target working group paper

FEDERATION BANCAIRE DE L'UNION EUROPEENNE BANKING FEDERATION OF THE EUROPEAN UNION

BANKENVEREINIGUNG DER EUROPÄISCHEN UNION (aisbl)

EUROPEAN SAVINGS BANKS GROUP GROUPEMENT EUROPEEN DES CAISSES D’EPARGNE

UROPÄISCHE SPARKASSENVEREINIGUNG

EUROPEAN ASSOCIATION OF COOPERATIVE BANKS GROUPEMENT EUROPEEN DES BANQUES COOPERATIVES

EUROPÄISCHE VEREINIGUNG DER GENOSSENSCHAFTSBANKEN

a.i.s.b.l. 10 rue Montoyer B- 1000 Brussels +32 (0)2 508 37 11 phone +32 (0)2 511 23 28 fax http://www.ebf-fbe.eu

C7026AET

Brussels, 24 September 2007

TARGET WORKING GROUP PAPER

The TARGET Working Group deals with the requirements of banks for the secure and efficient use of TARGET as a high value and individual payment system and the specification of user requirements for the development and future design of TARGET2. It is recommended, that this educational paper is distributed to all parties concerned in financial institutions participating directly in Target2.

TARGET 2

“Indirect Participation (IP) & Addressable BIC (AB)” Introduction: Clearing and Settlement services are widely offered by major European banks to financial institutions from around the world. Correspondent banking also means using the expertise and service capability of another, larger or special bank, to perform payment execution. Efficient payment mapping and routing is a key factor for seamless, correct and timely execution. Target2 offers supporting facilities for these processes by means of the functions of “Indirect Participation” and “Addressable BIC”. These functions are to be used in connection with the new Target2 directory. Consequently automated mapping and routing can be performed for all banks, using these new tools. Mapping & Routing according to Target2 Target2 offers IP (for European banks) & AB (for European and non European banks) to supplement the routing of payments. IP or AB is a default receiving option of an IP or AB bank to one Direct Participant in the TARGET2 Payment Module. Regardless of the fact that there is only one entry in the Target2 directory for an IP or AB, the same beneficiary bank is still reachable via correspondent banking relationships. This feature is to be seen as a support to correspondent banking business. The Target2 directory, when loaded into a Direct Participant’s back-office wire-transfer payment-operations system, offers useful information when a payment instruction of a Client Bank does not give/contain information about clearing and settlement channels and/or intermediary banks.

2

Target2 IP & AB does not conflict with any existing routing agreements and does not override any specific routing information. Target2 IP & AB mapping and routing support the payment operations processes of any Euro cash correspondent bank. Target2 IP or AB routing information NEVER overrules any other specific routing information given in a payment. Example of payments by various business cases: (Power point slides on each business case are enclosed) Participants: Ordering Client Bank Banco Salsa, Brasil Euro (SSI) Correspondent Bank UniCredit, Milano Target2 AB relationship with Deutsche Bank, Frankfurt Beneficiary Client Bank Banque Seine, France Euro (SSI) Correspondent Bank Société Générale, Paris Target2 IP relationship with BNP, Paris I. Business case for a complete MT202 treasury payment instruction:

1. Banco Salsa, Brasil does an overnight money market deal for 30 MM Euro with Banque Seine, France

2. Payments instruction of Banco Salsa, Brasil is made up according to the published SSI

3. The supporting deal-settlement-system prepares the payment instruction to be sent to their Euro-Correspondent-Bank, occupying :57: Société Générale, Paris, :58: Banque Seine, France

4. Payment is sent from Βanco Salsa, Brasil to Deutsche Bank, Frankfurt − Deutsche Bank, Frankfurt does not maintain an account for Société Générale,

Paris in its own books, therefore must make an outgoing clearing payment (e.g. via Target2)

− Deutsche Bank, Frankfurt money transfer system module for ‘qualification’ switches into the respective mapping & routing file. The mapping & routing file embeds the Target2 directory information on all Direct Participants, IP and AB

− The mapping & routing file states that Société Générale, Paris is a Direct Participant of Target2, and therefore is addressed directly.

5. Payment instruction passes through Deutsche Bank, Frankfurt money transfer system into Target2, header addressed to Société Générale, Paris, contents of the payment :57: Société Générale, Paris, :58: Banque Seine, France. Note that field 57 may be omitted as it is identical to the receiver’s BIC.

