Oversight of payment and securities settlement systems

Large-value payment systems form the backbone of the euro area market infrastructure. They are systemically important and an error in these systems can affect normal functioning of the economy. Oversight focuses on reducing systemic risk in the entire financial system as a whole. The oversight of systemically important payment systems of the Eurosystem is conducted by Eurosystem collectively.

The Eurosystem has five systemically important payment systems:

• TARGET2 (operated by the Eurosystem)
• EURO1 and STEP2 (operated by EBA CLEARING)
• CORE(FR) (operated by STET – a joint initiative of six major French banks)
• MASTERCARD CLEARING MANAGEMENT SYSTEM (operated by MasterCard Europe SA)

Latvijas Banka together with other national central banks of the Eurosystem is conducting oversight of the TARGET2 system (including Latvia's components) and also participates in the system's operational assessments on an annual basis, as well as to analyse the oversight results and statistical data of the TARGET2 system in the framework of the work of the European System of Central Banks (ESCB).

The oversight of securities settlement is required to promote smooth operation of payment systems. Majority of payments are executed using securities collateral and other financial collateral in securities settlement and clearing systems. Problems in these systems could cause disruptions in operation of payment systems and complicate the implementation of the Eurosystem's monetary policy.

The Eurosystem has:

• 21 securities settlement system (operated by securities depositaries or central banks)
• 17 financial instrument clearing systems (operated by central counterparties)

Nasdaq CSD SE, which operates the securities settlement system in Latvia, started its work in September 2017, merging the three Baltic depositories and joining TARGET2-Securities, the single Eurosystem platform for securities settlement.

Latvijas Banka together with other central banks of the Baltic States has overseen this merger project for three years (2015–2017) and will continue to oversee the Nasdaq CSD SE system by assessing its compliance with international oversight principles. When conducting system evaluations, overseers, if necessary, cooperate with the FCMC, which supervises Nasdaq CSD SE operations.

The creation of Nasdaq CSD SE and its joining TARGET2-Securities, the platform for securities settlement, is a benefit to the Baltic States, as investors and issuers have a single gateway to the Baltic and European securities markets, a single platform and uniform payment procedures, all of which increase the competitiveness of Baltic securities markets in the European Union.

Retail payment systems process a large volume of customer retail payments (money transfers and card payments). Although such systems are usually not systemically important, their smooth operation is significant for a wide range of natural and legal entities. These systems, compared with the systemically important payment systems, are subject to less stringent oversight requirements.

Retail payment systems are overseen by the central bank of the country in which the respective payment system operates. In order to ensure a level playing field and uniform oversight across the euro area, the national central banks of the Eurosystem mutually compare the oversight reports.

25 retail payment systems operated by the private sector or central banks are located in the euro area.

Latvijas Banka oversees Electronic clearing system of Latvijas Banka EKS, in accordance with international oversight principles, assessing the security and efficiency of system and analyses system statistics.

The oversight of Eurosystem payment systems includes the oversight of payment instruments such as transfers, card payments or direct debits, as they are an integral part of the payment system. Their widespread use requires a high level of safety and efficiency in order to ensure public confidence in the euro and promote economic development.

Latvijas Banka conducts oversight of payment instruments by compiling Latvia's payment statistics, analysing the development trends and, in conjunction with other national central banks of the Eurosystem, performing the assessment of the payment instrument scheme.

In 2016, Latvijas Banka compiled data on the social costs of retail payment instruments in Latvia in 2014. According to a common European methodology, data was gathered on how much money was necessary for traders, service providers and financial institutions to enable the public – natural and legal persons – to make payments for goods and services in Latvia.

Like other Eurosystem central banks, Latvijas Banka provides educational and consulting support to the public, financial sector participants and government, as well as promotes the development of innovative instruments.

The establishment of SEPA and the active work by the Euro Retail Payments Board to promote coordination and development of the European payment market serve as examples of this cooperation. In 2017, Latvijas Banka oversaw the process of creating the instant payment service that is part of the EKS, the electronic clearing system of Latvijas Banka.

Instant payments are electronic payments, with their most important feature being the following: money at any time of the day or in 24/7/365 mode immediately enters the beneficiary's account and these funds are immediately available. The instant payment service is an infrastructure developed by Latvijas Banka in August 2017 in order to promote the development of innovative instruments and the integration of Latvian payment market in the euro area.

Since 21 November 2017, the instant payments infrastructure operates in conjunction with the pan-European high-speed payment infrastructure RT1. It enables all Latvian credit institutions to run or start developing their own instant payment solutions for their clients. It contributes to further integration of the Latvian payment market into the euro area.

This is the next major leap in the development of innovative payment instruments in Latvia after the introduction of the euro and the integration into the single euro area.