TARGET Annual Report 2022

Market infrastructures, together with markets and institutions, constitute one of the three core components of the financial system. The market infrastructure for payments^[1] consists of the set of instruments, networks, rules, procedures and institutions that ensure the circulation of money. Its purpose is to facilitate transactions between economic agents and to support efficient resource allocation in the economy.

The Eurosystem has the statutory task of promoting the smooth operation of payment systems. This is crucial for a sound currency, the conduct of monetary policy, market functioning and financial stability. A key instrument which the Eurosystem uses for carrying out this task is the provision of payment settlement facilities.^[2]

To this end, in 1999 the Eurosystem created the Trans-European Automated Real-time Gross settlement Express Transfer system^[3] (TARGET) for the settlement of large-value payments in euro, offering a central bank payment service across national borders in the European Union (EU).

TARGET was developed to meet three main objectives:

1. provide a safe and reliable mechanism for the settlement of euro payments on a real-time gross settlement (RTGS) basis;
2. increase the efficiency of inter-Member State payments within the euro area;
3. serve the needs of the Eurosystem’s monetary policy.

In May 2008 TARGET2 replaced the first-generation system, TARGET. Like its predecessor, TARGET2 was used to settle payments connected with monetary policy operations, as well as interbank payments, customer payments exchanged between banks, and transactions related to other payment and securities settlement systems, i.e. ancillary systems. As TARGET2 provided intraday finality, meaning that settlement was final for the receiving participant once the funds had been credited, it was possible to reuse these funds several times a day.

From June 2015 TARGET2 participants were able to open dedicated cash accounts (DCAs) on the TARGET2-Securities (T2S) platform^[4], which they could use to settle the cash leg of their securities transactions. In addition, from November 2018 TARGET2 participants were able to open DCAs for TARGET Instant Payment Settlement (TIPS).^[5] TIPS is the service implemented by the Eurosystem for settling euro-denominated instant payments on an individual basis, around the clock.

TARGET2 offered harmonised market infrastructure services at EU level, as well as a single pricing structure. It provided ancillary systems with a harmonised set of cash settlement services and supported its users with enhanced liquidity management tools. In this manner, it contributed to financial integration, financial stability and liquidity efficiency in the euro area.

TARGET2 was accessible to a large number of participants. Approximately 1,000 credit institutions in Europe used it to make payments on their own behalf, on behalf of other (indirect) participants or on their customers’ behalf. Taking branches and subsidiaries into account, over 41,000 banks worldwide (and all of the customers of these banks too) could be reached via TARGET2.

Building on the synergies between the two market infrastructures, the Eurosystem worked intensively to consolidate TARGET2 and T2S services. The project brought technical as well as functional enhancements. This allowed changing market requirements to be met by replacing TARGET2 with a new RTGS system called T2 and liquidity management to be optimised across all TARGET services. The new RTGS system provides the market with enhanced and modernised services which will also be available for currencies other than the euro. The messaging standard has migrated to ISO 20022, as for T2S and TIPS. In addition, the project further strengthened cyber resilience capabilities and established a single point of access to all Eurosystem market infrastructure services. It supports multi-vendor connectivity, allowing participants to choose between different connectivity options and fostering competition among network service providers. The new system went live on 20 March 2023.

The report and its structure

This report is the 23rd edition of the TARGET Annual Report. The first edition was published in 2001, covering TARGET’s first two years of operation (1999 and 2000). As in previous years, the report provides information on TARGET2 traffic, its performance and the main developments that took place in 2022. It is aimed mainly at decision-makers, practitioners and academics who need to have an in-depth understanding of TARGET2. We hope it will also appeal to members of the general public with an interest in market infrastructure issues and, in particular, TARGET2.

In addition to the core content, this report includes seven boxes on topics of particular relevance in 2022. The boxes focus, respectively, on the evolution of turnover and volume in TARGET2; TIPS volume development and functional evolution; the impact of Russia’s invasion of Ukraine on TARGET2; the impact of the ECB’s monetary policy decisions on the money market rates derived from TARGET2; enhancements to the TARGET services communication tools; TARGET2 analytics for regulatory compliance; and an update on the TARGET2/T2S consolidation project and future RTGS services.

In the report, references made to the first-generation TARGET system (which was in operation from January 1999 to May 2008) are also applicable to its second generation, TARGET2 (which replaced TARGET in May 2008).

Note
Liquidity transfers between TARGET2 and T2S/TIPS DCAs and payments processed on T2S/TIPS DCAs are not included in the TARGET2 indicators presented in this report.

Although both T2S and TIPS DCAs are legally part of TARGET2, these (technical) transactions are excluded from the calculations to prevent the system’s indicators from being artificially inflated and to make the figures more easily comparable from year to year. Nevertheless, as a matter of transparency, some general statistics on T2S and TIPS DCAs are provided on the ECB’s website.^[6]

TARGET2 activity

In 2022 TARGET2 maintained its leading position in Europe, processing 92% of the total value settled by large-value payment systems in euro. It also remained one of the largest payment systems worldwide. Compared with the previous year, the total turnover processed increased by 17.8%, reaching €570.5 trillion.^[7] The total volume of payments grew by 6.5% to 102.6 million transactions.

The highest daily turnover during the year was recorded on 21 December, with a total value of €3,481 billion, and the highest daily volume of payments was recorded on 19 April, when 622,003 transactions were processed. This was the highest peak since the launch of TARGET2.

In 2022 the availability of TARGET2’s Single Shared Platform (SSP) stood at 100%.

Table 1

Evolution of TARGET2 traffic

1.1 TARGET2 turnover

TARGET2 turnover in 2022 amounted to €570.5 trillion, corresponding to a daily average of €2.2 trillion. Chart 1 shows the evolution of the value of TARGET2 traffic over the last nine years. TARGET2 turnover on RTGS accounts fell by almost 15% between 2015 and 2017, following the launch of T2S.^[8] In 2018 the TARGET2 turnover stabilised, and in 2019, 2020 and 2021 it recorded annual increases of 2.0%, 5.6% and 3.9% respectively. In 2022 TARGET2 turnover increased by 17.8% (see Box 1). These increases in turnover stemmed mainly from payments relating to operations with the central bank and from interbank payments.

