The Bank of Portugal (BdP) in two of its recent (2007 and 2008) reports on payment systems mentioned that the Portuguese Large-Value Real-Time Gross Settlement System (SPGT) settled all transactions with a value greater than 100,000 euro so as to minimize systemic risk. The retail payment system in Portugal, the Interbank Clearing System, according to a 2005 European Central Bank (ECB) assessment is a prominently important retail payment system rather than a systemically important payment system. In its 2004 assessment of TARGET components, the ECB concluded that SPGT fully observed seven of the ten Core Principles for Systemically Important Payment Systems (CPSIPS) as defined by the Committee on Payment and Settlement Systems (CPSS). It broadly observed Principles VII & VIII and Principle V was not applicable to the system. However, on February 18, 2008, SPGT was replaced by the European Union's Trans-European Automated Real-Time Gross Settlement Express Transfer (TARGET) 2 system. TARGET2 is the successor to TARGET, to which SPGT was already linked. While with TARGET, the large value interbank payment systems of member countries were interlinked, TARGET2 provides harmonized payment services under a single shared platform across its member countries. However, there is little information assessing TARGET2’s compliance with the CPSIPS except for a statement in a 2008 ECB report on TARGET2, in which it indicates that the system is expected to fully observe all the CPSIPS. Despite the lack of information on TARGET2, it is generally believed that the system is an improvement over its predecessor and its component systems. Therefore, the level of compliance assigned to SPGT by the 2004 ECB assessment is maintained until TARGET2 is fully implemented in all its member countries and assessed against the CPSIPS, which according to the 2008 ECB report, is expected in late 2008.

General Overview

In its 2004 assessment of TARGET components, the European Central Bank (ECB) concluded that the Portuguese Large-value Real-time Gross Settlement System (SPGT) fully observed seven of the ten Core Principles for Systemically Important Payment Systems (CPSIPS) as defined by the Committee on Payment and Settlement Systems (CPSS). It broadly observed Principles VII & VIII, and Principle V was not applicable to SPGT as it is a real time gross settlement (RTGS) system. According to a 2007 and a 2008 report by the Bank of Portugal (BdP) regarding the payment systems in the country, all large value transactions (greater than €100,000) were to be settled via the SPGT so as to avoid any systemic risk in the country's payment system. A 2006 report by the International Monetary Fund (IMF) notes that the Portuguese payment and settlement system infrastructure "is highly developed, efficient, technologically advanced" (p. 23) and risk management of the system is effective. The report further notes that there is a sound legal basis in the country for clearing and settlement "with a clear definition of finality and irrevocability, recognition of netting and novation, and protection of collateral arrangements. No-zero-hour rule exists and transactions settled with finality cannot be unwound, not even in case of a bankruptcy. The infrastructure for payments ensures a high degree of security and operational reliability" (p. 23).

SPGT was Portugal's Trans-European Automated Real-Time Gross Settlement Express Transfer (TARGET) component. As of November 19, 2007, TARGET has been replaced by its successor, TARGET2 and as of February 18, 2008, Portugal has migrated to TARGET2. TARGET2 not only replaced its predecessor TARGET, but also all former large value payment systems in the euro area, which included SPGT. According to a 2007 report by the European Central Bank (ECB) titled “Payment and Securities Settlement Systems in the European Union: Euro Area Countries,” (hereafter referred to as 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 2008 report titled "TARGET Annual Report: 2007" (hereafter referred to as the ECB's 2007 annual report), the ECB states that TARGET2 better meets user needs by: "providing a harmonized service level with a harmonized pricing structure; ensuring cost-efficiency; preparing for future developments; and including the enlargement of the EU and the euro area" (p. 26).

