In 2004, the European Central Bank (ECB) assessed the Dutch large-value interbank payment system, called TOP, as part of its assessment of all domestic Trans-European Automated Real-time Gross Settlement Express Transfer System (TARGET) components. The report concludes that TOP fully observes seven out of the ten Core Principles (CPs) and broadly observes two (CPs VII and VIII). The ECB finds that CP V is not applicable. A 2007 report by De Nederlandsche Bank (Dutch central bank or DNB), states that TOP is categorized as the systemically important payment system (SIPS) in the Netherlands. TOP is also the Dutch real-time gross settlement (RTGS) system. The International Monetary Fund conducted a Financial System Stability Assessment of the Netherlands in 2004, at which point it did not assess TOP because an earlier (2001) European Central Bank assessment had indicated that TOP was broadly compliant with Core Principles for Systemically Important Payment Systems (CPSIPS). The DNB has also assessed TOP in the course of its oversight of the system, and published its findings in a 2007 report. As regards CP VII, the Netherlands is in the process of satisfying with the more stringent business continuity requirements imposed by the European System of Central Banks and the Joint Business Continuity Working Group in the wake of the 9/11 terrorist attacks. The DNB assessment avers that once work is completed on this front, TOP will be fully compliant with CP VII. The Netherlands is expected to migrate to the Euro area payment system, TARGET2, on February 18, 2008. TARGET2 is a centralized system with a common technical platform that allows it to provide a harmonized level of service for its members.

General Overview

The 2006 Dutch central bank (De Nederlandsche Bank, or DNB) Annual Report, published in 2007 (henceforth referred to as the 2007 DNB report), states that the large-value interbank payment systems, known as TOP, is categorized as the systemically important payment system (SIPS) in the Netherlands. TOP is also the Dutch real-time gross settlement (RTGS) system. When the International Monetary Fund (IMF) conducted a Financial System Stability Assessment (FSSA) of the Netherlands in 2004, it did not assess the SIPS in the Netherlands because an earlier (2001) European Central Bank (ECB) assessment had already found TOP to be broadly compliant with Core Principles for Systemically Important Payment Systems (CPSIPS). The ECB reassessed TOP in 2004 as part of its assessment of all domestic Trans-European Automated Real-time Gross Settlement Express Transfer System (TARGET) components. The report concludes that TOP fully observes seven out of the ten Core Principles (CPs), broadly observes two (CPs VII and VIII), and found that CP V is not applicable in the Dutch context. As for CPs VII and VIII, the weaknesses pertain to "business continuity arrangements and economic efficiency" (p. 17). The report further states that these weaknesses were expected to be addressed with the operation of TARGET2 in 2007. According to a 2007 press release posted on the ECB website, TARGET2, a centralized Euro-area system with a common technical platform and harmonized services, was launched on November 19, 2007. The Netherlands is expected to migrate to TARGET 2 on February 18, 2008.

The 2007 DNB report asserts that "the payment and settlement systems relevant for the Netherlands largely meet the set international standards" (p. 105). This statement is based on a DNB assessment made in the course of its oversight of the payment and settlement systems in the country. Per the 2007 DNB report, TOP fully observes eight of the ten CPs; broadly observes CP VII; and CP V is not applicable to TOP, since it is a real time gross settlement (RTGS) system. As regards CP VII, the Netherlands is in the process of satisfying the more stringent business continuity requirements imposed by the European System of Central Banks (ESCB) and the Joint Business Continuity Working Group in the wake of the 9/11 terrorist attacks. The 2007 DNB report avers that once work is completed on this front, TOP will be fully compliant with CP VII.