For activities involving market participants (i.e. excluding central bank and ancillary system transactions), interbank transactions (transactions exclusively involving credit institutions) accounted for 72% of the total value of payments in 2022, while the remaining share was composed of customer transactions (i.e. transactions processed on behalf of a non-bank party, be they individuals or corporate customers). This share has remained stable over the past few years (75% of interbank payments in 2021).

A comparison of the TARGET2 turnover and the euro area’s annual GDP (around €13 trillion) shows that the system settled the equivalent of annual GDP in six days of operations. This reflects the role and efficiency of TARGET2, which provided intraday finality for transactions and allowed the funds credited to the participant’s account to become immediately available for other payments. Consequently, the same euro could be reused several times by several participants in the same day.

Chart 2 depicts the average daily turnover generated in TARGET2 for each month in 2021 and 2022, thus showing the seasonal pattern of the system. While the general pattern for both years is very similar, the values recorded in 2022 are higher than they were in the same periods of 2021, especially from the third quarter onwards, as ECB policy rates increased. More details can be found in Box 5.

Chart 3 displays the highest and lowest daily TARGET2 values for each month of 2022, as well as the average daily values. The days with the highest peaks are usually at quarter-ends, typically on the last day of the month, owing to reimbursements and due dates in various financial markets. This seasonal pattern was also visible in 2022. However, the day with the largest turnover of the year, with a total value of €3,480 billion, was 21 December. This is largely due to the combination of end-of-month, end-of-quarter and end-of-year effects traditionally observed around Christmas time.

Throughout 2022 the amplitude of TARGET2 turnover, expressed as the difference between the highest and the lowest values, was 54%, compared with 51% the previous year. Overall, the average values throughout the year followed a well-established seasonal pattern.

Peaks and troughs in the system’s values can also be influenced by other factors, such as TARGET2 holidays or the end of reserve maintenance periods. For example, the lowest values are typically recorded during the summer holidays and on days that are national holidays in some Member States or in other significant economies outside the EU. In 2022, for instance, the lowest values processed coincided with a public holiday in the United States (Presidents’ Day on 21 February).

Finally, Chart 4 compares traffic developments in the world’s major payment systems. In particular, it depicts the daily average turnover in euro equivalents for the last nine years of TARGET/TARGET2, Continuous Linked Settlement (CLS), Fedwire Funds (the US dollar-denominated RTGS system operated by the Federal Reserve System) and the Bank of Japan Financial Network System (BOJ-NET). Some common patterns can be identified across systems. However, the comparability of TARGET2 with other systems has been hampered by the migration of the securities settlement systems to T2S.^[9] If the average daily volume in TARGET2 after 2015 is considered together with the average daily turnover for DCAs, which are technically held in T2S, total traffic continued to increase.^[10]

1.2 Volume of transactions in TARGET2

After the low transaction volumes resulting from the financial crisis, TARGET2 traffic recovered, posting a positive trend between 2010 and 2013 (Chart 5). Although the number of transactions never reached pre-crisis levels, the system attracted around four million transactions more over that period. However, this trend reversed in 2014 and 2015 because after the period for migration to Single Euro Payment Area (SEPA) instruments ended^[11], there was once again a significant reduction in the customer payment segment, leading to lower TARGET2 volumes. On completion of the migration to SEPA, TARGET2 traffic stabilised at around 88 million transactions yearly. In 2022 the number of transactions increased significantly to more than 102 million.^[12] This represents a historical peak since the launch of TARGET2 in 2008, and actually even since the creation of the euro in 1999.

The exact volume settled in TARGET2 in 2022 amounted to 102,597,758 transactions, corresponding to a daily average of 399,213 payments. Compared with the previous year, the overall number of processed payments grew by 6.5%, driven by a higher number of interbank and customer payments. More detailed information on the evolution of the different traffic segments is provided in Box 1.

Throughout the whole year average daily volumes in TARGET2 calculated on a monthly basis were above the levels recorded for the corresponding months in 2021 (Chart 6). The biggest year-on-year difference, amounting to 11%, was observed in February and this trend continued for the rest of the year. Overall, Chart 6 indicates a seasonal pattern similar to that of the previous year.

The highest average daily volume was recorded in December, when it reached more than 430,000 transactions. This figure may be related to the high daily volumes normally observed at the end of the year.

Chart 7 depicts the peaks and troughs in terms of the daily volume on RTGS accounts in TARGET2 in 2022 and the average daily volume for each month. As observed for the value-based figures, the peaks typically fall on the last day of the month, and are especially pronounced at quarter-ends for the same reasons (i.e. deadlines in financial markets or for corporate business). In 2022 the highest daily volume was recorded on 19 April (the day immediately following the Easter weekend, during which TARGET2 was closed for four consecutive calendar days), when 622,003 transactions were processed. This was the highest daily peak in TARGET ever (i.e. for both TARGET1 and TARGET2). The lowest daily volume was recorded on 6 January (266,252 transactions), which was a public holiday in most European countries (Epiphany).

Chart 8 shows the yearly moving average of TARGET2 volumes (i.e. the cumulative volume processed in the preceding 12 months) for each month. This indicator helps to eliminate the strong seasonal pattern observed in TARGET2 traffic. The variation of this cumulative volume from one year to the next is also presented as a percentage. The chart shows that the cumulative volume started to decline in the second half of 2008 with the onset of the financial crisis. The number of transactions continued to drop sharply almost until the end of 2009. After that TARGET2 volumes were roughly stable until the end of 2011. They then started to grow moderately until the end of the first quarter of 2014, when they reached their highest point since the crisis. Thereafter the cumulative volume started to drop for the reasons set out at the beginning of this section (SEPA migration) and in October 2014 the cumulative yearly growth rate turned negative and continued to decrease until mid-2017. The negative trend reversed in 2017 because of the increases observed in the customer and interbank payments segment. It then remained stable throughout 2018 and 2019. In 2020 TARGET2 volumes peaked temporarily in the first quarter as a result of the market turbulence driven by the COVID-19 pandemic. After recording a slight decrease in the first quarter of 2021, TARGET2 volumes rose steadily over the rest of that year and throughout 2022, to reach their highest levels since the system was launched.

