In 2005, the International Monetary Fund (IMF) assessed France's systemically important payment systems (SIPS). The two large-value payment systems are the Transferts Banque de France (TBF) and Paris Net Settlement (PNS) systems, and the retail payment system is the Système Interbancaire de Télécompensation (SIT). TBF was France's component of the Trans-European Automated Real-time Gross Settlement Express Transfer (TARGET) system, the Euro area payment system. However, in November 2007 TARGET2 replaced TARGET and payment services were harmonized under a single shared platform (SSP) across its member countries. France joined TARGET2 with the second wave of countries on February 18, 2008. The TBF and PNS systems were deactivated and replaced by TARGET2. According to the IMF report, in 2005, TBF and PNS either observed or broadly observed the Committee on Payment and Settlement Systems' (CPSS) Core Principles for Systemically Important Payment Systems (CPSIPS). The 2005 IMF report concluded that the SIT observed 7 principles, broadly observed 2, and did not observe one principle. Moreover, the IMF assessment stated that all 4 principles relating to central bank responsibilities are being fully observed by the French central bank. However, there is little information assessing TARGET2's compliance with the CPSIPS except for a statement in the European Central Bank's 2002 report on TARGET2, in which it indicated that the system is expected to fully comply with the CPSIPS. Despite the lack of information on TARGET2, it is generally believed that TARGET2 is an improvement over its predecessor and its component systems. Therefore, the level of compliance assigned to France's payment systems by past assessments is maintained until TARGET2 is fully implemented in all the member countries and assessed against the CPSIPS.

General Overview

At the time of the 2005 IMF assessment, the Transferts Banque de France (TBF), a public sector real-time gross settlement system (RTGS), and the Paris Net Settlement (PNS), a private sector large-value payment system, were assessed as being of systemic importance. TBF was France's component of the Trans-European Automated Real-time Gross settlement Express Transfer (TARGET) system. On November 19, 2007, however, TARGET was replaced by its successor, TARGET2, which provided a common technical platform for all its members. Both the TBF and the PNS systems, per the French central bank's (Banque de France, or BdF) website, were deactivated and replaced in February 2008, as France became part of TARGET2. The other system considered systemically important and assessed by the IMF in 2005 was the private sector retail payment system, Système Interbancaire de Télécompensation (SIT). The IMF found that the SIT observes 7 principles, broadly observes 2, and does not observe one principle. TBF, at the time of the assessment, observed 6 and broadly observed 3, whereas PNS observed 7 and broadly observed 2. Core Principle V was not applicable in the context of TBF and PNS. Moreover, the IMF assessment noted that all 4 principles relating to central bank responsibilities were being observed by the BdF.

According to the 2005 IMF report, "France fulfills all prerequisites for effective payment clearing and settlement systems" (p. 89). Both the private sector banks and the BdF play important roles in payment services in the country. The relationship between the BdF and the banking sector is well established and co-operative. The needs of the users are accounted for in the development of the payment infrastructure. Until the adoption of TARGET2, all large-value operations were processed in two systems: TBF and PNS. TBF was managed and operated by the BdF. The hybrid PNS was managed and operated by the Center for Interbank Funds Transfers (CRI), an interbank body owned by 10 banks and the central bank. Retail transactions are processed in the French Automated Clearing House. SIT is a deferred net settlement system and is managed and operated by the Interbank Automated Clearing Group (GSIT).

According to a 2007 report by the European Central Bank (ECB) titled "Payment and Securities Settlement Systems in the European Union: Euro Area Countries," (hereafter referred to as 2007 ECB report on Euro Area Countries) TARGET2 provides a harmonized service level with a single technical platform across its member countries, as opposed to the decentralized structure of its predecessor. In its 2002 report on TARGET2, the ECB stated "TARGET2 is expected to fully comply" (p. 7) with the Bank for International Settlement's (BIS) Committee on Payment and Settlement Systems (CPSS) report on Core Principles for Systemically Important Payment Systems (CPSIPS). Further, per a 2005 report by the Bundesbank, TARGET2 is expected to maintain and improve upon the functioning of the TARGET and RTGS plus systems.

