E U R O P E A N C E N T R A L B A N K

THE ECB PAYMENT MECHANISM

The EPM is operated by the European Central Bank

Since 4 January 1999 the national central banks of the 15 Member States of the European Union (EU) have interconnected their local (euro) real-

time gross settlement (RTGS) systems in order to process cross-borderpayments with intraday finality in central bank money. In addition to this, the European Central Bank (ECB) operates its own payment processing tool, known as the ECB payment mechanism (EPM), whichis connected to the 15 national systems in exactly the same way as they are connected to one another. Moreover, the EPM’s core functions are very similar to those of any other TARGET component.The EPM is an integral part of TARGET. For a better understanding of TARGET as a whole, a short overview of the system is given in the next chapter. It should not be viewed asan exhaustive description of the TARGET system, as it describes only

the most important elements of a cross-border RTGS system, as well as its main goals and a few organisational aspects.

After this short overview of TARGET, the EPM itself is described as one of the components of the overall TARGET infrastructure.

An overview of the main core functions, the accessory features, the legal and operational environment and other relevant information from a user’s

point of view are described.

52

Published by:©European Central BankFrankfurt am MainAugust 2000

Concept and design:EURO RSCG THOMSEN RÖHLEDüsseldorf

Lithography:Color Service GmbHDüsseldorf

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

ISBN 92-9181-083-5 (EN)

Introduction

TARGET overview TARGET’s core features are:

TARGET (the Trans-European AutomatedReal-time Gross settlement ExpressTransfer system) is a euro payment systemconsisting of 15 national real-timegross settlement (RTGS) systems andthe ECB payment mechanism (EPM).

They are interconnected via commoninfrastructures and procedures, knownas the Interlinking, in order to provideRTGS participants across the EuropeanUnion (EU) with a uniform platform forprocessing euro payments.

TARGET is a system composed of 16 legally distinct entities. It is adecentralised system based on a certainlevel of harmonisation, with some common functions undertaken by theECB. There are more than 5,000 RTGSparticipants in TARGET and almost allEU credit institutions are accessible via TARGET. These are all listed in theTARGET Directory, as prepared by S.W.I.F.T.

TARGET has been developed to achieve three main objectives: • to provide a safe and reliable mechanism for the settlement

of cross-border payments on an RTGS basis;• to increase the efficiency of intra-EU cross-border payments;

and, most importantly,• to serve the needs of the monetary policy of the Eurosystem

(the Eurosystem is composed of the ECB and the national central banks (NCBs) of the countries which form the euro area).

Its very quick processing time –under normal circumstances, the

processing of a cross-border payment(the time between debiting at the sending NCB and crediting at the receiving NCB) takes no longer than a few minutes.

Transparency – although TARGETprocesses only euro payments, it

is also able to transport informationregarding the original amount and currency denomination in a similar wayto correspondent banking.

Security – the security features ofTARGET are a matter of major

importance to the NCBs/ECB, whichhave a genuine interest in ensuring thatTARGET payments are handled in asecure and highly reliable way. Thetechnical security requirements definedfor TARGET cover system availability,data and system integrity, message authentication and non-repudiation,data confidentiality and audit aspects.

Immediate finality – real-timegross settlement is an important

building block for the management ofpayment system risks, as credit institutionsare able to settle obligations in centralbank money with intraday finality, thuseliminating any settlement risk betweenbanks.

d

e

f3 c

The irrevocability of payments –payment orders become irrevocable

when the account of the sending participant held at the sending NCB/ECBis debited, adding a certainty factor to the processing of payments.

b

Its high availability – given themain objectives described above,

TARGET has a very central role to playin the processing of large-value paymentsin the EU. Therefore, the availability ofthe RTGS systems and the Interlinkingcomponents is seen by all as a key factor behind its smooth operation.

a TARGET’s future will be shaped by experience and by the evolution oftechnology and business requirements.Improvements are being made with theaim of further enhancing the smoothfunctioning of TARGET and the serviceprovided to its participants.

As an ongoing exercise, this meansdeveloping more common features andincreasing harmonisation, and includesthe establishment of a common business practice for the use of TARGETall over Europe.

In addition, the Eurosystem supportsbanks’ initiatives to create appropriatebusiness rules and best business practices for using the system.

4

With this instruction, the EBA’s settlement account in the EPM is debitedand a TARGET payment is sent to theNCBs at which the accounts of the longbanks are held. This brings the balanceof the settlement account back to zero.