Conclusion:

• Payment instruction executed according to SSI • IP relationship of Banque Seine, France is of no relevance to the routing of this

payment

3

The Field 57 information sent from Banco Salsa, Brasil was relevant for the mapping & routing of the payment. However Deutsche Bank, Frankfurt still needed to use the Target2 directory to confirm that the bank in Field 57 was directly addressable in Target2. II. Business case for an incomplete MT202 treasury payment instruction:

1. Banco Salsa, Brasil has a similar deal with Banque Seine, France 2. Banco Salsa, Brasil “forgets” or “omits” due to some circumstances out of our

knowledge, to properly occupy field :57: of the payment instruction sent to Deutsche Bank, Frankfurt

3. Payment is sent from Βanco Salsa, Brasil to Deutsche Bank, Frankfurt − Deutsche Bank, Frankfurt does not maintain an account for Banque Seine, France

in its own books, therefore must make an outgoing clearing payment (e.g. via Target2)

− Deutsche Bank, Frankfurt money transfer system module for ‘qualification’ switches into the respective mapping & routing file. The mapping & routing file embeds the Target2 directory information on all Direct participants, IP and AB

− The mapping & routing file states that Banque Seine, France is an IP of Target2 via BNP, and therefore the Target2 payment is addressed to BNP.

4. Payment instruction passes through Deutsche Bank, Frankfurt money transfer system into Target2, header addressed to BNP, contents of the payment unchanged: :58: Banque Seine, France

Conclusion:

• Payment instruction executed according to IP relationship of Banque Seine, France • IP information allows automatic routing to Banque Seine’, France, preferred Euro

Correspondent for any type of payment (commercial etc. etc.) The missing Field 57 information from Banco Salsa, Brasil is relevant to use of the available alternate information provided by the Target2 directory. III. Business case for a complete MT103 commercial payment instruction: IV. Business case for an incomplete MT103 commercial payment instruction: V. Business case for an incomplete or purposely open MT103 commercial payment

instruction: Assumptions for different routing This study concerns the routing of payment orders sent from a client-bank to their Euro-correspondent for execution. The example of the payment order concerned is lacking information for mapping and routing and therefore additional steps within the

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correspondent-bank’s repair process have to be undertaken. These repair steps are necessary to allocate a correspondent-bank relationship for the beneficiary bank. This study does not deal with those payment instructions, where the routing has been instructed clearly and without any doubt by the ordering client-bank. That is where the client bank has properly completed the respective fields 56 and/or 57 in the Swift-payment-order, when mapping and routing would not need any repair action. Purpose of dedicated routing, if more than one Euro-Cash-Correspondent Bank for a Client-Bank exists.

• A Client-Bank may still have more than one Euro-Cash-Correspondent-Bank relationship.

• This selection of many relationships may be to serve different purposes; different business lines or the Client-Bank simply has not yet consolidated its Euro payment business to one bank of its choice. Occasionally it is still seen that Client-Banks have a Euro-account in each Euro-country, based on legacy times gone by.

• A Client-Bank may therefore have different Euro vostro cash accounts for 1. money market deals and other treasury related business 2. a different relationship with another European Bank for cheque business 3. another one for securities related business and even 4. another one or many for commercial payments business

• To ensure that the large cash transactions relating to money market and other deals are always at the Correspondent-Bank chosen for cash management, SSI’s are published and have to be obeyed when fulfilling the obligation of a deal transaction.

• SSIs are therefore embedded in the formatting-tool of dealing systems to ensure use of the necessary mapping & routing for these treasury transactions.

• The usage of additional EURO-accounts for other “special” purposes; for instance for cheque or securities business, is mostly only known to the relevant bilateral business partners. Payment routing therefore refers to those individual agreements, only known to the relevant departments.

• The routing for commercial payments is mostly based on experience or in rare cases based on special SSI’s embedded in an internal routing information table.

Registration of Indirect Participants and Addressable BIC The process of registration of IP & AB is embedded in the identical administrative procedures at each National Central Bank (NCB). These need to be followed accordingly. Each NCB has provided sufficient information for the distinction on which type to choose for IP or AB registration. NOTE IP & AB always relate to ONE direct or multi-direct participant only. This relates to the 1:1 relationship needed for a clear routing with reference to the Target2 directory. To avoid misinterpretation, the customer client of a Direct Participant, to be listed as an IP or AB, needs to authorize its payment system provider clearly and unambiguously.

