An assessment conducted by the International Monetary Fund (IMF) in 2002 on the payments systems in Luxembourg concluded that the two main payment systems in the country, the Luxembourg Inter-bank Payment System (LIPS-Gross) and the Luxembourg Inter-bank Payment System-Netting (LIPS-Net) observed all Core Principles for Systemically Important Payment Systems (CPSIPS) as prescribed by the Committee on Payment and Settlement Systems (CPSS). A 2004 assessment by the European Central Bank (ECB) on LIPS-Gross arrived at a similar conclusion. However, both systems have since been discontinued and replaced. LIPS-Gross, Luxembourg's real-time gross settlement (RTGS) system and its Trans-European Automated Real-time Gross settlement Express Transfer (TARGET) component, was replaced by TARGET2 in November 2007. LIPS-Net, on the other hand, was discontinued in 2006 and transactions settled through this system are now being processed on STEP2 (the pan-European platform operated by the Euro Banking Association. Subsequent to these changes, there has been little information publicly available addressing Luxembourg's compliance with the CPSIPS. On TARGET2's compliance with the CPSIPS, a 2002 report by the ECB indicated that the system is expected to fully comply with the CPSIPS. Despite the lack of information on TARGET2, it is generally believed that TARGET2 is an improvement over its predecessor and its component systems. Therefore the level of compliance assigned to Luxembourg's payment systems by past assessments is maintained until TARGET2 is fully implemented in all the member countries and assessed against the CPSIPS.

General Overview

The IMF, in 2002, assessed the Luxembourg Inter-bank Payment System (LIPS-Gross) and the Luxembourg Inter-bank Payment System-Netting System (LIPS-Net). At the time of the assessment, both systems observed the Committee on Payment and Settlement Systems' (CPSS) Core Principles for Systemically Important Payment Systems (CPSIPS). Subsequently, however, both systems were discontinued. LIPS-Gross was replaced by TARGET2 in November 2007. TARGET2 is the successor to the Trans-European Automated Real-time Gross settlement Express Transfer (TARGET), of which LIPS-Gross was a component of. LIPS-Gross was Luxembourg's real-time gross settlement (RTGS) system and, according to a 2004 ECB assessment on all TARGET components, LIPS-Gross observed all the CPSIPSs. TARGET2 is expected to be phased into its member countries' systems in three groups -- November 2007, February 2008, and May 2008. Luxembourg was part of the first group of countries. Despite the overall consensus as to TARGET2 being superior to TARGET, there is little information publicly available addressing its compliance with the CPSIPS.

LIPS-Net processed all domestic checks and credit transfers (BCL website) until it ceased operations in October 2006 (ECB 2007c). The 2007 ECB report titled "Payment and Securities Settlement Systems in the European Union: Euro Area Countries," (hereafter referred to as 2007 ECB report on Euro Area Countries) states that, presently, Luxembourg's credit transfers and standing orders are processed on STEP2 (the pan-European platform operated by the Euro Banking Association). Further, since July 2006 checks have been exchanged and cleared between banks on a bilateral basis.

According to 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 2002 report on TARGET2, the ECB stated 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). Further, per a 2005 report by the Bundesbank, TARGET2 is expected to maintain and improve upon the functioning of the TARGET and RTGSplus systems.

The 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) notes that the Bundesbank (German central bank), Banca d'Italia (Italian central bank) and Banque de France (French central bank) provide TARGET2 participants with a single technical platform, called the Single Shared Platform (SSP). The report further 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, national central banks (NCBs) are permitted to continue processing payments via their Proprietary Home Account application (PHAs) instead of the SSP for a four-year transitional period from when the country migrates to TARGET2, so as to allow participants more time and facilitate their change-over to the SSP (ECB 2007d).

Despite the transition to TARGET2, member countries' NCBs still have supervisory authority, and national legislation still holds significance. 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 CPSIPSs as one of the standards the Eurosystem (the ECB and the national central banks of the euro area which have adopted the euro) must apply when performing its oversight role.

Luxembourg does not have an all-encompassing law that governs all aspects of payment systems, according to the 2007 ECB report on Euro Area Countries. Instead, the report states that the Civil Code addresses certain general provisions on payments and lists the various forms of payment. The report also notes that, in general, issues relating to payments are covered by private contracts between financial institutions, customers, and retailers; and issues that relate to checks, bills of exchange, collateral, and the supervision of the financial sector are covered by specific laws. The 2007 ECB report on Euro Area Countries notes that the relevant provisions for regulating European Union (EU) area payment systems are put forth in the Treaty and the Statute of the European System of Central Banks (ESCB). The report also states that the main provisions of the Treaty and the Statute of the ESCB governing payment systems are Article 105(2) of the Treaty, and Article 22 of the Statute of the ESCB.

