The Hellenic Real-time Money transfer Express System (HERMES), Greece's large value interbank payment system was replaced on May 19, 2008 by the European Union's Trans-European Automated Real-Time Gross Settlement Express Transfer (TARGET) 2 system. TARGET2 is the successor to TARGET, to which HERMES was linked. A 2004 European Central Bank (ECB) assessment of TARGET components revealed that HERMES observed seven of the ten Core Principles for Systemically Important Payment Systems (CPSIPS) as defined by the Committee on Payment and Settlement Systems (CPSS). While with TARGET, the large value interbank payment systems of member countries were interlinked, TARGET2 provides harmonized payment services under a single shared platform across its member countries. However, there is little information assessing TARGET2's compliance with the CPSIPS except for a statement in a 2008 ECB report on TARGET2, in which it indicates that the system is expected to fully observe all the CPSIPS. Despite the lack of information on TARGET2, it is generally believed that the system is an improvement over its predecessor and its component systems. Therefore, the level of compliance assigned to HERMES by the 2004 ECB assessment is maintained until TARGET2 is fully implemented in all its member countries and assessed against the CPSIPS, which according to the 2008 ECB report, is expected in late 2008.

General Overview

Until May 2008, Greece's large value interbank transactions were settled through the country's real time gross settlement (RTGS) system, the Hellenic Real-time Money transfer Express System (HERMES). HERMES was also Greece's Trans-European Automated Real-Time Gross Settlement Express Transfer (TARGET) component. As of November 19, 2007 the TARGET has been replaced by its successor, TARGET2 and as of May 2008 Greece's has migrated to TARGET2. TARGET2 not only replaced its predecessor TARGET, but also all former large value payment systems in the euro area, which included HERMES. 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 the 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 2008 report titled "TARGET Annual Report: 2007" (hereafter referred to as the ECB's 2007 annual report), the ECB states that TARGET2 better meets user needs by: "providing a harmonized service level with a harmonized pricing structure; ensuring cost-efficiency; preparing for future developments; and including the enlargement of the EU and the euro area" (p. 26).

In its 2004 assessment of TARGET components, the ECB concluded that HERMES fully observed seven of the ten Core Principles for Systemically Important Payment Systems (CPSIPS) as defined by the Committee on Payment and Settlement Systems (CPSS). It broadly observed Principles VII & VIII and Principle V was not applicable to HERMES. Greece's retail payment system, DIAS is not considered by the ECB as a systemically important retail payment systems as noted in the organization's 2005 report on retail payment systems in the Euro area.

As Greece became part of TARGET2, the new system is the responsible for settling all large value transactions in the country. However, there is practically no information on the Bank of Greece (BoG) website regarding the transition from HERMES to TARGET2. In its 2002 report on TARGET2, the ECB states that "TARGET2 is expected to fully comply with the BIS [Bank for International Settlement] CPSS report on Core Principles for Systemically Important Payment Systems" (p. 7). A 2008 report by the ECB titled "Payment Systems and Market Infrastructure Oversight Report 2007," (hereafter referred to as the ECB's 2008 Oversight Report) states that the CPSS' CPSIPS is the most important standard the Eurosystem uses in its oversight policy. Further the report notes that the ECB in cooperation with the National Central Banks (NCBs) conducted a comprehensive assessment of the TARGET2 design against the CPSS' CPSIPS and concluded that "TARGET2 is likely to fully observe all relevant Core Principles provided that the action plan [agreed upon by the participants] is properly followed-up" (pp. 12-13). The report also indicates that the Governing Council of the ECB will make a final assessment of the TARGET2's compliance with CPSIPS by the end of 2008 and is expected to publicly release a report on the oversight assessment of TARGET2 within the first quarter of 2009.

The ECB's 2008 Oversight Report notes that the Bundesbank, (German central bank), Bank of Italy, and Banque de France (French central bank) will provide TARGET2 participants with a single technical platform, called the Single Shared Platform (SSP). Further a 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) 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 beginning when the country migrates to TARGET2, so as to allow participants more time to facilitate their change-over to the SSP. Therefore, 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 CPSIPS as one of the standards the Eurosystem must apply when performing its oversight role.