SPGT became fully operational on 30 September 1996 and according to a 2008 Bank of Portugal report titled "Payment Systems in Portugal," certain operations were to be processed via the system. Transactions with a value of over €100,000 were to be settled in the SPGT, especially in the following cases: (1) interbank transfers between participants (including transfers on behalf of customers) with a value date that falls within the two subsequent working days; and (2) settlement of large-value checks and direct-debits (equal to or more than the above-mentioned limit). Moreover the following operations were also to be processed via SPGT irrespective of their unit value: (1) settlement of the interbank clearing system balances (checks, electronic funds transfer (TEI), direct debits, bills of exchange) and stock exchange clearing balances; (2) money market operations contracted and processed via the market electronic transfer system (SITEME); contracting and repayment of operations; (3) operations carried out with the Bank of Portugal (excluding SITEME operations); (4) TARGET cross-border transfers; (5) transfers ordered in favor of other BdP depositors not participating in the SPGT (such as, the Settlement System for Other Depositors' participants); and (5) credit entries resulting from transfers ordered by other BdP depositors in favor of SPGT participants.

As Portugal became part of TARGET2, the new system is the responsible for settling all large value transactions in the country. However, there is practically no information on the BdP website regarding the transition from SPGT to TARGET2. In its 2002 report on TARGET2, the ECB states 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). A 2008 report by the ECB titled "Payment Systems and Market Infrastructure Oversight Report 2007," (hereafter referred to as the ECB's 2008 Oversight Report) states that the CPSS' CPSIPS is the most important standard the Eurosystem uses in its oversight policy. Further the report notes that the ECB in cooperation with the National Central Banks (NCBs) conducted a comprehensive assessment of the TARGET2 design against the CPSS' CPSIPS and concluded that "TARGET2 is likely to fully observe all relevant Core Principles provided that the action plan [agreed upon by the participants] is properly followed-up" (pp. 12-13). The report also indicates that the Governing Council of the ECB will make a final assessment of the TARGET2's compliance with CPSIPS by the end of 2008 and is expected to publicly release a report on the oversight assessment of TARGET2 within the first quarter of 2009.

The ECB's 2008 Oversight Report notes that the Bundesbank, (German central bank), Bank of Italy, and Banque de France (French central bank) will provide TARGET2 participants with a single technical platform, called the Single Shared Platform (SSP). Further a 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) 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 (NCBs)” (p. 4). Furthermore, NCBs are permitted to continue processing payments via their Proprietary Home Account (PHAs) application instead of the SSP for a four-year transitional period beginning when the country migrates to TARGET2, so as to allow participants more time to facilitate their change-over to the SSP. Therefore, despite the transition to TARGET2, member countries’ national central banks still have supervisory authority, and national legislation remains significant. 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 CPSIPS as one of the standards the Eurosystem must apply when performing its oversight role.

The now defunct SPGT was owned and operated by BdP. The retail payments are processed through the Interbank Clearing System (SICOI) and although this system is owned by the central bank, it has its operation delegated to an interbank services provider, the Interbank Services Company (SIBS). In addition to the above two systems, the BdP owns and operates the Settlement System for Other Depositors (SLOD) to process credit transfers between institutions not participating in the SPGT. The BdP oversees payment systems in Portugal pursuant to the Organic Law of the Bank of Portugal. Article 14 of Organic Law states that "it shall be incumbent on the Bank of Portugal to regulate, oversee and promote the smooth operation of payment systems, namely within the scope of its participation in the European System of Central Banks (ESCB)." In addition to Organic Law, Section 1 of Article 117-A of the Legal Framework of Credit Institutions and Financial Companies, approved by Decree-Law No. 298 of 1992, states that “Banco the Portugal may subject to its supervision the entities that have as their purpose to carry on, or that actually carry on, activities specially relevant for the operation of the payment system, specifying the rules and duties applicable to them, from among those envisaged in this Decree-Law for financial companies." The 2008 report by the BdP states that "the oversight function is performed by means of monitoring payment systems, assessing their compliance with the Core Principles for the Systemically Important Payment Systems, issuing regulations, exercising moral suasion and providing settlement services for banks or payment and clearing systems, as well as by playing a catalyst role in developing these systems and promoting coordination among the relevant parties through the Interbank Co-ordinating Commission for Payment Systems (CISP)" (p. 6).

