ANNUAL REPORT 2008 - Polymer Bank Notes of the World

and the Eurosystem’s business continuityoversight expectations for systemicallyimportant payment systems. The first resultsof the assessment were encouraging and, atthe end of 2007, the TARGET2 overseersconcluded that TARGET2 was likely to fullycomply with all relevant Core Principles,provided that a number of oversight findingswere addressed by the system operator in thecourse of 2008 on the basis of an agreed actionplan. In November 2008 the system operatorprovided a report to the overseers, detailinghow the points included in the action planhad been addressed. The TARGET2 overseersreviewed the report and the actions taken by theTARGET2 operator and provided a final reporton the oversight assessment of the TARGET2design to the decision-making bodies of theECB in March 2009. A public version of theassessment report will be made available.The TARGET2 overseers consider that theoperation of the system has been in line withexpectations. Only one major incident, whichoccurred on 30 June 2008, required specialattention and action on the part of the TARGET2overseers. Some oversight recommendationsrelated to this incident have been discussed withthe system operator and mitigation measureshave been implemented.EURO1EURO1 is a large-value payment system forcross-border and domestic transactions ineuro between banks operating in the EU. It isoperated by the clearing company of the EuroBanking Association, EBA CLEARING.EURO1 works on a multilateral net basis. Theend-of-day positions of EURO1 participantsare ultimately settled in central bank money viathe TARGET2 system, with the ECB acting assettlement agent. Oversight activities in 2008focused on, among other things, the migration ofthe settlement of EURO1 end-of-day positionsto TARGET2 in May 2008, when the previousTARGET system ceased to exist. The migrationof settlement to TARGET2 was completedwithout any problems.On 7 July 2008 EBA CLEARING implementedtwo additional liquidity distribution windowsin EURO1 under the Flexible SettlementCapability (also referred to as the liquiditybridge), one at 1 p.m. and the other at 3.30 p.m.The liquidity bridge arrangement facilitates theprocessing of payments that would otherwisebe placed on hold as a result of banks havingreached their debit or credit caps in EURO1.The two additional liquidity distributionwindows aim to reduce the balance kept on theEURO1 pre-settlement account in TARGET2and to maximise the recycling of pre-fundedliquidity. Their implementation received apositive assessment from the overseers fromboth a EURO1 and a TARGET2 perspective.CONTINUOUS LINKED SETTLEMENT SYSTEMThe Continuous Linked Settlement (CLS)system provides a multi-currency service forthe simultaneous, i.e. payment-versus-payment(PvP), settlement with finality of paymentinstructions relating to foreign exchangetransactions. Through its PvP mechanism, CLSvirtually eliminates foreign exchange settlementrisk, i.e. the risk that one party to a foreignexchange transaction will pay the currency it hassold, but not receive the currency it has bought.CLS was launched in 2002 and initially settledforeign exchange transactions in seven majorcurrencies, including the euro. Following theapproval by CLS overseers of the Mexican pesoand the Israeli shekel for settlement by CLS in2008, CLS now settles in 17 currencies. Inaddition, CLS settles single-currency paymenttransactions that are linked to a limited set offinancial instruments, i.e. over-the-counter(OTC) transactions in credit derivatives andnon-deliverable forward 19 transactions.CLS is managed by CLS Bank International(CLS Bank), New York. CLS Bank is ownedby private sector banks and other financial19 Defined as “net cash settled” forward foreign exchange transactions,whereby two parties agree to enter into two notional foreignexchange transactions and settle the difference between the twonotional transactions in cash in an agreed currency. The currenciesspecified in the two notional foreign exchange transactions are notphysically exchanged by the parties to the non-deliverable forward.164 ECBAnnual Report2008