Chart 9 compares the growth rate (between 2021 and 2022) of traffic in TARGET2 with the growth rates of major payment systems worldwide and SWIFT payment-related FIN traffic (categories 1 and 2). The chart reveals that the changes in traffic diverged significantly across systems. The largest increase – over 6% – was recorded by TARGET2, while Fedwire Funds (the US payment system) and EURO1 decreased by 4% and 3% respectively. This shows that TARGET2 benefited from a general increase in payment activities worldwide in 2022.

1.3 Interactions between TARGET2 and T2S

T2S is the Eurosystem’s pan-European platform for securities settlement in central bank money, bringing together both securities and cash accounts on a single technical platform.^[14]

T2S went live on 22 June 2015, with central securities depositories (CSDs) joining the platform for euro settlement in waves. The final migration wave was completed on 18 September 2017, making 2022 the fifth full year of operations. In addition, on 29 October 2018 Danmarks Nationalbank connected its RTGS and collateral management system, Kronos2, to T2S, so Danish kroner can now also be used to settle the cash leg of securities transactions in T2S. On the same date VP Securities (a Danish CSD that had already been using T2S for settlement in euro) migrated its Danish krone settlement to the platform.

Although the accounts are centralised on a single platform, the legal and business relationships of the holders of the securities and cash accounts remain with the CSDs and national central banks respectively. T2S DCAs are opened with the central banks and used exclusively for the securities settlement business in T2S. Although they are technically held on the T2S platform, euro-denominated DCAs were legally part of TARGET2. Therefore the rights and obligations of T2S DCA holders were reflected in the TARGET2 Guideline. At the end of 2022 there were 828 active DCAs on the T2S platform.

At the start of each T2S business day liquidity was sent from TARGET2 to T2S. Towards the end of the day any remaining liquidity on DCAs was swept back to the RTGS accounts in TARGET2. During the day liquidity could be freely transferred from TARGET2 to T2S and vice versa.

In 2022 there were an average of 655 inbound liquidity transfers from TARGET2 to T2S and 1,145 outbound liquidity transfers from T2S to TARGET2 each day.

Chart 10 shows the average cumulative central bank liquidity held in T2S on a daily basis between January and December 2022.^[15]

In terms of the intraday pattern, liquidity was injected into T2S at the beginning of the TARGET2 night-time phase (19:30 CET) and then remained fairly constant until the TARGET2 daytime processing (at 07:00 CET). After this more liquidity reached T2S and fluctuations occurred. There was a spike in the liquidity held in T2S before 16:00 CET, owing to participants sending liquidity to T2S to reimburse auto-collateralisation and ensure remaining transactions were settled. At 16:30 CET the liquidity in T2S decreased sharply as a consequence of the optional cash sweep bringing liquidity back from T2S to TARGET2. The next drop, to zero, was observed towards the end of the business day. This was related to the automated cash sweep from T2S to TARGET2 at 17:45 CET, when all remaining liquidity on DCAs was pushed from T2S back to TARGET2. The optional cash sweep was preferred to the automated cash sweep.^[16]

Chart 11 illustrates the daily average value of auto-collateralisation in T2S by month in 2022. Auto-collateralisation is intraday credit granted by a euro area central bank and triggered when a T2S DCA holder has insufficient funds to settle securities transactions.

The average use of auto-collateralisation on stock, i.e. where the credit received from the central bank was collateralised by securities already held by the buyer, remained relatively stable throughout the year. The average daily value was €18.77 billion.

The average usage of auto-collateralisation on flow, i.e. settlement transactions financed via credit received from a central bank and collateralised by securities about to be purchased, was slightly more volatile and peaked at €117.39 billion in September 2022. The average daily value was €105.13 billion.

On average, 15.15% of the total value of auto-collateralisation was represented by auto-collateralisation on stock and 84.85% by auto-collateralisation on flow in 2022.

1.4 Interactions between TARGET2 and TIPS

TIPS is a harmonised and standardised pan-European service for the settlement of instant payments in central bank money. TIPS went live on 30 November 2018 with high capacity and 24/7/365 availability.

TIPS functionalities include the sending and receipt of instant payments, liquidity transfers and recalls of settled instant payment transactions based on the ISO 20022 standard and in accordance with the SEPA Instant Credit Transfers (SCT Inst) scheme. These instant payments are settled on TIPS DCAs held by Payment Service Providers (PSPs) with the respective national central banks.

Legally, euro-denominated TIPS DCAs were within the perimeter of TARGET2, so the rights and obligations of TIPS DCA holders were included in the TARGET2 Guideline. At the end of 2022 there were 163 active euro-denominated TIPS DCAs and 13,268 reachable parties in TIPS.

From its inception, TIPS was designed with multi-currency capability. This means that TIPS is able to provide settlement in non-euro central bank money. Based on the Currency Participation Agreement between Sveriges Riksbank and the Eurosystem signed on 3 April 2020, the connection between the Swedish RTGS system RIX and TIPS was technically established on 23 May 2022. This marked the successful completion of the first phase of the migration of the Swedish community to TIPS. The connection is essential for funding and defunding the accounts of future Swedish participants in TIPS. In the second phase the Swedish market is testing and preparing for final migration in the course of 2023, aiming to settle instant payments in Swedish kronor on the TIPS technical platform supporting the Swedish service RIX-Inst.

Work continued in 2022 in support of Danmarks Nationalbank’s plan to join TIPS, aiming to make instant payments in Danish kroner available by November 2025.

Formal discussions with Norges Bank proceeded on potentially settling instant payments in Norwegian kroner on the TIPS technical platform.

The initiative to settle instant payments across different currencies on the TIPS platform (starting with payments between the euro and the Swedish kronor) was further developed as a way of leveraging the multi-currency capability. A settlement model called the Linked Transactions Model was identified for such transactions. If the Eurosystem and Riksbank decide to take this initiative forward to the realisation phase, a pilot project will be carried out with either a restricted number of participants or an a reduced scale.

1.5 Comparison with EURO1

EURO1 was the only direct competitor to TARGET2 among large-value payment systems denominated in euro. The market share of TARGET2 was defined as its relative share vis-à-vis EURO1, as shown in Chart 12.