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Although there is no standard form for this service-agreement, it is recommended that this authorization should be a written agreement. After receiving the registration form, the National Central Bank will input the data into the SSP. Conflicting Registration At the time of input, a NCB will realize, if the IB or AB to be registered can be put on to the database. As mentioned before, any IP or AB can only be registered ONCE in the SSP, since there is a 1:1 link to the routing logic and consequently to its correspondent bank relationship. If the IP or AB has already been entered into the system by another NCB, the second or any following NCB will get an error note. This will terminate any further input into the SSP pending clarification. How to deal with Conflicting Registration? Attached you will find a presentation that explains the process to be followed. Each NCB will inform the Direct Participant about this conflict, if it occurs. To deal with these cases, which need to be sorted out as fast as possible in an orderly way, it is recommended that each Target2 participant needs to have a speedy process for communication and clarification installed.

Guido RAVOET Secretary General

Chris DE NOOSE Chairman of the

Management Committee

Hervé GUIDER Secretary General

Client Bank sends paymentinstruction to its

correspondent bank

2

PaymentRouting information

complete forexecution ?

Follow instructions

YES

Decision tree Indirect Participant (IP) & Addressable BIC (AB)

NO

Search for routing information

2

any other routinginformationavailable

?

YES

has BeneficiaryBank published special

instructions(i.e. SSI for commercial

MT103)

?

NO start inquiry action

Follow instructions

Beneficiary Bankis Target2 IP or AB

Look up Target2Directory

Address payment to designated Target2

direct participant

NO

YES

YES

Banco Salsa, Brasilcheck SSI, find Soc.Gen., Pariscreate instruction

Banque Seine, France

: 57: SocGen, Paris: 58: Banque Seine, France

Deutsche Bank, Ffm- Payment is complete- STP to T2- no repair & no search

Société Générale, Paris:57: SocGen, Paris

Credit :58: Banque Seine, France

1

4

5

- no relevance -IP relationshipBNP Paris

I. MT202 with reference to a Money Market deal

23

deal

T2

DG-P/TGT/2007/086

II. MT202 with reference to a Money Market deal

Banco Salsa BrasilSSI check is forgotten or omittedcreate instruction


: 57: / empty: 58: Banque Seine, France

Deutsche Bank, Ffm- Payment received only :58: Banque Seine, France- no account for :58: Banque Seine, France with DB- payment drops for REPAIR- intermediary bank selection process- link to mapping & routing data base T2 directory- IP BNP is found used for header addressing

IP relationshipBNP Paris

:57: Credit :58: Banque Seine, Paris

1

3

deal

- no relevance -Société Générale, Paris

Ø

2

Ø

T2

4

III. a) MT103 commercial payment in favour of Banco Salsa, Brasil

AIB, Dublin

MT 103 :56: ABN, Amsterdam:57: Banco Salsa, Brasil

ABN Amsterdam:56: ABN, Amsterdam

Credit :57: Banco Salsa, Brasil

Deutsche Bank, Ffm- payment is complete- no repair, no search

2

1

- no relevance -Soc Gen, Paris (SSI)

- no relevance –Relationship„AB“ of Unicredit, Milano

3

T2

III. b) MT103 commercial payment in favour of Banque Seine, ParisINcomplete for execution

AIB, Dublin

MT 103 :56: empty:57: Banque Seine, France

- no relevance -Soc – Gen, Paris

(SSI)

Deutsche Bank, Ffm- no account for Banque Seine, Paris- payment to repair- no other partnerbank routing ?- link to search T2 directory

- find „IP“ of BNP

2

1

BNP Paris:56:

Credit :57: Banque Seine, Paris 3

Ø /

T2

Ø / empty


MT 103 :56: empty:57: Banco Salsa, Brasil

Deutsche Bank, Frankfurt:56: empty

Credit: :57: Banco Salsa, Brasil

BNP, Paris - payment incomplete- no account for Banco Salsa, Brasil- no other partnerbank routing ? - payment to repair - search- find „AB“, Deutsche Bank Frankfurt

in mapping & routing data base (T2)

2

1

- no relevance -UniCredit, Milano (SSI)

3

IV. MT103 commercial payment from Banque Seine, Paris to Banco Salsa, Brasil - INcomplete for execution

T2

Conflicting registration requests in TARGET2

Conflicting registration

What is the business case?• Registration request conflicting with an existing record in the

TARGET2 directory.• Multiple registration requests for a (new) bank not yet

registered in the TARGET2 Directory.

How to handle such cases?• In the first stance, preventative measures should be taken. In

particular an appropriate communication to TARGET2 banks would avoid most of the conflicts.

• Then, for those conflicts that cannot be avoided, Central Banks will be put in place strict procedures to handle them.