The 2007 report by the ECB titled "Fifth Progress Report on TARGET2 -- Annex 2: User Information Guide to TARGET2 Pricing," (hereafter referred to as the 2007 ECB TARGET2 -- Annex 2 report) notes that the Bundesbank (German central bank), Banca d'Italia (Italian central bank), and Banque de France (French central bank) provide TARGET2 participants with a single technical platform, called the Single Shared Platform (SSP). The report further indicates that, despite the SSP, "TARGET2 is legally composed of national components governed by the national legislation of each participating member state [thus] the business relationship with the users and their accounts remain with the national central banks [NCBs]" (p. 4). Furthermore, NCBs are permitted to continue processing payments via their Proprietary Home Account (PHAs) application instead of the SSP for a four-year transitional period following the country's migration to TARGET2, so as to allow participants more time and to facilitate their change-over to the SSP.

Despite the transition to TARGET2, member countries' NCBs retain supervisory authority and national legislation retains significance. According to the 2007 ECB report on Euro Area Countries, "central banks monitor developments in the field of payment and settlement systems in order to assess the nature and scale of the risks inherent in these systems... they define principles and standards for the promotion of safe, sound and efficient payment and settlement systems. They analyze and assess the extent to which the systems comply with these principles and standards" (p. 19). Per the same report, the Governing Council of the ECB adopted the CPSIPS as one of the standards the Eurosystem (the ECB and the NCBs of the euro area which have adopted the euro) must apply when performing its oversight role.

The laws governing payment systems in France include both national and European Union (EU) legislations on payment systems. The 2007 ECB report on Euro Area Countries notes that the relevant provisions for regulating EU area payment systems are put forth in the Treaty and the Statute of the European System of Central Banks (ESCB). The report also states that the main provisions of the Treaty and the Statute of the ESCB governing payment systems are Article 105(2) of the Treaty, and Article 22 of the Statute of the ESCB. The main national laws that govern payment systems in the country are the Monetary and Financial Code (Code Monétaire et Financier, or COMOFI), the Commercial Code (Code de Commerce) and the charter of the central bank (Statute of the Banque de France). Payment system oversight forms an integral part of the BdF's statutory tasks. It performs its duties of ensuring the smooth functioning and security of payment systems within the framework of the tasks of ESCB, as mentioned in the Art. 105(2) of the Treaty of Maastricht and in Articles 3 and 22 of the Statute of the ESCB. The responsibilities and powers of the BdF with respect to payment system oversight are laid down in the COMOFI.

The Center for Interbank Funds Transfers (Centrale des Règlements Interbancaires, or CRI), owned by nine credit institutions and the BdF, owns and operates the PNS system. Other organizations involved in payment systems in the country are the SWIFT Users Group in France (Groupement des Utilisateurs SWIFT en France, or GUF); the French Interbank Teleclearing System (Groupement Pour un Système Interbancaire de Télécompensation, or GSIT); and the Bank Card Consortium (Groupement des Cartes Bancaires, or GCB).

According to the 2007 ECB report on Euro Area Countries, the retail payment systems in the region are to be categorized as systemically important systems, prominently important systems, and other systems, and the Eurosystem ensures that these systems are also overseen by consistent policy. Finally, the Single Euro Payments Area (SEPA) project is worth mentioning in the context of the EU's integration of its payment systems. The SEPA project "consists of a series of initiatives aimed at the introduction of common instruments, standards, and infrastructures for retail payments in euro across Europe" (p. 28) which would imply that from 2008 onwards, citizens of EU Member States should be able to make euro payments throughout Europe from a single bank account, using a single set of payment instruments, with about the same ease and security as they do now.

The Principles

I. The system should have a well-founded legal basis under all relevant jurisdictions.

FC

The IMF's 2005 assessment indicated that the now-defunct TBF system observed this principle. TBF was France's TARGET component. However, as of November 2007, TARGET has been replaced by TARGET2 and TBF was deactivated. France joined TARGET2 in May 2008 and there is little information publicly available as to the system's compliance with this principle. According to the IMF's 2005 report, "French law and the contractual arrangements within the framework of TBF payment system provide a well-established and reasonably comprehensive legal foundation for fund transfers in a RTGS. There is a consistent and reliable set of laws, regulations, and contractual arrangements that form the legal basis for TBF and payment transfers executed in this system. All relevant laws as well as contractual arrangements within the framework of TBF between the different parties involved are fully enforceable" (pp. 89-90).