The two systems were different by design, since EURO1 operates on a net settlement basis and only achieves final settlement in central bank money (in TARGET2) at the end of the day. Furthermore, they responded partly to different business cases, since only TARGET2 settled individual transactions in central bank money and processed ancillary system transactions and payments related to monetary policy operations.

However, the traffic in the two systems was made up largely of interbank and customer payments. This helps to explain, in part, the relative share of TARGET2 vis-à-vis EURO1, which is calculated on the basis of these two payment categories only. In 2022 the share of TARGET2 increased in terms of both the value and volume of payments processed, with 92% of the value and 70% of the volume settled by large-value payment systems in euro.

Chart 12 does not give a full picture of banks’ routing preferences for all systems, only partially and in relation to the settlement of large-value euro-denominated transactions. In particular, it does not reflect the extent to which payments are channelled through ACHs or correspondent banking arrangements.

1.6 Value of TARGET2 payments

Chart 13 shows the evolution of the average value of a TARGET2 payment between 2014 and 2022. The continuous decrease from 2015 to 2017 was largely related to the migration of securities settlement system traffic to T2S.^[17] In 2022 the average value of a payment increased to €5.5 million, from €5.0 million in 2021.

Chart 14 illustrates the distribution of TARGET2 transactions per value band, indicating the shares, in terms of volume, that fall below a certain threshold. The picture remains similar to that of the previous year. Generally, about 70% of all TARGET2 transactions were for values of less than €50,000. Payments of more than €1 million accounted for only 9% of traffic.

On average, almost 219 payments with a value of more than €1 billion were made per day, accounting for 0.05% of payment flows. Given the wide distribution of transaction values, the median payment in TARGET2 is calculated as €6,500, which indicates that half of the transactions processed in TARGET2 each day were for a value lower than this amount. This figure confirms that TARGET2 offered a range of features attracting a large number of low-value transactions, especially those of a commercial nature. Although the picture changed slightly following completion of the migration to SEPA, particularly with regard to commercial payments, TARGET2 was still widely used for low-value payments in 2022, in particular urgent customer transactions. This is not unusual in the field of large-value payments and is also observed in other systems worldwide. It remains to be seen whether the increased prominence of instant retail payments will have an impact on this trend for similar systems in the future.

Chart 15 depicts the average value of TARGET2 payments executed at different times of the day. The chart indicates that in 2022, as in previous years, TARGET2 settlement showed a strong intraday pattern. After the system opened at 07:00 CET, the hourly average value of transactions fluctuated minimally throughout the day. Between 09:00 CET and 13:00 CET, the average value increased slightly owing to the settlement of CLS and other ancillary system transactions. A more visible increase was recorded between 16:00 CET and 17:00 CET relating to an optional cash sweep from T2S DCAs to TARGET2 and ancillary systems such as EURO1 settling their cash balances in TARGET2. The last hour of operations, between 17:00 CET and 18:00 CET, was reserved for interbank transactions, while the cut-off time for customer payments was 17:00 CET. The average size of payments increased dramatically at this time, owing to banks squaring their balances and refinancing themselves on the money market. Overall, the last two hours of TARGET2 operations were characterised by a limited number of transactions, but at very high values.

The average payment value in 2022 during the last opening hour of TARGET2 was largely equivalent to that in 2022.

The chart does not take into account payments that took place before the start and after the end of the business day, since these transactions fall under the night-time settlement category (Section 1.7) and related strictly to accounting practices, for example liquidity transfers from the local accounting systems of central banks, the fuelling of sub-accounts, and T2S DCAs.

1.7 Night-time settlement in TARGET2

TARGET2 operated during the day from 07:00 CET to 18:00 CET, and also offered the ability to settle payments at night. Although the system was open for regular payments from financial institutions and ancillary systems during the day-trade phase, night-time settlement was only for ancillary systems connecting via the Ancillary System Interface (ASI) and liquidity transfers to/from T2S and TIPS.^[18] Other operations, such as bank-to-bank transactions or customer payments, were only allowed during the day.

There were two night-time settlement windows: 19:30 CET to 22:00 CET and 01:00 CET to 07:00 CET. The two windows were separated by a technical maintenance window, during which no settlement operations were possible.

Since the system was closed at night to any other form of payment processing, ancillary systems could take advantage of banks’ stable and predictable liquidity positions and settle their transactions efficiently and safely. In general, the night-time windows were mainly used by retail payment systems. In 2022, an average of around 1,815 payments representing a value of €15. 40 billion were settled every night in TARGET2. Compared with 2021, this constitutes a decrease of about 16.91% in terms of value of payments and 3.46% in volume.

Chart 16 shows how the volumes and values settled in TARGET2 during the night evolved after 2009. The increase in volume in November 2011 occurred as a result of the SEPA Clearer ancillary system starting to make use of the night-time settlement service in TARGET2. From then on, the number of payments settled at night increased steadily, notably in 2014, while values remained fairly stable. The trend reversed in 2015, with night-time settlement values and volumes decreasing continuously thereafter. As indicated above, the changes in the night-time settlement pattern in this period can be attributed primarily to securities settlement systems migrating their operations to T2S. From December 2018 onwards night-time settlement values and volumes reached historically low levels because some ancillary system activity moved to the day-trade phase.

1.8 Payment types in TARGET2

Charts 17 and 18 present a breakdown of TARGET2 volumes and turnover by type of transaction. Traffic is divided into four categories: payments to third parties (for example interbank transactions and customer transactions), payments related to operations with the central bank (such as monetary policy operations and cash operations)^[19], ancillary system settlement, and liquidity transfers between participants belonging to the same group.

About 84% of TARGET2 volume in 2022 was made up of payments to third parties, i.e. between market participants. The volume of ancillary system settlement represented 7% of the total, while 7% was generated through operations with the central bank and the remaining 3% linked to liquidity transfers. Overall, these figures were similar to those for the previous year.

With regard to turnover in the year, payments between participants represented only 40% of total value. The value of ancillary system settlement made up 13% of the total volume, 20% was generated through operations with the central bank and the remaining 27% linked to liquidity transfers. Overall, these figures were similar to those for the previous year.

The difference between volume-based and value-based indicators across payment categories stems from the fact that the average sums involved in monetary policy transactions, ancillary system instructions and liquidity transfers were typically much larger than payments to third parties.