The 2007 ECB report on "Payment and Securities Settlement Systems in the European Union" indicates that there are three payment and clearing systems in the Netherlands: TOP, Equens Nederland B.V., and Unisys Payment Solutions and Services (UPSS). The DNB operates and oversees all three. TOP processes large value interbank payments and is also used by banks to process their clients' transactions. TOP processes settlements of low value payment systems such as Equens and Euronext as well. In addition, TOP provides access to TARGET, which is a pan-European payment settlement system. TOP customers include all banks registered in the Netherlands, clearing and settlement services like Equens and Euronext, the Dutch government and several government agencies. TOP channels payment orders for foreign central banks and supranational bodies, even though they do not hold accounts with TOP/DNB. Private persons and non-financial bodies cannot participate in TOP. There is no value limit to payments processed by TOP, though it is designed as a large-value payment system in Euros. TOP uses the Society for Worldwide Interbank Financial Telecommunication (SWIFT) network to communicate the processing of payments through a secured internet link called TOPView.

The Netherlands is preparing to integrate itself with TARGET2 and will be connected to the system in February 2008. According to the 2007 DNB report, this will represent another step towards the integration of the European financial market. The DNB is also implementing procedures and meeting standards to launch the Single Euro Payments Area (SEPA), which "will enable citizens to effect payments in the euro area with a single current account and a single set of payment instruments... from 2008" (p. 93), thereby creating a single integrated payments market in the Euro area.

Per the 2007 ECB report, other payment sector bodies in the Netherlands include the Netherlands Bankers' Association (NVB), Equens Nederland B.V., and the National Forum on the Payment System (Maatschappelijk Overleg Betalingsverkeer, or MOB). The NVB is a general association of which nearly all Dutch banks are members, and it looks after the general interests of banks. Equens Nederland B.V. is the retail-payment clearing house in the Netherlands, and "runs the network of POS [point of sale] terminals and the interbank authorization network for cash dispenser transactions" (p. 312). The MOB within the DNB aims to promote the efficiency of the payment system in the country by "exchanging information on practical bottlenecks and policy issues, and by striving for joint agreement on efficiency measures" (p. 312). The 2007 ECB report states that the MOB formed a working group in 2006 to ensure the smooth transition of the Dutch payment system to the SEPA.

The 2007 ECB report provides statistical data on the use of TOP. The transaction volume in 2005 was 4.7 million, with the total value amounting to €30,700. Of this, domestic transactions accounted for 83 percent of volume, and 52 percent of the total value processed by TOP. Cross border transactions using TARGET accounted for the remaining 17 percent and 48 percent of the volume and value processed respectively. The 2007 ECB report notes that coins and banknotes are used for cash payments and roughly account for 70 percent of the total volume of commercial transactions. In 2002, they amounted to €66.3 billion in value and 7.1 billion in volume. They are, however, popular as media for small transactions. Cashless payments are the most popular means in trade and industry, claiming nearly all transactions. In 2005, the volume of cashless payments was 3.8 billion, whereas its value was approximately €5,400 billion. They include credit transfers, direct debits, and payment cards. Issuance and processing of checks have been discontinued by the Dutch banks as of 2001, mainly due to decline in use and high processing costs.

The Principles

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

FC

According to the 2004 ECB assessment, the Netherlands fully observes this principle. The legal framework is comprehensive and well enforced. TOP is designated under the EU Settlement Finality Directive. A 2007 DNB report also indicates that TOP observes this principle. The 2007 ECB report enumerates the laws that comprise the legal structure governing payments in the Netherlands. They are the 1998 Bank Act, the 1987 Coinage Act, the 1992 Dutch Civil Code, the External Financial Relations Act, the Act on cross-border payment services implementing the EU Directive 97/5/EC, the Identification (Financial Services) Act, the Disclosure of Unusual Transactions Act, the Exchange Offices Act, and the 1998 Finality Act implementing the EU Settlement Finality Directive.

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 2004 ECB assessment, the Netherlands fully observes this principle, and the 2007 DNB report concurs. The 2001 IMF Report on Observance of Standards and Codes (ROSC) on transparency in the payment system in the Netherlands observes that since TOP is linked by TARGET into an "area-wide RTGS system for the European Union" (p. 21), the overall systemic risk is substantially reduced. The rules and procedures of the TARGET are spelled out in the TARGET Guideline. The 2007 ECB report adds that the TOP User Guide contains all the operational rules for the system, including the time schedules, access criteria, processing, accounts, products, and other operational guidelines.