The BdP is part of the ESCB, which was officially established on 1 June 1998 and comprised the ECB and the NCBs European Union Member States. Article 105(2) of the Treaty Establishing the European Community (Maastricht Treaty) and Article 22 of the Statute of the ESCB include among the ESCB’s institutional functions the promotion of the smooth operation of payment systems. According to the 2007 ECB report on Euro Area Countries, the BdP "pledged to implement and disseminate the policies presented in the ’Statement on the role of the Eurosystem in the field of payment systems oversight’ published by the ECB on 21 June 2000 and to adopt the CPSS' CPSIPS" (pp. 362-363).

The Principles

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

FC

The 2004 ECB assessment concluded that SPGT observed this principle. However, in February 2008, TARGET2 replaced SPGT and as of October 2008, there is no published assessment of TARGET2 against the CPSS' CPSIPS. According to the ECB's 2007 annual report, in 2007, the Eurosystem completed the TARGET2 Guideline, which forms the basis for the NCBs to establish their TARGET2 component systems, governed by their national legislation. The TARGET2 Guideline contains the main legal elements of TARGET2, including governance arrangements and audit rules, as well as transitory provisions on the migration from TARGET to TARGET2. The Guideline was published in the Official Journal of the European Union in September 2007 and is also available on the ECB’s website in all EU languages. The Guideline has a harmonized set of rules for all TARGET2 participants and allows Eurosystem NCBs to implement these rules in an identical manner, with deviations only if national laws require such. The harmonized conditions also contain relevant alternatives which will enable NCBs to customize their respective implementation in line with the requirements of national law. According to the ECB's 2007 annual report "this approach implements the decision of the Governing Council of the ECB in October 2005 to legally construct TARGET2 as a multiple system, but aiming at the highest degree of harmonization of the legal documentation used by the central banks within the constraints of their respective national legal framework” (p. 27).

Despite the transition to TARGET2, the NCBs of member countries still have supervisory authority and national legislation still applies. According to the 2007 ECB report on Euro Area countries, the relevant provisions for regulating EU area payment systems are put forth in the Treaty and the Statute of the ESCB. Other important EU directives relating to payment systems are the Cross-Border Credit Transfers Directive (Directive 97/5/EC) of January 27, 1997, and the Settlement Finality Directive (Directive 98/26/EC) of May 19, 1998.

A 2006 report by the IMF notes that there is a sound legal basis in Portugal for clearing and settlement "with a clear definition of finality and irrevocability, recognition of netting and novation, and protection of collateral arrangements. No-zero-hour rule exists and transactions settled with finality cannot be unwound, not even in case of a bankruptcy" (p. 23).

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 2004 ECB assessment concluded that SPGT observed this principle. According to the 2008 report by the BdP, "the operating rules of the SPGT were laid down in the relevant Regulation approved by the Board of Directors of the BdP and contractually accepted by the system participants. The SPGT Regulation stipulated the broad lines of the system and the relations and responsibilities of the intervening parties" (p. 14). Other important documents pertinent to understanding the rules of the SPGT system were the Procedures Manual, which provides the participants with the detailed and practical procedures to be followed in order to ensure that the system functions smoothly, and the System Manual, which provides an overview of the main operational features of the SPGT and a complete description of its components.

However, as noted earlier in this report, on February 18, 2008 SPGT ceased operations and was replaced by the Euro Area payment system, TARGET2. As of October 2008, there is no published assessment of TARGET2 against the CPSS' CPSIPS. However, according to an ECB's 2007 annual report, the general functional specifications of TARGET2 provide the public with a high-level overview of the SSP for TARGET2 and its functional specifications. The user detailed functional specifications provides the public with a more in-depth and detailed explanation of the core services and the optional services offered by the SSP. Further, the user handbook for the information and control module (ICM) of the SSP describes the online information tools and control measures of the ICM, allowing access to the other relevant modules of the SSP. In 2007 the Eurosystem completed the TARGET2 Guideline, which forms the basis for the NCBs to establish their TARGET2 component systems, governed by their national legislation. The TARGET2 Guideline contains the main legal elements of TARGET2, including governance arrangements and audit rules, as well as transitory provisions on the migration from TARGET to TARGET2. The Guideline was published in the Official Journal of the European Union in September 2007 and is also available on the ECB’s website in all EU languages.