1.9 The use of prioritisation

Priority options helped TARGET2 participants to optimise their liquidity usage by allowing them to reserve a certain amount of liquidity for specific payment priorities. When submitting payments in TARGET2, participants could assign them a priority: “normal”, “urgent” or “highly urgent”. In general, payments were settled immediately on a “first in, first out” basis, as long as sufficient liquidity was available in the participant’s RTGS account. However, if this was not the case, payments that could not be settled immediately were queued according to priority. Participants could reserve a set amount of their liquidity for the “urgent” and “highly urgent” priority classes, and less urgent payments were made when excess liquidity was sufficient. This was a way of securing liquidity for more urgent payments. The priorities for pending transactions could be changed at any time via the information and control module (ICM).

Chart 19 gives an overview of the use of priorities in TARGET2 in terms of the overall TARGET2 volume in 2022. It shows that 87% of transactions were “normal” priority, 7% were “highly urgent” and the remainder were “urgent”. The distribution of the use of priorities when submitting payments to TARGET2 was stable over the years.

Chart 19

Use of priorities in TARGET2 in 2022

(percentages)

1.10 Non-settled payments

Non-settled payments in TARGET2 were transactions that had not been processed by the end of the business day, for example because they were erroneous, insufficient funds were held in the account to be debited, or a sender’s limit had been breached. The transactions were ultimately rejected. Chart 20 shows the monthly evolution of the daily average of non-settled payments in volume and value terms between 2009 and 2022.

In 2018 the average daily number and value of non-settled transactions fell sharply, driven mainly by the migration of one of the securities settlement systems to T2S at the end of 2017. As a result of its gross settlement model, some of its transactions were rejected, owing to either insufficient liquidity or cancellation, and reported as non-settled TARGET2 payments. In 2022 the average daily number of non-settled transactions increased to 422, compared with 278 in 2021. The average total value of these transactions increased to €2.8 billion in 2022, compared with €0.9 in 2021.

Chart 20

Non-settled payments in TARGET2

(left-hand scale: number of transactions; right-hand scale: EUR billions)

Non-settled payments in 2022 represented less than 0.01% of the total daily volume and about 0.01% of the total daily turnover in TARGET2. These levels may be considered very low and confirm that liquidity was appropriately distributed across participants throughout the period.

1.11 Use of credit lines in TARGET2

The intraday credit line was a facility in TARGET2 through which banks could overdraw their intraday account against eligible collateral. In 2022 the average maximum intraday credit line at participant level stood at €1.90 billion, largely in line with the €1.81 billion seen in 2021. Average usage was also largely unchanged, with 2.45% of payments settled using the intraday credit line in 2022, compared with 2.55% in 2021 (Chart 21). In the last months of the year average usage of the credit line returned to the levels observed before mid-2021.

With large amounts of central bank reserves available on their TARGET2 accounts, participants were less reliant on intraday credit lines. This trend had been observed since the start of the ECB’s asset purchase programme (APP). It continued in 2020 and 2021, when additional stimulus was provided by the Eurosystem in response to the COVID-19 pandemic. The average maximum intraday credit line at participant level increased from €1.90 billion in October to €1.94 billion in November and €2.25 billion in December. This coincided with repayment of part of the Eurosystem’s targeted longer-term refinancing operations (TLTRO) between November and December, which freed up collateral and reduced excess liquidity.

1.12 Share of inter-Member State traffic

The share of inter-Member State traffic in TARGET2 indicates the percentage of traffic that was exchanged between participants belonging to different banking communities. Chart 22 shows that there has been a positive trend for both volume-based and value-based indicators since 2009. This trend reflects the increasing level of financial integration in the large-value payment segment, which is mainly supported by TARGET2. This trend continued in 2022, with the share reaching 50% in volume terms, and 45.8% in value terms.

Chart 22

Share of inter-Member State traffic in TARGET2

(percentages)

When analysing these data, it should be borne in mind that whether a payment is sent or received by a given banking community may depend more on a bank’s internal organisation than on its real geographical domicile. For example, a subsidiary of a French bank located in Italy, because of its internal organisation, may send TARGET2 payments to another bank also located in Italy via its headquarters in France. In this case, the payment flow will be considered to be cross-border, even though the payment is taking place between two entities located in the same country. In contrast, banks located in European Economic Area (EEA) countries whose central banks do not provide TARGET services, such as the Czech Republic or Sweden, could participate in TARGET2 component systems provided by other central banks. For example, if a Swedish bank participating in TARGET2-Bank of Finland sent TARGET2 payments to banks in Finland that also participated in TARGET2-Bank of Finland, the payment flows would be considered domestic, even though they took place between entities located in different countries.

The inter-Member State payments depicted in Chart 22 were identified based on the national banking communities of the sending and receiving direct participants on the platform. Since it was also possible to connect to TARGET2 from a non-EEA country, for example as an indirect participant or an addressable Bank Identifier Code (BIC) holder, changes in the cross-border share in terms of volume were also computed on the basis of the originator and the beneficiary of the payment, taking into account the full payment chain information (i.e. originator, sending settlement bank, receiving settlement bank and beneficiary). When calculating the inter-Member State shares based on originator and beneficiary of payment, the share of cross-border payments in 2022 stood at 62.84% in terms of volume and 40.29% in terms of value. Taking the full payment chain into account therefore leads to a cross-border share that is significantly higher in volume but lower in value.

1.13 Tiering in TARGET2

Tiered participation arrangements occur in a payment system when a direct participant of that system provides services that allow other participants to access the system indirectly. The indirectly connected participants benefit in turn from the clearing and settlement facility services offered by direct participants.

While indirectly connected parties, i.e. indirect participants and addressable BIC holders, benefit from a settlement facility that would otherwise be costly to access directly, these types of arrangement also entail risks. Tiered participation arrangements can create dependencies that may lead to overall credit, liquidity or operational risks for the payment system, its participants and the stability of the banking system. Close monitoring of the tiering level in TARGET2 was thus of paramount importance. It was also an oversight requirement under Article 17 of the SIPS Regulation.^[20]

The image below shows the map of TARGET2 flows based on the location of payment originators and final beneficiaries. The institutions at both ends of the payment chain are a reflection of the global reach of TARGET2.