The PNS system, according to the 2005 IMF assessment, broadly observed this principle. Information on the BdF's website shows that TARGET2 replaced the PNS system as well. The 2005 IMF report indicated that the PNS system had a generally sound legal basis with a consistent and reliable set of laws, regulations, and contractual arrangements. Moreover, off-setting, bilateral, and multilateral netting in the framework of PNS were fully recognized. The two main recommendations made by the IMF for this system, at the time its assessment, related to more clarity in the definition of "irrevocability" and the requirement to promote "settlement banks to change the status of their clients to that of indirect participants in the system to enlarge the scope of the finality regulations and reduce the existing legal risk for settlement banks" (p. 112). The IMF assessment also concluded that SIT observes this principle. The SIT system, according to the 2005 IMF report, is operated on a contractual law basis, ruled by the French Civil Code, the French Commercial Code and the Monetary and Financial Code (COMOFI).

II. The system's rules and procedures should enable participants to have a clear understanding of the system’s impact on each of the financial risks they incur through participation in it.

FC

Per the 2005 IMF report, the now-defunct TBF system broadly observed this principle. TBF was France's TARGET component; however, as of November 2007, TARGET has been replaced by TARGET2 and thereby TBF was deactivated. The IMF report also indicated that the PNS system observed this principle. According to the BdF website, PNS was replaced by TARGET2. France joined TARGET2 in February 2008 and there is little information publicly available as to the system's compliance with this principle. The 2005 IMF report indicated that overall participants in TBF were provided with a comprehensive description of the system's design, functionalities, timetables, and risk management procedures. The SIT system, according to the IMF 2005 assessment, observes this principle. The IMF 2005 report notes that, in the case of PNS and SIT, the rules and procedures are clear enabling participants to have a clear understanding of the risks resulting from their participation in these systems.

III. The system should have clearly defined procedures for the management of credit risks and liquidity risks, which specify the respective responsibilities of the system operator and the participants and which provide appropriate incentives to manage and contain those risks.

FC

The IMF 2005 report indicated that the now-defunct TBF system observed this principle. TBF was France's TARGET component. However, as of November 2007, TARGET has been replaced by TARGET2 and TBF was deactivated. France joined TARGET2 in May 2008 and there is little information publicly available as to the system's compliance with this principle. The 2007 ECB report on Euro Area Countries notes that "the following sources of liquidity can be used in TARGET2: balances on RTGS accounts, provision of intraday liquidity, and offsetting payment flows (i.e. the use of algorithms to settle a number of queued payments)" (p. 39). The report further states that intraday credit will be granted to participants against eligible collateral by the respective national central banks. According to a 2005 report by the Bundesbank, TARGET2 has bilateral and multilateral limits that will permit liquidity management for all TARGET2 participants. The PNS system observed this principle per the findings of the 2005 IMF report and. according to the BdF website, was replaced by TARGET2. The IMF concluded that the SIT system observes this principle. The SIT system has in place clearly defined procedures for the management of credit risks and liquidity risks.

IV. The system should provide prompt final settlement on the day of value, preferably during the day and at a minimum at the end of the day. (Systems should seek to exceed the minima included in this Core Principle.)

FC

The IMF 2005 report indicated that the now-defunct TBF system observed this principle. TBF was France's TARGET component. However, as of November 2007, TARGET has been replaced by TARGET2 and TBF was deactivated. France joined TARGET2 in May 2008 and there is little information publicly available as to the system's compliance with this principle. According to the 2007 ECB report on Euro Area Countries, the EU's Settlement Finality Directive of 1998 harmonized laws in member states, ensuring that the operations of payment and settlement systems are not stopped by the bankruptcy of a participant. Furthermore, the report states that unless otherwise indicated by the participant, payments in TARGET2 (an RTGS system) are settled immediately or at least by the end of the business day.

According to the IMF's 2005 report, the PNS system observed this principle as well. The PNS system was an RTGS system, according to the 2005 IMF report, and provided final settlement during the day and moreover the report stated that "finality is fully endorsed under French law and no retroactive actions are possible on payments done on behalf of the participant itself or on behalf of an indirect participant, other than those due to willful negligence and fraud" (p. 107). Per the 2005 IMF report, the SIT system observed this principle. The SIT network operates under cut-offs which indicate the end of the exchange period for a given type of operations. The report also notes that payments made after the cut-off period are settled the next day and final settlement takes place in the TBF system on the day of value.