The Central Bank of Luxembourg (Banque Centrale du Luxembourg, or BCL) is responsible for the oversight of payment systems and in this capacity undertakes routine and ad hoc inspections and audits. According to the BCL's 2006 Annual Report (published in 2007), with the advent of TARGET2, its role has become narrower. Nevertheless, the report indicates that the BCL will continue to oversee the decentralized activities of TARGET2. The 2002 report by the IMF concluded that the "role, responsibilities, and objectives of the BCL are clearly defined in the Treaty of the ESCB Statutes and the national Law implementing the Directive 98/26/EC on settlement finality in payment and securities settlement systems" (p. 62).

According to the 2007 ECB report on Euro Area Countries, the retail payment systems in the region are to be categorized as systemically important systems; prominently important systems, and other systems, and the Eurosystem ensures that these systems are also overseen by consistent policy. Finally, the Single Euro Payments Area (SEPA) project is also 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," which would imply that from 2008 onwards, citizens of the 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 fairly 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.

FC

The IMF, in 2002, assessed LIPS-Gross and LIPS-Net and concluded that both systems observed the CPSIPS. A 2004 assessment by the ECB also concluded that LIPS-Gross observed this principle. Subsequently, however, both systems were discontinued and LIPS-Gross was replaced by TARGET2 in November 2007 and there is little information publicly available as to TARGET2's compliance with this principle. LIPS-Net, according to the 2007 ECB report on Euro Area Countries, ceased to exist in October 2006.

Luxembourg does not have an all-encompassing law that governs all aspects of payment systems, according to the 2007 ECB report on Euro Area Countries. Instead, the report states that the Civil Code addresses certain general provisions on payments and lists the various forms of payment. The report also notes that, in general, issues relating to payments are covered by private contracts between financial institutions, customers and retailers; and issues that relate to checks, bills of exchange, collateral, and the supervision of the financial sector are covered by specific laws.

The EU's 1998 Settlement Finality Directive (98/26/EC) was transposed into national legislation in 2001. Similarly, the EU Directives on cross-border credit transfers and cross border payments in Euro have been adopted by Luxembourg per the 2007 ECB report on Euro Area Countries. According to the 2007 ECB report on Euro Area Countries "the Organic Law of the Banque Centrale du Luxembourg refers only in very general terms to its responsibilities in the area of payment systems" (p. 288). The report also notes that the BCL acts in accordance with the guidelines and rules set out for the ESCB. The IMF's 2002 report indicated that the BCL's oversight function is laid down in Article 105 of the European Commission's Treaty and Articles 3 and 22 of the Statutes of the ESCB.

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 IMF, in 2002, assessed LIPS-Gross and LIPS-Net and concluded that both systems observed the CPSIPS. A 2004 assessment by the ECB also concluded that LIPS-Gross observed this principle. Subsequently, however, both systems were discontinued. LIPS-Gross was replaced by TARGET2 in November 2007 and there is little information publicly available as to TARGET2's compliance with this principle. LIPS-Net, according to the 2007 ECB report on Euro Area Countries, ceased to exist in October 2006. A report by the BCL titled "Terms and Conditions for Participation in Target2-LU" provides participants with a description of the rules for TARGET2.

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

LIPS-Gross observed this principle according to the IMF's 2002 report and the 2004 assessment by the ECB. Similarly, the IMF's 2002 report concluded that LIPS-Net observed the CPSIPS. Subsequently, however, both systems were discontinued. LIPS-Gross was replaced by TARGET2 in November 2007 and there is little information publicly available as to TARGET2's compliance with this principle. LIPS-Net, according to the 2007 ECB report on Euro Area Countries, ceased to exist in October 2006.

The 2007 ECB report on Euro Area Countries notes that "the following sources of liquidity can be used in TARGET2: balances on RTGS accounts, provision of intraday liquidity, and offsetting payment flows (i.e. the use of algorithms to settle a number of queued payments)" (p. 39). The report further states that intraday credit will be granted to participants against eligible collateral by the respective national central banks. According to a 2005 report by the Bundesbank, TARGET2 has bilateral and multilateral limits that will permit liquidity management for all TARGET2 participants.

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

LIPS-Gross observed this principle, according to the IMF's 2002 report and the 2004 assessment by the ECB. The IMF's 2002 report concluded that LIPS-Net observed the CPSIPS. Subsequently, however, both systems were discontinued. LIPS-Gross was replaced by TARGET2 in November 2007 and there is little information publicly available as to TARGET2's compliance with this principle. LIPS-Net, according to the 2007 ECB report on Euro Area Countries, ceased to exist in October 2006.

