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Standards for the use of EU Securities Settlement Systems in ESCB credit operations

8 January 1998

The European Monetary Institute (EMI) will today release a report entitled "Standards for the use of EU securities settlement systems in ESCB credit operations". The report, which complements the analysis contained in the EMI report on =, released in February 1997, sets out nine standards to be met by EU securities settlement systems (SSSs), which will be used for the settlement of the credit operations of the European System of Central Banks (ESCB) in Stage Three of EMU.

The objective of the standards is to limit the risks to which the ESCB will be exposed in settling its credit operations, which, according to its Statute must be based on adequate collateral. The ESCB will thus assess the securities settlement systems in the light of the standards set out in the report. The standards are not intended to reflect aspects of the oversight or supervision of SSSs. They include the following requirements as preconditions for the use of an SSS by the ESCB in Stage Three of EMU:

First, SSSs should have a sound legal basis, in order to ensure that the settlement of payments and the transfer of securities are final and that the rights of the ESCB to the securities held on its accounts in such systems are adequately protected (Standard 1).

Second, system operators should address both settlement risk (the risk that the full value of securities or funds is not transferred by a defaulting counterparty) and custody risk (the risk that the ability of participants to transfer securities is temporarily or permanently impaired by insolvency, negligence or fraud of an intermediary acting as custodian of the securities).

Therefore, SSSs should settle the cash side of the ESCB's operations in central bank money in order to protect the ESCB from the risk of the failure of the entity that holds the accounts used to make payments for securities (Standard 2). They should implement appropriate measures to address custody risk (Standard 3); this risk is critical for the cross-border use of collateral, particularly when more than one SSS or more than one intermediary will have to be involved in the tiering of securities accounts. Furthermore, SSSs must be subject to regulation and/or control by a competent authority (Standard 4) and make participants aware of the risks of and access conditions to the systems (Standard 5).

Third, from the start of Stage Three of EMU, system operators should implement proper risk management procedures in order to cope with the effects of default by one or more participants (Standard 6) and also provide the facilities necessary to settle ESCB operations (involving intraday and overnight credit) with intraday finality (Standard 7). In the medium term, systems will be required to provide such facilities on an delivery versus payment (DvP) basis. DvP facilities are at present only available on an end-of-day basis in most EU SSSs.

Finally, the operating hours and days of systems should be consistent with those of the TARGET system (Standard 8), as well as ensuring an adequate level of operational reliability of technical systems and the availability of adequate backup facilities (Standard 9).

All the standards presented in the report must be met by the SSSs by 1 January 1999, with the exception of the requirement for intraday DvP settlement facilities, which is to be implemented by 1 January 2002.

The EMI and the NCBs are now beginning the process of assessing systems' compliance with the standards. If an SSS does not meet the requirements of the standards, the former may be used, possibly on a limited basis, only on condition that adequate measures are adopted against risks until the standards have been implemented in full. A final list of eligible systems will be published by the ECB in the second half of 1998.

Copies of the report will be distributed to interested parties in their respective countries by each of the EU national central banks. Copies will also be available from the EMI:


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