The EBA has extremely high requirementsin terms of availability and processingspeed. The EPM has proven that it isable to provide the required service andthat it can meet the very high standardsset by the EBA. Once the ContinuousLinked Settlement (CLS) service is madeavailable to the market, a similar rolewill be played by the EPM, as also inthis case the ECB will act as the eurosettlement service provider for CLS.

Features and functioning The ECB payment mechanism (EPM)enables the ECB to act as a full memberof the TARGET Interlinking system. The EPM is a settlement system which technically operates in the same way asany other RTGS system within TARGET.

The EPM provides not only payment andassociated accounting facilities in eurofor the ECB’s own needs, but also offersa high quality real-time correspondentbanking service to a restricted group ofECB customers. It contains the necessaryCentral Accounting System (CAS) forthe settlement of payments betweencustomers and is capable of sending therequired confirmation and/or paymentmessages to those customers. It is aflexible and efficient cash managementtool for its account holders.

For example, through the EPM, the ECBacts as settlement service provider forEuro 1, the large-value net settlementsystem operated by the EBA ClearingCompany (EBA). For that purpose, theEBA has opened a settlement accountin the EPM. The settlement process itselfis governed by a predefined timetableand by operational procedures whichcover both normal and abnormal circumstances.

At the agreed cut-off time (4 p.m. C.E.T.),the final balances are calculated andthe clearing banks are informed

accordingly. All banks with a debit position (short banks) send a cross-border TARGET payment order to their NCB infavour of the EBA’s settlement accountwith the ECB, within the deadline set bythe EBA. Upon receipt of these funds,the ECB sends a confirmation to theEBA, in order to enable it to manage thesettlement process. The EBA monitors all messages received from the ECB tocheck that all expected payments havebeen credited to its account.

When all short banks have paid in, andsufficient funds are available to coverthe aggregate long banks’ balances, theEBA instructs the ECB to pay the creditbalances out to the long banks.

The ECB payment mechanism

credit institutions

EPM monitoring(S

.W.I

.F.T

.

The EPM’s principal interfaces

EPM customersThe EPM only offers its services to

three categories of customers: non-EU central banks, European andinternational institutions and clearingand settlement organisations. Consequently, all other entities, including credit institutions, are excluded as possible EPM customers.

Operating hoursThe EPM operates from 7 a.m. to

6 p.m. (C.E.T.) on TARGET business days,details of which can be found in theTARGET section of the ECB’s website(http://www.ecb.int).

CommunicationThe normal communication channel

with the EPM is the S.W.I.F.T. network.Customers may process their payments(and enquiries) in their own applications,which then communicate with the EPMvia the S.W.I.F.T. FIN service. Accountholders without a S.W.I.F.T. connectionmay be allowed to deliver

their payment orders in a predefinedfile format, and can receive informationon the status of their account(s) andtransactions in a similar way.

Payment cycles1) Instructions from EPM customers

to make outgoing payments• The EPM customer sends a correctlyformatted S.W.I.F.T. message to the EPM. • The EPM checks the validity of thepayment order. • The EPM checks the account balance.If either sufficient funds or overdraftfacilities are available to cover theamount of the payment to be processed,then the amount is debited from theordering customer’s account and a debit advice (MT900, optionally) isreturned to the customer via S.W.I.F.T.• If the beneficiary of the paymentorder is another EPM customer, thepayment instruction is processed and a credit confirmation is forwarded viaS.W.I.F.T. to the beneficiary customer.

• If this is not the case, and the paymentorder contains a valid TARGET BIC of anEU national central bank (NCB), thepayment is forwarded automaticallythrough TARGET. Once the payment has been executed (i.e. the receivingNCB has credited the receiving creditinstitution), a confirmation is also sentto the ordering customer. This confirmation assures the ordering institution, only a few minutes after the payment has been debited on itsaccount, that the next credit institutionin the payment chain has received thefunds on its central bank account.• However, a payment instruction maynot lead to the successful crediting ofthe beneficiary account in TARGET, e.g. if the credit institution specified inthe instruction is not addressable via TARGET or, possibly, not addressable viathe NCB indicated. In this case, theEPM customer account is re-credited (acredit confirmation will also follow) andthe customer is informed of the reasonsfor the payment being unsuccessful.

a

b

c

d

credit institutions�

�

�( (

(

S.W

.I.F

.T.

