The Bank of Italy's (BoI) Real Time Gross Settlement System for Large-Value Payments (BIREL) was assessed against the Committee on Payment and Settlement Systems' Core Principles for Systemically Important Payment Systems (CPSIPS) by the International Monetary Fund (IMF). The IMF published the findings of this assessment in a 2004 report in which it concluded that BIREL observed nine of the ten CPSIPS and three of the four corresponding to the central bank's responsibilities. BIREL, at the time of the 2004 IMF report, was the only systemically important payment system in the country. Overall, the report gave a very positive rating to BIREL and the shortcomings it addressed were minor, which according to the Italian authorities (as stated in a 2006 IMF report) were remedied subsequently. BIREL was a participant in the Euro area's Trans-European Automated Real-time Gross Settlement Express Transfer (TARGET) system. TARGET was replaced by TARGET2 in November 2007. The migration of the TARGET member countries has taken place in Groups of four. Italy was part of the third group of countries that migrated to TARGET2 on May 19, 2008. 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 European Central Bank (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 BIREL by the 2004 IMF 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

The International Monetary Fund (IMF) conducted a detailed assessment of the Bank of Italy's (BoI) Real Time Gross Settlement (RTGS) System for Large-Value Payments (BIREL) and published its findings in a 2004 report. BIREL, according to the 2004 IMF report, was Italy's systemically important payment system (SIPS) at the time. The report concluded that BIREL observed all the Core Principles for Systemically Important Payment Systems (CPSIPS) as required by the Committee on Payment and Settlement Systems (CPSS) with the exception of Principle 1 (system should have a well-founded legal basis under all relevant jurisdictions). BIREL's compliance with Principle 1 and Principle D (on Central Bank responsibilities) were rated as broadly observed by the IMF report. The shortcomings identified by the report with regards to the above principles were minor and were easily remediable. For example, the 2004 IMF report noted that BIREL would become observant of Principle D "when the BoI [would] put in place arrangements for cooperation and exchanges of information with the 7 central banks and banking supervisors in the non-EU countries concerned" (p. 37). BIREL was part of the now defunct Trans-European Automated Real-Time Gross Settlement Express Transfer (TARGET) system, the payment system for the Euro area.

In its 2004 assessment of TARGET components, the ECB concluded that BIREL fully observed nine of the ten CPSIPS. It largely observed Principle VIII. As of November 19, 2007 the ECB's TARGET has been replaced by its successor, TARGET2. The replacement takes place in phases of four Groups of countries. Groups 1, 2, and 3's implementation of TARGET2 has already been achieved. Italy was part of Group 3 list of countries joining TARGET2 on May 19, 2008. 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 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 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), BoI, 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" (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 laws governing payment systems in Italy include both national and European Union (EU) laws on payment systems. Article 105(2) of the Treaty Establishing the European Community (Maastricht Treaty) and Article 22 of the Statute of the European System of Central Banks (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 Italian laws that comprise the general regulatory framework for the Italian payment system are provisions of the Italian Civil Code and the Legislative Decree No. 385 of 1993 (the 1993 Banking Law).

The main providers of payment services are the banking system, the Italian Post Office and the BoI. The BoI, according to information provided on its website, in its role as payment system operator maintains close cooperation with the banking community to manage an efficient and reliable payment systems. The 1993 Banking Law confers upon the BoI explicit responsibilities and powers for ensuring the efficiency and soundness of the Italian payment system. The BoI performs its functions in accordance with international and European guidelines. Article 146 of the 1993 Banking Law states that the BoI "shall promote the regular operation of payment systems. For this purpose, it may issue regulations to ensure the efficiency and reliability of clearing and payment systems."

According to the 2007 ECB report on Euro Area countries "the use of cash is still widespread [and in fact] the use of cash in Italy relative to GDP is almost twice the euro area average" (p. 267). The 2006 BoI report notes, however, in 2005, the number of transactions made with non-cash instruments increased by 3 percent in Italy to over 3.6 billion. 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" (ECB 2007b, p. 28) which would imply that 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.

CP

The IMF in its 2004 assessment concluded that BIREL broadly observed this principle. The shortcomings identified by the assessment were minor and a 2004 assessment of TARGET components by the ECB indicated that BIREL observed this principle. Moreover, a 2006 IMF update of the 2004 assessment indicated that the Italian authorities concluded that with the migration to the new BIREL system in May 2004, the BoI addressed all the recommendations in the 2004 assessment, with the exception of a few marginal aspects.

