Italy
Detailed Assessment of Compliance with the Committee for Payment and Settlement Systems (CPSS) Core Principles for Systemically Important Payment Systems

This paper presents findings of the Detailed Assessment of Italy’s Compliance with the Committee for Payment and Settlement Systems (CPSS) Core Principles for Systemically Important Payment Systems. At present, the Italian banking system is subject to significant challenges resulting from slowing economic growth, and low and declining interest rates, which have resulted in pressures on margins and a need to diversify sources of income. Banca d’Italia RTGS System for Large-Value Payments (BIREL) enables participants to make final and irrevocable transfers between the settlement accounts they hold with the Banca d’Italia.

Abstract

This paper presents findings of the Detailed Assessment of Italy’s Compliance with the Committee for Payment and Settlement Systems (CPSS) Core Principles for Systemically Important Payment Systems. At present, the Italian banking system is subject to significant challenges resulting from slowing economic growth, and low and declining interest rates, which have resulted in pressures on margins and a need to diversify sources of income. Banca d’Italia RTGS System for Large-Value Payments (BIREL) enables participants to make final and irrevocable transfers between the settlement accounts they hold with the Banca d’Italia.

I. CPSS Core Principles for Systemically Important Payment Systems

A. General

1. The present document is the detailed assessment of Italy’s compliance of the Committee for Payment and Settlement Systems’ (CPSS) Core Principles for Systemically Important Payment Systems (CPSIPS). The assessment was conducted during a mission of the International Monetary Fund’s (IMF) Monetary and Financial Systems Department (MFD), which visited Rome during June 16–27, 2003. The assessor was Mr. Peter Allsopp, formerly with the Bank of England.

2. The assessor had full cooperation from the Italian counterparts and received all information necessary for the assessment. The logistical support and warm hospitality of the authorities and officials of the Banca d’Italia (BI) are greatly appreciated.

Information and methodology used for the assessment

3. The information used in the assessment included all relevant laws, rules, and procedures governing the payments system in Italy, and the various publications of the BI, including information available on its website. In addition, extensive discussions were held with staff of the BI’s Payment System, Internal Audit, Information Technology, and Legal Departments and the Payment System Oversight Office (PSOO), and representatives of the Italian Association of Banks (Associazione Bancaria Italiana (ABI)), the Committees for Cooperation between the BI and the Banking System (TUG, CASPER), the commercial banks, and the Interbank Company for Automation (SIA).

4. In preparing this assessment, the assessor was greatly helped by the availability of a comprehensive self-assessment, which had been prepared by the BI. Much of the material in the BI’s self-assessment has been incorporated into this assessment.

5. The methodology used for this assessment follows the Guidance Note for Assessing Observance of the CPSIPS, prepared by the IMF and the World Bank in collaboration with the CPSS in August 2001.

Institutional and market structure—overview

6. The BI was created in 1893 through the merger of three of the existing banks of issue as a consequence of a radical reorganization of the banking system. In 1926, coinciding with the exclusive privilege to issue banknotes, the BI was given the task of providing the clearing procedures for settlement of interbank payments and securities transactions. In the late 1940s, the BI extended clearing services to all its branches. A first major step toward a new organizational and operational architecture of the clearing system was taken in 1989–91, after which most interbank transactions were settled in central bank money through the clearing system; previously, most interbank payments had been settled through banks’ bilateral correspondent accounts.

7. In 1997, the real-time gross settlement system (RTGS) for large-value interbank payments, BIREL, was launched, and since the beginning of 1998 all types of domestic high-value transactions have been settled through BIREL. The shift from net to gross settlement for large-value transactions enhanced the security of payments and significantly reduced systemic risk at a time when volumes and values were increasing rapidly. The BI-COMP clearing (net settlement) system is still in operation for retail transactions.

8. With the start of Stage III of the European Monetary Union (EMU) in January 1999, BIREL became the domestic component of the European Union (EU)-wide RTGS system, TARGET. BIREL is accordingly operated and managed as a component of TARGET. The rules, guidelines, and other documents relating to BIREL, and to its operating procedures, have to be drawn up by the BI within the constraints of the TARGET rules that have been issued by the European Central Bank (ECB), under Article 22 of its Statute. Similarly, the BI’s policies, on such topics as the charges for BIREL transactions, have to comply with relevant decisions of the ECB Governing Council. TARGET guidelines, which are also issued by the ECB, are not legally binding; they seek to prevent conflicts arising between National Central Banks (NCBs), or between the operating rules and procedures of the individual RTGS systems.

