In the first half of 1998 work continued at the EMI to complete the Eurosystem’s operational framework for the implementation of monetary policy. Following the publication by the EMI, in September 1997, of the report entitled "The single monetary policy in Stage Three: General documentation on ESCB monetary policy instruments and procedures", the ECB endorsed the content of that report in the summer of 1998 and developed it further, in close co-operation with the NCBs, by specifying additional provisions in a number of areas. As a result, in September 1998 the ECB published a new version of the report with the same title (the "General documentation").

The monetary policy framework of the Eurosystem comprises a minimum reserve system, open market operations and standing facilities as described below. In accordance with Article 12.1 of the Statute of the ESCB, the Governing Council of the ECB is responsible for the formulation of monetary policy, while the Executive Board is empowered to implement monetary policy according to the decisions and guidelines laid down by the Governing Council. To the extent deemed possible and appropriate, and with a view to ensuring operational efficiency, the ECB has recourse to the NCBs to carry out the operations which form part of the tasks of the ESCB. The Eurosystem’s monetary policy operations are executed on equal terms and conditions in all participating Member States.

The most relevant new features of the version of the "General documentation" published by the ECB in September 1998, as compared with the earlier version published by the EMI, are the details of the eligibility criteria and risk control measures to be applied to assets eligible for the monetary policy operations of the Eurosystem, the specification of procedures to be applied for cross-border transactions in the context of the correspondent central banking model (CCBM), the establishment of the conditions for access to the deposit facility, the definition of the features of the minimum reserve system and the definition of the calendar of tender operations for 1999. Finally, the "General documentation" presented specific provisions to be applied to the monetary policy instruments and procedures during the transition to Stage Three.

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1.1 The minimum reserve system

On 7 July 1998 the Governing Council of the ECB decided that the ECB would require credit institutions established in euro area Member States to hold minimum reserves as from the start of Stage Three.

The minimum reserve system applied by the ECB is primarily intended to fulfil the following two monetary policy functions: the stabilisation of money market interest rates ("stabilisation function") and the enlargement of a structural liquidity shortage within the banking system ("enlargement function"). As regards the stabilisation function, the introduction of an averaging provision (implying that reserve requirements have to be fulfilled on average over a monthly maintenance period and not on a daily basis) enhances the flexibility of the credit institutions’ day-to-day liquidity management, allowing them to exploit short-term arbitrage opportunities in the money market. In this way, the averaging provision can be expected to contribute to a stabilisation of the overnight interest rate over the course of the maintenance period. This, in turn, reduces the need for central bank fine-tuning intervention in the market and thus allows the Eurosystem to extract valuable information from market developments. With regard to the enlargement function, a sufficiently large structural liquidity shortage within the banking system enhances the ability of the Eurosystem to operate efficiently as a supplier of liquidity.

The minimum reserve system applied by the ECB can be characterised by the following main elements. First, the reserve requirement applies to all credit institutions (as defined in Article 1 of the First Banking Co-ordination Directive) which are established in the euro area. Second, the reserve requirement of each individual credit institution is calculated by applying a reserve ratio, which has been set at 2%, to its liabilities in the form of overnight deposits, deposits with an agreed maturity or period of notice of up to two years, debt securities issued with an agreed maturity of up to two years and money market paper. However, liabilities vis-à-vis institutions established in the euro area and liabilities vis- à-vis the Eurosystem are not subject to reserve requirements. If a credit institution cannot provide evidence of its liabilities in the form of debt securities with an agreed maturity of up to two years and money market paper vis-à-vis other institutions subject to minimum reserve requirements, this institution is allowed to apply a standardised deduction, which was set at 0% at the start of Stage Three, to the aforementioned liabilities. In order to determine the final reserve requirement, each credit institution is allowed to deduct a lump-sum allowance of E 100,000 from the resulting amount. Third, a credit institution complies with its obligations under the minimum reserve system if its average daily reserve holdings, as computed over a reserve maintenance period running from the 24^th day of each month to the 23rd day of the following month,1 is at least equal to its reserve requirement. Fourth, the required reserve holdings are remunerated at a level corresponding to the average interest rate over the maintenance period of the main refinancing operations of the Eurosystem (i.e. broadly in line with market conditions). Finally, a credit institution may apply to the NCB of the Member State in which it is resident for permission to hold all its minimum reserves indirectly, through an intermediary.

On 1 December 1998 the Governing Council adopted the ECB Regulation on the application of minimum reserves (ECB/1998/15). This Regulation lays down in a legally binding form the features of the minimum reserve system applied by the ECB. The legal basis for this ECB Regulation is set out in Article 19 of the Statute of the ESCB and in the Council Regulation (EC) No. 2531/98 concerning the application of minimum reserves by the European Central Bank, which was adopted by the ECOFIN Council on 23 November 1998.

