STEP2-T PFMI disclosure report by EBA CLEARING S.A.S. · STEP2-T PFMI disclosure report by EBA...

STEP2-T PFMI disclosure report by EBA CLEARING S.A.S.

20th August 2015

Copyright © EBA CLEARING S.A.S. 2015. All rights reserved.

STEP2-T PFMI disclosure report by EBA CLEARING S.A.S. 20

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Responding institution: ABE CLEARING S.A.S. à capital variable (EBA CLEARING)

Jurisdiction(s) in which the FMI operates: EU Authority(ies) regulating, supervising or overseeing the FMI: STEP2-T is overseen by the European Central Bank (ECB) as lead overseer, with the involvement of National Central Banks of the Eurosystem.

STEP2-T is classified as a Systemically Important Payment System (SIPS). The list of payment systems in the eurozone and their classification can be found at:

https://www.ecb.europa.eu/press/pr/date/2014/html/Paymentsystemclassification-yearofreference2012.pdf?beb6eb19a71eeecfc05f22ab90d141ba

The date of this disclosure is 20th August 2015. This disclosure can also be found at www.ebaclearing.eu/N=Reference-Documents.aspx. For further information, please contact [email protected]

I. Executive summary STEP2 is a Pan-European Automated Clearing House (PE-ACH) for retail payments in euro. STEP2 provides a state-of-the-art network-independent processing engine, which is based on global XML-based ISO standards and is fully compliant with the European Payment Council (EPC) SEPA Credit Transfer (SCT) and SEPA Direct Debit (SDD) Scheme Rulebooks and Implementation Guidelines.

A short history Back in 1999, EBA CLEARING took the decision to implement a mass payment system based on direct bank participation from all EU Member States with the objective to eliminate bank-internal routing costs, reduce reconciliation costs, enforce STP standards and ensure operational resilience. The first service was launched in April 2003 for processing credit transfers complying with the Convention on Credit Transfers in Euro, i.e. retail payments of up to 50,000 euro per transaction, in accordance with the requirements of EC Regulation 2560/2001, which was later superseded by EC Regulation 924/2009 (subsequently amended by EU Regulation 260/2012). By processing payments governed by the Convention on Credit Transfers in Euro, the STEP2 XCT Service provided banks across Europe with an efficient and very cost-effective ACH-type service for their cross-border retail transactions. The XCT Service was closed down in December 2011 as part of the industry’s migration to the Single Euro Payments Area (SEPA). At its peak, the XCT Service processed nearly half a million payments per day, with over 100 direct participants providing reach across Europe.



http://www.ebaclearing.eu/N=Reference-Documents.aspx


mailto:[email protected]


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Between 25th September and 6th October 2006, the banking community of Luxembourg migrated its domestic traffic to the STEP2 platform, thus becoming the first community to move from a local ACH to a PE-ACH. The use of STEP2 put the Luxembourg banks in a position to improve service levels and reduce their infrastructure investment and maintenance cost by phasing out their legacy infrastructure. In preparation for SEPA, a second service – the Italian Credit Transfer (ICT) Service – was launched in November 2006 with a community of eight Italian banks acting as pilots, enhancing the existing features and functions through a STEP2 Domestic Service, which formed the basis for the development of a SEPA Credit Transfer Service. The STEP2 ICT Service provided the major Italian banks with a smooth and efficient path for gradually migrating their legacy credit transfers to SEPA. The service was closed down on 26th September 2014, following the successful migration to SEPA of the ICT participants. Before the STEP2 SEPA Credit Transfer (SCT) Service went live in January 2008, more than 100 institutions participated in the EBA CLEARING SEPA testing programme as part of the thorough preparations for operational readiness in SEPA and direct participation in the PE-ACH. The SCT Service allows the European banks to send their SEPA-compliant credit transfers to one processing pipeline; it supported the European banks to offer SEPA payment instruments to their customers as from the launch date of the EPC SCT Scheme on 28th January 2008. From November 2008 to December 2011, the Finnish banking community migrated its domestic credit transfers to STEP2. This allowed the Finnish banks to close down their domestic infrastructure and reduce internal costs. The STEP2 SEPA Core Direct Debit (SDD Core) Service and the STEP2 SEPA B2B Direct Debit (SDD B2B) Service on the STEP2 platform were both launched on 2nd November 2009, the launch date of the EPC SEPA SDD Core and B2B Schemes. In October 2011, the STEP2 Irish Transfer (IET) Service was launched with a view to facilitating the migration of the Irish banking community to SEPA. On 31st July 2014, the STEP2 IET Service was closed down, following the successful migration of its participants to SEPA. Through its SCT and SDD offerings, STEP2 provides banks across Europe with one channel through which they can send and receive their SEPA Credit Transfers as well as their SEPA Direct Debits. Today, EBA CLEARING’s PE-ACH platform provides full reach among payment service providers (PSPs) that have signed the SCT and SDD Scheme Adherence Agreements of the EPC and thereby enables banks and payment institutions to offer SEPA-compliant payment services to their customers across all 34 SEPA countries.

STEP2 has been overseen by the ECB since its launch.