9. It is no longer possible to consider credit, liquidity, and other issues in BIREL without appreciating the cross-border aspects that result from its role within TARGET and the EMU Single Currency Area. Links have been created between BIREL participants and banks in other EU countries, including, for some international bank groups, the centralization in one branch of the Euro Treasury functions and daily liquidity management for all their branches across the EU member states. These links can generate daily flows of funds through BIREL, as a component of TARGET, that have no relation to economic transactions within Italy. Similarly, intraday liquidity supplied (against collateral pledged in Monte Titoli, the Italian Central Securities Depository) by the BI to a participant in BIREL may immediately be transferred through TARGET to cover payments to be made by another branch of the same bank in another EU RTGS system. Funds to repay that intraday advance come back into BIREL through TARGET later in the business day.

10. At present, the Italian banking system is subject to significant challenges resulting from slowing economic growth, and low and declining interest rates, which have resulted in pressures on margins, and a need to diversify sources of income. These conditions have fostered a process of banking consolidation, actively encouraged by the BI with a view to establishing groups able to compete at the EU level. The changing structure of the banking system poses challenges for the working and development of the payment systems, including BIREL. In turn, the launch of New BIREL represents a significant change in the operation of the payment systems which may have implications for money market conditions.

Payment systems infrastructure

11. BIREL enables participants to make final and irrevocable transfers between the settlement accounts they hold with the BI. Participants can therefore make payments in central bank money throughout the EU. They can settle a variety of transactions across their settlement accounts: (i) monetary policy operations; (ii) domestic large-value payments including transactions concluded on the screen-based Interbank Deposit Market;1 (iii) cross-border interbank and customer payments; (iv) the cash leg of the securities settlement systems; (v) multilateral net balances generated by the clearing system for domestic retail payments (BI-COMP), by the Euro 1 system and by the CLS system; and (vi) daily cash margins on derivatives payable to Cassa di Compensazione e Garanzia, the derivatives clearing house.

12. There is no minimum amount for a payment to be made through BIREL, so that it can be used for time-critical low-value payments, initiated by individuals as well as corporate customers of the participants. There is a maximum limit on the size of each payment that can be made through BI-COMP to control credit and liquidity risks in that system; the limit is currently being raised, at the urging of the banks, from €250,000 to €500,000.

13. The settlement accounts of BIREL participants also serve to hold their compulsory reserves (in a “reserve account”). Under ECB rules, the reserve requirements take the form of a monthly average, with the maintenance period ending on the 23rd day of each month. During the day, reserve balances can therefore be drawn down to zero.

14. If a BIREL participant requires additional intraday liquidity, this will be supplied free of charge by the BI, by means of a collateralized overdraft (on an overdraft account) advanced to a participant with whom the necessary legal agreement has been signed. Securities accepted as collateral are those Tier 1 and Tier 2 securities in which the BI undertakes monetary policy operations on behalf of the ECB. The securities have to be held in Monte Titoli, where they can be quickly transferred between a participant’s own account and the BI account. Haircuts are imposed on the market value of the securities, at varying levels set by EU rules.

15. BIREL is used by 660 financial institutions holding an RTGS account with the BI. A bank outside Italy currently accesses BIREL, and its RTGS account with the BI, on a remote (i.e., cross-border) basis from its branch in another EU member state. In New BIREL, the number of banks that are direct participants will decline, with other banks accessing New BIREL settlement procedures indirectly through correspondent accounts with direct participants. In addition, banks which do not hold an RTGS account with the BI can hold a special (“centralized”) account, through which they can settle some transactions directly with the BI, such as payments for bank notes paid in or withdrawn or in respect of monetary policy operations.

16. The volume and value of payments through the Italian payments system increased considerably during the 1990s, reaching a peak of €43,000 billion in 1998 (more than 40 times Italy’s GDP). There was a decline in the payment traffic from 1999, resulting from the start of Stage III of EMU (which eliminated the need for foreign exchange transactions between the individual EU currencies), and more recently from consolidation in the banking system and the depressed state of the economy and the stock market; but the decline appears to have stabilized in the first four months of 2003 (Figure 1 and Table 1).

Figure 1.
Figure 1.

Payment System Flows, 1988–2002

Citation: IMF Staff Country Reports 2004, 132; 10.5089/9781451819762.002.A001

Source: BI.
Table 1.

BIREL Payment Flows and Sources of Intraday Liquidity

(in EUR billion)

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Source: BI.

17. In terms of the total volume of transactions settled, BIREL ranked 2nd among EU RTGS systems in both 2001 (10.2 million payments) and 2002 (9.6 million payments). In terms of the total value, it ranked 5th in each year. The table above shows that the value of cross-border payments sent by Italy through TARGET is not much more than 50 percent of the value of domestic payments (which include transactions in the securities and other markets). It is also noticeable that the value of cross-border payments sent by Italy in each period is almost exactly matched by the value of payments received by Italy in the same periods—presumably a reflection of the importance of the cross-border liquidity and cash management flows, outwards and inwards, referred to earlier.