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1.2 Open market operations and standing facilities

Open market operations are the main instrument used by the Eurosystem for the purposes of steering interest rates, managing the liquidity situation in the market and signalling the monetary policy stance. The majority of the Eurosystem’s open market operations consist of reverse transactions against eligible collateral. The two main kinds of open market operation are the main refinancing operations (MROs), which have a maturity of two weeks and are conducted on a weekly basis, and the longer-term refinancing operations (LTROs), which have a maturity of three months and take place on a monthly basis. In addition, the Eurosystem may conduct fine-tuning open market operations through reverse transactions, outright purchases and sales of assets, the collection of deposits, or foreign exchange swaps. While the MRO and LTRO are conducted through standard tenders, fine-tuning operations can be performed either through quick tenders or through bilateral procedures involving a limited set of counterparties, except for outright operations which can be carried out only through bilateral transactions. Other available open market operations include structural operations which have a longer time horizon and a maturity which may or may not be standardised. They may include reverse transactions, outright purchases or sales of assets, or the issuance of ECB debt certificates. However, the ECB decided that, given the structural liquidity deficit prevailing in the euro area at the start of Stage Three, it would not issue debt certificates from the start of Stage Three. With regard to the two standing facilities, counterparties can use the marginal lending facility to obtain overnight liquidity against eligible assets and the deposit facility to make overnight deposits with the Eurosystem. The two standing facilities are available to eligible counterparties at their own initiative and without any restrictions. Under normal circumstances the interest rates on the standing facilities form a corridor for the overnight market interest rate, with the marginal lending rate providing the ceiling and the deposit rate the floor.

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1.3 Eligible counterparties and assets

The Eurosystem accepts a wide range of underlying assets for its credit operations. A distinction is made between two categories of eligible assets: tier one and tier two. Tier one consists of marketable debt instruments which fulfil the uniform, area-wide eligibility criteria established by the ECB, while tier two comprises other marketable and non-marketable debt instruments, equities and non-marketable financial assets, which take into account the differences between the national financial and banking systems, and for which eligibility criteria have been established by the NCBs, subject to the minimum eligibility criteria defined by the ECB. However, no distinction is made between the two tiers with regard to their eligibility for the various types of monetary policy operation of the Eurosystem (except for the fact that tier two assets are not normally used by the Eurosystem in outright transactions).

The list of eligible assets for the Eurosystem’s credit operations was made available on the Internet in October 1998. The amount of marketable eligible assets outstanding at the start of Stage Three was slightly above E 5,000 billion. Most of these outstanding assets (98%) consisted of tier one collateral. Approximately 75% were government securities, 18% securities issued by credit institutions, 4% securities issued by the corporate sector, and the remainder securities issued by NCBs. Appropriate risk control measures are applied to protect the Eurosystem against the risk of financial loss. Risk control measures for tier one assets are harmonised across the euro area and include the following elements: initial margins, which take into account the length of time during which the Eurosystem is exposed to credit risk; specific valuation haircuts, which are differentiated according to the residual maturity and coupon structure of the debt instrument; and symmetric margin calls, which aim to ensure that the value of the underlying assets matches the requirements. The risk control measures for tier two assets are defined by the NCB that has included the asset in its tier two list, subject to the approval of the ECB. They are at least as stringent as the risk control measures applied to tier one assets.

A list of counterparties eligible for the monetary policy operations of the Eurosystem has been established on the basis of common eligibility criteria. It includes all those institutions that are subject to minimum reserve requirements. These institutions are, in principle, eligible to access open market operations based on the standard tender procedures and the two standing facilities. In addition, eligible counterparties to the Eurosystem’s monetary policy operations have to satisfy certain prudential and operational requirements, i.e. they must be financially sound, subject to prudential supervision, and satisfy the operational criteria for participation in monetary policy operations. The list of institutions subject to minimum reserve requirements, which covers all credit institutions established in the euro area, comprises more than 8,000 institutions.This list was made available on the Internet in October 1998. More than 4,000 of these credit institutions have access to the two standing facilities of the Eurosystem, while almost 3,000 have access to the refinancing operations. At the start of Stage Three no credit institution was exempt from the minimum reserve requirements.

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1.4 Preparatory work for the implementation of monetary policy instruments

Given the decentralised approach adopted for the implementation of the monetary policy of the Eurosystem, the bulk of the implementation work in this field, including the testing of the systems and the preparation of the relevant legal documentation, was conducted by the NCBs. The work was initially co-ordinated by the EMI and its relevant Sub-Committees and subsequently co-ordinated and supervised by the ECB.