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In June 2003, the Governing Council of the ECB adopted an oversight framework for retail payment systems operating in euro (“Oversight standards for euro retail payment systems”). STEP2 was classified by the ECB as a Prominently Important Payment System (PIRPS). Under the Oversight standards for euro retail payment systems of June 2003, PIRPS had to observe a sub-set of the Core Principles for Systemically Important Payment Systems (‘CPSIPS’) published by the Committee on Payments and Settlement Systems Market Infrastructures (CPSS)1, namely Core Principles I, II, VII, VIII, IX and X. In 2004, a comprehensive oversight assessment of the STEP2 system against the applicable CPSIPS was carried out. It was concluded that STEP2 fully observed all six applicable Core Principles. Following this initial oversight assessment, detailed oversight assessments have been carried out in relation to changes to the system. Functional changes to the system and changes to its rules typically attract an ex ante oversight assessment and the requirement for a nihil obstat to proceed from the Overseer. Ex ante oversight assessments have been carried out in relation to all major changes to the system, including for example the introduction of new services (e.g. the SCT and SDD Core and B2B Services), the settlement arrangements (e.g. migration to settlement in TARGET2), the introduction of new cycles (e.g. addition of new day-time cycles and introduction of night-time cycles), resilience improvements (e.g. addition of a third data centre and addition of EBICS as a third communication channel). In April 2012, the Principles for Financial Market Infrastructures (PFMIs) were published by the Committee on Payments and Settlement Systems Market Infrastructures (CPSS) and the International Organisation of Securities Commissions (IOSCO) as global standards for the safety and efficiency of FMIs. The PFMIs were adopted by the Governing Council of the European Central Bank (Governing Council) as Eurosystem oversight standards for all types of FMIs in the euro area in June 2013.2 On 23rd July 2014, the ECB Regulation 795/2014 on Oversight Requirements for Systemically Important Payment Systems (the “SIPS Regulation”) was published in the Official Journal of the EU.3 The SIPS Regulation implements the CPSS-ISOCO PFMIs and applies to payment systems in the eurozone. In August 2014, the Eurosystem adopted a Revised Oversight Framework for Retail Payment Systems. In accordance with the oversight framework of the Eurosystem, Systemically Important Retail Payment Systems (SIRPS) have to comply with the SIPS Regulation in its entirety, as opposed to Prominently Important Retail Payment Systems (PIRPS) and Other Retail Payment Systems (ORPS).4 On 21st August 2014, the ECB notified EBA CLEARING as SIPS Operator of STEP2-T of the classification of the STEP2-T System as a SIPS. The SIPS Regulation foresees

1 The CPSS changed its name into Committee on Payments and Market Infrastructures (CPMI) effective

1st September 2014.

2 Eurosystem Oversight Report 2014.

3 Regulation ECB/2014/28 of the European Central Bank (EU) N° 795/2014 of 3 July 2014 on oversight

requirements for systemically important payment systems, OJ L 217, 23.7.2014, p.16 4 Eurosystem Revised Oversight Framework for Retail Payment Systems, adopted in August 2014.


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a one-year transition period for SIPS to comply with the requirements as of the date of notification of their classification. The Eurosystem will conduct oversight assessments of the four systemically important payment systems of the euro area against the SIPS Regulation and will help usher the respective operators towards full compliance.5 This disclosure report describes the STEP2-T system’s design and operations, its governance and legal framework, as well as the approach by EBA CLEARING as SIPS Operator to the enhancements which are required for compliance with the Eurosystem oversight requirements for systemically important payment systems.6

II. Summary of changes since the last update of the disclosure

A comprehensive oversight assessment of the STEP2 system was conducted in 2004, and was concluded in 2005. The oversight report ”Assessment of euro retail payment systems against the applicable Core Principles”, including inter alia the results of this STEP2 assessment, can be found at:

https://www.ecb.europa.eu/pub/pdf/other/assessmenteuroretailpaymentsystems200508en.pdf?28b16b39946998e023c2bdd2dcc8dd0d

The oversight activities and outcomes of oversight assessments on STEP2 are published by the Eurosystem in its oversight reports. Following the publication of the report in August 2005, the results of the subsequent oversight assessments on STEP2 can be found at:

https://www.ecb.europa.eu/pub/pdf/other/paymentsystemsandmarketinfrastructureoversightreport2007en.pdf (page 15) https://www.ecb.europa.eu/pub/pdf/other/eurosystemoversightreport200911en.pdf (page 24) https://www.ecb.europa.eu/pub/pdf/other/eurosystemoversightreport2011en.pdf (pages 22 - 23) https://www.ecb.europa.eu/pub/pdf/other/eurosystemoversightreport2014.en.pdf (page 21)

The present report is the first disclosure report responding to the CPSS-IOSCO Disclosure framework for financial market infrastructure of December 2012, as per Article 20 of the SIPS Regulation.

5 Eurosystem Oversight Report 2014.

6 The exercise of the oversight on STEP2 is conducted on the basis of the classification of STEP2 as an

ESIRPS (European Systemically Important Retail Payment System) as opposed to a NSIRPS (National

Systemically Important Payment System (NSIRPS), i.e. the lead Overseer submits information and

materials to all NCBs of the Eurosystem and an NCB may but is not obliged to participate in given

oversight activity.



https://www.ecb.europa.eu/pub/pdf/other/paymentsystemsandmarketinfrastructureoversightreport2007en.pdf


https://www.ecb.europa.eu/pub/pdf/other/eurosystemoversightreport200911en.pdf



https://www.ecb.europa.eu/pub/pdf/other/eurosystemoversightreport2014.en.pdf



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Following the classification of STEP2-T as a SIPS, and in relation to EBA CLEARING as SIPS Operator of STEP2-T, noteworthy activities in preparation for compliance with the SIPS Regulation implementing the PFMIs include the following:

The terms and conditions governing STEP2 have been amended to create a legal basis for new requirements stemming from the PFMIs compared to the CPSIPS, in particular in relation to critical participants and tiered participation arrangements.

During 2014 and 2015, a fit-for-purpose governance framework has been implemented in line with the new standards introduced by the SIPS Regulation. In particular, a Board nomination policy and Board evaluation policy and methodology were developed and introduced, and a thorough exercise was undertaken to formalise existing governance policies, processes and practices into a comprehensive set of documented codes and policies.

A Board Nomination and Governance Committee was created to assist the Board in implementing the Board nomination and evaluation processes, and in monitoring the effectiveness of the corporate governance framework.

The risk management function and enterprise risk management framework of the Company are fully operational for all systems of EBA CLEARING, including the STEP2-T system. An independent external audit on the design and operating effectiveness of the Risk Management Framework was conducted.