18. The flows of payments in BIREL, and in particular the flows of cross-border payments, are concentrated in a relatively small number of banks. In 2002, nine banks accounted for 80 percent of the value of cross-border payments, while 27 banks accounted for 80 percent of the volume of such payments.

19. Operations on the participants’ settlement accounts may be effected through the BIREL electronic message system for the management of central accounts3 or through the SWIFT FIN service, either by sending payment messages directly to the BI or (in New BIREL) by using the Y-Copy system. The BI provides an automatic conversion service, free of charge, between the domestic format RNI/BIREL and the SWIFT format. Operations on the settlement accounts may also be carried out through the BI’s branch network.

20. The access criteria for BIREL participants are the same, applying to all EU RTGS systems connected to TARGET. Access is granted on an open and non-discriminatory basis to banks (credit institutions), investments firms, and organizations providing clearing and settlement services and public sector bodies. Remote access is possible within a specific legal and technical framework. Accordingly, institutions referred to above can directly access the Italian settlement system, and their RTGS accounts with the BI, without a branch in Italy, if they are incorporated in a country belonging to the European Economic Area (EEA). One bank is currently in that position.

21. BIREL operates in accordance with the TARGET calendar. It is closed on Saturdays, Sundays, New Year’s day, Good Friday, Easter Monday, May 1st (labor day), Christmas day, and December 26. The operating day begins at 07:00 ECB time and closes ordinarily at 18:00.

22. BIREL is now being replaced by New BIREL, which is being progressively rolled out from June to December 2003. Only seven banks were operating in New BIREL as direct participants at the time of the IMF mission, together with 414 banks as indirect participants (these banks account for half of the system’s volume of payments and over 40 percent of the value). This assessment is accordingly based on BIREL, but comments are, where relevant, made on specific features or aspects of New BIREL.

Transparency of payment system oversight

23. The tasks of the BI in operating and managing BIREL are clearly and publicly set out in Italian legislation, within the context of TARGET rules and guidelines issued by the ECB. The policies, procedures, and practices of the BI in respect of BIREL are open and transparent, through a series of publications and through close and continuing contacts with the system’s users. The BI publishes regular reports on the operation of BIREL, and on the volumes and values of payments through the system.

B. Detailed Assessment of Observance of the CPSS CPSIPS and Central Bank Responsibilities

Table 2.

Detailed Assessment of Observance of CPSS CPSIPS and Central Bank Responsibilities in Applying the CPSIPS—BIREL

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II. Recommended Actions and Authorities’ Response to the Assessment

A. Recommended Actions

Table 3.

Recommended Actions to Improve Observance of CPSS Core Principles and Central Bank Responsibilities in Applying the CPSIPS—BIREL

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Table 4.

Summary Observance of CPSS Core Principles and Central Bank Responsibilities in Applying the CPSIPS—BIREL

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B. Authorities’ Response

24. The IMF visit was a valuable opportunity to have the design and the management of the Italy’s main payment system reviewed by authoritative external experts; Banca d’Italia welcomed the constructive and cooperative approach taken by the IMF team throughout the mission. The review process highlighted the strengths of the Italian payment system BIREL and, at the same time, pointed out the areas where New BIREL is expected to have higher level of legal soundness, operational reliability, efficiency and practicality. However, Banca d’Italia does not fully agree with some arguments especially of a legal nature, that are behind the observations concerning Core Principle I and recommendation D. In any case, considering that these observations concern access to BIREL of branches of foreign banks located outside the European Economic Area (EEA), Banca d’Italia would like to inform that in New BIREL (fully in operation at the beginning of 2004) such intermediaries (except for the Italian branches of American banks) will gain access to the system as indirect participants, thus removing the potential legal risks currently detected. As a result, New BIREL will be fully compliant with both Core Principle I and recommendation D. Please find below the Bank’s responses as to the individual recommendations.

Legal foundation

25. The first part of the recommendation concerns the need for foreign participants (from non-EEA country) to be assessed as to the potential risk of conflict of jurisdiction that their participation could introduce in the system in case of opening of an insolvency proceeding against those intermediaries.

26. The 14 participants mentioned in the recommendation have not been requested to provide legal opinions. In fact, following the decision made by the ECB Governing Council in March 2000 and the common interpretation given to the TARGET Guideline in force since January 2001, Banca d’Italia has grandfathered from the submission of the legal opinions all the institutions already participating in BIREL at that time, among which the 14 banks concerned.

