What model of governance for central bank’s operated systems?

1. What model of governance for central bank’s operated systems? Denis BEAU Deputy Director Payment System and Market Infrastructure Directorate Banque de France World Bank Seminar 30 May 2007 1

2. Introduction • Governance arrangements are important because the interests of stakeholders in relation to risk and efficiency management are different and may conflict • Risk of underperformance in the fulfilment of public interest of safety and efficiency • Importance well recognized with dedicated international standard/recommendation for SIPS/SSS/CCP • Requirements to be met do not vary with the form of ownership: effective, accountable and transparent 2

3. Introduction • What may differ are the challenges to be faced and the techniques to be used 3

4. Outline • Challenges with central-bank owned systems • Solutions chosen forTARGET2 • new challenges raised with TARGET2 Securities 4

5. Challenges with central-bank owned systems • Decision management • Identifying and balancing the needs of potential users in a system where they have no ownership: • Composition and role of user groups in the design and operation phases? • Identifying and balancing « production » choices with public policy objectives : • risk/efficiency trade-offs between operating a system in full,outsourcing some of the function to be performed (to other central banks, to private service providers), providing only the settlement asset? • Ensuring independence decision making process between operation and oversight: • separation of functions in different organisational units? 5

6. Challenges with central-bank owned systems • Decision control • ensuring independent control/oversight over management: • Relationships between operations functions and internal audit/oversight functions? • Role for an external audit? • Ensuring accountability to users: • Public disclosure of which types of information? 6

7. TARGET2- solutions chosen Swift Net Services Bank B Bank A SSP Interlinking via FIN NCBs Ancillary ssystems From TARGET to TARGET2 7

8. Overall management of T2 Coordination of TARGET2 Provision of the SSP Support to Level 2 Coordination of national migration Business relations Level 1-Governing Council of the ECB Level 2- CBs Level 3- 3CB Level 3-3CB Central banks Central Banks TARGET 2 Governance - overview 8

9. TARGET 2: 3 governance levels Level1: ECB Governing Council Responsible for the direction, management and control of TARGET2 Level2: Participating central banks They have a subsidiary competence for issues left to their discretion by Level 1 and act as an advisory body to the GC in all matters relating to TARGET2 (PSSC) Level3:  3 CBs (Banque de France, Bundesbank, Banca d’Italia) These three central banks develop and manage the future system on the basis of a service level agreement with Level 2, within the general framework defined by Level 1 9

10. TARGET2-involvement of users • Public consultations: • 2002: invitation to comment on the principles and structures of T2 • 2004: invitation to comment on the GFS • Working groups at European level: • TARGET Working Group • Joint TF on operation, risk and contingency • Joint TF on testing and migration • User groups at national level 10

11. TARGET2- « Production » choices • The 3CB as service provider: • Expertise in payment service provisions: • Well-established systems at national level with innovative features • Account for about 65% of current TARGET traffic • Optimal use of resources and expertise («building block approach », cutting-edge business continuity provision) • Multicultural team fitted to European projects • Separation of functions: • CB as operator vs CBs as users • Oversight vs operation 11

12. TARGET2- controls • 2 bodies are performing compliance checks: • internal ESCB auditors: 2 audits already performed about the conduct of the project, at the European level, as well as the national level • Eurosystem overseers : • specific arrangement put in place involving all CBs, conducted by the ECB • a preliminary assessment done • a complete assessment against the core principles for SIPS will be performed before the system goes live. 12

13. What’s new with TARGET2 Securities ? CSD CSD operations today T2S does not segregate custody and settlement… Lending Reporting T2S does not segregate custody and settlement… Custody Settlement Other… Coll. Mgmt T2S world T2S CSD Lending Reporting Settle-ment Custody It provides a common settlement facility Other… Coll. Mgmt 13

14. What’s new with TARGET2 Securities ? The concept: securities and cash accounts in one platform TARGET2 CASH SECURITIES CSD A NCB A CSD A ACCOUNTS NCB A ACCOUNTS T2S SETTLEMENT ENGINE CSD B NCB B CSD B ACCOUNTS NCB B ACCOUNTS NCB C CSD C NCB C ACCOUNTS CSD C ACCOUNTS T2S 14 TARGET2

15. What’s new with TARGET2 Securities ? • Objectives and principles of the T2S project governance: • - Balance between efficiency and wide representation of all categories of stakeholders: • Central banks • CSDs • Users (mainly banks, others: e.g. CCPs) - Maintain high level of openness and transparency - Reflect financing and risk-taking in decision-making : T2S fully owned and operated by the Eurosystem 15

16. What’s new with TARGET2 Securities ? Project Governance User Requirements phase ECB Governing Council PSSC Executive Board T2S Advisory Group National User Groups Information Sessions with all Stakeholders Co-ordination Group Information Sessions - Non-functional requirements Scope & Schedule Lifecycle & Matching Settlement Functionality Interfaces Static Data 17 Six Technical Groups 16

17. Conclusion- some lessons learned • Need for a clear, structured and strong governance • Key importance of transparent and accountable dialogue with users to balance absence of role in ownership/decision • Key importance of organisational arrangements to handle potential conflicts of interest between the various roles of the Central Bank 17