To enhance the risk tolerance and strategy statement of the Company, a Risk Strategy Statement is being developed to complement the Risk Tolerance Statement of the Company.

A blueprint for further enhancing certainty of settlement and an accompanying legal analysis were finalised and submitted to the Overseer.

The Company has identified the amount of, and maintains, sufficient liquid net assets to cover potential general business losses.

The Company has prepared a recovery and orderly wind down policy, and is developing a comprehensive recovery and orderly wind down plan which has been submitted in draft to the Overseer.

Criteria for the identification of critical participants have been developed, and designated critical participants have been invited to complete a self-certification on compliance with the requisite resilience requirements.

The admission criteria for STEP2-T, as well as an abridged version of the default rules, are published on the STEP2 section of the website of EBA CLEARING providing an overview of the system’s features and functioning.

A process for identification of tiered participants (intra-group and extra-group) has been implemented. Based on the results thereof, a statistical analysis on tiering is being conducted.

A service availability report for publication to stakeholders has been prepared.

Relevant updates of the publicly available pages on the website of EBA CLEARING, as well as the present disclosure report, have been prepared.

Further, detailed self-assessments are submitted to the Overseer, addressing each of the questions for the assessment of payment systems as comprised in the Eurosystem’s Assessment methodology for payment systems.


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III. General background on the FMI General Description of the FMI and the markets it serves STEP2 was launched in 2003 following the decision of EBA CLEARING to implement a mass payment system based on direct bank participation from all EU Member States with the objective to eliminate bank-internal routing costs, reduce reconciliation costs, enforce straight-through processing standards and ensure operational resilience. Today, the platform is one of the key clearing and settlement mechanisms in the Single Euro Payments Area (SEPA), both in terms of processing volumes and participating institutions. As a cornerstone of the SEPA processing infrastructure, STEP2 provides full reach for SEPA Credit Transfers and Direct Debits to over 4,800 payment service providers across all SEPA countries. The delivery of the STEP2 platform responded to the vision that all euro payments should be treated as domestic payments. This vision is at the heart of the Single Euro Payments Area. The underlying aim of SEPA is to overcome the inefficiencies caused by national fragmentation through the creation of an integrated payments environment with uniform standards and rules. STEP2 has been a major building block of SEPA. The timely delivery of its SEPA Services as well as the processing capacity, operational robustness and rich functionality of the system made STEP2 the platform of first choice of many Eurozone communities during SEPA migration. STEP2 allows payment service providers to send and receive SEPA Credit Transfers and Direct Debits to and from any counterparty in Europe through one channel. A growing number of banks and banking communities across Europe are taking advantage of this single channel approach for both their domestic and cross-border SEPA transactions. The STEP2 System has been designed and evolves as a result of requirements from (potential) users and is intrinsically user defined. Practicality and costs for the users are prime considerations underlying the design of the system, without compromising on the resilience and robustness of the system and its compliance with oversight requirements. By way of conclusion, the foregoing may demonstrate that STEP2 responds to a major business need for the realisation of SEPA, and performs a useful function in the euro area and beyond. An overview of the volume evolution in STEP2 is shown on the next page.


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STEP2 volume evolution: daily average volumes during the SEPA migration ramp-up and beyond

General organisation of the FMI EBA CLEARING has been created in the form of a société par actions simplifiée under French law and its head offices are located in Paris, France. The by-laws of EBA CLEARING are publicly available on the website of EBA CLEARING at www.ebaclearing.eu/N=Reference-Documents.aspx. EBA CLEARING currently has 60 shareholders. The shareholders of EBA CLEARING are those financial institutions that are participants in its large–value payment system EURO1, and close to all shareholders are users of STEP2-T. Each shareholder holds one share and has one vote at the Shareholders Meeting. The list of shareholders is publicly available on the website of EBA CLEARING at www.ebaclearing.eu/N=Shareholders.aspx. The Board of EBA CLEARING is responsible for setting the strategic direction, overseeing management and adequately controlling the Company, with the ultimate aim of directing the Company towards the fulfillment of its strategic aims and long-term objectives.

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http://www.ebaclearing.eu/N=Shareholders.aspx


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The Board is assisted by five Board Committees in carrying out its functions:

the Audit & Finance Committee (AFC);

the Board Risk Committee (BRC);

the Strategy and Policy Committee (SPC);

the Remuneration Committee (RemCo); and

the Nomination and Governance Committee (NGC). The mission and activities of the Board Committees are set forth in the Annual Report of the Company. In addition, the Board receives reports from the Operations and Technical Committee, chaired by a Board member and composed of user representatives, and from the Legal Advisory Group. The responsibility for the day-to-day management rests with the Chief Executive Officer (CEO). The CEO reports to the Board. Heads of Units have delegated powers for managing the activities relating to their units. The roles attributed to the various Units coincide with the functions required for carrying out the activities of EBA CLEARING. An overview of the management is included in the Annual Report 2014. Effective 21st July 2015, a single Service Development and Management Unit is entrusted with the management of the EURO1/STEP1 and STEP2 Services, with dedicated senior managers being assigned to the two service lines respectively as well as to Marketing and the relation with the users, and to New Initiatives. EBA CLEARING applies a three-lines-of-defence approach for its risk management, ensuring different levels of control. The Chief Risk Officer and the Internal Audit function are independent and have a dotted direct reporting line to the Board Risk Committee and the Audit and Finance Committee respectively. In order to ensure that all types of users are considered in the design and evolution of its systems and offerings, the Company maintains a broad range of communication channels. To make best use of expert knowledge and facilitate frequent and constructive dialogue with its users, the Company has established user groups and expert fora. These include the STEP2 SEPA Business Working Group, serving as a forum in which direct participants in the STEP2 SEPA Services can discuss and provide feedback on issues and developments concerning these services. There are also regular country or regional user meetings, and the Company organises individual user visits and information campaigns. Information sessions are organised for wider stakeholder groups, e.g. the regular SEPA info sessions in relation to the STEP2 SEPA Services. Consultations may also take place on an ad hoc basis. A dedicated corporate governance section, setting forth the governance arrangements, lines of responsibility, Board and management role and composition, and relations with stakeholders is included in the Annual Report. A report on the risk management and internal control functions is equally included in the Annual Report. The Annual Report is publicly available on the website of the Company at www.ebaclearing.eu/N=Reference-Documents.aspx. Further, the composition of the Board and mission of the Board Committees are published on the website of EBA CLEARING at www.ebaclearing.eu/N=Governing-bodies.aspx and www.ebaclearing.eu/N=Board-committees.aspx.