27. The Bank’s decision is to be ascribed to the provisions set forth by the TARGET Guideline which refer to the requirement for any “applicants” to submit legal opinions. However, Banca d’Italia has assessed the likelihood that conflicts of jurisdiction may arise from such participation. It is worth mentioning that foreign institutions participating in BIREL gain access to the system as Italian branches. According to Article 95 of the 1993 Italian Banking Law these branches are subject to the “Administrative compulsory liquidation”, i.e., the special bankruptcy proceeding applicable to banks according to the Italian Law. This measure is adopted by the Minister of the Treasury, acting on a proposal from Banca d’Italia, where exceptionally serious administrative irregularities or violations of laws, regulations or bylaws governing the bank’s activity are found or exceptional serious capital losses are expected. On the basis of such a provision, following the opening of a bankruptcy proceeding on the failed bank in its home country, the Italian branch shall be subject to a parallel bankruptcy proceeding according to the Italian Law.

28. In addition, the transposition of the European Settlement Finality Directive into the Italian Law (Legislative Decree no. 210 of 12 April 2001) has contributed to the legal certainty associated with foreign participation in BIREL. In fact, according to Legislative Decree no. 210, in case of a participant’s insolvency the rights and obligations arising from, or in connection with, the participation of that intermediary are determined by the law governing the system concerned.

29. Against this background, and on the basis of the analysis carried out by the Bank’s Legal Department, the risk stemming from possible conflicts of jurisdictions borne by Banca d’Italia in relation to the participation in BIREL by foreign banks is more theoretical than real.

30. In fact, the home country proceeding’s liquidator in theory might go to the Italian court and claim the return of the collateral assuming that the intraday credit were granted following the opening of the home country proceeding; the same holds true for the payments assumed to be settled after the opening of the proceeding. The Italian court, however, would plausibly reject the claim on the basis of the Legislative Decree no. 210, according to which, as regards banks subject to compulsory administrative liquidation, the validity of transactions within BIREL must be assessed having regard to the timing of the opening of the bankruptcy proceeding in Italy.

31. The home country proceeding’s liquidator might go to the home country court and obtain a favorable decision if the home country jurisdiction does not recognize the protection of finality within foreign payment systems and/or the legal effects of the foreign bankruptcy proceeding. However, this decision would be hardly enforceable in Italy since according to the Legislative Act no. 218 of May 31, 1995, foreign sentences are effective in Italy, among other things: (i) if the issuing court is competent according to the principles on jurisdiction in force in Italy and (ii) if such sentences are not against the “Italian public order.”

32. In practice, these conditions would not probably be met. As regards the former, the jurisdiction—according to the Italian Law—would belong to Italian courts since the Italian Banking Law expressly provides for the opening of a compulsory administrative liquidation. As to the latter condition, the effectiveness of the sentence of the home country court would impair the protection of payment systems from the effect of insolvency proceedings, which is an objective pursued by the Italian legislator on the basis of Community Law. Such a legislation specifies, among other things, that in case of insolvency by a participant the rights and obligations relating to its participation in the system are regulated by the law governing the system; the payment orders entered into the system are valid and enforceable even after the opening of the insolvency proceeding, provided that the system is not or should not have been aware of the opening of the proceeding. The collateral provided by the failed participant to the system/central bank can be realized exclusively to the benefit of the collateral taker. With this in mind, the effectiveness of the sentence would most likely be against the “economic public order” which is included in the notion of “public order.”

33. In conclusion, the legal risks stemming from foreign participation in BIREL seem theoretical. It is to be pointed out, however, that such a conclusion has never been so far tested in any courts.

34. Having said that, as Banca d’Italia’s approach to the request of legal opinions to foreign participants has been determined by the rules governing TARGET, the Bank itself, with a letter of August 12, 2003, has requested the ECB to analyze the issue concerning the legal opinions and the grandfathering clause. As a follow up, the ECB has started an investigation among all national central banks to know (i) the way each national TARGET component has applied the TARGET Guideline and the inherent ‘grandfathering clause,’ and (ii) how frequently updates of Country and Capacity Opinions of foreign TARGET participants have been sought. Such stocktaking is aimed at ensuring a consistent approach within the Eurosystem and at assessing the need to amend the present TARGET Guideline, also taking into account that the Settlement Finality Directive has been transposed in all European legislations.

35. In any case, only three out of 14 foreign banks, namely Italian branches of American banks, are direct participants in New BIREL; the remaining non-EEA banks communicated their intention to participate indirectly through an Italian bank. As to the request of legal opinions to American banks, Banca d’Italia intends to wait for the finalization of the TARGET Guideline review, which is currently under examination at the ECB level. On the basis of the above considerations, it can be stated that the recommendations concerning BIREL are no longer applicable to New BIREL.

