Full Compliance Summary

Until recently, Italy’s systemically important payment system was known as BI-REL, which was Italy's component of the Trans-European Automated Real-time Gross Settlement Express Transfer (TARGET) system, the Euro area payment system. However, in November 2007 TARGET2 replaced TARGET and payment services in the Euro area were harmonized under a single shared platform across its member countries. Italy joined TARGET2 with the third and final wave of countries in May 2008. As a result, BI-REL was deactivated. According to a 2009 European Central Bank (ECB) assessment of TARGET2 against the Core Principles for Systemically Important Payment Systems (CPSIPS) promulgated by the Committee on Payment and Settlement Systems, TARGET2 observes all CPSIPS. Despite the single shared platform nature of the new system, national legislation and national central banks still maintain primary supervision for their national components of TARGET2. The International Monetary Fund (IMF) in its 2004 assessment of Italy's payment systems concluded that the Bank of Italy (BoI), the country's central bank, only largely observed Central Bank Responsibility D as the BoI did not have formal arrangements for exchange of information with non-EU countries. Subsequently, a 2006 IMF report noted that Italian authorities, at the time, were engaged in formalizing cooperation with the U.S. Federal Reserve. Similarly, a 2008 World Bank report on payment systems indicates in its appendix that Italian cooperation with other relevant authorities is ensured through a formal mechanism, such as a Memorandum of Understanding, or is required by law.

General Overview

Like many other countries in the euro zone, Italy has recently transformed its systemically important payment system in order to participate in a single, pan-European platform. Italy was part of the Trans-European Automated Real-time Gross settlement Express Transfer (TARGET) system, which in turn was replaced by its successor, TARGET2. Italy was among the third and final wave of countries to join TARGET2, doing so in May 2008. In 2009, the European Central Bank (ECB) released an assessment of TARGET2’s compliance with the Core Principles for Systemically Important Payment Systems (CPSIPS) as defined by the Committee on Payment and Settlement Systems. With the exception of one principle, which was not applicable to Italy due to the Real-Time Gross Settlement (RTGS) nature of TARGET2, all core principles were deemed to be “observed” by the ECB (its highest qualitative rating).

A 2007 report by the ECB titled "Fifth Progress Report on TARGET2 - Annex 2: User Information Guide to TARGET2 Pricing," (hereafter referred to as the 2007 ECB TARGET2 - Annex 2 report) notes that the Bundesbank (German central bank), Banca d'Italia (Italian central bank, or BoI) and Banque de France (French central bank) provide TARGET2 participants with a single technical platform, called the Single Shared Platform (SSP). The report further indicates that despite the SSP, "TARGET2 is legally composed of national components governed by the national legislation of each participating member state. [Thus] the business relationship with the users and their accounts remain with the national central banks" (p. 4). Furthermore, national central banks (NCBs) are permitted to continue processing payments via their Proprietary Home Account application instead of the SSP for a four-year transitional period from when the country migrates to TARGET2, so as to allow participants more time and facilitate their changeover to the SSP.

Despite the transition to TARGET2, member countries' NCBs still have supervisory authority, and national legislation still holds significance. According to another 2007 ECB report titled "Payment and Securities Settlement Systems in the European Union: Euro Area Countries" (hereafter referred to as the 2007 ECB report on Euro Area Countries), "central banks monitor developments in the field of payment and settlement systems in order to assess the nature and scale of the risks inherent in these systems,” and “they define principles and standards for the promotion of safe, sound and efficient payment and settlement systems. They analyze and assess the extent to which the systems comply with these principles and standards" (p. 19). Per the same report, the Governing Council of the ECB adopted the CPSIPS as one of the standards the Eurosystem (the ECB and the national central banks of the euro area) must apply when performing its oversight role.

A 2008 report by Massimo Cirasino and Jose Antonio Garcia of the World Bank describes Italy’s legal and regulatory framework of its payment system as highly developed. The authors give the same description for Italy’s oversight and security of its payment system. The laws governing payment systems in Italy include both national and European Union (EU) laws on payment systems. Article 105(2) of the Treaty Establishing the European Community (Maastricht Treaty) and Article 22 of the Statute of the European System of Central Banks (ESCB) include among the ESCB's institutional functions the promotion of the smooth operation of payment systems. As noted by the 2007 ECB report on Euro Area Countries the main Italian laws that comprise the general regulatory framework for the Italian payment system are provisions of the Italian Civil Code and the Legislative Decree No. 385 of 1993 (the 1993 Banking Law).