http://www.ebaclearing.eu/N=Governing-bodies.aspx

http://www.ebaclearing.eu/N=Board-committees.aspx


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Legal and regulatory framework EBA CLEARING, the SIPS Operator of EURO1 and of STEP2-T, is a limited liability company incorporated under French law in the form of a société par actions simplifiée à capital variable. EBA CLEARING has branches in Belgium and in Germany and representative offices in Italy, Finland, and the United Kingdom. EBA CLEARING’s role is primarily the role of a ‘business administrator’. EBA CLEARING does not incur any rights or obligations arising from the sending and receiving of payment messages, and at no time does EBA CLEARING hold any funds or deposits in relation to the operation of its systems. The STEP2-T system is governed by a set of STEP2 System Documentation, including in particular the STEP2 General Terms and Conditions. The STEP2 General Terms and Conditions comprehensively cover the rights and obligations arising from participation in the system. The STEP2-T System Documentation is governed by German law. A legal opinion, in a form satisfactory to the System Operator and to the Overseer, was obtained under the governing law of the system, and is regularly updated. Further, capacity opinions must be provided by each STEP2 Direct Participant for being admitted to a STEP2 Service. EBA CLEARING as System Operator makes available to each STEP2 Direct Participant (A) sorting and routing capacity and processing services provided by SIA, and (B) a calculation module and interface capacity referred to as the “Multilateral Netting Module” or “MNM” provided by SWIFT. Settlement of the STEP2-T System takes place in central bank money using the Ancillary System Interface of TARGET2-ECB. The material aspects of the STEP2-T System and activities relevant thereto are unambiguously governed by one single governing law. Direct Participants may include entities that have a SWIFT BIC or equivalent business identifier code for which a Direct Participant has been appointed (a “Reachable BIC”) in the routing tables maintained for STEP2-T. Payment orders are not allocated to Reachable BICs but constitute payment orders of or, as applicable, addressed to the Direct Participant. The relationship between a Direct Participant and a Reachable BIC for which the Direct Participant is acting in relation to the receipt or forwarding of messages contained in files is exclusively governed by their respective bilateral arrangements and is outside of the context of the STEP2-T system. The use of networks for the sending and receiving of files containing payment and other messages to and from the STEP2 platform is outside of the scope of the STEP2-T System. Each entity that is a Direct Participant is responsible for its contractual relationship with its network provider(s).


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The STEP2-T system is included in the list of designated systems under the Settlement Finality Directive since 2009. The legal denomination of the system was changed into STEP2-T following migration of settlement operations for the SEPA Services to TARGET2 in December 2008. The SIPS Regulation applies to and is binding on STEP2-T, which meets the criteria laid down in Article 1(3) of the SIPS Regulation. The STEP2-T system is overseen by the ECB as lead Overseer, with the participation of national central banks of the Eurosystem.

System design and operations7 1. Functionality and technology STEP2 provides a state-of-the-art network-independent processing engine, which is based on global XML-based ISO standards and fully compliant with the EPC SCT and SDD Scheme Rulebooks and Implementation Guidelines. The platform ensures full straight-through processing of all transactions in the interbank space and offers its users the most advanced standard functionality based on latest technology:

24-hour file sending, payment warehousing and scheduling of payments in a specific cycle: STEP2 Direct Participants can send payments at any time. Payment warehousing and cycle scheduling allow participants to choose the date and settlement cycle in which a credit transfer should be processed up to three business days in advance.

Same-day and optional night-time settlement cycles.

Payment cancellation and Recall functionality: STEP2 provides its participants with the possibility to cancel sent payments after they have been validated but before they have been settled, using a payment cancellation request (camt.056) message. If the payment has already been settled, the message will be forwarded to the beneficiary bank as a Request for Recall as per EPC Scheme Rulebook requirement.

Network independence: Direct participants can connect to the STEP2 central system through SWIFTNet, SIANet and EBICS. Direct participants can use two networks in parallel for sending files to STEP2. For receiving their files, participants use a primary channel, which can be switched intraday to a pre-configured secondary channel if the default channel is affected by a technical issue. This intra-day channel switch feature helps banks to mitigate processing risks.

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The system overview in this section is provided for information purposes only. EBA CLEARING accepts no liability to any third party in respect of the content hereof. Detailed rights and obligations, processes and procedures are contained in the STEP2-T system documents.


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Machine-readable routing tables: EBA CLEARING publishes routing tables of all reachable banks for each STEP2 Service, one week ahead of the monthly activation date. They are distributed via a secure network in machine-readable format for automatic import into the banks’ systems and are also available for download. The routing tables contain further information on which Additional Optional Services (AOS), optional settlement cycles and processing options each bank has subscribed to.

Interactive workstation: Direct participants have access to an interactive workstation for the monitoring of files and payments, the Direct Participant Work Station (DPWS).