36. As regards the second part of the recommendation (issue of a Decree on the electronic processing of payment instructions), Article 12 of the Presidential Decree No. 445 of December 28, 2000 (Consolidated Law on Administrative Documentation) provides for the electronic transfer of payments between private citizens and/or public administrations to be carried out according to the technical rules which are to be defined by a Decree of the Prime Minister. The Decree will set out standards aiming at ensuring a uniform high level of security, authenticity, integrity for the electronic processing of payments.

37. Indeed, such a Decree has not yet been enacted. Banca d’Italia will draw the attention of the Ministry of the Economy to the need of proceeding with the issuance of the Act.

38. However, Banca d’Italia notes that: (i) the absence of the technical rules to be adopted by the Italian Prime Minister does not affect the validity of payment instructions within BIREL; and (ii) the technical rules already adopted in both BIREL and New BIREL are stringent enough to ensure high levels of security, authenticity and integrity in the processing of payment instructions within the system.

39. With regard to (i) Banca d’Italia notes that the above technical rules are not intended to specify the legal requirements for the validity of payment instructions. They will define standards. The legal requirements for the validity of electronic payment instructions have been already defined in the recent legislation which has considered the electronic document signed by electronic signature as equivalent to written documents in giving evidence of the origin of the payment instruction. Before the introduction of such legislation case laws of the Italian Supreme Court reached the same conclusions.

40. The legal regime of evidence does not exclude that the assumed originator of a payment instruction may challenge the authenticity or the integrity of the instruction, for instance on the ground of fraud. However, the claimant would have to prove that the payment order was not authorized by him and that a fraud outside his own control was executed. On the contrary, if the fraud were executed within his own organization or made easier by negligence of the claimant and the payment order were sent according to the security and authenticity standards in place within the system, the payment order would be considered as valid and legally attributable to the claimant.

41. A liability of Banca d’Italia as settlement agent of the system might be invoked on valid grounds only if the fraud were executed outside the control of the claimant and the efficiency and adequacy of the security measures of the information system and its ability to ensure authenticity, integrity, traceability and confidentiality were challenged. Only if the information system were considered by a court as inadequate or a negligence of the Bank’s staff were found and actions of recovery against the beneficiary of the invalid payment order were not successful Banca d’Italia might be sentenced to refund losses borne by the claimant. However, since an adequate level of security protection is in place (see item (ii) below), the liability of the Bank may be excluded on the basis of lack of negligence in setting up the information system for BIREL even if the fraud is executed outside the control of the claimant.

42. With regard to (ii), as recognized by the same assessment, New BIREL is based upon an adequate level of security, which is fully compliant with the TARGET security requirements for data security. As regards the security requirements for the electronic processing of payments already adopted by both BIREL and New BIREL, the following has to be noted. With a view to meeting the data integrity, authorization and authenticity requirements, all payment orders received from system participants or submitted by Banca d’Italia are processed in “close” networks (RNI-SWIFT, the Bank’s internal network) which envisage specific security measures: logical access control, message authentication codes (MAC) and line encryption. With the launch of New BIREL and the following adoption of the SWIFNet network based on the TCP/IP transmission protocol, such measures have been enhanced. The new transmission mechanism has been built up attaching particular attention to integrated security aspects, notably: (a) the network devices are physically separate from the Bank’s internal network; (b) an ad-hoc “managing network” is dedicated to the security control system; and (c) links with the “central processing systems” are realized through mainframe environments. An Intrusion Detection System controls links to the SWIFTNet and access points to the Bank’s internal network detecting possible abnormal situations in the data processing flows. All security measures are redundant and duplicated in the Bank’s two processing sites to allow for a comprehensive security control under both normal and exceptional (e.g., disaster recovery) circumstances.

43. The adequate level of security reached by New BIREL is confirmed by the fact that the technical rules to be issued by the Italian Prime Minister are not expected to introduce more stringent technical standards than those currently in place within the system.

Understanding and management of risks

44. According to the New BIREL Membership agreement, active indirect participants, in addition to direct ones, are requested to sign contract-letters governing participants’ rights and obligations with regard to the system. The Membership agreement mentions the risks vis-à-vis the system incurred by indirect participants. The risks stemming from the bilateral relationships between direct participants and indirect participants (both active and passive) are not mentioned in the rules of the system. This is because Banca d’Italia considers these kinds of risk the responsibility only of the parties involved, as is the case with any correspondent banking relationships.

