TARGET Consolidation Project of the Eurosystem: Benefits and Challenges
TARGET consolidation project was prepared and launched by the Eurosystem and scheduled to November 2021 with an aim to consolidate the real-time gross settlement (RTGS) systems of TARGET2 and T2S (each of which will be explained in detail below) by improving them technically and functionally to ensure a better service in the changing environment of the market demands. TARGET2 will be succeeded by the new RTGS system which will be promising to ameliorate the liquidity management among all TARGET services and to offer more optimized and updated services for the market.
TARGET services of T2S (TARGET2-Securities) and TIPS (TARGET Instant Payment Settlement) have already migrated to ISO 20022 for the messaging; and TARGET2 also will do so with the activation of the consolidation project.
What is TARGET2?
TARGET2 (T2) is a real-time gross settlement (RTGS) system of the Eurosystem and it basically processes all the payments in relation to Eurosystem’s financial policy operations and transactions both among banks and/or commercial ones. Banks when they create payment orders in Euro, they need to submit it to TARGET2 via which those transactions are worked and deposited in central bank money.
TARGET2 is one of the biggest payment systems in the world thanks to more than 1.000 banks using the system for Euro transactions both for their own businesses and for their customers. If you take the account branches and subsidiaries into the consideration, which constitute more than 52.000 banks, the reach of the customers that TARGET2 holds is extremely high. Another aspect proving the importance and effect of TARGET2 is that TARGET2 operates and processes an amount of Euro which is almost as much as the GDP (Gross Domestic Profit) of the whole Euro zone and does this in each five days.
What is TARGET2-Securities?
T2S (TARGET2-Securities) is a system that ensures a safe simultaneous exchange platform for the process of the selling or buying of the securities where the payment and the security swap hands and which is basically named as securities settlement.
Especially for the cross-border settlements where the main and biggest issue is to be able to abide by the differentiating settlement policies and practices of different countries, T2S eased the process to a large extent by at the same time offering a safer and more efficient securities settlement. At the moment, 20 European countries use T2S and investors are able to exchange securities and cash safely within the concordance of different rules and practices.
In terms of the risks that may occur during the transaction, the system prevents this by using central bank as the main source: Banks do the payment for the securities by using their central bank accounts, so basically, the money is central bank money.
Motivation behind the consolidation project
Together with the changes in consumer expectations, regulatory requirements and of course technological improvements, the Eurosystem could not ignore the requirement to update its payment settlement system. Although TARGET2 has been operating effectively and fluently during the last decade, a more modernized and enhanced system was needed to satisfy the current market demands by ensuring easier, cost-friendly and technologically-equipped system.
Benefits and alterations
The main objectives and promises of the TARGET2 & T2S consolidation project can be classified into 3 key points:
- Technical consolidation of T2 and T2S
By creating a more automated and technologically-improved system with the combination of the useful infrastructural elements, the technical consolidation of T2 and T2S are to be achieved. Also, in the messaging system, the ISO 20022 will be used in the TARGET2 services with the consolidation, therefore, a more secure and protected IT system is required to hinder the cyber attacks as effective as possible.
- Integration and concordance in terms of connectivity
Central Liquidity Management (CLM) platform offers a centralized system which will provide its users with the ability to observe and control the liquidity in central bank across all TARGET services. As the user opens a cash account in a national central bank, it will be automatically connected to the customer’s dedicated cash accounts for the use of new RTGS system, T2S and TIPS. With this system, it will be possible for participating banks to monitor the liquidity data of their central bank and to arrange them easily for individual settlements if needed. The system also brings in better automation thanks to its advanced tools for liquidity management.
One another benefit of the consolidation and harmonization on connectivity is that a safe and standard interface will be ensured to the market participants in accessing the financial market infrastructure of the Eurosystem which is called ESMIG (Eurosystem Single Market Infrastructure Gateway).
- Convergence of T2 and T2S functions
Functional integration of TARGET2 and T2S is critical both in terms of cost reducing and better efficiency because it means that technically, a unified approach will be able to solve the problems and in terms of connectivity and safety, a harmonized process can offer solutions to the payment and securities settlements.
Within the scope of consolidation project, there will be a couple of other elements that the Eurosystem plans to activate in all TARGET services:
- ESMIG (Eurosystem Single Market Infrastructure Gateway), as mentioned above, will offer a harmonized gateway for participants to access the services provided by the Eurosystem. This interface also aims to increase multi-vendor connectivity by offering different connectivity selection options for the participants to choose and automatically inciting a challenging competition within the network service providers.
- The time and effort spent to produce and preserve the copies of reference data will be able to be reduced to minimum with a common reference data which will also be useful in keeping the management of user access rights centralized.
- Backdated information will be accessed with a common data warehouse.
- To minimize and optimize the operational costs of the Eurosystem resulting from the billing processes, a common billing system will be established.
One challenge that may effect the cross-border transactions of European banks after the TARGET consolidation gets activated (November 2021) is the possible the delay of SWIFT’s transition to new messaging standard of ISO 20022 to the end of 2022. This means that European banks may need to use both legacy and new messaging standards in between November 2021 and end of 2022, so they will have to come up with a plan for the cross-border payments in T2. Therefore, it is critical for the banks to work on a safe, effective and smooth transition model in collaboration with SWIFT.
How Fineksus can help?
At Fineksus, we offer a wide range of software products including financial messaging software both for local and global payment systems. PayGate financial messaging products are designed to provide a smooth, secure and effective integration for your messaging services. Fineksus recently launched a new module, PayGate Sign Service, for easing the transformation of Target consolidation. PayGate Sign Service helps to digitally sign messages based on required certificate which is stored on Swift Hardware Security module HSM. In addition with PayGate Converter module, defining, mapping and validating messages from any format to ISO 20022 or MT is possible. It eases standards migration and customer onboarding projects, while simplifying formats translation, mapping and validation. Also reduces migration costs and risks. A “local” conversion engine based on T2 Libraries ;
- Generate ISO20022 messages as per T2 guidelines
- Including Validation services
- Be ready on time
- Shield applications from ISO20022 adaptation
Gökçe Gence, Head of Solution & Project