V. A system in which multilateral netting takes place should, at a minimum, be capable of ensuring the timely completion of daily settlements in the event of an inability to settle by the participant with the largest single settlement obligation. (Systems should seek to exceed the minima included in this Core Principle.)

NC

According to the 2005 IMF report, this principle was not applicable to the now-deactivated TBF and PNS systems. Both systems were RTGS systems. TARGET2, the successor to TARGET and TBF, is also an RTGS system. The IMF report did note that the SIT system did not observe this principle. The 2005 IMF assessment rated the SIT as not observing this principle since "SIT operates almost entirely without safeguards against the default of the largest net debtor" (p. 118). Defaults therefore pose a substantial threat to the financial system. As a result the IMF recommends immediate implementation of adequate safeguards against the default of the largest net debtor.

VI. Assets used for settlement should preferably be a claim on the central bank; where other assets are used, they should carry little or no credit risk and little or no liquidity risk.

FC

The IMF 2005 report indicated that the now-defunct TBF and PNS systems observed this principle. TBF was France's TARGET component. However, as of November 2007, TARGET has been replaced by TARGET2 and TBF was deactivated. France joined TARGET2 in May 2008 and there is little information publicly available as to the system's compliance with this principle. However, according to the 2007 ECB report on Euro Area Countries, "any euro payment which participants wish to process in real time and in central bank money can be executed in TARGET2" (p. 38). The SIT settles through the TBF. Since TBF settles in central bank money, the settlement asset does not carry any credit risk. Therefore, according to the 2005 IMF report, SIT observes this principle.

VII. The system should ensure a high degree of security and operational reliability and should have contingency arrangements for timely completion of daily processing.

CP

According to the 2005 IMF report, the now-defunct TBF system broadly observed this principle. TBF was France's TARGET component. However, as of November 2007, TARGET has been replaced by TARGET2 and TBF was deactivated. France joined TARGET2 in May 2008 and there is little information publicly available as to the system's compliance with this principle. Per the IMF's 2005 assessment, the PNS system also observed this principle. The PNS system had proper contingency arrangements in place, with measures to ensure integrity, confidentiality non-repudiability, authentication of data, and user/system protection. It also had provisions for ensuring the quality of and development of new software.

Although there is no comprehensive assessment publicly available of TARGET2's functioning against the CPSS' requirements for this principle, a 2007 report by the ECB titled "Fourth Progress Report on TARGET2" does indicate that a "a concept called 'Measures to Ensure the Security and Operational Reliability of TARGET2 Participants' has been developed" (p. 9). By implementing this concept, the report states, "the Eurosystem, in its capacity as TARGET2 system operator, will meet CP VII in respect of the security and operational reliability of TARGET2 participants" (p. 9). Per the 2007 ECB TARGET2 -- Annex 2 report, TARGET2 has set contingency arrangements for failures in the system due to central bank(s)' failure, proprietary home account (PHA) failure, an ancillary system(s)' failure, a bank(s)' failure, and the failure of the Society for Worldwide Interbank Financial Telecommunication (SWIFT). Further the 2007 ECB report on Euro Area Countries notes that "TARGET2 will offer the highest possible level of reliability and resilience, as well as sophisticated business contingency arrangements commensurate with the systemic importance of the TARGET2 infrastructure" (p. 37).

The 2005 IMF report adds that the SIT network has several levels of security to protect its network. The system operator has defined clear security policies and there are several levels of business continuity and contingency arrangements. Nonetheless that IMF report indicates that the "current business continuity arrangements appear to be insufficient with regards to the back up sit" (p. 122) and the IMF recommended that SIT operators put in place adequate measures to ensure settlement on the day of value in case of a large operational disruption. Therefore, the SIT is categorized as 'broadly observing' this principle by the IMF assessors.

VIII. The system should provide a means of making payments which is practical for its users and efficient for the economy.

FC

The 2005 IMF assessment concluded that the PNS system observed this principle whereas, TBF broadly observed this principle. TBF and PNS as stated above ceased to exist when France joined TARGET2 in May 2008 and there is little information publicly available as to the system's compliance with this principle. In its 2005 report, the deficiency identified for the now-defunct TBF was that it lacked proper cost recovery mechanisms. With regards to the PNS system the IMF report noted "due to the payment system's liquidity saving facilities and its efficient risk and liquidity management tools, along with its relatively short processing times and intraday finality, the system is practical for its users" (p. 109). The report noted that the SIT system observes this principle and has achieved a high degree of operational reliability.