45. Banca d’Italia will be, in any case, available to supplement the Membership agreement with appropriate references to make indirect participants aware as to the risks they incur through the appointment of other banks (direct participants) to handle their New BIREL receipts.

Security and operational reliability, and contingency arrangements

46. At present in Italy the number of providers of both public utilities and software is very limited. Recently there has emerged an ever-increasing need to monitor also the concentration of the supply of the utilities and technological services.

47. With specific regard to the operational risks and the potential vulnerabilities associated with the use of a limited number of service providers by the major participants in New BIREL, Banca d’Italia is going to amend the rules of the system in order to provide for the intermediaries wishing to gain access to the system to indicate (i) any service provider to which elements of the payment system functionality are outsourced, and (ii) their belonging to a banking group. In this latter respect, the information requested will make it possible to assess the evolution of the two-tier participation as well as the possible concentration of risks, also of an operational nature.

48. Participants will be also required to declare whether they have signed formal Service Level Agreements with their service providers and how often they monitor such service levels. This information will support Banca d’Italia in its monitoring and control of operational risks in New BIREL.

49. Having replied to the IMF specific recommendations on Core Principle VII, Banca d’Italia would also like to take this opportunity to disclose the initiatives it has adopted since the last year—in line with the actions undertaken at the European level—with a view to strengthening the security and the operational reliability of the system.

50. Banca d’Italia, in the exercise of its institutional functions, has been carrying out a far-reaching project involving intermediaries, settlement system operators and service providers with a view to assessing the ability of the domestic financial marketplace to cope with possible regional disasters, in line with the action plans laid down at both the EU and the international levels. This project consists in a number of initiatives pertaining to the infrastructure of payment systems and financial markets as well as to the leading banking groups. These initiatives are directed at: (i) increasing the business continuity, inter alia, through mutual back-up procedures; (ii) raising the availability of key (business and technical) staff to face unforeseeable events; (iii) carrying out periodical tests involving a large number of intermediaries; (iv) enhancing communication channels; and (v) promoting higher reliability of service providers.

51. A working group (so-called CO.DI.SE)—consisting of Banca d’Italia, which has the chair, representatives of market infrastructures, banks and financial markets—was set up. Its main concern is to coordinate the business continuity activities carried out by different bodies.

52. A further coordination forum—consisting of institutions external to the financial sector such as public utilities—has been set up at the Presidency of the Council of Ministers. Within such a forum, Banca d’Italia is responsible for coordinating the initiatives pertaining to the financial system.

53. A regulation governing the minimum requirements for business continuity is currently being issued. For its implementation a gradual approach based on three levels will be followed: the first level concerns the first 6 banking groups in terms of size; the second level refers to the 20 medium/large sized banks; the third level concerns the remaining banks. The business continuity requirements for the first 6 systemically important banking groups will be in line with those envisaged for the other financial infrastructures.

54. With specific reference to financial markets, some provisions concerning business continuity (already in force as of February 2002) have been included in the official Banca d’Italia Market surveillance instructions concerning financial markets and the centralized management of securities. In line with these provisions, each supervised institution is requested to draft an annual report on the management of operational risks.

55. With specific reference to providers of infrastructures relevant for the payment system (Interbank Company for Automation - SIA and the Italian service providers) a specific regulation is being drafted.

56. Following the above legal interventions, the resulting framework will be in line with the initiatives taken at the domestic and international levels.

57. In this context, a crucial role will be played by the CO.DI.SE. with reference to: (i) the assessment of interdependencies among systems and (ii) the provision of indications as to the integration of the Business Continuity Plans (BCP) and Service Level Agreements (SLA) drafted by each supervised institution with a view to ensuring their consistency with the global BCP.

58. This framework will contain guidelines concerning the business continuity criteria to be followed by payment infrastructures. Such a framework will be structured around the definition of operations plans (crises scenarios, secondary sites, time for the resumption of activities) and their management and control.

59. In this respect, it should be noted that a methodology for the management of risks associated with TARGET 2 (expected to go live as from 2007) is currently being drafted at the European level. The ESCB has already defined three major crises scenarios: (i) the destruction of the primary site (approach followed for the current system – TARGET); (ii) a regional disaster causing the destruction of both primary and secondary sites (e.g., events of September 11, 2001); and (iii) cyber terrorism, through unauthorized network access.

60. Works are underway to define the business continuity perimeter, i.e., the systems and infrastructures to be involved. In addition to TARGET domestic components, the involvement of structures and ancillary systems that need to settle their operations within the operational day is currently being considered.