According to the 2007 ECB report on Euro Area Countries, the EU's Settlement Finality Directive of 1998 harmonized laws in member states and thereby ensures that the operations of payment and settlement systems are not stopped by the bankruptcy of a participant. Furthermore, the report also states that unless otherwise indicated by the participant, payments in TARGET2 are settled immediately or at least by the end of the business day.

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.)

FC

The IMF, in 2002, assessed LIPS-Gross and LIPS-Net. As LIPS-Gross is a RTGS system this principle was inapplicable to it. At the time of the IMF assessment it was indicated that LIPS-Net observed this principle. Subsequently, however, both systems were discontinued. LIPS-Gross was replaced by TARGET2 in November 2007. TARGET2 like its predecessor TARGET is a RTGS 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

The IMF, in 2002, assessed LIPS-Gross and LIPS-Net and concluded that both systems observed the CPSIPS. A 2004 assessment by the ECB also concluded that LIPS-Gross observed this principle. Subsequently, however, both systems were discontinued. LIPS-Gross was replaced by TARGET2 in November 2007 and there is little information publicly available as to TARGET2's compliance with this principle. Nevertheless, 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).The LIPS-Net system, according to the 2007 ECB report on Euro Area Countries, ceased to exist in October 2006.

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

LIPS-Gross observed this principle according to the IMF's 2002 report and the 2004 assessment by the ECB. Similarly, the IMF's 2002 report concluded that LIPS-Net observed the CPSIPS. Subsequently, however, both systems were discontinued. LIPS-Gross was replaced by TARGET2 in November 2007 and there is little information publicly available as to TARGET2's compliance with this principle.

Although there is no comprehensive assessment publicly available of TARGET2's functioning against the CPSS' requirements for this principle, a 2007 report by the ECB titled "Fourth Progress Report on TARGET2" does indicate that "a concept called 'measures to ensure the security and operational reliability of TARGET2 participants' has been developed. By implementing this concept, the report states, the Eurosystem, in its capacity as TARGET2 system operator, will meet CP 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(s)' failure, a bank(s)' 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 IMF, in 2002, assessed LIPS-Gross and LIPS-Net and concluded that both systems observed the CPSIPS. A 2004 assessment by the ECB also concluded that LIPS-Gross observed this principle. Subsequently, however, both systems were discontinued. LIPS-Gross was replaced by TARGET2 in November 2007 and there is little information publicly available as to TARGET2's compliance with this principle.

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

FC

LIPS-Gross observed this principle according to the IMF's 2002 report and the 2004 assessment by the ECB. The IMF's 2002 report concluded that LIPS-Net observed the CPSIPS. Subsequently, however, both systems were discontinued. LIPS-Gross was replaced by TARGET2 in November 2007 and there is little information publicly available as to TARGET2's compliance with this principle. A report by the BCL titled "Terms and Conditions for Participation in Target2-LU" provides information on the access criteria for participants in TARGET2. Further, 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

The IMF, in 2002, assessed LIPS-Gross and LIPS-Net and concluded that both systems observed the CPSIPS. A 2004 assessment by the ECB also concluded that LIPS-Gross observed this principle. Subsequently, however, both systems were discontinued. LIPS-Gross was replaced by TARGET2 in November 2007 and there is little information publicly available as to TARGET2's compliance with 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 BCL is responsible for the oversight of payment systems and in this capacity undertakes routine and ad hoc inspections and audits. The 2002 report by the IMF concluded that the "role, responsibilities and objectives of the BCL are clearly defined in the Treaty of the ESCB Statutes and the national Law implementing the Directive 98/26/EC on settlement finality in payment and securities settlement systems" (p. 62). The BCL acts in accordance with the guidelines and rules set out for the ESCB as noted in the 2007 ECB report on Euro Area Countries. The IMF's 2002 report indicated that the BCL's oversight function is laid down in Article 105 of the European Commission's Treaty and Articles 3 and 22 of the Statutes of the ESCB.

With the advent of TARGET2, the BCL's role has become narrower, according to its 2006 Annual Report; nevertheless, BCL will continue to oversee the decentralized activities of TARGET2. 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 still hold significance. The 2007 ECB report on Euro Area Countries, states that "central banks [in the EU countries] 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 and to ensure the transparency of the arrangements concerning payment instruments and services. Where necessary, 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).

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

FC

The 2007 ECB report on Euro Area Countries notes that in 2001 the Governing Council of the ECB adopted the CPSIPSs as one of the standards the Eurosystem must apply when performing its oversight role.

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.

FC

Refer to Principle B.

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.

FC

The 2007 ECB report on Euro Area Countries states that "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). The 2006 Annual Report by the BCL stated that "as a member of the European system of central banks, the BCL has also contributed to the work in the field of oversight of the Payment and Settlement Systems Committee (PSSC)... [Similarly], the BCL has contributed to the working out of a methodology for the oversight of TARGET2" (p. 87).