In 2022 the aggregate level of tiering on the sender side in TARGET2 reached around 7.0% in terms of value and 22.9% in terms of volume (Chart 23). This meant that, on average, for every euro sent by direct participants in TARGET2 during the year, only 7.0 cents were settled on behalf of indirectly connected parties outside their banking group. More than 75% of the tiered business (consolidated at banking group level) came from outside the EEA, showing that TARGET2 made it possible for institutions around the world to access the euro market.

The largest indirect participant in terms of value sent (consolidated at banking group level) was ranked approximately 49th out of all TARGET2 participants in 2022.

Further analysis reveals that 57.31% of all direct participants in TARGET2 (consolidated at banking group level) did not conduct any business during the year on behalf of indirect parties. Chart 24 shows that around 447 direct participants did not send any tiered payments, while 63 sent payments on behalf of only one tiered banking group in 2022. At the other end of the spectrum, around 81 direct participants acted as a settlement bank for more than 100 tiered banking groups.

Overall, these statistics point to a relatively stable and contained level of tiered participation in TARGET2.

1.14 Money market transactions in TARGET2

Market participants used TARGET2 to settle unsecured money market transactions in central bank money. By applying the Furfine algorithm^[23] it is possible to identify TARGET2 transactions which were related to money market loans, or, more precisely, to the unsecured overnight money market.^[24] This unique dataset is updated regularly to obtain the latest information about the money market. Overall, TARGET2 transaction data provide a rich source of information for analysing monetary policy implementation and TARGET2 operations. The importance of the money market is twofold: (i) it is an important vehicle for redistributing liquidity among TARGET2 participants; (ii) it is a large-value and time-critical area of business that the operator needs to be aware of, in particular when dealing with abnormal situations.

The dataset was developed using the TARGET2 simulator environment and comprises data from June 2008 onwards.^[25] In 2022 around 29,388 money market loans with a total value of about €2.42 trillion were identified. This corresponded to a daily average of 114 money market loans, with a value of about €9.41 billion (Chart 25). Overall, the amount of unsecured funds traded on the overnight market remained at low levels compared with the period before the financial and sovereign debt crises. Activity increased slightly in July as a result of the monetary policy decisions taken, although with no disruptive effects.^[26]

Chart 26 complements this analysis by showing the cumulative distribution in value of all money market transactions during the day in 2022. On the lending leg, 50% of total value was settled by around 15:25 CET, while 98% was settled by around 17:35 CET. This confirms the assumption that the last few hours of TARGET2 operations were particularly important for the interbank market. Three-quarters of loans were repaid by around 12:00 CET and 90% by around 14:30 CET. These patterns ensured that liquidity repaid could be reused for payment purposes later that day.

1.15 Shares of national banking communities

The following two charts break down TARGET2 volumes and turnover according to the share of the biggest national banking communities contributing to its traffic.

Chart 27

Country contributions to TARGET2 volume

(percentages)

Chart 28

Country contributions to TARGET2 value

(percentages)

As in previous years, the largest contributor to TARGET2 traffic in volume terms in 2022 was Germany, which accounted for more than half of the transactions settled in the system. The addition of France, Italy, Spain, the Netherlands and Belgium increases the share of transactions to 87.5%, which is on a par with previous years. The shares of the biggest contributors to TARGET2 volumes remained stable.

Germany is also the main contributor by turnover, followed by France, Luxembourg and the Netherlands. The top four countries by turnover generated over three-quarters of the total value settled in TARGET2 in 2022. The concentration of turnover remained stable compared with the previous year.

The high concentration of both TARGET2 values and volumes in certain countries was not only due to the size of particular markets. It can also be attributed to the fact that from November 2007 onwards the system allowed activities of banking groups to be consolidated in a single RTGS account held by the group’s head office, increasing concentration in countries where a large number of these groups are incorporated.

1.16 Pattern of intraday flows

Chart 29 shows the intraday distribution of TARGET2 traffic, i.e. the percentage of daily volumes and values processed at different times of the day in 2022. This indicator is significant for the operator as it represents the extent to which settlement is evenly spread throughout the day or concentrated at certain peak times. Ideally, the value/volume distribution should be as linear as possible to avoid liquidity and operational risk.

Chart 29

Intraday distribution of TARGET2 traffic in 2022

(percentages of daily volumes and values)

In value terms, the path was typically very close to linear distribution, indicating an even spread throughout the day, which in turn ensured smooth settlement of TARGET2 transactions.

In volume terms, the curve was well above the linear distribution, with over one-fifth of transactions submitted to the system within one hour of the start of operations – including transactions sent at night and warehoused payments – and almost half submitted within three hours of the start. One hour before the system closed, almost 100% of the TARGET2 volume had already been processed. A comparison with previous years shows no significant deviations.

In 2022, as in 2021, 99.99% of all payments settled in the payments module of TARGET2 were processed in less than five minutes.

Service delivery times and payment processing times generally remained stable in 2022, confirming the high performance level of TARGET2’s SSP. This excellent performance was advantageous for the banking community, particularly for its real-time liquidity management.

Payment processing times were measured for all payments settled in TARGET2, with the exception of: (i) ancillary system settlement transactions using the ASI, (ii) payments settled during the first hour of operations (see the “morning queue effect” below) and (iii) payments not settled owing to a lack of funds or a breach of limit. In practice, around 30% of all TARGET2 payments fell into these three categories, meaning that the statistics on processing times applied to around 70% of the system’s traffic.

99.94%^[30] of requests or enquiries were processed in less than one minute and only 0.06% in one to three minutes, with levels remaining the same as in 2021.

Chart 30 helps to better quantify the system’s performance by showing the distribution of processing times on the SSP, i.e. the percentage of traffic with a processing time below a certain number of seconds. The reference point taken is the peak day of the year, 19 April 2022, when 622,003 payments were settled. The chart shows that on this day 50% of transactions were settled within 26 seconds and 90% within 38 seconds, confirming the system’s high level of performance.