Criteria for participation (CP IX)

Central Bank Responsibility C

61. Generally speaking, it should be observed that the choice of a two-tier participation in New BIREL is consistent with the process of financial consolidation which is increasingly leading to the concentration of liquidity management in the parent bank. This, in turn, has affected the functioning of the system which, over time, experienced an increasing concentration of payments in a limited number of large participants. Also, a two-tier participation approach in RTGS systems was followed by other major countries.

62. In the new context, a two-tier participation structure is able to pursue the following two objectives: (i) to enhance efficiency in the management of banks’ liquidity, and (ii) to increase the central bank operational efficiency, by virtue of the reduction in the number of accounts to be handled. Given the high payment concentration in the former system, the new forms of participation in New BIREL will not change the risk profile of the Italian RTGS system: around 120 participants (including all Italian parent banks), which will likely gain access to New BIREL as direct participants, will keep acting as they did in the old system by settling approximately the same payments in terms of number and value. More precisely, in 2002 in BIREL the 10 most active banks settled some 50 and 53 percent of total payments in terms of number and value respectively; the first 50 most active banks settled around 85 and 87 percent of total payments in terms of number and value respectively. The 120 banks which will likely gain access to New BIREL as direct participants settled around 84 and 86 percent of total payments in terms of number and value respectively in 2002.

63. As regards the reference made in the Detailed Assessment to a possible incentive to the setting up of new “quasi-payment systems”, it is worth highlighting that at present the participation in BIREL by a parent bank, settling also on behalf of the banks of its own group, substantially differs from the direct participation by a bank that operates a quasi-payment system. The former is the outcome of the rationalization process in the liquidity management within banking groups which featured, as already pointed out, the evolution of participation in BIREL in recent years. The role played by parent banks, as the cash-flow managers for the whole group, will most likely influence the form of access to New BIREL by the parent bank (as direct participant) and by the other banks of the group (as possible indirect participants). Direct participation by a bank that operates a quasi-payment system, instead, represents the provision of settlement services by a bank (the settlement agent in the quasi-system) to its correspondent banks/partners (possible New BIREL indirect participants). The latter will remain liable for all the liquidity and credit risks arising from the bilateral relationships with the direct participant in its capacity as settlement agent. At present, in Italy the existing quasi-payment systems relate to groups of cooperative banks, the most important of which is that managed by ICCREA – the central credit institution for cooperative banks.

64. In addition, should new quasi-payment systems emerge following the adoption of a two-tier participation structure, a distinction should be made between the impact of the operation of quasi-systems on New BIREL and that on the payment system as a whole. As to the former, the PSD, in performing the control over New BIREL, would be able to assess the evolution of the system risks and to adopt appropriate measures, if need be. As regards the impact of quasi-systems on the Italian payment system as a whole, the PSOO, in its capacity as overseer of privately-run payment systems, would be able to control the activity of such quasi-payment systems through the use of its instruments and regulatory powers. The integration of extensive information, which will be at the PSD and PSOO disposal, would allow in any circumstances to make prompt and consistent policy decisions with respect to New BIREL and the payment system as a whole.

65. It is worth specifying that at present the functioning of the Italian payment system relies upon settlement systems for interbank transactions owned and managed by Banca d’Italia: New BIREL processes large-value transactions and BI-COMP is the clearing system devoted to the handling of retail payments.

Central bank responsibility D

66. As already stated, considering that almost all branches of foreign banks (except for some American banks) located outside the EEA previously participating to BIREL directly intend to gain access to New BIREL only as indirect participants, it does not appear to be a pressing need for coordination between Banca d’Italia and foreign domestic supervisory authorities.

67. In any case, the Payment System Department—following the recommendation—intends to seek, in liaison with the Supervision Department, the most appropriate ways to reach an agreement for the mutual exchange of information with the American authorities and, should additional non-EU intermediaries wish to gain access to New BIREL as direct participants, a similar approach will be followed with the respective central banks and supervisory authorities.

APPENDIX

Figure 2.
Figure 2.

BIREL Credit Line Available to Participants

Citation: IMF Staff Country Reports 2004, 132; 10.5089/9781451819762.002.A001

Source: BI
Figure 3.
Figure 3.

Target Performance: Average Overall Availability

Citation: IMF Staff Country Reports 2004, 132; 10.5089/9781451819762.002.A001

Source: BI
1

The e-MID screen-based interbank deposit market is organized and managed by e-MID SpA (a private company owned by banks and financial institutions), and is supervised by the BI.

2

Nominal value of eligible securities deposited (at either their centralized accounts at Monte Titoli or their pledged-out accounts at the BI) by BIREL participants holding a pledged-out account at the BI.

3

RNI/BIREL, which runs on the National Interbank Network, RNI.