Via the DPWS, users can directly monitor their real-time bilateral liquidity positions against other participants

and against the system view the status of individual files, bulks or payments request details on archived payments ask for the re-transmission of a file cancel entire bulks or create a bilateral relationship with any other direct

participant to exchange files in the batch mode

Reconciliation reports: STEP2 sends a range of machine-readable reports to the direct participants in order to help them with the reconciliation of payments. These include the following:


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– Real-time validation report, informing direct participants of the validation results with regard to the files they have sent

– Pre-settlement report advising direct participants of the amounts to be

settled in the upcoming cycle

– Cycle reconciliation report, containing a summary of the settlement instructions created for that cycle

– Payment cancellation file, notifying direct participants that have sent

payment cancellations of the status of the payment instructions subject to those requests

– Daily reconciliation report, providing reconciliation information related to all

of the cycles of that day This set of advanced standard features optimally supports participant banks in managing their payment traffic on the STEP2 platform and their own processing capacities in a very efficient and flexible manner. 2. Clearing and settlement cycles STEP2 SCT Service STEP2 SCT provides the following clearing and settlement cycle arrangements:

Five day-time cycles: Participants are free to send payments for settlement during any of these five cycles but must be ready to process incoming payments during each of them. The sending cut-off of the last settlement cycle in the day stands at 16:00 CET.

Two optional night-time cycles: Participation is on a closed user group basis, i.e. any bank wishing to send or receive payments during either or both of the optional cycles has to register separately for each optional cycle.

Possibility to request additional cycles: Any community interested in additional cycles may enquire about their implementation in the STEP2 SCT Service.


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STEP2 SDD Services The STEP2 SEPA Direct Debit Services settle in two separate cycles:

SDD Core settlement takes place between 12:00 and 12:45 CET

SDD B2B settlement takes place between 13:00 and 13:45 CET The STEP2 SDD Services validate in real time from 06:00 to 11:00 (Core) / from 08:00 to 12:00 (B2B) CET and from 13:00 (Core) / 14:00 (B2B) to 22:00 CET. SDD notification files are delivered to debtor banks six times a day. STEP2 segregates the SDD transactions in order to deliver collections and cancellations/rejects/returns in different files. This allows participants to first process transactions with same-day value (R-transactions) and then transactions with future settlement dates (collections). In November 2014, the STEP2 SDD sending cut-off times were extended: participants can send collections until 15:00 CET for B2B and 16:00 CET for Core and COR18. The sending cut-off for sending R-transactions on D remained unchanged (11:00 CET for Core / 12:00 CET for B2B). 3. Functioning of the clearing and settlement process Clearing and settlement phases Each payment cycle can be divided into three standard phases:

Validation phase: From the opening time of the cycle until the sending cut-off time, incoming and warehoused payments for this cycle are validated and stored.

Settlement phase: From settlement opening time until settlement cut-off time, STEP2 calculates what each direct participant owes to every other direct participant, and sends the results to the multilateral netting module for settlement in TARGET2.

Output phase: When settlement has been completed, STEP2 delivers the payments and reconciliation reports to the direct participants.

Settlement of STEP2 in TARGET2 Participating banks settle their STEP2 obligations by paying a net calculated amount in TARGET2. STEP2 first creates bilateral gross obligations and reports them to the banks, calculates the multilateral net positions and sends these multilateral net amounts to TARGET2 using the Ancillary System Interface.

8 COR1 is an option in the SDD Core Service to allow direct debits to be sent (and received) at

the latest one (1) inter-bank business day before due date.


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Direct participants in the STEP2 SEPA Services have the possibility to request MT 900 / MT 910 and MT 940 / MT 950 messages from TARGET2 for reconciliation purposes. Measures supporting smooth settlement A number of measures and procedures are in place to ensure that the STEP2 SEPA Services settlement is carried out in a smooth manner, even under more exceptional circumstances:

Pre-settlement report: After each sending cut-off for a settlement cycle, STEP2 sends to the direct participants the liquidity positions they will have to settle in the upcoming cycle. For SDD, it is possible to have this information broken down per Reachable BICs. This possibility will be provided for SCT with the next functional release in 2016.

Information period: Apart from the possibility to monitor their real-time settlement position via the DPWS, direct participants have a 15-minute-long information period before each settlement for liquidity management reasons. This information period allows the participants to check whether they are short or long with regard to their STEP2 obligations and to take the necessary actions. The start of the information period is notified to the settlement banks in TARGET2 by an ICM Broadcast.

Operational monitoring: In the rare case that a direct participant in the STEP2 SEPA Services might be lacking liquidity at the time of settlement, EBA CLEARING is in a position to detect this rapidly through operational monitoring and can contact the participant to ensure it tops up its RTGS account in order to prevent any delay in the settlement and distribution of output files.

Automatic re-submission of payments in STEP2 SCT: If a direct participant lacks liquidity in any of the first four day-time cycles, its payments are withdrawn from that particular cycle, so that settlement can take place normally for the remaining participants. The payments withdrawn are automatically resubmitted to the next cycle, with the exception of the last cycle of the business day.

As part of its initiative to further enhance the settlement certainty of the STEP2 SEPA Services, EBA CLEARING conducted a study and a stakeholder consultation in 2014. As a result, EBA CLEARING presented a blueprint in September 2014 outlining the high-level design principles to further enhance settlement certainty in STEP2 through the introduction of a pre-funded cycle at the end of the day.

4. Frequent intraday settlement and finality STEP2-T provides frequent intraday settlement. STEP2-T has adopted a multiple batch settlement for the SCT Service – there are two (optional) night-time processing cycles and five day-time processing cycles for the STEP2 SCT Service –, and a single batch settlement for the SDD Core and B2B Services – there is one processing cycle for the STEP2 SDD Core Service and one processing cycle for the STEP2 SDD B2B Service9. 9 Debit collections are notified to the receiver up to D-14 and at least on D-1.