The Bank of Greece is the central bank of Greece and among its many tasks it is responsible for the oversight of payment systems in the country. Article 2 of the Statute of the BoG states that the Bank is an integral part of the European System of Central Banks (ESCB) and that, upon adoption of the euro as the national currency of Greece, it must perform all ESCB-related tasks in accordance with the provisions of the Statute of the ESCB. The Statute of the BoG states that the Bank is responsible for the oversight of payment and settlement systems. As noted in the 2007 ECB report on Euro Area Countries "by virtue of Articles 2 and 55 of its Statute, the Bank of Greece is legally responsible for the oversight both of payment and settlement systems and of payment instruments, with the aim of ensuring the effectiveness and reliability of those systems and, moreover, of reducing systemic risk" (p. 165).

Payments and payment systems in Greece are governed both by European Union legislation and national legislation. Article 105(2) of the Treaty Establishing the European Community (Maastricht Treaty) and Article 22 of the Statute of the ESCB include among the ESCB's institutional functions the promotion of the smooth operation of payment systems. As noted by the 2007 ECB report on Euro Area countries the main Greek laws that comprise the general regulatory framework for the Greek payment system are: the Monetary Policy Council Act 50 of 2002 on the "establishment of a framework for the oversight of payment systems;" the Monetary Policy Council Act 46 of 2000 on the "Operating Rules of the HERMES System (as amended by Monetary Policy Council Act 52 of 2003);" and the Joint Decision of the Ministers for Economy and Commerce 6617/B 104 of 1992.

The Principles

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

FC

The 2004 ECB assessment concluded that HERMES observed this principle. However, in May 2008, TARGET2 replaced HERMES and as of October 2008, there is no published assessment of TARGET2 against the CPSS' CPSIPS. According to the ECB's 2007 annual report, in 2007, the Eurosystem completed the TARGET2 Guideline, which forms the basis for the NCBs to establish their TARGET2 component systems, governed by their national legislation. The TARGET2 Guideline contains the main legal elements of TARGET2, including governance arrangements and audit rules, as well as transitory provisions on the migration from TARGET to TARGET2. The Guideline was published in the Official Journal of the European Union in September 2007 and is also available on the ECB's website in all EU languages. The Guideline has a harmonized set of rules for all TARGET2 participants and allows Eurosystem NCBs to implement these rules in an identical manner, with deviations only if national laws require such. The harmonized conditions also contain relevant alternatives which will enable NCBs to customize their respective implementation in line with the requirements of national law. According to the ECB's 2007 annual report "this approach implements the decision of the Governing Council of the ECB in October 2005 to legally construct TARGET2 as a multiple system, but aiming at the highest degree of harmonization of the legal documentation used by the central banks within the constraints of their respective national legal framework" (p. 27).

Despite the transition to TARGET2, the NCBs of member countries still have supervisory authority and national legislation still applies. 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 January 27, 1997, and the Settlement Finality Directive (Directive 98/26/EC) of May 19, 1998.

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

The 2004 ECB assessment concluded that HERMES observed this principle. The 2007 ECB report on Euro Area countries states that "the operating rules and procedures governing HERMES [were] laid down in its Operating Regulation of December 2000, as amended, which has been ratified and enacted by acts of the Monetary Policy Council" (p. 169). However, as noted earlier in this report, on May 19, 2008 HERMES ceased operations and was replaced by the Euro Area payment system, TARGET2. As of October 2008, there is no published assessment of TARGET2 against the CPSS' CPSIPS. However, according to an ECB's 2007 annual report, the general functional specifications of TARGET2 provide the public with a high-level overview of the SSP for TARGET2 and its functional specifications. The user detailed functional specifications provides the public with a more in-depth and detailed explanation of the core services and the optional services offered by the SSP. Further, the user handbook for the information and control module (ICM) of the SSP describes the online information tools and control measures of the ICM, allowing access to the other relevant modules of the SSP. In 2007 the Eurosystem completed the TARGET2 Guideline, which forms the basis for the NCBs to establish their TARGET2 component systems, governed by their national legislation. The TARGET2 Guideline contains the main legal elements of TARGET2, including governance arrangements and audit rules, as well as transitory provisions on the migration from TARGET to TARGET2. The Guideline was published in the Official Journal of the European Union in September 2007 and is also available on the ECB's website in all EU languages.

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 2004 ECB assessment HERMES observed this principle. However, HERMES was replaced by TARGET2 in May 2008 and as of October 2008 there is no published assessment of TARGET2 against the CPSIPS.

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 2004 ECB assessment concluded that HERMES observed this principle. However, HERMES was replaced by TARGET2 in May 2008 and as of October 2008 there is no published assessment of TARGET2 against the CPSIPS.