4

Protocol annexed to the Treaty on European Union signed in Maastricht on February 7, 1992 and ratified by the Italian Republic in Law 454/1992. The protocol amends the Treaty of Rome of March 25, 1957.

5

Legislative Decree No. 210 of April 12, 2001 sets forth the types of insolvency procedures in Italy: (i) compulsory administrative liquidation; (ii) bankruptcy; and (iii) the suspension of payments and the return of assets to third parties (see Articles 74, 77.2 and 107.6 of the 1993 Banking Law, Article 56.3 of the 1998 Consolidated Law on Financial Intermediation, and any other provisions of Italian laws or, if applicable, of the laws of an EU or non-EU country providing for the suspension or cancellation of payments and the return of assets to third parties).

6

See Official Journal of the European Community, L. 140 of May 24, 2001 (2001/401/EC).

7

Agreement ratified by Italy in Law No. 975 of December 18, 1984.

8

BI and ABI, Pagamenti interbancari: una riforma per la sicurezza e l’efficienza, Bancaria Editrice, Rome, 1994; Banca d’Italia, I pagamenti interbancari in Italia: linee di riforma - il progetto dopo la consultazione con il sistema bancario, Rome, 1995; Notiziario BIREL (5 issues) published periodically during the implementation of BIREL and its adaptation to TARGET (English version, BIREL Newsletter).

9

BI, Sistema di regolamento lordo BIREL e operazioni su iniziativa delle controparti, November 1998; Banca d’Italia, La Guida all’accesso remoto ai Servizi di regolamento in contante e in titoli della Banca d’Italia, 2001 edition; the paper is also available on www.bancaditalia.it; Banca d’Italia, Sistema di regolamento lordo BIREL/TARGET - Guida per gli aderenti.

10

A queued payment in BIREL is irrevocable from the moment that it is added to the sending participant’s queue. It can thereafter be revoked during the day only if a mistake has been made, and then only with the agreement of the intended beneficiary participant: both participants have to send a fax to the BI requesting the withdrawal of the instruction from the queue. If the payment is still in the queue at the end of the day, and cannot be settled through the use of the optimization mechanism, it is cancelled by the system.

11

ECB Regulation 2818/98 of December 1, 1998 on the application of compulsory reserve requirements as subsequently amended.

12

In particular, high priority for the balances stemming from ancillary systems (such as BI-COMP) or the transactions carried out with the Eurosystem (such as monetary policy operations); medium priority for the transactions executed on the Italian screen-based market for interbank deposits (e-MID) and ordinary priority for all the other transactions. Within this order of priorities, payments are automatically submitted for settlement on a First-In First-Out (FIFO) basis.

13

At the cut-off times of 17:00 and 18:00 a First-Available First-Out (FAFO) mechanism is automatically activated, if that is necessary to minimize the volume of still unsettled payments. In practice this mechanism has been used very infrequently since 1997.

14

See Figure 2 in Appendix

15

A payment in a participant’s queue that represents a net obligation arising from one of the ancillary systems settling through New BIREL (BI-COMP, Express II, and CGA) may not be revoked by that participant.

16

A payment can thereafter be revoked only if a mistake has been made, and then only with the agreement of the intended beneficiary participant: both participants have to send a fax to the BI requesting the withdrawal of the instruction from the sending participant’s queue. If the payment is still in the queue at the end of the day, and cannot be settled through the use of the optimization mechanism, it is cancelled by the system.

17

See footnote 15.

18

See Figure 3 in Appendix.

19

The implications of a large-scale disaster having a wide-spread impact on the entire region of Rome are being considered in the BCP discussions.

20

A special NCB study group of academics and central bankers is now looking in more detail at this public good concept.

21

In effect one participant out-sources to another the management of the flow of its payments through its RTGS account with BI.

22

European Central Bank, TARGET Guideline.

23

In addition to the publications mentioned in footnote 8, see Banca d’Italia, White Paper on the Payment System in Italy, Rome, 1988; Banca d’Italia, Libro bianco sui pagamenti interbancari - Linee strategiche, motivazione e implicazioni della riforma dei sistemi di compensazione e di regolamento interbancari, Roma, 1994; Banca d’Italia, Institutional Issues, Interbank payments in Italy: lines of reform, Rome, April 1995.

24

Banca d’Italia, White Paper on Payment System Oversight. Guiding principles for performance of the function, Rome, May 1997; Banca d’Italia, White Paper on Payment System Oversight. Objectives, Methods, Areas of Interest, Rome, November 1999. The latter White Paper is also available on www.bancaditalia.it.

Italy: Detailed Assessment of Compliance with the Committee for Payment and Settlement Systems (CPSS) Core Principles for Systemically Important Payment Systems
Author: International Monetary Fund