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 an ECB assessment in 2004, the Netherlands fully observes this principle, and the 2007 DNB report concurs. Per the 2004 ECB report, TOP has a queuing facility to prioritize payments based on the first-in first-out (FIFO) principle. The system also has adequate liquidity, so that it minimizes queuing and liquidity risk. TOP also has a "gridlock resolution mechanism" (p. 11), although it has rarely been used due to ample liquidity in the system.

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

According to the 2004 ECB assessment, the Netherlands fully observes this principle, and a 2007 DNB report concurs. Continuous settlement is provided throughout the day according to the 2004 ECB report. The 2007 ECB report states that as TOP is a gross settlement system and payments in the system are settled in real time and are irrevocable. The paying bank is required to have a credit balance for settlement or adequate collateral to cover the payment. If the transaction is not covered, it does not get processed. Such transactions fall into a queuing mechanism which can be viewed using TOPView. The system enables participants to schedule, prioritize, stop, or withdraw transactions. There are four levels of priority to a payment order: priority one is reserved for the DNB to settle ancillary systems; priority two is for urgent payments, priority three is for normal payments, and priority nine for non-urgent payments. TOP users can use the latter three priority payment orders.

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 is not applicable to TOP 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

According to the 2004 ECB assessment, the Netherlands fully observes this principle, and a 2007 DNB report concurs. The 2004 ECB assessment further attests that payments settle in the books of the DNB, the Dutch central bank, eliminating credit or liquidity risk for participants in terms of agent or assets. The 2007 ECB report notes that since TOP only processes transactions when sufficient collateral is available, it significantly reduces credit and liquidity risks.

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, the Netherlands broadly observes this principle, adding that the National Central Banks (NCBs) report that a "hot standby site" (p. 13) is within a kilometer of the primary site for contingency situations. The security policy is also in place, and disaster recovery procedures are clearly documented. The Netherlands applies the TARGET risk-management methodology, (which uses ISO 17799, an international standard), as well as a national methodology which is aligned with international standards. However, the assessment finds that normal operations need more than four hours to be back on track, and this compromises compliance. Also, although the infrastructure is tested periodically, the testing procedures need to be improved in light of the terrorist attacks of September 11, 2001. The 2007 DNB report adds that the resilience of the Dutch payment system is partly ensured by the adequate Business Continuity Plan (BCP) that each institution has. The BCP Assessment Framework was devised by the DNB in 2004, and updated in 2006. The Escalation Committee for Payment and Securities Transactions is another form of defense of the payment system infrastructure. The Committee meets whenever a potential crisis threatens to affect multiple institutions, and organizes coordination. The 2007 DNB report also mentions a crisis management training exercise to deal with crisis scenarios, and states that the program will be continued.

The 2007 DNB report mentions an assessment made by the DNB in the course of its oversight of the payment and settlement systems in the country which indicates that TOP broadly observes CP VII and the Netherlands is in the process of satisfying the more stringent business continuity requirements imposed by the ESCB and the Joint Business Continuity Working Group in the wake of the 9/11 terrorist attacks. The 2007 DNB report asserts that once work is completed on this front, TOP will be fully compliant with CP VII.

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, the Netherlands broadly observes this principle. The assessment further attests that TOP and TARGET meet the needs of their users. Their technical design and capacity can handle the level of demand they are subjected to, as well as unforeseen excesses. Also, they have a formal pricing policy in place, which is full cost recovery. The participants of TOP can influence the price structure of products and services, but not the overall pricing policy. The TARGET cost methodology, which is followed by TOP, takes into account development costs, operating costs and overheads, and recovers between 2 percent and 100 percent of the cost. The 2007 DNB report mentions an assessment made by the DNB in the course of its oversight of the payment and settlement systems in the country which indicates that TOP observes this Principle.

