The European playing field for interbank payment and settlement is changing. Target2, Target2Securities and TIPS are being consolidated in a new platform and messaging is switching from SWIFT MT to ISO20022. Enigma Consulting can assist you in analysing and implementing the changes.

Pieter van Stempvoort
Pieter van Stempvoort
Senior Consultant

Target2 has traditionally provided interbank payment and settlement of Euro money streams between banks in the European Union, for example, SEPA bank transfers and direct debits. Target2Securities (T2S), introduced in 2015, plays a similar role in the financial settlement of securities transactions. And TIPS went live at the end of last year; a new system of the central banks that provides clearing and settlement of instant European SEPA payments.

It was decided to consolidate the three systems into a single platform, geared towards rationalisation of the systems and centralisation of liquidity management.

Rationalisation of Target2 and T2S

Both systems will be integrated into a new Real Time Gross Settlement (RTGS) platform, functionally and technically. The characteristics of clearing and settlement, such as the timing of interbank payments, are the same for both systems. However, TIPS will remain a separate system because of the specific characteristics of instant payments in terms of payment speed and 24*7*365 availability.

Centralisation of liquidity management

At present, banks maintain separate liquidity positions for all three systems with their central banks, each with a separate minimum liquidity reserve and their own tooling for liquidity management. With consolidation, a centralised tool will be introduced for liquidity management, enabling banks to control and monitor the different liquidity positions with their central banks far more efficiently. All liquidity positions maintained for different settlements count towards a bank’s liquidity reserve. That way, less money is tied up in the liquidity positions a bank has to maintain with its central bank.

Migration from SWIFT MT to ISO20022

Traditionally, interbank payment traffic has been based on SWIFT’s MT standard. The shortcomings of this standard are becoming more and more apparent in respect of the completeness and structure of data exchange, fuelled by legal requirements to prevent money laundering and the financing of terrorism.

As far as payment and settlement, T2S and TIPS already use ISO20022, but the older Target2 is still based on the MT standard. The same applies to EBA Clearing’s EURO1 and STEP1 systems.

The new consolidated RTGS platform will change this: this system is wholly fully based on ISO20022. This relates primarily to payment traffic messages (MT1 and MT2 series) and reports (MT9 series). EBA Clearing’s EURO1 and STEP1 will switch to this standard simultaneously. That switch will take place by way of a big bang in November 2021 without a dual transition period.

With the introduction of ISO20022 in 2004, the exchange of financial messages between banks themselves and between companies and banks is changing rapidly. The exchange of SEPA payment messages, including the recently introduced instant payment, is based entirely on this standard. Many countries worldwide also base their local retail and high-value payment traffic on ISO20022 messages. The advantages of ISO20022 are that payments can be processed more efficiently and at lower costs, which also benefits banking clients. In addition, they can benefit from the more structured version of data in payment orders and reports.

It’s up to the banks

The migration of MT to ISO20022 as a result of implementation of the new RTGS platform and the transition from EURO1 and STEP1 as of November 2021 is resulting in mandatory changes for banks that participate in these systems. They are being monitored closely by their central banks in respect of strategy and progress of implementation. Non-compliance is not an option: in that case, a bank will no longer be able to participate in these systems or settle Euro payment traffic as a so-called direct participant.

Admittedly, the improvements in liquidity management being facilitated by the new RTGS platform are not critical. More efficient automated processes for liquidity management and more efficient use of liquidity reserves can partly compensate for the cost of migrating to ISO20022. It could be attractive to tackle both areas of change together.

Many systems that need to be adapted because of the aforementioned changes are also being affected by the transition of correspondent banking to ISO20022. As it happens, SWIFT launched a public consultation with its members last year on migrating international payment traffic via the SWIFT network to the ISO20022 standard too, so-called MX messages. The proposal is to complete this migration in a number of phases within 5 to 6 years. It is logical to implement these changes now while they are not yet regarded as critical. It is important to monitor SWIFT’s plans in this regard closely anyway and to approach the strategy for all the changes required for migration as a cohesive whole.

The payment traffic experts at Enigma Consulting have considerable experience in the field of interbank payment traffic via the systems of the European central banks and EBA Clearing, for example. They also possess a great deal of knowledge and experience of the underlying system architecture of major banks, small banks and clearing houses. They are best placed to assist you in the structural analysis of the impact and implementation of the changes. Contact one of our payment traffic experts.

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Pieter van Stempvoort

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