IX. The system should have objective and publicly disclosed criteria for participation, which permit fair and open access.

CP

The now-deactivated TBF system observed this principle, according to the IMF's 2005 assessment. As of February 18, 2008, France joined TARGET2 and there is little information publicly available as to the system's compliance with this principle. The PNS system, which also ceased to exist with TARGET2's inception, broadly observed this principle. A 2006 report by the Bundesbank mentions that "TARGET2 provides open and competitively neutral access to large-value payments in euro. In principle, credit institutions will be free to choose between direct or indirect participation" (p. 4). The 2005 IMF report also noted that SIT broadly observes this principle. In general, the IMF report concluded that the SIT system's participation rules are clearly defined but recommended "broadening the access to the system via a revision of the present participation criteria" (p. 126).

X. The system's governance arrangements should be effective, accountable and transparent.

FC

The now-defunct TBF and PNS systems observed this principle, according to the IMF's 2005 assessment. As of February 18, 2008, France joined TARGET 2 and there is little information publicly available as to the system's compliance with this principle. The IMF, in its 2005 assessment, concluded that SIT observes this principle. The SIT system, per the report, has all the rules regarding governance arrangements embodied in a 2003 document called Statuts du Interbank Automated Clearing Group.

A. The central bank should define clearly its payment system objectives and should disclose publicly its role and major policies with respect to systemically important payment systems.

FC

France observes this principle, as indicated in the IMF's 2005 assessment. Per the same report, "the objectives, roles and major policies of the Bank of France (BdF) with regards to payment systems are clearly defined and publicly disclosed, in particular through a sound legal and institutional framework" (p. 127). The report also noted that the "BdF has close relationships with the banking industry [and] informs the public thoroughly about new developments and envisaged changes. The public is also well informed about the role of BdF and its objectives in the payment area" (pp. 128-129).

As stated in the 2007 ECB TARGET2 -- Annex 2 report, despite the transition to TARGET2, member countries' national central banks still have supervisory authority and national legislation still hold significance. The 2007 ECB report on Euro Area Countries, states that "central banks [in the EU countries] monitor developments in the field of payment and settlement systems in order to assess the nature and scale of the risks inherent in these systems and to ensure the transparency of the arrangements concerning payment instruments and services. Where necessary, they define principles and standards for the promotion of safe, sound and efficient payment and settlement systems. They analyze and assess the extent to which the systems comply with these principles and standards" (p. 19).

B. The central bank should ensure that the systems it operates comply with the Core Principles.

FC

According to the 2005 IMF assessment, France observes this principle. The BdF operated the now-defunct TBF system, which was discontinued with the inception of TARGET2. In this capacity, the BdF had several measures in place to ensure that TBF complied with the CPSIPS. The 2007 ECB report on Euro Area Countries notes that in 2001 the Governing Council of the ECB adopted the CPSIPS as one of the standards the Eurosystem must apply when performing its oversight role.

C. The central bank should oversee compliance with the Core Principles by systems it does not operate and it should have the ability to carry out this oversight.

FC

France observes this principle, according to the IMF's 2005 assessment. According to the 2005 IMF report, "the BdF is charged by law with the oversight of payment systems operated by the private sector and fulfils this task in line with international standards" (p. 131).

D. The central bank, in promoting payment system safety and efficiency through the Core Principles, should cooperate with other central banks and with any other relevant domestic or foreign authorities.

FC

The IMF's 2005 report noted that France observes this principle. The report further states that "the BdF has a well-developed network for cooperation with other authorities and is paying careful attention to matters of cooperative oversight" (p. 132). The BdF has close cooperation with other central banks, particularly with the central banks of the Eurosystem. It has signed several Memoranda of Understanding with other authorities. The 2007 ECB report on Euro Area Countries states "in order to institutionalize cooperation and the exchange of information regarding large-value payment systems in the EU, banking supervisors and payment system overseers from all EU Member States concluded a memorandum of understanding, which came into force on 1 January 2001" (p. 106).