T A R G E T

T A R G E T

�

�

�

�

�

�

Payment order MT202Debiting ordering party & crediting receiving NCBDebit advice MT900 - optional

Payment settlement message requestPayment settlement message notificationTARGET settlement status (MT298)

Settling a payment from an EPM customer

EPM customers

EPM customers

76

national central bank

��

�EPM accounting

http://www.ecbhttp://www.ecb.int

EPM.Helpdesk@ecb.int

We are, of course, willing to meet our future customers or, if the distanceis a problem, we should be pleased to communicate using any of the following channels:

Telephone: + 49 69 1344 6444E-mail: EPM.Helpdesk@ecb.intFax: + 49 69 1344 7498ECB’s website: http://www.ecb.int

position. Customers have real-time readaccess to their balances, that is to say toall payments settled on their accounts.They even have modification rights onthe status of the payments they haverequested, but which are still not settled (e.g. owing to a lack of funds).

These control facilities include:• Commands: the account holder isable to change the priority of a queuedpayment or cancel an instruction.• Enquiries: customers may enquireabout specific details of an inward oroutward payment, access summarised(or detailed) information on all outstanding operations on theiraccounts and even request accountbalances at any time.• Notifications: whenever an outwardpayment is debited on its account, thecustomer can receive a debit advice.The same applies to inward payments,when a credit advice is sent. Owing toincorrect formatting, the EPM might reject payment instructions from its

customers, in which case a specificmessage is sent for information (payment rejection message). Finally, for the notification of settlementthrough TARGET, for each outward TARGET payment, the customer receivesa confirmation of settlement on thereceiving side (beneficiary institutionaccount credited). If, for some reason,the payment is not settled on the receiving side, the notification will statethe reason for the default. • Reports: besides the normal end-of-day statement (including the start-of-day balance, transactions performedduring the day and closing balance),customers may ask the EPM to sendbalance or interim transaction reportsat any time during the day. Together,these enquiry and control facilities provide extremely valuable and accurate information on the status of customeraccounts and payments, especiallycompared with the information supplied via traditional correspondentbanking channels.

2) Incoming funds for an EPM customer• EPM customers are able to receive incoming euro payments on theiraccount via TARGET. To do so, thecustomer needs to be identified by itsBIC code (which should appear in thefirst of the fields 56, 57 or 58 of thepayment instruction).• Customers may also receive paymentsfrom another EPM customer. • When funds are received, the customeraccount is credited and a paymentinstruction (full MT202 information) is forwarded, via S.W.I.F.T., to the customer in real time. Upon request,the customer can receive a credit confirmation (MT910), provided that itis the final beneficiary of the payment.

Reporting and status notificationsThe EPM provides its customers

connected via S.W.I.F.T. with a numberof real-time enquiry and control facilities, enabling account holders tomonitor the status of their payments,together with their overall treasury

credit institutions EPM customers

�

�

�)S.W

.I.F

.T.

�

�Payment status message requestCrediting beneficiary debiting sending NCB

�

�Payment settlement message notificationPayment instruction MT202

Crediting an EPM customer with incoming funds

e

Additional featuresPayment instructions may be

submitted to the EPM for settlement upto six business days before the indicatedvalue date. These payments will bewarehoused and processed only on therequested value date.

Depending on the configuration of theaccount, the EPM may queue paymentsfor which insufficient funds are available on the indicated value date.

There is no requirement for a minimumbalance on the EPM’s accounts andovernight credit balances may, in somespecial cases, be remunerated.

Although our focus is on euro payments,we should be pleased to consider anyrequests from our customers for additional services. As our range of services develops over time, we shallinform our customers of any changes.The ECB is a relatively new organisation.As a result, our current range of servicesand facilities may be considered to be limited. However, by offering a highly professional service with regardto our core functionalities, we havesuccessfully been able to serve our limited, but very specialised, customerbase since the start of live operationson 4 January 1999.

The ECB payment mechanism

98

f

▼▼

How to become an EPM customerThe TARGET and Payment Processing

Division will be pleased to provide youwith more detailed information andanswer any questions you may have inrelation to opening and operating anaccount with the EPM. One of the best ways of doing this is to talk directly to the EPM Helpdesk. We could also supply you with moredetailed information to meet your specific needs.

The EPM Helpdesk is available on TARGET business days from 7 a.m. to 7 p.m. (C.E.T.). Experienced staff will beable to assist EPM customers and tointervene where needed.

The EPM customer relationship isgoverned by two legal documents: theEPM Terms and Conditions (whichgovern all customer accounts in theEPM) and the Customer Agreement(which covers the details specific to anindividual account). The first includesmore general information, such as theCustomer Business Specifications andthe Pricing Rules. The CustomerAgreement, on the other hand, includes more specific information,such as the expected account operations (average number of payments per day, average value ofdaily payments, peak expectations interms of volume and value), as well as any special requirements for theaccount.

▼

(

(

T A R G E T

T A R G E T

EPM accounting

�

national central bank