In 2003 and 2004, the IMF and the European Central Bank (ECB) each assessed Germany's real-time gross settlement system (RTGSplus). At the time of both these assessments, the RTGSplus was designated as the systemically important payment system in Germany. RTGSplus was Germany's large-value interbank payment system and a component of the Trans-European Automated Real-time Gross Settlement Express Transfer (TARGET) system, the Euro area payment system. The 2003 IMF report concluded that the system observed the Committee on Payment and Settlement Systems' Core Principles for Systemically Important Payment Systems (CPSIPS). The 2004 ECB assessment arrived at a similar conclusion, with the exception of downgrading one principle to "largely observed." However, in November 2007, the RTGSplus was replaced by TARGET2, the successor to TARGET, which harmonized payment services under a single shared platform (SSP) across its member countries. In its 2002 report on TARGET2, the ECB indicated that the system was expected to fully comply with the CPSIPS. Further, per a 2005 report by the Bundesbank, TARGET2 is expected to maintain and improve upon the functioning of the TARGET and RTGSplus systems. However apart from these statements, there is little information assessing TARGET2's compliance with the CPSIPS. Despite the SSP, national legislation and national central banks will still maintain primary supervision for their national components of TARGET2. 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 Germany's payment system by past assessments is maintained until TARGET2 is fully implemented in all its member countries and assessed against the CPSIPS.

General Overview

Germany's real-time gross settlement (RTGS) system, the RTGSplus, which is the country's systemically important payment system (SIPS) was assessed as fully observing the Committee on Payment and Settlement Systems' (CPSS) Core Principles for Systemically Important Payment Systems (CPSIPS) by the IMF in its 2003 Financial System Stability Assessment (FSSA). In 2004, the European Central Bank (ECB) conducted a self-assessment of all the payment systems linked to the Trans-European Automated Real-time Gross Settlement Express Transfer (TARGET) system, the Euro area payment system and concluded that RTGSplus, the German TARGET component, observed nine out of the ten core principles (CPs), and largely observed CP VIII. However, on November 19, 2007, Germany's RTGSplus was discontinued and replaced by TARGET's successor, TARGET2. According to a 2007 report by the 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 with the BIS CPSS report on Core Principles for Systemically Important Payment Systems" (p. 7). Further, per a 2005 report by the Bundesbank, TARGET2 is expected to maintain and improve upon the functioning of the TARGET and RTGSplus 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" (p. 4). Furthermore, national central banks (NCBs) are permitted to continue processing payments via their Proprietary Home Account application (PHAs) instead of the SSP for a four-year transitional period from when the country migrates to TARGET2, so as to allow participants more time to facilitate their change-over to the SSP.

Hence, despite the transition to TARGET2, member countries' national central banks still have supervisory authority, and national legislation remains significant. 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 CPSS' CPSIPS as one of the standards the Eurosystem must apply when performing its oversight role.

The laws governing payment systems in Germany include both national and European Union (EU) laws 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 national laws governing payment systems in Germany are the Banking Act (Kreditwesengesetz, or KWG); the Act Concerning the Deutsche Bundesbank (the Bundesbank Act); the Civil Code; the Insolvency Code (Statute); and the Checks Act of 1933.

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 also worth mentioning in the context of the EU's integration of its payment systems. According to the report, 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 onward, EU citizens should be able to make euro payments throughout Europe from a single bank account, using a single set of payment instruments with fairly the same ease and security as they presently enjoy.

The Principles

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

FC

According to the 2003 IMF assessment and an ECB assessment in 2004, Germany observes this principle. At the time of both these assessments, the SIPS in Germany was the RTGSplus system. However, as of November 2007, RTGSplus has been replaced by TARGET2 and there is little information publicly available as to this system's compliance with this principle. The laws governing payment systems in Germany include both national and EU legislation. Despite the transition to TARGET2, member countries' national central banks still have supervisory authority and national legislation still apply. According to the 2007 ECB report on Euro Area Countries, the relevant provisions for regulating EU area payment systems are put forth in the Treaty and the Statute of the ESCB. Other important EU directives relating to payment systems are the Cross-Border Credit Transfers Directive (Directive 97/5/EC) of 27 January 1997 and the Settlement Finality Directive (Directive 98/26/EC) of 19 May 1998. The national laws governing payment systems in Germany are: the Banking Act; the Act Concerning the Deutsche Bundesbank; the Civil Code; the Insolvency Code (Statute); and the Checks Act of 1933.

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

According to the 2003 IMF assessment and an ECB assessment in 2004, Germany observes this principle. At the time of both these assessments, the SIPS in Germany was the RTGSplus system. As mentioned above, RTGSplus has been replaced by TARGET2 and there is little information publicly available as to this system's compliance with this principle. The IMF noted in its 2003 report that "a detailed description of the system design, the timetable for daily payment processing, and the liquidity risk management procedures are readily available to participants. Participants are kept fully informed of the financial risks" (p.44) through the now-defunct RTGSplus System.

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

According to the 2003 IMF assessment and an ECB assessment in 2004, Germany observes this principle. At the time of both these assessments, the SIPS in Germany was the RTGSplus system, which has since been replaced by TARGET2. 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.

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

Germany observes this principle, according to the findings of a 2003 IMF assessment and an ECB assessment in 2004. According to the 2007 ECB report on Euro Area Countries, the EU's Settlement Finality Directive of 1998 harmonized laws in member states and thereby ensures 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 are settled immediately, or at least by the end of the business day.

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.)

II

This principle was not applicable in the German context per the 2003 IMF assessment and an ECB assessment in 2004. TARGET2, the successor to TARGET and the RTGSplus system, is an RTGS system.

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

Germany observes this principle according to the findings of a 2003 IMF assessment and an ECB assessment in 2004. 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).

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

FC

According to the 2003 IMF assessment and an ECB assessment in 2004, Germany observes this principle. 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. By implementing this concept, 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 failure, a bank 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).

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

CP

According to the 2003 IMF assessment, Germany broadly observes this principle. The ECB's 2004 assessment concurred with the IMF assessment and found that Germany largely observed this principle.

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

FC

According to the 2003 IMF assessment and an ECB assessment in 2004, Germany observes 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).

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

FC

Germany observes this principle, according to the findings of a 2003 IMF assessment and an ECB assessment in 2004.

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

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 remains significant. One of the primary tasks of Bundesbank is to oversee the payment systems and thereby maintain the stability of the financial system, according to the Bundesbank website. In this capacity, the Bundesbank's website notes that its "activities range from monitoring compliance with international oversight standards, through observing developments in the payment field and maintaining contact with market participants, to working on joint ventures with other central banks and banking supervisors." Per the 2007 ECB report on Euro Area Countries, the Bundesbank's oversight activities are based on the Bundesbank Act, the Statute of the ESCB, the Treaty establishing the European Community, internationally recognized standards and Eurosystem standards. The report further 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

One of the primary tasks of the Bundesbank is to oversee the payment systems and thereby maintain the stability of the financial system, according to its website, which adds that the Bundesbank's "activities range from monitoring compliance with international oversight standards, through observing developments in the payment field and maintaining contact with market participants, to working on joint ventures with other central banks and banking supervisors." The 2007 ECB report on Euro Area Countries notes that in 2001 the Governing Council of the ECB adopted the CPSS' 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

Refer to Principle B.

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 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). The report further states that the Bundesbank actively coordinates and exchanges information between the banking supervisor, Clearstream (the German central depository), and other domestic agencies. Moreover, Germany is an integral part of the ESCB and a member of the CPSS.