A phenomenon worth reporting in the context of TARGET2 performance is the “morning queue effect”. When TARGET2 started daylight operations at 07:00 CET, a large number of transactions (about 20% of the daily volume on peak days) were already waiting for settlement. They were either payments submitted by banks on previous days with a future value date (i.e. “warehoused payments”) or payments released by banks via SWIFT in the hours preceding the opening of the system. On peak days more than 100,000 transactions may have been processed in the first hour, which affects the average settlement time during this period. This huge volume of transactions normally took around 30 to 45 minutes to process. In order to neutralise this effect, the first hour of operations was excluded when TARGET2 processing times were calculated.

Specifically, in the first hour the use of urgency flags (“urgent” and “highly urgent”) was still recommended for payments considered time-critical (such as CLS pay-ins). This circumvented settlement delays by using different queues (one for each type of priority). In addition, attention should be drawn to the possibilities offered in TARGET2 to reserve funds for highly urgent and urgent payments (see Section 1.9).

2.1 Technical availability

In the light of TARGET2’s importance for the functioning of the financial system and the knock-on effects that any potential malfunctions could have had on other market infrastructures, the Eurosystem paid particular attention to ensuring its smooth operation. This is clearly underlined by the fact that the SSP of TARGET2 achieved 100% technical availability in 2022.

Technical availability was measured on TARGET2 business days during the day-trade phase (including end-of-day processing), from Monday to Friday between 07:00 CET and 18:45 CET (19:00 CET on the last day of the minimum reserve period), including any extensions required to complete the operational day (e.g. delayed closing owing to a technical problem in TARGET2 – or in T2S, which has an effect on TARGET2 – or major problems in ancillary systems settling in TARGET2). The availability measurement did not include systems or networks not directly managed by TARGET2 (in particular, the availability of SWIFTNet services). Incidents occurring during night-time settlement were not included either.

Technical availability was not intended to measure the impact of partial outages involving the TARGET2 SSP. For example, incidents affecting only the processing of ancillary system transactions without any effect on other payment processing activities could not be measured in this figure, although they had an overall impact on TARGET2 and were taken into account when assessing the system’s performance. However, such incidents were considered when measuring processing times where applicable, and were also reported transparently and followed up accordingly.

2.2 Incidents in TARGET2

The ECB published up-to-date information about the availability of TARGET2 via the Market Information Dissemination tool.^[31] All incidents were followed up with a detailed incident report and risk management process. The aim of this approach was to learn from these events in order to avoid a recurrence or incidents of a similar nature.

TARGET2 did not experience any incidents in 2022 that suspended the settlement of payments.

The closing of the interbank payment cut-off at 18:00 CET was nevertheless delayed on 13 occasions, a significant increase compared with previous years. Most of these were related to problems in T2S which prevented the timely repatriation of funds to TARGET2 RTGS accounts.

3.1 RTGS accounts

In December 2022 the total number of RTGS accounts active in TARGET2 (encompassing direct participants, technical accounts, ancillary system accounts and special-purpose accounts) was 1,863, i.e. lower than at the end of 2021 (1,958).

Chart 32

Number of RTGS accounts in TARGET2

3.1.1 Internet-based participation

In November 2010 internet-based participation was introduced to allow small banks to obtain a direct connection to TARGET2 without necessarily being connected to the SWIFT network. The service, which was subject to a monthly fee of €70, was designed mainly for low-volume participants that wished to hold an account directly with their central bank, either an RTGS account^[36] or a home accounting module account (provided the respective central bank has opted for this module).

While the initial number of internet-based participants was relatively modest (68 at the end of 2012), it increased significantly in 2013 (to 509 participants by the end of that year), with the phasing out of the last proprietary home accounts still offering payment settlement services. Another increase in the second half of 2016 (to 634 participants by September 2016) was caused by some banks opening TARGET2 accounts via internet-based access solely to settle long-term refinancing operations. While total internet-based participation gradually declined from then on, a third increase took place from mid-2020 (to 630 participants by December that year). This increase was also caused by banks opening TARGET2 accounts via internet-based access solely to settle long-term refinancing operations. In December 2022 the overall number of internet-based participants was 575, indicating a gradual decline in this type of participation. The largest share of internet-based participants was in Germany, followed by France and Italy.^[37]

3.2 Participation types

At the end of December 2022 957^[38] direct participants held an account on the SSP of TARGET2 and were registered as such in the directory. Through these, 528 indirect participants from the EEA and 4,611 correspondents worldwide were able to settle their transactions in TARGET2.

Including the branches of direct and indirect participants, a total of 41,385 BICs around the world (56.56% of them located in the EEA) were accessible via TARGET2 at the end of 2022. Compared with the number of reachable BICs at the end of 2021, this figure represents a drop of around 3%, driven mainly by the decrease in the number of addressable BIC holders associated with branches of direct and indirect participants.

Participants and institutions addressable via TARGET2 were listed in the TARGET2 directory, which was available to all direct participants for information and routing purposes. In addition to direct participants with an RTGS account for sending payments to and receiving payments from other direct participants, a number of banks opted to open special-purpose RTGS accounts which were not reported as direct participants in the TARGET2 directory. These were used, among other things, to settle specific business (for example Eurosystem open market operations) or fulfil reserve obligations in countries where reserves are computed on RTGS accounts. There were 423 of these accounts, also known as “unpublished BICs”, at the end of 2022 (compared with 435 in 2021).

3.3 Ancillary systems

At the end of 2022 a total of 79^[39] ancillary systems were using the TARGET2 SSP for settlement purposes, including 32 retail payment systems, 22 securities settlement systems and 17 clearing houses (including six central counterparties).

Of the 79 ancillary systems using the SSP for settlement purposes, 56 made use of the ASI, a feature which was developed to facilitate and harmonise cash settlement of these systems in TARGET2.^[40] Table 3 shows the number of times each of the available ASI models was used during the year.

4.1 Cost recovery objectives

The objective initially set by the ECB’s Governing Council in 2007 was for TARGET2 to recover all its costs (with the exception of the “public good factor”)^[41] over the six-year amortisation period, i.e. between May 2008 and April 2014. This included development costs, running costs, overhead costs and capital costs.

The evolution of TARGET2’s cost recovery rate since the finalisation of its migration phase in 2008 is shown in Chart 34.