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

FC

According to the 2004 ECB assessment, the Netherlands fully observes this principle. Further, the access criteria are publicly available as well as handed out to the participants. A 2007 DNB report also notes that TOP observes this Principle. Per the 2004 ECB report, the DNB constantly monitors compliance with access criteria. As noted by the 2007 ECB report, the ESCB sets the access criteria for participation in TOP within the TARGET framework. The criteria, as enforced in the Netherlands by the DNB, allows access to : (1) "financial departments of central or regional governments of EU Member States which are active in the money market; (2) institutions forming part of the public sector under Article 3 of Council Regulation (EC) No 3603/93 which have been authorised to hold accounts for customers; (3) supervised credit institutions under Article 1, first indent, of Directive 77/780/ EEC, which are established in the EEA; (4) supervised investment firms under Article 1(2) of Directive 93/22/EEC which are established in the EEA; (5) supervised providers of clearing and settlement services; and (6) central banks established in the EU the RTGS systems of which are not connected to TARGET" (p. 318). The Dutch authorized institutions, including foreign bank branches and subsidiaries that fall under the Second Banking Co-ordination Directive are also eligible. Supervised non-bank financial intermediaries such as payments and securities clearing institutions can participate but cannot access the credit facilities. All participants in the system follow the same rules and are subject to reserve requirements. Also, the DNB allows some other NCBs and international financial institutions indirect access to the system, acting as their correspondent. The DNB charges every participant with an account in TOP an annual fee of €3,000, apart from transaction fees for each transaction. Cross-border transactions through TARGET incur fees set in the TARGET pricing structure.

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

FC

According to the 2004 ECB assessment, the Netherlands fully observes this principle. However, the report finds that there are no formal conflict resolution procedures to resolve disagreements between the system and its users. Consultative decision making is also done on an ad hoc basis rather than in accordance with established procedures involving overseers, users, and auditors. The 2007 DNB report mentions an assessment made by the DNB in the course of its oversight of the payment and settlement systems in the country, which indicates that TOP observes 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

The 2007 ECB report mentions that the task of the DNB in respect of payments in the country is stipulated in the Bank Act, as amended in 1998, as well as the Statute of the ECB. Per the 1998 Bank Act, the DNB is authorized to ensure the smooth operation of payments. In pursuit of this objective, the 2007 ECB report states, "the [DNB] has a dual role...: on the one hand, it provides payment services - for example to the local stock exchange - and, on the other hand, it is responsible for the oversight of payment and securities settlement systems" (p. 308). The oversight encompasses ensuring the security, reliability, efficiency, and continuity of payment systems and instruments in the country. The main objective, as noted in the 2007 ECB report, is the prevention of systemic risk and the protection of customers. Oversight entails setting up assessment frameworks to test the operation of TOP and the Equens.

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

FC

The 2007 DNB report notes that since TOP is a systemically important payment system, "it has to observe all the Core Principles" (p. 108). The report states that the DNB assesses TOP on its observance of the CPSIPS, and publishes its compliance levels. The 2004 ECB assessment report notes that, in 2001, the Governing Council of the ECB adopted the CPSIPS as the "minimum standards for the Eurosystem's common oversight policy on systemically important payment systems (SIPS)" (p. 4). Therefore, starting 2001, all payment SIPS within the EU, including TOPS, were assessed against the CPSIPS.

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

There is insufficient information publicly available as to the DNB's compliance with Central Bank Responsibility C.

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 informs that the DNB has consultative arrangements with commercial banks on national and international policy objectives. For instance, the DNB chairs the Payments and Securities Settlements Policy Forum, which comprises the DNB and the major banks. The DNB also chairs the Working Group on Payments and the Working Group on Securities, which comprise representatives of the DNB, the commercial banks, the stock exchange, Equens and Currence. Another working group, the Wellink Working Group, established in 2001 is chaired by the president of the DNB, and comprises of the chairpersons of the boards of seven banks, the President of Equens and the chairperson and director of the NVB. However, this information is insufficient to ascertain the DNB's compliance with Central Bank Responsibility D.