The testing process for all procedures included preliminary testing of individual systems and, thereafter, a period of overall testing of the systems and procedures of the Eurosystem. The latter started at the beginning of July 1998. Its aim was, in particular, to test the interconnections between the multiplicity of systems and procedures that were considered critical to the performance of the Eurosystem’s Operations. The overall testing consisted of three phases, the first of which involved testing the normal systems and procedures for specific Eurosystem activities within individual business areas, including monetary policy, foreign exchange policy, payment systems, the back office and accounting. The second phase, which started in September 1998, focused on the testing of contingency procedures, while the third phase, which started in October, represented a general "dress rehearsal" for all Eurosystem processes critical to the conduct of monetary policy. The three phases were carried out under the management of the Steering Committee for the Overall Testing (SCOT). The whole process made considerable demands on staff resources, both at the NCBs and at the EMI/ECB, and was completed successfully.

The preparation of the relevant national legal documentation was finalised by the NCBs under the ECB’s supervision, which was, in essence, aimed at ensuring that a level playing-field in this regard would be in place throughout the euro area. As regards liquidity management procedures, preparatory work was finalised in the course of 1998, including all procedures needed for internal Eurosystem communication and for the consolidation of the NCBs’ balance sheets in order to produce the Eurosystem’s balance sheet and update the relevant forecasts on a daily basis. To guide credit institutions in their reserve management, the Governing Council also decided that accurate information regarding the liquidity conditions in the euro area – including the aggregate current account holdings of euro area credit institutions, the aggregate use of the standing facilities on the preceding Eurosystem business day and the aggregate minimum reserve requirement for the current maintenance period of euro area credit institutions – would be published by 9.30 a.m. on every Eurosystem business day.

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1.5 Domestic asset and liability management

While monetary policy decisions are taken centrally, the management of domestic assets and liabilities is effected by the NCBs on their own responsibility, irrespective of whether they act on their own account, as fiscal agents, on behalf of their customers or for their staff. Such management may include transactions with securities, deposit taking, the transfer of profits to the respective government or administrative expenditures. To ensure that operations in domestic assets and liabilities do not undermine the single monetary policy by creating unwarranted liquidity and signalling effects, any financial operations in domestic assets and liabilities by the NCBs which are not carried out for monetary policy purposes are subject to internal ECB rules.

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2 Foreign exchange rate policy framework

2.1 The euro conversion rates

In accordance with the decision taken by the European Council at its meeting in Luxembourg in December 1997, on 3 May 1998, following the decision adopted by the Council of the European Union (EU Council), meeting in the composition of the Heads of State or Government, on the Member States which would participate in the euro area from the start of Stage Three, a Joint Communiqué on the procedure to be used to determine the irrevocable conversion rates for the euro at the end of Stage Two was issued by the ministers and central bank governors of those EU Member States which would participate in the euro area, the European Commission and the EMI, as the forerunner of the ECB. The form of the pre-announcement – a joint political declaration endorsed by all the authorities involved – was chosen owing to the Treaty requirement that the formal adoption of the irrevocable conversion rates for the euro should take place on 1 January 1999. In addition, since the ECU should be converted into the euro at a 1:1 rate, and since some of the ECU component currencies (the Danish krone, the Greek drachma and the pound sterling) would not participate in the euro area from the outset, it was not possible to announce the irrevocable euro conversion rates for the participating currencies. Hence the decision was taken to pre-announce the bilateral rates (equal to the ERM central rates) of the currencies participating in the euro area that would be used on 31 December 1998 to determine the irrevocable euro exchange rates.

On 31 December 1998 the irrevocable euro exchange rates were established in the context of the regular daily concertation procedure, as had been clarified in the pre-announcement.

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2.2 Agreement on the new exchange rate mechanism (ERM II)

In accordance with the Resolution adopted by the European Council at its meeting held in Amsterdam on 16 and 17 June 1997, the European Monetary System/exchange rate mechanism (EMS/ERM), which played a keyrole in the progress towards EMU, was replaced by a new exchange rate mechanism (ERM II) from the start of Stage Three. This new mechanism links the currencies of Member States outside the euro area to the euro. The operating procedures of this new exchange rate mechanism are laid down in an Agreement between the ECB and the NCBs of the Member States outside the euro area (Central Bank Agreement) which was signed by the President of the ECB and the four non-euro area NCB governors on 1 September 1998. This Agreement replaces, with effect from 1 January 1999, the Agreement of 13 March 1979 – as amended by the Instrument of 10 June 1985 and the Instrument of 10 November 1987 – laying down the operating procedures of the EMS/ERM.