The main providers of payment services are the banking system, the Italian Post Office and the BoI. The BoI, according to information provided on its website, in its role as payment system operator maintains close cooperation with the banking community to manage an efficient and reliable payment systems. The 1993 Banking Law confers upon the BoI explicit responsibilities and powers for ensuring the efficiency and soundness of the Italian payment system. The BoI performs its functions in accordance with international and European guidelines. Article 146 of the 1993 Banking Law states that the BoI "shall promote the regular operation of payment systems. For this purpose, it may issue regulations to ensure the efficiency and reliability of clearing and payment systems."

According to the 2007 ECB report on Euro Area Countries, the retail payment systems in the region are to be categorized as systemically important systems, prominently important systems, and other systems, and the Eurosystem ensures that these systems are also overseen by consistent policy. The Single Euro Payments Area (SEPA) "consists of a series of initiatives aimed at the introduction of common instruments, standards and infrastructures for retail payments in euro across Europe," (p. 28) and since late 2009 has been gradually replacing sovereign retail payment systems across Europe. As of February 2010, there is no comprehensive assessment of the SEPA system against CPSIPS.

According to a 2008 Annual Report by the BoI, TARGET2 settled an average 370,000 payments worth EUR 2.67 trillion per day in 2008. This represented an increase of 1 percent in the number of payments and 10 percent in their value over the previous year. The portion of payment settlements handled by Italy fell in value by EUR 7 billion from 2007 to 2008, in part due to the global financial crisis in late 2008. According to the 2007 ECB report on Euro Area Countries "the use of cash is still widespread [and in fact] the use of cash in Italy relative to GDP is almost twice the euro area average" (p. 267). The 2008 Annual Report by the BoI reiterates this fact, stating that “the use of non-cash instruments remains quite limited in Italy by international standards” (p. 196), noting that 60 percent of bank card transactions are ATM cash withdrawals. Still, the overall trend for Italy continues to be the increased use of non-cash payments.

The Principles

FCI. The system should have a well-founded legal basis under all relevant jurisdictions.

TARGET2 observes this principle per the findings of the 2009 ECB assessment. The report explains that “the legal framework of TARGET2 is clearly designed in a set of legal instruments and arrangements” (p. 5). Of such instruments, the most important in terms of oversight is the Guideline of the European Central Bank on TARGET2, which was adopted by the Governing Council on April 26, 2007. Other important EU regulations relating to payment systems are put forth in the Treaty and the Statute of the ESCB, the Cross-Border Credit Transfers Directive (Directive No. 97/5/EC) of January 27, 1997, and the Settlement Finality Directive (Directive No. 98/26/EC) of May 19, 1998.

According to the 2007 ECB report on Euro Area Countries, despite Europe’s transition to TARGET2, member countries' national central banks still have supervisory authority and national legislation still holds significance. The 2007 ECB report highlighted two laws governing payment systems in Italy: the 1993 Banking Law, which grants general oversight powers to the central bank, and the Consolidated Law on Financial Intermediation, which establishes the private nature of the management of financial markets while assigning supervisory functions to the BoI.

The 2008 World Bank publication on payment systems worldwide indicates in its appendix that legal provisions in Italy cover: (1) clarity of timing of final settlement especially when there is an insolvency; (2) legal recognition of (bilateral and multilateral) netting arrangements; (3) recognition of electronic processing of payments; (4) the non-existence of any zero hour or similar rules; (5) enforceability of security interests provided under collateral arrangements and of any relevant repo agreements; and (6) protection from third-party claims of securities and other collateral pledged in a payment system.

FCII. The system's rules and procedures should enable participants to have a clear understanding of the system’s impact on each of the financial risks they incur through participation in it.

According to the 2009 ECB assessment, TARGET2 observes this principle. The report notes that the TARGET2 Guideline “sets out provisions pertaining to the management of financial risks” (p. 5). Other sources of information on financial risks available to TARGET2 users include the User Detailed Functional Specification, the Information and Control Module, the User Handbook, the Manual of Procedures and the Information Guide.

FCIII. The system should have clearly defined procedures for the management of credit risks and liquidity risks, which specify the respective responsibilities of the system operator and the participants and which provide appropriate incentives to manage and contain those risks.

Per the 2009 ECB report, TARGET2 “observes” this principle. It further states that "owing to the RTGS nature of TARGET2 – where participants’ accounts are debited and credited simultaneously – no credit exposures among participants arise other than the risk entailed in the original exposures between the parties" (p. 6). Moreover, adequate collateral eliminates any credit risk for the central banks in relation to the provision of intraday credit to the participants. The ECB assessment notes that TARGET2 participants are provided with a number of tools for managing and economizing their liquidity requirements.

The 2007 ECB report on Euro Area Countries notes that "the following sources of liquidity can be used in TARGET2: balances on RTGS accounts, provision of intraday liquidity, and offsetting payment flows (i.e. the use of algorithms to settle a number of queued payments)" (p. 39). The report further states that intraday credit is granted to participants against eligible collateral by the respective national central banks. According to a 2005 report by the Bundesbank, TARGET2 has bilateral and multilateral limits that permit liquidity management for all TARGET2 participants.