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

According to the 2004 ECB assessment, this principle was not applicable to HERMES. Similarly, TARGET2 being an RTGS system, this principle is not applicable to it either.

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 2004 ECB assessment concluded that HERMES observed this principle. However, there is little information regarding TARGET2's compliance with this principle. 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.

CP

According to the 2004 ECB assessment, HERMES broadly observed this principle. However, as noted earlier, in May 2008, HERMES ceased operations and was replaced by TARGET2. Although there is no comprehensive assessment publicly available of TARGET2 against the CPSS requirements for this principle, a 2007 report by the ECB titled "Fourth Progress Report on TARGET2" indicates that "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 [Core Principle] 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 2004 ECB assessment, HERMES broadly observed this principle. With regards to the new system, TARGET2, there is no assessment publicly available of this system against the CPSS requirements for this principle.

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

FC

The 2004 ECB assessment concluded that HERMES observed this principle. As for TARGET2, 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

The 2004 ECB assessment concluded that HERMES observed this principle. There is insufficient information publicly available as to TARGET2's compliance with this principle.

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. The BoG is responsible for the oversight of payment systems in the country. Article 2 of the Statute of the Bank of Greece states that the Bank is an integral part of the ESCB and that, upon adoption of the euro as the national currency of Greece it must perform all ESCB-related tasks in accordance with the provisions of the Statute of the ESCB. The Statute of the BoG also states that the Bank is responsible for the oversight of payment and settlement systems. As noted in the 2007 ECB report on Euro Area countries "by virtue of Articles 2 and 55 of its Statute, the Bank of Greece is legally responsible for the oversight both of payment and settlement systems and of payment instruments, with the aim of ensuring the effectiveness and reliability of those systems and, moreover, of reducing systemic risk" (p. 165).

In November 2007, the "Terms of Reference for the Oversight Assessment of Euro Systemically and Prominently Important Payment Systems against the Core Principles" and the "Guide for the Assessment against the Business Continuity Oversight Expectations for SIPS" were published. The documents provide a common methodology for oversight which aims "to provide the Eurosystem's payment systems overseers with clear and comprehensive guidelines for the assessment of the relevant systems and the preparation of oversight reports" (ECB 2008b, p. 10). The ECB's 2008 Oversight Report notes that TARGET2 is designed on the basis of the above common methodology.

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

II

According to the provisions of its Statute, the Bank of Greece may "establish operating rules and oversee payment systems, with a view to ensuring the efficiency and soundness of these systems and, in particular, to reducing systemic risk and strengthening competition. Moreover, it may set rules and oversee the operational reliability and legal safety of means of payment, with a view to safeguarding their efficiency, in accordance with the provisions applicable in the ESCB framework." However, there is insufficient information publicly available that identifies BoG's oversight responsibilities that correspond to the CPSS' CPSIPS.

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. According to the ECB's 2007 annual report on TARGET, "throughout 2007, the TARGET2 design was subject to an intensive assessment against the relevant Core Principles. In terms of scope, the oversight assessment of the TARGET2 design included the design of the SSP, as well as the proprietary home accounts (PHAs) of four NCBs [the National Bank of Belgium, the Deutsche Bundesbank, Bank of Lithuania, and the Bank of Portugal] which will be used to provide RTGS services during the transition period" (p. 25).

The ECB's 2008 Oversight Report states that although the Eurosystem's oversight policies and requirements reflect internationally recognized standards, the "details are adjusted to the specific conditions and needs of the Eurosystem" (p. 7). The report also notes that CPSS' CPSIPS is the most important standard the Eurosystem uses in its oversight policy. Further the report notes that the ECB in cooperation with the NCBs conducted a comprehensive assessment of the TARGET2 design against the CPSS' CPSIPS and concluded that "TARGET2 is likely to fully observe all relevant Core Principles provided that the action plan [agreed upon by the participants] is properly followed-up" (pp. 12-13).

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.

II

According to the provisions of its Statute, the Bank of Greece may "establish operating rules and oversee payment systems, with a view to ensuring the efficiency and soundness of these systems and, in particular, to reducing systemic risk and strengthening competition. Moreover, it may set rules and oversee the operational reliability and legal safety of means of payment, with a view to safeguarding their efficiency, in accordance with the provisions applicable in the ESCB framework." However, there is insufficient information publicly available that identifies BoG's oversight responsibilities that correspond to the CPSS' CPSIPS.

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.

II

The 2007 ECB report on Euro Area countries states that "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). However, there is insufficient information publicly available as to Greece's compliance with this principle.