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 the 2004 ECB assessment SPGT observed this principle. However, the system was replaced by TARGET2 in February 2008 and as of October 2008 there is no published assessment of TARGET2 against the CPSIPS. As noted in a 2006 IMF report, the risk management procedures of the Portuguese payment systems are "robust" (p. 23).

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 SPGT observed this principle. However, the system was replaced by TARGET2 in February 2008 and as of October 2008 there is no published assessment of TARGET2 against the CPSIPS. The 2008 report by the BdP noted that "the operations and transfers [in the SPGT] were considered final from the moment they wee entered in the receiving settlement account" (p. 18).

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

Since the SPGT was a RTGS system this principle was not applicable to it as noted in the 2004 ECB report. Similarly, TARGET2 being a RTGS system, this principle is not applicable to it either.

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 2004 ECB assessment concluded that SPGT observed this principle. However, there is little information regarding TARGET2's compliance with this principle. 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).

In its 2008 report the BdP noted that "all participants in the SICOI, the interbank money market (MMI) system and the SPGT – i.e. the Treasury, credit institutions and financial companies – must hold a single current account with the central bank for settlement purposes" (p. 7).

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, SPGT broadly observed this principle. Further, the 2006 report by the IMF noted that "the infrastructure for payments [in Portugal] ensures a high degree of security and operational reliability" (p. 23). However, as noted earlier, in February 2008, SPGT ceased operations and was replaced by TARGET2. Although there is no comprehensive assessment publicly available of TARGET2 against the CPSS requirements for this principle, a 2007 report by the ECB titled “Fourth Progress Report on TARGET2” indicates that “a concept called ’Measures to ensure the security and operational reliability of TARGET2 participants’ has been developed. By implementing this concept, the Eurosystem, in its capacity as TARGET2 system operator, will meet CP [Core Principle] 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 failure, a bank 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.

CP

According to the 2004 ECB assessment, SPGT broadly observed this principle. Further, the 2006 report by the IMF noted that "the infrastructure for payments [in Portugal] ensures a high degree of security and operational reliability" (p. 23). With regards to the new system, TARGET2, there is no assessment publicly available of this system against the CPSS requirements for this principle.

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

FC

The 2004 ECB assessment concluded that SPGT observed this principle. As for TARGET2, 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).

With regards to the now defunct SPGT system, the 2008 BdP report noted that the following entities were able to apply for SPGT membership: "(1) credit institutions authorized to operate in Portugal, according to the legislation of Portugal and the European Community; (2) public sector bodies accepting deposits or other repayable funds, authorized to participate on a case-by-case basis, which frequently initiate or receive large-value transfers involving other participants; and (3) the Treasury. Access was granted provided that the applicants possess the minimum technical facilities required by the system, have signed the SPGT membership contract and have paid the membership fee" (p. 14).

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

FC

The 2004 ECB assessment concluded that SPGT observed this principle. There is insufficient 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

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 remains significant. According to the 2006 IMF report, "supervision of payments and settlement systems in Portugal is professional and active, comparing very well with international standards" (p. 1). The BdP oversees payment systems in Portugal pursuant to the Organic Law of the Bank of Portugal. Article 14 of Organic Law states that "it shall be incumbent on the Bank of Portugal to regulate, oversee and promote the smooth operation of payment systems, namely within the scope of its participation in the European System of Central Banks (ESCB)." In addition to the Organic Law, Section 1 of Article 117-A of the Legal Framework of Credit Institutions and Financial Companies, approved by Decree-Law No. 298 of 1992, states that “Banco the Portugal may subject to its supervision the entities that have as their purpose to carry on, or that actually carry on, activities specially relevant for the operation of the payment system, specifying the rules and duties applicable to them, from among those envisaged in this Decree-Law for financial companies."

