SEPA for High-value Payments
‘Banks should move to pan-European platforms’ is the message coming from both the politicians at the European Commission and from the regulators at the European Central Bank (ECB). This strategy has been focussed very much on the retail level and automated clearing house (ACH) business, but it applies equally to high-value payments.
It is true that SEPA is less of a pressing issue for high-value payments systems, because this market has already started to undergo consolidation and the two prime infrastructures, TARGET and EURO1, already operate at a pan-European level. Much has been reported recently about the forthcoming move to TARGET2, but at the same time EURO1, operated by the bank-owned EBA Clearing company, has been continually evolving to meet the needs of banks and support their migration towards SEPA.
Several national banking communities are currently studying moving their large-value payments traffic to the EURO1 platform and have entered into preliminary discussions with EBA Clearing.
As a private euro clearing and settlement system, EURO1 constitutes a viable alternative for banks to TARGET. The system has steadily grown in terms of daily traffic since its development in 1998 and currently processes on average 160,000 payments per day. On top of these, the platform also processes the payments volume of the low-value payment system STEP1 (nearly 25,000 payments per day). All three EBA clearing systems (EURO1, STEP1 and STEP2) have already achieved new daily volume peaks in the course of 2005.
The legal certainty of EURO1 is assured by virtue of the single obligation structure (SOS), a structure that effectively creates a real-time net settlement process, which was recognised as such by the International Monetary Fund (IMF) during its audit of the system against the 10 core principles for systemically important payment systems. EURO1 will settle in TARGET2, which should even further streamline the settlement process. Under the existing distributed TARGET network, the settlement is generally completed within 30 minutes.
Since its early days, EURO1 has demonstrated in a very practical way how banks can exploit the potential of economies of scale and scope through using a pan-European infrastructure.
Large banks and banking groups with subsidiaries and branches all over Europe have been particularly quick at identifying and reaping the benefits of feeding their intra-EU large-value payments into one central pipeline. As EURO1 offers a sub-participation status that allows a group’s subsidiaries – as well as branches located outside of the parent’s country of domicile – to be directly addressed in the system, banks can use the system for the direct routing of both their inter-bank and intra-bank transactions.
This direct routing to subsidiaries, whose BICs are listed in the system as a sub-address under the main identity of the EURO1 or STEP1 participant, provides banks with a number of advantages.
First, it allows them to avoid relying on the more costly and indirect intervention of correspondents.
Secondly, it enables banking groups to manage their liquidity more efficiently. Without the option to include sub-participants, a banking group with subsidiaries or branches in several European countries would have to maintain separate pools of liquidity as collateral with each country’s respective central bank. In aggregate, the dispersed liquidity creates a less efficient allocation of capital than the pooled model. In EURO1, all of these entities – subsidiaries and branches – can use one liquidity position. This liquidity position is supported by one liquidity collateral pool that the parent bank sets up.
Thirdly, EURO1 accommodates different reporting and monitoring needs. The sub-participation functionality has recently been enhanced to allow banks to choose between a centralised and a decentralised flow of information. Either the parent bank can receive details of all the payments sent by itself and its subsidiaries (centralised model) or the subsidiary can be set up to receive statements and reports about its own payments with only a balancing item appearing on the parent’s own statement (decentralised model). The implementation of either option takes place very simply through commands given via the parent’s workstation and the subsidiary can have its own workstation for no additional licensing fee.
In the context of cross-border mergers and the growing consolidation in the banking sector of the new EU member states, the enhanced sub-participant functionality in EURO1 helps multinational banks in their effort to have it both ways. On the one hand, they can fully exploit the advantages in efficiency, pricing and cost-saving gained through the use of one system for all their intra-EU payments; on the other hand, they are flexible about maintaining control of the detailed monitoring of their payment flows or handing over that responsibility to their subsidiaries. The latter option enables subsidiaries to keep a close eye on their payments and to manage their liquidity directly. Thus, this new EURO1 feature supports the liquidity management of its participant banks both on a European-wide level and on a national level.
The EURO1 platform will soon implement another improvement towards the efficient use of capital by its members. Specifically, EBA clearing maintains a ‘pre-fund’ account with the ECB that member banks pay into prior to settlement. Currently, the funds deposited into this account cannot be used as collateral for EURO1 transactions. After implementation, those funds will count towards a firm’s overall liquidity. A bank will be able to use its own funds to pay into this pre-fund account and then have this liquidity recognised in the EURO1 system to make further payments.