processed.

Q1/01 Q2/01 Q3/01 Q4/01 Q1/02 Q2/02 Q3/02

1,72

7,25

Q4/02

1,58

4,75

1,56

0,82

1,42

1,17

1,31

5,48

1,12

2,39

1,08

4,93

983,

582

Q1/01 Q2/01 Q3/01 Q4/01 Q1/02 Q2/02 Q3/02 Q4/02

1,81

9,52

1,99

1,42

1,85

6,50

1,76

7,11

1,72

9,57

1,73

2,42

1,70

4,51

1,82

6,46

Volume of cross-border interbank payments (MT-202) per quarter

Volume of cross-border customer payments (MT-100, 103, 103+) per quarter

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4) Eligible currencies at the time of printing.

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TARGET security

The security policy for TARGET is basedon an agreed security strategy andmethodology. Since the beginning of1997 TARGET risk analyses have beenconducted on a regular basis. The newTARGET risk management framework was developed in 2002. The implementationof the state-of-the-art security policywill ensure that TARGET is protectedfrom all threats, whether internal orexternal, deliberate or accidental, andwill minimise the impact on the continuity of TARGET business of any threats that, despite all measurestaken, do materialise.

TARGET contingency measures

The Eurosystem gives top priority to the enhancement of TARGET contingencymeasures. TARGET contingency measuresensure that, even if TARGET is not fullyoperational, systemically important payments can be processed in a timelymanner. The Eurosystem has always requiredall local TARGET components to have bothTARGET business continuity measures andTARGET contingency measures available.TARGET business continuity requires eachnational component to be able to switchto a secondary site within the shortesttime possible, in the event of a failureoccurring at the primary site. In addition,TARGET contingency measures ensure the processing of systemically importantpayments in the event of both primaryand secondary sites being temporarilyaffected.

Compensation scheme

In 2003 the new TARGET compensationscheme was set up for the benefit ofTARGET participants in the event of amalfunctioning of TARGET. The TARGETcompensation scheme is an attractive,simple and standardised compensationoffer by the ESCB, which largely followsmarket practices. The scheme compensatesparticipants for certain additional costsincurred as a result of non-completion of a payment order on the processingday owing to a TARGET malfunctioning.The TARGET compensation scheme appliesto all national RTGS systems that arecomponents of or connected to TARGET,and is available for all TARGET participants(including TARGET participants of nationalRTGS systems of non-euro area countries)in relation to all TARGET payments (withno distinction between domestic and cross-border payments).

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As in the case of the current TARGETsystem, TARGET2 will be a system for the settlement of predominantly systemically-relevant, large-value euro payments in central bank money.Nevertheless, as is the case at present,there will be no de jure or de factolimits set by the Eurosystem or theNCBs on any payments that users maywish to process in real time in centralbank money.

On the basis of both the GoverningCouncil decision and the views of TARGETusers, the Eurosystem will establish aproject plan for the next generation ofTARGET. The new system is expected tobecome operational during the secondhalf of this decade.

EU enlargement

The Governing Council of the ECB alsodecided on 24 October 2002 that accedingcountry central banks (ACCBs) will havethe possibility – but not the obligation –to connect to TARGET as from the dateof their joining the EU. In this context,ACCBs might decide for reasons of cost-effectiveness to connect to TARGETwithout the need to operate their owneuro RTGS. Participation in TARGET will be compulsory only when the respective Member States participate in Economic and Monetary Union, i.e.when they adopt the euro in place oftheir national currencies.

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On 24 October 2002 the Governing Councilof the ECB decided on the long-termstrategy for TARGET (TARGET2). In view of increasing financial integration withinthe euro area and the fact that the businessneeds of the users of TARGET are becomingeven more similar, the main objective ofthe Eurosystem is to ensure that TARGETevolves towards a system that (i) bettermeets customers’ needs by providing an extensively harmonised service level,(ii) guarantees cost efficiency, and (iii) is prepared for swift adaptation to futuredevelopments, including enlargementof the EU and the Eurosystem.

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TARGET payments can be made via the following systems:

Within the euro area:Belgium ELLIPS Germany RTGSplus

Greece HERMESSpain SLBEFrance TBFIreland IRISItaly BI-RELLuxembourg LIPS-GrossNetherlands TOPAustria ARTISPortugal SPGTFinland BoF-RTGSEuropean Central Bank EPM

Outside the euro area: 5)

Denmark KRONOSSweden ERIXUnited Kingdom CHAPS euro

5) Special liquidity conditions apply to TARGET participants operating from these countries.

Multiple access points

Most credit institutions are participantsin the euro RTGS system of their homecountry. Credit institutions with a widenetwork of branches or subsidiariesacross the EU can choose to becomemembers of different euro RTGSsystems within which they are able to obtain intraday credit from the respective NCBs.

Further information on TARGET

More detailed information on TARGETcan be found in the “Information guidefor credit institutions using TARGET”and the “TARGET Annual Report”. Allrelevant documents and reports can be accessed from the ECB’s website atwww.ecb.int

Alternatively, hard copies can be ordered from any of the NCBs or from the ECB at the following address:

European Central BankPress and Information DivisionKaiserstrasse 2960311 Frankfurt am MainGermanyFax: +49 69 1344 7404

Further information can be obtained by e-mail from: target.hotline@ecb.int

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