In November 2007, the "Terms of Reference for the Oversight Assessment of Euro Systemically and Prominently Important Payment Systems against the Core Principles” and the “Guide for the Assessment against the Business Continuity Oversight Expectations for SIPS” were published. The documents provide a common methodology for oversight which aims "to provide the Eurosystem’s payment systems overseers with clear and comprehensive guidelines for the assessment of the relevant systems and the preparation of oversight reports" (ECB 2008b, p. 10). The ECB's 2008 Oversight Report notes that TARGET2 is designed on the basis of the above common methodology.

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

FC

According to the 2006 IMF report, "supervision of payments and settlement systems in Portugal is professional and active, comparing very well with international standards" (p. 1). The 2008 report by the BdP states that its "oversight function is performed by means of monitoring payment systems, assessing their compliance with the Core Principles for the Systemically Important Payment Systems, issuing regulations, exercising moral suasion and providing settlement services for banks or payment and clearing systems, as well as by playing a catalyst role in developing these systems and promoting coordination among the relevant parties through the Interbank Co-ordinating Commission for Payment Systems (CISP)" (p. 6).

The 2007 ECB report on Euro Area countries notes that, in 2001, the Governing Council of the ECB adopted the CPSS’ CPSIPS as one of the standards the Eurosystem must apply when performing its oversight role. According to the ECB's 2007 annual report on TARGET, "throughout 2007, the TARGET2 design was subject to an intensive assessment against the relevant Core Principles. In terms of scope, the oversight assessment of the TARGET2 design included the design of the SSP, as well as the proprietary home accounts (PHAs) of four NCBs [the National Bank of Belgium, the Deutsche Bundesbank, Bank of Lithuania, and the Bank of Portugal] which will be used to provide RTGS services during the transition period" (p. 25).

The ECB's 2008 Oversight Report states that although the Eurosystem’s oversight policies and requirements reflect internationally recognized standards, the "details are adjusted to the specific conditions and needs of the Eurosystem" (p. 7). The report also notes that CPSS' CPSIPS is the most important standard the Eurosystem uses in its oversight policy. Further the report notes that the ECB in cooperation with the NCBs conducted a comprehensive assessment of the TARGET2 design against the CPSS' CPSIPS and concluded that "TARGET2 is likely to fully observe all relevant Core Principles provided that the action plan [agreed upon by the participants] is properly followed-up" (pp. 12-13).

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

According to the 2006 IMF report, "supervision of payments and settlement systems in Portugal is professional and active, comparing very well with international standards" (p. 1). The 2008 report by the BdP states that its "oversight function is performed by means of monitoring payment systems, assessing their compliance with the Core Principles for the Systemically Important Payment Systems, issuing regulations, exercising moral suasion and providing settlement services for banks or payment and clearing systems, as well as by playing a catalyst role in developing these systems and promoting coordination among the relevant parties through the Interbank Co-ordinating Commission for Payment Systems (CISP)" (p. 6).

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

According to the 2008 report by the BdP, "it is involved in co-operation at both a general and an interbank level" (p. 8). The BdP actively cooperates with the Securities Market Commission (CMVM), and the Insurance Supervisory Authority. In addition, the BdP cooperates with the deposit guarantee fund, the agricultural guarantee fund, and the investors’ compensation fund. For purposes of interagency cooperation the National Council of Financial Supervisors was established. Furthermore, in 1997 the CISP was set up. As reported by the 2008 BdP report, the CISP's objectives are: "to coordinate the activities of interbank working groups, to define strategies for the development of retail payment systems, to promote interbank cooperation on new products, and to regulate and standardize payment systems. On the international cooperation front, 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). Despite the above information, none of the sources cited directly addresses Portugal's compliance with this principle.