However, in May 2008, TARGET2 replaced the Italian BIREL and as of July 2008, there is no published assessment of TARGET2 against the CPSS' CPSIPS. According to a ECB's 2007 annual report, in 2007, the Eurosystem completed the TARGET2 Guideline, which forms the basis for the National Central Banks (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, member countries NCBs 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 IMF assessment of BIREL and the 2004 ECB assessment of TARGET components (which included BIREL) concluded that the system complied with this principle. However, as noted earlier in this report, on May 19, 2008 BIREL ceased operations and was replaced by the Euro areas payment system, TARGET2. As of July 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

Both, the 2004 IMF and ECB assessments noted that BIREL observed this principle. However, BIREL was replaced by TARGET2 in May 2008 and as of July 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

As noted by both, the 2004 IMF and ECB assessments, BIREL observed this principle. As noted in the 2004 IMF report, "as a real-time gross settlement system, BIREL provide[d] real-time, immediate finality" (p. 22). The report further noted that Legislative Decree No. 210 of April 2001 implemented the EU Settlement Finality Directive in Italy and as such "a payment order from a participant which meets the necessary authentication and other requirements and has therefore been accepted by the system is irrevocable from the moment that it is added to the queue of that participant's pending payments" (p. 22). However, BIREL was replaced by TARGET2 in May 2008 and as of July 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 both, the 2004 IMF and ECB assessments, this principle was not applicable to BIREL. 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 IMF assessment and the 2004 ECB assessment (of TARGET components) concluded that BIREL observed this principle. According to the 2004 IMF assessment, "settlement within BIREL is in central bank money, by debiting the sending participant's settlement account with the BI and crediting the beneficiary participant's settlement account" (p. 23). 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.

FC

According to both, the 2004 IMF and ECB assessments, BIREL observed this principle. However, as noted earlier, in May 2008, BIREL 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" 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 [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.

FC

The 2004 IMF assessment concluded that BIREL observed this principle. However, the 2004 ECB report assigned a largely observed rating for BIREL for this principle. The 2004 IMF report noted that BIREL met this principle's requirements for cost efficiency, practicality, and user relevance. However, as noted earlier, in May 2008, BIREL ceased operations and was replaced by TARGET2 and there is no assessment publicly available of TARGET2 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

BIREL observed this principle as indicated in two 2004 assessments of it, namely, the IMF's and the ECB's. As noted in the 2004 IMF report, the criteria for participation in BIREL were those laid down by the ECB for access to TARGET. The access criteria for BIREL's settlement procedures were published in the guide for participants, and were also mentioned in the system's membership agreement. BIREL, however, was replaced by TARGET's successor TARGET2 in May 2008 and there is little information publicly available regarding the new system's compliance with 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

BIREL observed this principle (IMF 2004; ECB 2004). According to the 2004 IMF report, BIREL's governance arrangements were part of the overall governance structure of the BoI and BoI's "approach to ensuring transparency and accountability in its management of BIREL [was] consistent with its general policy of publishing material to its customers, including banks and BIREL participants, and to the community at large" (p. 33). However, as of May 19, 2008, BIREL was replaced by the Euro area's TARGET2.

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. According to the 2004 IMF assessment, Italy observes this principle. The 2004 IMF report notes "the payment system objectives of the BI are to promote security and efficiency of the payment mechanism and to ensure the provision of payment services to all banks on a nondiscriminatory basis, so as to safeguard competition in the payment services market" (p. 35).

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.

FC

According to the 2004 IMF assessment, Italy observes this principle. 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 NBB, the Deutsche Bundesbank, Lietuvos Bankas, 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 2004 IMF assessment, this principle is not applicable to Italy "since there are currently no privately operated systemically important payment systems in Italy [and as such] there is no need for the BoI to carry out such oversight" (pp. 35-36).

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.

CP

The 2004 IMF report concluded that, at the time of the assessment, Italy only largely observed this principle. However, the report also noted that "this responsibility [was expected to be] fully observed when the BoI has put in place arrangements for cooperation and exchanges of information with the 7 central banks and banking supervisors in the non-EU countries concerned" (p. 37). A 2006 IMF update of the 2004 assessment indicated that the Italian authorities concluded that the BoI addressed all the recommendations in the 2004 assessment, with the exception of a few marginal aspects. Similarly the 2006 IMF report states that "as regards the recommendation concerning responsibility D, BoI has entered into an agreement on information sharing with the U.S. Federal Reserve for information sharing" (p. 50). 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).