Case of an existing record in the TARGET2 Directory

Conflicting registrationCase of an existing record in the TARGET2 Directory

99991231

Valid till

20080218

Valid from

U

Modif Flag

BNPAFRPPXXX

BIC Addressee

BNPAFRPPXXXBKBKJPJTXXX

BIC Acc. HolderBIC Participant

BKBKJPJT is already registered as correspondent of BNPAFRPP and DRESDEFF requests its registration as well…

DRESDEFF

Form 1013

Rejected

DRESDEFF should check beforehand whether BKBKJPJT was already registered in the TARGET2 Directory.

Business case to be avoided

Further description of the business case

BKBKJPJT

DRESDEFFBNPAFRPP

1. DRESDEFF contacts BNPAFRPP to agree on the change. In particular it will be agreed from which date onwards the change should be activated.

2. It is left to DRESDEFF and/or BNPAFRPP to consult/inform the Japanese bank about the change.


Proposed procedure

DRESDEFFBNPAFRPP

3. BNPAFRPP signs the form for deleting the record and sends it to DRESDEFF.

4. DRESDEFF sends to Bundesbank the form for deletion and its own form for creation.


Proposed procedure

DRESDEFFBNPAFRPP

5. Bundesbank checks the coherence of deletion/activation date.

6. Bundesbank sends the form of BNPAFRPP for deletion by Banque de France


Proposed procedure

DRESDEFFBNPAFRPP

8. Bundesbank enters the creation date and notifies DRESDEFF.

7. Banque de France has 2 business day to check the deletion request, to process it and to notify Bundesbank.


Proposed procedure

Valid tillValid fromModif FlagBIC Addressee BIC Acc. HolderBIC Participant

9999123120080218UBNPAFRPPXXX BNPAFRPPXXXBKBKJPJTXXX

2009010420080218MBNPAFRPPXXX BNPAFRPPXXXBKBKJPJTXXX

9999123120090105ADRESDEFFXXXDRESDEFFXXXBKBKJPJTXXX

2009010420080218MBNPAFRPPXXX BNPAFRPPXXXBKBKJPJTXXX

9999123120090105UDRESDEFFXXXDRESDEFFXXXBKBKJPJTXXX

2009010420080218UBNPAFRPPXXX BNPAFRPPXXXBKBKJPJTXXX


2009010420080218DBNPAFRPPXXX BNPAFRPPXXXBKBKJPJTXXX



What is the effect on the TARGET2 Directory?

What is the timeline?Publication date for the TARGET2 Directory

Last possible update for a Central Bank

Monday 07:00Wednesday 18:00

Around 1 week for the inter CB procedure

Wednesday

Registration of correspondents should be asked for at least 12 calendar days before the requested activation date

Steps 5&6Checking &

sending

2 days

Step 7Checking &

deletion

2 days

Step 8Creation

1 day

Steps 1 to 4Bilateral

discussions

???



Case of a (new) bank not yet registered in the TARGET2 Directory

Conflicting registrationCase of a (new) bank not yet registered

Further description of the business caseThe bank BANKSGSG is not yet in the TARGET2 Directory and two participants request its registration at the same moment.

Only one request can be accepted in the TARGET2 Directory.

DRESDEFFBNPAFRPP DRESDEFFBNPAFRPP DRESDEFFDRESDEFFBNPAFRPPBNPAFRPP BANKSGSGBANKSGSG

BANKSGSG

DRESDEFFBNPAFRPP

Proposed procedure


3- The 2nd request is rejected.

“Rejected!”

4- BNPAFRPP is informed that the bank is already registered with DRESDEFF.

5- Bilateral contacts between BNPAFRPP and DRESDEFF.

1- The 1st

request is validated.

6. It is left to DRESDEFF and/or BNPAFRPP to consult BANKSGSG.

“OK

!”

2- DRESDEFF is informed that the request is accepted.

the preferred routing should remain with DRESDEFF


Proposed procedure

After discussions between BNPAFRPP and DRESDEFF, (preferably involving BANKSGSG itself ):

Either…

no change required in the directory, i.e. the record can stay as it is

the preferred routing should be changed to BNPAFRPPOr…

replacement of the existing record, i.e. application of the previous procedure.


What is the timeline?Publication date for the TARGET2 & BIC Directories

Last possible update for a Central Bank

Monday 07:00Wednesday 18:00

Around 1 week for the inter CB procedure

Registration of new correspondent should be asked more than 12 calendar days before the requested activation date

Steps 5 to 6Bilateral

discussions

???

Steps 3 to 4Rejection and & notification

2 days

Steps 1 & 2Entering and

& notification

2 days(…)

target working group paper

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