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The design of STEP2-T is based on payment orders being transmitted to the recipient thereof after settlement has occurred (“send – settle – deliver”).10 Payment orders are only accepted for settlement provided there are sufficient funds. Payment obligations are final, i.e. an irrevocable and unconditional transfer of funds has occurred, upon completion of settlement. The STEP2-T system applies a multilateral net calculation for the sending of debit orders and credit orders included in the settlement file to the external settlement system, i.e. TARGET2-ECB. This is to ensure that its participants can benefit from liquidity efficiency and also to reduce intraday liquidity needs at the level of the participants. In case a direct participant does not provide sufficient funds for settlement, the calculation of the net positions and settlement will occur without the respective direct participant and its messages. Only payment orders for which the net calculated positions can give rise to simultaneous settlement of gross obligations are included in each round for settlement. The provision of sufficient funds to cover any net calculated position is a condition for acceptance of payment orders for settlement, as is the case for RTGS systems. Delivery of payment orders only takes place after settlement, and payment orders that were not included in a settlement round are ‘queued’ or can be rejected, similarly to what is in place for RTGS systems. 5. Resilience and business continuity The STEP2 platform is a highly resilient processing system with full disaster recovery features and operational procedures that are regularly practised with the user community. It provides the following key benefits:

A scalable processing engine: The STEP2 Services are based on a highly efficient and robust processing engine capable of handling very large transaction volumes.

A highly experienced operator: The technical provider of STEP2 is SIA, one of the largest financial processors in Europe. The SIA processing environment offers state-of-the-art technology with exceptional resilience features.

Three processing sites: The primary site maintained by SIA runs in cluster configuration with data sharing facility and a power distribution layout that has a fully redundant radial configuration. The second processing site, also maintained by SIA, is equivalent to the primary site and works in a synchronous mode, meaning that all data is replicated in real time. Since 1st January 2014, a third processing site implemented by SIA and IBM has been fully operational. The activation of the third processing site has increased the resilience of STEP2, which now also covers regional disasters.

10

The design of STEP2 does not compel receiving participants to credit their customers in anticipation of a receipt. Payment messages are only transmitted and delivered following completion of settlement, and as regards direct debit messages, the result of the settled debit collections (excluding debit collections rejected by the receiver or cancelled by the sender prior to settlement) is notified to the direct participant after completion of settlement only.


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Three operations centres for system monitoring: EBA CLEARING runs three separate operations centres in different countries. Two of these independent sites operate in parallel mode with a rotation of staff and machines taking place on a regular basis. The three sites ensure a constant monitoring of the different STEP2 Services.

Customer support for operations-related queries and emergency situations: The Investigations and Customer Support Unit (ICU) is EBA CLEARING’s single point of contact for all operations-related queries. The Company also has several channels and tools in place for incident and crisis communication. While the common language is English, customer support is additionally provided in other languages by the multilingual staff.

Crisis simulation exercises: These exercises are organised by EBA CLEARING and SIA on an annual basis. Their main objective is to test the functionality of the disaster recovery arrangements, both in terms of file sending/receiving and connectivity to participants’ workstations.

ISO 27001 certification: Since January 2013, EBA CLEARING’s Information Security Management System, which is geared at managing and securing the Company’s information assets, has been certified as ISO 27001-compliant.

6. Admission In order to fulfil the admission criteria for STEP2, a STEP2 Direct Participant must

1. be authorised to conduct banking business 2. have TARGET2 account access

i.e. (a) have a direct participant status in TARGET2 or the status of an indirect participant in TARGET2 with multi-addressee access, or (b) have a central bank that undertakes to provide a TARGET2 account for settlement for such Direct Participant

3. be able to send files in the required format: i.e. be able to send STEP2 Files in the format specified by EBA CLEARING;

4. have its registered office or a branch in the EEA / SEPA i.e. participate in the system via an office located in the EEA or, for the SEPA Services, in the geographical area of SEPA

5. provide a capacity opinion i.e. provide a capacity opinion with respect to its participation for each STEP2 Service it participates in.

In addition to the above, for each of the STEP2 SEPA Services (SCT, SDD Core and SDD B2B), it is a condition for admission to a given service that the applicant has adhered to the corresponding SEPA Scheme Rulebook of the European Payment Council.


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7. Basic statistical data The average daily volumes and values on a monthly basis are published on the website and publicly available at https://www.ebaclearing.eu/N=STEP2-Statistics.aspx. A monthly statistical country report on the SDD Core and SDD B2B Services, including on the R-transactions, reason codes and technical rejections, is available to all participants on the website pages with restricted access. These reports are also made available to the EPC and to the ECB. A dedicated statistical report on operational reliability is in preparation for distribution to stakeholders.

8. Envisaged changes to the system Subject to feedback from the Overseer, it is envisaged to further enhance the certainty of settlement for the STEP2-T System, inter alia to avoid that multiple rounds of recalculation would be required during the last processing cycle and an ensuing possible recourse to an extension of operating hours.

IV. Principle-by-principle summary narrative disclosure

STEP2-T has been classified as a SIPS falling under the SIPS Regulation implementing the PFMI for payment systems in the eurozone, and notification of such classification was made to EBA CLEARING on 21 August 2014. The Overseer of the STEP2-T System will conduct oversight assessments of the four systemically important payment systems of the euro area, including STEP2-T, after the end of the transition period foreseen by the SIPS Regulation. Pending completion of a first oversight assessment of STEP2-T against compliance with the oversight requirements laid down in the SIPS Regulation, this section IV of this first disclosure report responding to the CPSS-IOSCO Disclosure framework contains a description of the main activities undertaken since the entry into force of the SIPS Regulation. STEP2-T was compliant with the oversight requirements applicable to the system in full until such date. Detailed self-assessments following the Eurosystem’s Assessment methodology for payment systems have been prepared in draft during the transition period and have been shared with the Overseer.

https://www.ebaclearing.eu/N=STEP2-Statistics.aspx


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Principle 1: Legal basis An FMI should have a well-founded, clear, transparent, and enforceable legal basis for each material aspect of its activities in all relevant jurisdictions.