At the time of TARGET2’s development, a number of assumptions were made about the volume of operations in relation to cost recovery. It was estimated that in the first year of operation (i.e. from May 2008 to April 2009), TARGET2 would settle a total of 93.05 million transactions and that this figure would then need to increase by an average of 6% per year. Although the objective was met the year the system was launched, the overall economic slowdown and exceptional market conditions in the ensuing years made it impossible to meet the targeted 6% increase.

From launch the system saw an average annual decrease in billed traffic of 0.7%, which largely explains why cost recovery was only around 90% for the first few years of operation.

In July 2012, acknowledging this underperformance, the Eurosystem decided to amend the single pricing scheme as of January 2013. The fixed periodic fee for users was increased, while transaction fees remained unchanged. The new pricing scheme represented an acceptable compromise, with a limited increase in participants’ fees and a reasonable extension to the system’s payback period. In 2013 the amended pricing scheme helped to bring cost recovery close to 100%.

By 2014 most^[42] of the investment costs were amortised, which substantially reduced the costs still to be recovered and lifted recovery to more than 100%. These annual profits were used to offset the losses accumulated over the first few years of operation.

While TARGET2 generated annual profits from 2014 onwards, the level of cost recovery fluctuated considerably each year. The reasons for this were, first, that the SEPA migration end-date resulted in a one-off drop in the total amount of customer payments settled. Second, T2S migration had an effect from both a cost and revenue perspective. TARGET2 underwent adaptations in preparation for the launch of T2S, the costs of which started to be recouped from 2015 onwards. These adaptation costs were passed on to system participants in the form of a specific fee.^[43] The successful migration of the respective CSDs to T2S from June 2015 onwards also reduced the total amount of ancillary system transactions settled in TARGET2.

The total amount of billable traffic in TARGET2 increased by 6.3 million transactions in 2022 and overall revenues increased to €446.2 million. Annual cost recovery also increased to 108.4%.

4.2 Financial performance of TARGET2 in 2022

In 2022 the total annual costs to be recovered for the provision of the core services of TARGET2 amounted to €42.7 million. On the revenue side, TARGET2 participants were billed for 100.6 million transactions, which, together with the fixed monthly fees, generated total revenues of €46.2 million. This resulted in a cost recovery rate of 108.4% and an annual profit of €3.6 million. At the end of 2022 the loss accumulated since the launch of TARGET2 had therefore decreased by the same amount, and stood at €0.2 million. This meant that TARGET2 had fulfilled its cost recovery objective by the time it was replaced by the new T2 system in March 2023.

Chart 35

Accumulated profit

(EUR millions)

4.3 Analysis of revenues collected in 2022

Based on 2022 figures, the following observations can be made.

• 94% of direct participants in the SSP opted for the flat fee option (option A), while 6% opted for the degressive fee option (option B).^[44] This shows that TARGET2 was capable of attracting both major market players and a large number of small and medium-sized institutions.
• Participants that opted for pricing option B generated, in total, around 89% of billed traffic.^[45] As a result of this concentration, 41% of all billed transactions were in the lowest pricing band: €0.125. This demonstrates that key participants, particularly multi-country banks, benefited from the attractive degressive fee option offered by TARGET2 and the competitive group pricing offers.^[46]
• Transactions between credit institutions generated around 93% of TARGET2 volumes, with the remaining 7% attributable to ancillary system transactions.
• 75% of TARGET2 revenues were variable, i.e. came from transaction fees, while fixed subscription fees accounted for 25%.
• Measured from the start of the system, total cost recovery of TARGET2 stood at 99.4%.

5.1 TARGET2 risk management

The management of operational risks was key for ensuring the resilience of the TARGET2 service. In December 2021 the Governing Council approved a new TARGET services risk management framework (TS RMF) applicable to all TARGET services (TARGET2, TARGET2-Securities and TIPS). The TS RMF follows up the recommendation from the TARGET2 overseer to establish and document a three-line model.^[47] In particular, the TS RMF clarifies the roles and responsibilities of stakeholders (most significantly for the first and second lines of defence) in identifying, assessing and managing operational risks. The second line was established mid-2020 and reports to the Market Infrastructure Board (MIB). Following the MIB’s endorsement of the TS RMF, the resourcing of a fully-fledged second line was completed in December 2021.

The TS RMF consolidates the link to information security risk management processes designed to: (i) monitor developments to ensure that progress on the implementation of security checks in response to issues resulting from risk assessments is satisfactory; (ii) enable those involved to learn from operational experience, ensuring appropriate measures are taken to prevent an incident from recurring; and (iii) proactively identify new threats and vulnerabilities that could emerge from the changing environment and, if needed, initiate deliberations on implementing additional security checks to prevent these threats from materialising.

Now that the consolidation project has gone live, the MIB is preparing to finalise a new TARGET services cyber resilience and information security (CRIS) framework, which will further enhance risk management. This will be implemented incrementally and further improved after its endorsement by the Governing Council, which is planned in the first half of 2023.

5.2 Oversight activities

As part of the continuous oversight cycle, the ECB oversight function organised a number of bilateral meetings at different levels in 2022 between the TARGET2 operator and the ECB as the competent authority, as well as at the level of the European System of Central Banks (ESCB) Committee and working group. The regular meetings allowed for discussion of developments and risks in the system and served as a means for the overseer to effectively monitor the system’s risk profile. In combination with other oversight tools, these allowed the overseers to assess TARGET2’s continued compliance with the SIPS Regulation and other oversight requirements.

In October 2022 the ESCB Market Infrastructure and Payments Committee (MIPC) approved the outcome of the pre-assessment of the consolidated platform prior to its go-live. This was carried out as a major change assessment of TARGET2, as foreseen in the Eurosystem Oversight Guide for SIPS.

To further ensure the resilience of TARGET2, the oversight function continued to follow up on remediation actions taken by the operator to address open findings from previous assessments.

As concerns TIPS, the oversight function reviewed the changes that occurred during the year. These included TIPS Release 5.0 deployed in November 2022, Release 4.1 in May 2022 (including adaptations stemming from the onboarding of Sveriges Riksbank to TIPS) and release R2023.NOV, which is being implemented in 2023 to improve search criteria and query information.

There were no new releases in 2022. Owing to the limited remaining lifetime, the Eurosystem decided not to seek any change requests from participants. No adaptations were required as part of SWIFT Standards Release 2022.