FCIV. The system should provide prompt final settlement on the day of value, preferably during the day and at a minimum at the end of the day. (Systems should seek to exceed the minima included in this Core Principle.)

The 2009 ECB assessment states that TARGET2 observes this principle. The assessment further states that "unless instructing participants have indicated the settlement time, accepted payment orders shall be settled immediately or at the latest by the end of the business day on which they were accepted, provided that sufficient funds are available on the payer’s RTGS account and taking into account: (1) any bilateral or multilateral liquidity limits that a participant has set for the use of available liquidity for payment orders in relation to other TARGET2 participants; and (2) liquidity reservations for highly urgent or urgent payment orders" (p. 7). Those payment orders that are unable to be settled by the cut-off times are returned as unsettled.

According to the 2007 ECB report on Euro Area Countries, the EU's Settlement Finality Directive of 1998 harmonized laws in member states and thereby ensures that the operations of payment and settlement systems are not stopped by the bankruptcy of a participant. Furthermore, the report also states that unless otherwise indicated by the participant, payments in TARGET2 are settled immediately or at least by the end of the business day.

IIV. A system in which multilateral netting takes place should, at a minimum, be capable of ensuring the timely completion of daily settlements in the event of an inability to settle by the participant with the largest single settlement obligation. (Systems should seek to exceed the minima included in this Core Principle.)

This principle is not applicable to TARGET2, as it is a system that provides RTGS services.

FCVI. Assets used for settlement should preferably be a claim on the central bank; where other assets are used, they should carry little or no credit risk and little or no liquidity risk.

According to the 2009 ECB report, TARGET2 observes this principle. The assessment further states that "payments processed in TARGET2 are settled in central bank money in the accounts of the direct TARGET2 participants" (p. 7). The 2008 World Bank publication on payment systems worldwide reiterates this point in its appendix, noting that RTGS payments in Italy have been operated by the central bank since 1997.

FCVII. The system should ensure a high degree of security and operational reliability and should have contingency arrangements for timely completion of daily processing.

TARGET2 observes this principle as reported in the 2009 ECB assessment. The objectives of the information security policy for TARGET2 and the tools and procedures for achieving these objectives are defined in the TARGET2 Risk Management Framework (T2RMF). The 2009 ECB assessment states that "the main objective of information security is to protect TARGET2 business processes and any related information from a wide range of threats, whether internal or external, deliberate or accidental, and to minimize the impact on the business continuity of TARGET2 of any threats that, despite all measures taken, do materialize" (p. 8). The T2RMF is comprised of three levels: the first level describes the systems’ high-level security policy principles and requirements, the second level specifies concrete security requirements and controls, and the third level describes in detail the risk management process, including the conduct of regular risk assessments and the reporting structure.

The 2007 ECB report on Euro Area Countries notes that "TARGET2 [offers] the highest possible level of reliability and resilience, as well as sophisticated business contingency arrangements commensurate with the systemic importance of the TARGET2 infrastructure" (p. 37). Per the same report TARGET2 - Annex 2 report, TARGET2 has set contingency arrangements for failures in the system due to central bank(s)' failure, proprietary home account failure, an ancillary system failure, a bank failure, and the failure of the Society for Worldwide Interbank Financial Telecommunication (SWIFT).

FCVIII. The system should provide a means of making payments which is practical for its users and efficient for the economy.

The 2009 ECB assessment mentions that TARGET2 observes this principle. The report also notes that TARGET2 meets the business needs of its users, ensures high levels of processing capacity, performance and resilience, and bases its pricing policy on a sound cost methodology. The report further states that "the pricing policy [for TARGET2], which has been agreed by the Governing Council [of the ECB], aims at achieving two main objectives: first, ensuring wide participation in the system, through a pricing scheme which is attractive both for big players and smaller institutions; second, ensuring full cost recovery, taking into account a public good factor" (p. 10).

FCIX. The system should have objective and publicly disclosed criteria for participation, which permit fair and open access.

The ECB's 2009 assessment assigns an “observed” rating for TARGET2 for this principle. The report further notes that the access/exit criteria for the systems are clearly and explicitly stated and publicly disclosed in the TARGET2 Guideline. Direct participation in TARGET2 is permitted to: (1) credit institutions established in the European Economic Area (EEA); (2) credit institutions established outside of the EEA, provided that they act through a branch established in the EEA; and (3) central banks of EU Member States and the ECB. The ECB and the central banks, on an ongoing basis, verify that their respective participants continue to abide by the system's access criteria.