SIPS Regulation Article 3

Approach since entry into force of the SIPS Regulation Since August 2014, the terms and conditions governing STEP2 have been amended to create a legal basis for new requirements stemming from the PFMIs compared to the CPSIPS, in particular in relation to critical participants and tiered participation arrangements.

Principle 2: Governance An FMI should have governance arrangements that are clear and transparent, promote the safety and efficiency of the FMI, and support the stability of the broader financial system, other relevant public interest considerations, and the objectives of relevant stakeholders.


Approach since entry into force of the SIPS Regulation During 2014 and 2015, a fit-for-purpose governance framework has been implemented in line with the new standards introduced by the SIPS Regulation. In particular, a Board nomination policy and Board evaluation policy and methodology were developed and introduced, and a thorough exercise was undertaken to formalise existing governance policies, processes and practices into a comprehensive set of documented codes and policies. A Board Nomination and Governance Committee was created to assist the Board in implementing the Board nomination and evaluation processes, and in monitoring the effectiveness of the corporate governance framework. A specific section setting forth the mission and strategic objectives of the Company has been included in the Annual Report.

Principle 3: Framework for the comprehensive management of risks An FMI should have a sound risk-management framework for comprehensively managing legal, credit, liquidity, operational, and other risks.


Approach since entry into force of the SIPS Regulation The risk management function and enterprise risk management framework of the Company are fully operational for all systems of EBA CLEARING, including the STEP2-T system. An independent external audit on the design and operating effectiveness of the Risk Management Framework was conducted. To enhance the risk tolerance and strategy statement of the Company, a Risk Strategy Statement is being developed to complement the Risk Tolerance Statement of the Company.


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Principle 4: Credit risk An FMI should effectively measure, monitor, and manage its credit exposure to participants and those arising from its payment, clearing, and settlement processes. An FMI should maintain sufficient financial resources to cover its credit exposure to each participant fully with a high degree of confidence. In addition, a CCP that is involved in activities with a more-complex risk profile or that is systemically important in multiple jurisdictions should maintain additional financial resources sufficient to cover a wide range of potential stress scenarios that should include, but not be limited to, the default of the two largest participants and their affiliates that would potentially cause the largest aggregate credit exposures to the CCP in extreme but plausible market conditions. All other CCPs should maintain, at a minimum, total financial resources sufficient to cover the default of the one participant and its affiliates that would potentially cause the largest aggregate credit exposures to the CCP in extreme but plausible market conditions.


Approach since entry into force of the SIPS Regulation No specific actions have been undertaken. Reference is made to the description of the system’s design in the preceding sections of this disclosure report.

Principle 5: Collateral An FMI that requires collateral to manage its or its participants’ credit exposure should accept collateral with low credit, liquidity, and market risks. An FMI should also set and enforce appropriately conservative haircuts and concentration limits.


Approach since entry into force of the SIPS Regulation Credit risk, i.e. the risk arising from the inability of a participant to pay its settlement obligations when due or at a later time in the future, does not arise in the context of the STEP2-T System. Reference is made to the description of the system’s design in the preceding sections of this disclosure report.

Principle 7: Liquidity risk An FMI should effectively measure, monitor, and manage its liquidity risk. An FMI should maintain sufficient liquid resources in all relevant currencies to effect same-day and, where appropriate, intraday and multiday settlement of payment obligations with a high degree of confidence under a wide range of potential stress scenarios that should include, but not be limited to, the default of the participant and its affiliates that would generate the largest aggregate liquidity obligation for the FMI in extreme but plausible market conditions.


Approach since entry into force of the SIPS Regulation Reference is made to the description of the system’s design in the preceding sections of this disclosure report. A participant needs to have the necessary liquidity on its account in TARGET2 for its payment orders to be included in, and accepted for, a settlement round. Enhancements to the tools available to participants for monitoring and controlling their liquidity needs are envisaged at the time of implementation of the initiative referred to under Principle 8.


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Principle 8: Settlement finality An FMI should provide clear and certain final settlement, at a minimum by the end of the value date. Where necessary or preferable, an FMI should provide final settlement intraday or in real time.


Approach since entry into force of the SIPS Regulation STEP2-T provides frequent intraday settlement. STEP2-T has adopted a multiple batch settlement for the SCT Service – there are two (optional) night-time processing cycles and five day-time processing cycles for the STEP2 SCT Service –, and a single batch settlement for the SDD Core and B2B Services – there is one processing cycle for the STEP2 SDD Core Service and one processing cycle for the STEP2 SDD B2B Service. A blueprint for further enhancing certainty of settlement and an accompanying legal analysis were finalised and submitted to the Overseer. Subject to a nihil obstat to proceed, a functional release is planned for implementation of the envisaged changes, taking into account the required lead time for preparing the implementation.

Principle 9: Money settlements An FMI should conduct its money settlements in central bank money where practical and available. If central bank money is not used, an FMI should minimise and strictly control the credit and liquidity risk arising from the use of commercial bank money.


Approach since entry into force of the SIPS Regulation No specific actions have been undertaken. STEP2-T settles in TARGET2-ECB.

Principle 13: Participant-default rules and procedures An FMI should have effective and clearly defined rules and procedures to manage a participant default. These rules and procedures should be designed to ensure that the FMI can take timely action to contain losses and liquidity pressures and continue to meet its obligations.


Approach since entry into force of the SIPS Regulation The default rules contained in the STEP2 System Documentation have been amended to clarify the impact of the implementation of the provisions of the EU Bank Recovery and Resolution Directive or similar legislation. An abridged version of the default rules has been published on the public pages of the website.

Principle 15: General business risk An FMI should identify, monitor, and manage its general business risk and hold sufficient liquid net assets funded by equity to cover potential general business losses so that it can continue operations and services as a going concern if those losses materialise. Further, liquid net assets should at all times be sufficient to ensure a recovery or orderly wind-down of critical operations and services.


