THE CENTRAL BANKING SYSTEM OF THE EURO AREA

WHY TARGET2-SECURITIES?

Under current arrangements, European central securitiesdepositories (CSDs) normally settle the central bank moneyleg of securities transactions that are denominated in eurothrough the local real-time gross settlement (RTGS)component of the TARGET system (see Char t 1). To facilitatethis, par ticipants in a CSD (whether direct or indirectparticipants) must also participate (directly or indirectly) in thenational RTGS system of the country where the CSD islocated. With the introduction of TARGET2, it will be possiblefor each par ticipant in TARGET2 to settle, through a singleTARGET2 account, transactions effected via any CSD that

provides for settlement in central bank money in euro.With its single technical platform replacing the multiplicity ofplatforms of the current TARGET system, TARGET2 hasincreased the pressure for a common European platform forthe settlement of securities transactions.

TARGET2-Securities may be this common securitiessettlement platform if the Governing Council of the EuropeanCentral Bank (ECB) decides to implement it. A decision isexpected by early 2007. The label “TARGET2-Securities”reflects the main objective of optimising interactions betweenTARGET2 and securities settlement systems.

TARGET2 - S E CUR I T I E S

The Eurosystem is working in cooperation with CSDs and theirpar ticipants to determine whether the project is feasible andto identify the market’s preferences in relation to the featuresof TARGET2-Securities.

BENEFITS

The implementation of such a facility, which would be fullyowned and operated by the Eurosystem, would potentially

bring large cost savings as a result of the high level of efficiencyand technical harmonisation that it would entail for marketpar ticipants, par ticularly in the field of cross-border business.TARGET2-Securities would represent a major step towards asingle Eurosystem interface with the market. In addition, itcould facilitate the cross-border management of collateral and,thereby, pan-European liquidity management. Synergies withother systems operated by the Eurosystem – in par ticularTARGET2 and solutions for the cross-border use of collateral– could be expected.

HOW WOULD IT WORK IN PRINCIPLE?

Like TARGET2,TARGET2-Securities would settle only in euro.At the star t of the operating day, the participating CSDs wouldtransfer the securities account positions to TARGET2-Securities.1 During operating hours, real-time gross settlement(on a DVP model 1 basis) in central bank money would takeplace on the TARGET2-Securities platform (see Char t 2). This

1 With TARGET2, the national central banks will retain their relationships with thebanks. Similarly, with TARGET2-Securities, CSDs would retain their relationshipswith participants, in particular with regard to the securities accounts.

Cha r t 1 : C u r ren t ma rke t i n f r a s t r u c t u re w i t h TARGET

TARGET

Euroclear FR (BE, NL*)

Securitiesaccounts

Cash accounts

TBF

accounts

Clearstream DE

Securitiesaccounts

Monte TitoliSecuritiesaccounts

IberclearSecuritiesaccounts

APK Securitiesaccounts

NBB SSS

Securitiesaccounts

Interbolsa

Securitiesaccounts

BOGS

Securitiesaccounts

OeKB

Securitiesaccounts

NTMA

Securitiesaccounts

RTGS+Cash

accountsBIRELCash

accounts

SLBECash

accounts

BOF-RTGSCash

accounts

TOPCash

accounts

EllipsCash

accounts

SPGTCash

accounts

HermesCash

accounts

ARTIS

IRIS Cash accounts

LIPS Cash accounts

Other CSDs

Securitiesaccounts

Cash

mainlyDvP

Cashaccounts

*planned for BE and NL

would enable the new facility to benefit from the efficiency ofthe so-called integrated model, whereby the settlement ofsecurities and cash takes place on the same technical platform.

TARGET2-Securities would only provide settlement serviceswhile other CSD functions (such as corporate actions, custodyfunctions, safekeeping and administration) would continue tobe offered by the CSDs. Non-settlement activities affecting thesecurities positions of par ticipants would be carried outoutside the operating hours of TARGET2-Securities. At the endof each day’s TARGET2-Securities operations, the par ticipatingCSDs and TARGET2 would run their end-of-day procedures,including accounting.

ISSUES UNDER CONSIDERATION

In order to evaluate the feasibility of TARGET2-Securities, theEurosystem is currently consulting market par ticipants, CSDsand other market infrastructure providers on a number ofissues, which include the following:

Scope of assets: should TARGET2-Securities cover all typesof securities currently settled by CSDs or should CSDs

continue to offer settlement in central bank money for someassets?

Scope of services: does TARGET2-Securities need to offerservices such as matching, securities lending or collateralmanagement?

Settlement frequency: in addition to real-time settlementwith optimisation mechanisms and self-collateralisation, shouldTARGET2-Securities also offer batch settlement?

Cha r t 2 : Ma rke t i n f r a s t r u c t u re w i t h TARGET2 -S e cu r i t i e s ( du r i n g op e r a t i n g hou r s )

TARGET2

Cash accounts

OeNB, NBB, BBK, BdE, BoF, BdF, BoG, CBFSAI, BdI, BcL, DNB, BdP

TARGET2-Securities

Sub-cash accounts

Clearstream DE

Monte Titoli

Iberclear

APK

NBB SSS Interbolsa BOGS

NTMA Securitiesaccounts

Other CSDs

Euroclear (BE, FR, NL)

DvP

OeKB

Account structure: what is the most feasible accountstructure for TARGET2-Securities, both in terms of securitiesand central bank money?

Communication: what role should CSDs play in the routingof settlement instructions to TARGET2-Securities?

Separation of custody and settlement functions: are thereany legal or other obstacles in a given country to separationof the entity providing custody services (the CSD) and theentity providing settlement services (TARGET2-Securities)?

Timing: what timeframe is realistic for the Eurosystem todevelop and launch TARGET2-Securities, and coulddeployment be gradual (e.g. cer tain services star ting earlierthan others or a phased country migration)?

INFORMATION ON TARGET2-SECURITIESMore information and hard copies of this brochure can beobtained from any of the national central banks or from theECB at the following address:European Central BankPress and Information DivisionKaiserstrasse 2960311 Frankfur t am MainGermanyFax: +49 69 1344 7404