FCX. The system's governance arrangements should be effective, accountable and transparent.

TARGET2 observes this principle as stated in the 2009 ECB assessment. The report notes that the ownership, decision-making structure, and operational function are adequately specified in the relevant system documentation. The same report notes that "there are three separate levels of governance for both the establishment and the operational phases of TARGET2… Level 1 (Governing Council of the ECB) has final competence in relation to TARGET2 and safeguards its public function. Level 2 (Eurosystem CBs) has subsidiary competence for TARGET2 in relation to issues left to its discretion by Level 1, while Level 3 (SSP providing CBs) builds and operates the SSP" (p. 11). The Governing Council is responsible for the direction, management and control of TARGET2.

FCA. The central bank should define clearly its payment system objectives and should disclose publicly its role and major policies with respect to systemically important payment systems.

As stated in the 2007 ECB TARGET2 - Annex 2 report, despite the transition to TARGET2, member countries' national central banks still have supervisory authority and national legislation remains significant. According to the 2004 IMF assessment, Italy observes this principle. The 2004 IMF report notes "the payment system objectives of the BoI are to promote security and efficiency of the payment mechanism and to ensure the provision of payment services to all banks on a nondiscriminatory basis, so as to safeguard competition in the payment services market" (p. 35). The 2006 IMF report, states that the “BoI’s objectives in respect of the national payment systems have been set out in depth in a variety of publications, regular and ad hoc” (p. 47).

In November 2007, the "Terms of Reference for the Oversight Assessment of Euro Systemically and Prominently Important Payment Systems against the Core Principles" and the "Guide for the Assessment against the Business Continuity Oversight Expectations for SIPS" were published. The documents provide a common methodology for oversight which aims "to provide the Eurosystem's payment systems overseers with clear and comprehensive guidelines for the assessment of the relevant systems and the preparation of oversight reports" (ECB 2008b, p. 10). The ECB's 2008 Oversight Report notes that TARGET2 is designed on the basis of the above common methodology.

FCB. The central bank should ensure that the systems it operates comply with the Core Principles.

According to the 2004 IMF assessment, Italy observes this principle. The 2007 ECB report on Euro Area Countries notes that, in 2001, the Governing Council of the ECB adopted the CPSS' CPSIPS as one of the standards the Eurosystem must apply when performing its oversight role. According to the ECB's 2007 annual report on TARGET, "throughout 2007, the TARGET2 design was subject to an intensive assessment against the relevant Core Principles. In terms of scope, the oversight assessment of the TARGET2 design included the design of the SSP, as well as the proprietary home accounts (PHAs) of four NCBs [the National Bank of Belgium, the Deutsche Bundesbank, Lietuvos Bankas, and the Bank of Portugal] which will be used to provide RTGS services during the transition period" (p. 25).

The ECB's 2008 Oversight Report states that although the Eurosystem's oversight policies and requirements reflect internationally recognized standards, the "details are adjusted to the specific conditions and needs of the Eurosystem" (p. 7). The report also notes that CPSS' CPSIPS are the most important standards the Eurosystem uses in its oversight policy.

IIC. The central bank should oversee compliance with the Core Principles by systems it does not operate and it should have the ability to carry out this oversight.

According to the 2004 IMF assessment, this principle is not applicable to Italy "since there are currently no privately operated systemically important payment systems in Italy [and as such] there is no need for the BoI to carry out such oversight" (pp. 35-36). This statement is reiterated by the 2006 IMF assessment.

FCD. The central bank, in promoting payment system safety and efficiency through the Core Principles, should cooperate with other central banks and with any other relevant domestic or foreign authorities.

The 2004 IMF report concluded that, at the time of the assessment, Italy only largely observed this principle. However, the report also noted that "this responsibility [was expected to be] fully observed when the BoI has put in place arrangements for cooperation and exchanges of information with the 7 central banks and banking supervisors in the non-EU countries concerned" (p. 37). A 2006 IMF update of the 2004 assessment indicated that the Italian authorities concluded that the BoI addressed all the recommendations included in the 2004 assessment, with the exception of a few marginal aspects. Similarly the 2006 IMF report states that "as regards the recommendation concerning responsibility D, BoI has entered into an agreement on information sharing with the U.S. Federal Reserve for information sharing" (p. 50). It also says that the BoI cooperates with the ECB and other EU central banks but that there are no agreements in place with any central banks or banking supervisors outside the European Economic Area. Meanwhile, the 2008 World Bank report on payment systems indicates in its appendix that Italian cooperation with other relevant authorities is ensured through a formal mechanism, such as Memorandum of Understanding, or is required by law. The report also states that such cooperation involves regular meetings, information exchanges, and joint inspections. It does not, however, specify with which countries Italy has made such agreements.