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Approach since entry into force of the SIPS Regulation The Company has identified the amount of, and maintains, sufficient liquid net assets to cover potential general business losses. The Company has prepared a recovery and orderly wind down policy, and is developing a comprehensive recovery and orderly wind down plan which has been submitted in draft to the Overseer.

Principle 16: Custody and investment risks An FMI should safeguard its own and its participants’ assets and minimise the risk of loss on and delay in access to these assets. An FMI’s investments should be in instruments with minimal credit, market, and liquidity risks.


Approach since entry into force of the SIPS Regulation EBA CLEARING does not incur any rights or obligations arising from the sending and receiving of payment messages, and at no time does EBA CLEARING hold any funds or deposits in relation to the operation of its systems. No changes have been made to the policy applied for investments of own assets.

Principle 17: Operational risk An FMI should identify the plausible sources of operational risk, both internal and external, and mitigate their impact through the use of appropriate systems, policies, procedures, and controls. Systems should be designed to ensure a high degree of security and operational reliability and should have adequate, scalable capacity. Business continuity management should aim for timely recovery of operations and fulfilment of the FMI’s obligations, including in the event of a wide-scale or major disruption.


Approach since entry into force of the SIPS Regulation Criteria for the identification of critical participants have been developed, and designated critical participants have been invited to complete a self-certification on compliance with the requisite resilience requirements. No (other) gaps were identified in relation to compliance for the STEP2 system with the requirements of Article 15 of the SIPS Regulation implementing Principle 17 on Operational risk.

Principle 18: Access and participation requirements An FMI should have objective, risk-based, and publicly disclosed criteria for participation, which permit fair and open access.


Approach since entry into force of the SIPS Regulation The admission criteria for STEP2-T have been published on the public pages of the website.


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Principle 19: Tiered participation arrangements An FMI should identify, monitor, and manage the material risks to the FMI arising from tiered participation arrangements.


Approach since entry into force of the SIPS Regulation A process for identification of tiered participants (intra-group and extra-group) has been implemented. Based on the results thereof, a statistical analysis on tiering is being conducted.

Principle 21: Efficiency and effectiveness An FMI should be efficient and effective in meeting the requirements of its participants and the markets it serves.


Approach since entry into force of the SIPS Regulation A service availability report for publication to stakeholders has been prepared.

Principle 22: Communication procedures and standards An FMI should use, or at a minimum accommodate, relevant internationally accepted communication procedures and standards in order to facilitate efficient payment, clearing, settlement, and recording.


Approach since entry into force of the SIPS Regulation No specific actions have been taken. Reference is made to the description of the communication procedures and standards used in the preceding sections of this disclosure report.

Principle 23: Disclosure of rules, key procedures, and market data An FMI should have clear and comprehensive rules and procedures and should provide sufficient information to enable participants to have an accurate understanding of the risks, fees, and other material costs they incur by participating in the FMI. All relevant rules and key procedures should be publicly disclosed.


Approach since entry into force of the SIPS Regulation Relevant updates of the publicly available pages on the website of EBA CLEARING, as well as the present disclosure report, have been prepared.


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V. List of publicly available resources

EBA CLEARING and STEP2:

“About EBA CLEARING” section on website: www.ebaclearing.eu/N=About-

EBA-CLEARING.aspx

By-laws of EBA CLEARING: www.ebaclearing.eu/N=Reference-

Documents.aspx

EBA CLEARING Shareholders: www.ebaclearing.eu/N=Shareholders.aspx

EBA CLEARING Board: www.ebaclearing.eu/N=Governing-bodies.aspx

EBA CLEARING Board Committees: www.ebaclearing.eu/N=Board-

committees.aspx

EBA CLEARING Annual Report 2014:

https://www.ebaclearing.eu/N=Reference-Documents.aspx

STEP2 section on EBA CLEARING website:

www.ebaclearing.eu/N=STEP2.aspx

STEP2 Statistics: https://www.ebaclearing.eu/N=STEP2-Statistics.aspx

E-book “STEP2: Straight through SEPA”: https://www.ebaclearing.eu/E-

Books/STEP2-Services/

Oversight reports with the results of oversight assessments on STEP2 published by the ECB:

“Assessment of euro retail payment systems against the applicable Core

Principles”, August 2005:

https://www.ecb.europa.eu/pub/pdf/other/assessmenteuroretailpaymentsys

tems200508en.pdf?28b16b39946998e023c2bdd2dcc8dd0d

“Payment systems and market infrastructure oversight report 2007”, July

2008:

https://www.ecb.europa.eu/pub/pdf/other/paymentsystemsandmarketinfrast

ructureoversightreport2007en.pdf

“Eurosystem oversight report 2009”, November 2009:

https://www.ecb.europa.eu/pub/pdf/other/eurosystemoversightreport20091

1en.pdf

“Eurosystem oversight report 2011”, April 2012:

https://www.ecb.europa.eu/pub/pdf/other/eurosystemoversightreport2011e

n.pdf

“Eurosystem oversight report 2014”, February 2015:

https://www.ecb.europa.eu/pub/pdf/other/eurosystemoversightreport2014.e

n.pdf

http://www.ebaclearing.eu/N=About-EBA-CLEARING.aspx

http://www.ebaclearing.eu/N=About-EBA-CLEARING.aspx



http://www.ebaclearing.eu/N=Shareholders.aspx

http://www.ebaclearing.eu/N=Governing-bodies.aspx



https://www.ebaclearing.eu/N=Reference-Documents.aspx

http://www.ebaclearing.eu/N=STEP2.aspx

https://www.ebaclearing.eu/N=STEP2-Statistics.aspx

https://www.ebaclearing.eu/E-Books/STEP2-Services/

https://www.ebaclearing.eu/E-Books/STEP2-Services/











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