Participation in ER II is voluntary for all the Member States outside the euro area. Nevertheless, Member States with a derogation can be expected to join the mechanism. It is regarded as a continuation of EMS/ERM membership and a prelude to the possible future participation of a Member State in Stage Three of EMU. Sustainable convergence of economic performance and policies in participating non-euro area Member States by reference to the euro area, in particular in the field of price stability, is one of the main objectives of ERM II. Such convergence is considered to be a prerequisite for sustainable exchange rate stability, while such stability is, in turn, conducive to greater convergence. The convergence-oriented nature of ERM II is reflected not only in the central role assigned to the euro, but also in the possibility of closer exchange rate co-operation with the ECB, subject to progress in economic convergence towards the euro area. The new mechanism is based on central rates against the euro with a standard fluctuation band of ±15% or narrower fluctuation bands, depending on progress towards convergence, around the central rates. Foreign exchange intervention and financing at the margins of the standard or narrower fluctuation bands are, in principle, automatic and unlimited, with very short-term financing available. The ECB and the participating non-euro area NCBs could, however, suspend automatic intervention if this were to conflict with their primary objective of maintaining price stability. The new exchange rate mechanism does not include the Short- Term Monetary Support mechanism and the swap operations (creation of official ECUs against US dollar and gold reserve assets) as provided for by the EMS/ERM. These two mechanisms were unwound by the last day of stage Two, as described in Chapter III, Section 4.1.

In September 1998 two Member States outside the euro area – Denmark and Greece – expressed their intention to join the new mechanism as from 1 January 1999. In order to stabilise market expectations and achieve a smooth transition to the new mechanism, the intention of the Danish and Greek Governments to carry on from the EMS/ERM to ERM II was pre-announced at the informal ECOFIN Council meeting on 26 September 1998. This pre-announcement also included notification of the fluctuation bands to be used for the Danish krone (a narrower band of ±2.25%) and the Greek drachma (the standard band of ±15%). In accordance with the European Council Resolution on the new exchange rate mechanism, the decisions on the terms of the participation of the Danish krone and the Greek drachma in ERM II, i.e. the central rates of these currencies against the euro and the width of their fluctuation bands, were taken on 31 December 1998 by the ministers of the euro area Member States, the ECB and the ministers and central bank governors of Denmark and Greece, following a common procedure involving the European Commisson and after consultation of the Monetary Committee. The Danish krone has been participating in ERM II with a ±2.25% fluctuation band and a central rate against the euro of DKK 7.46038, and the Greek drachma with the standard fluctuation band of ±15% and a central rate against the euro of GRD 353.109 since 1 January 1999. Further to this decision, the ECB, Danmarks Nationalbank and the Bank of Greece, in accordance with Article 1.2 of the Central Bank Agreement of 1 September 1998, established, by common accord, the following bilateral upper and lower rates between the euro and their respective currencies for compulsory intervention in ERM II.

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2.3 Foreign exchange intervention and the management of the ECB’s foreign reserve assets

The preparation and testing of the infrastructure required for the conduct of foreign exchange intervention by the Eurosystem was finalised in the course of 1998. The infrastructure was developed in such a way as to enable the Eurosystem to execute foreign exchange intervention in both a decentralised and a centralised manner, both the context of ERM II and against other EU and non-EU currencies.

With regard to the ECB’s foreign reserve management, a detailed methodological framework was finalised for the management of the reserves. The finalisation and testing of the IT systems support needed by the ECB for its decision-making process also took place in the course of the year. This technical infrastructure is used to convey the ECB’s decisions to the NCBs, which are in charge of carrying out portfolio management operations in accordance with these instructions. Decisions transmitted by the ECB include the setting of the operational objectives in terms of currency distribution, interest rate risk, credit risk and liquidity requirements. A list of counterparties eligible for foreign exchange operations by the Eurosystem was selected and the relevant legal documentation required for foreign reserve management was prepared.

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2.4 Initial transfer of foreign reserve assets from the NCBs to the ECB

In accordance with Article 30.1 of the Statute of the ESCB, the euro area NCBs transferred foreign reserve assets of an amount equivalent to E 39.5 billion to the ECB at the start of Stage Three. That amount corresponds to the limit of E 50 billion established by the Statute of the ESCB for the initial transfer of foreign reserve assets to the ECB, reduced in accordance with the share in the ESCB’s capital of the non-participating Member States. 85% of the amount transferred consists of foreign currency reserves, while 15% is gold. Article 30.4 of the Statute of the ESCB provides for the possibility for the ECB to make further calls on the NCBs’ foreign reserve assets beyond the limit set in Article 30.1.

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2.5 The NCBs’ and Member States’ operations with their foreign reserve assets

The foreign reserve assets not transferred to the ECB at the start of Stage Three are held and managed by the NCBs. In order to ensure consistency with the euro area’s single monetary and foreign exchange policies, and in accordance with Article 31.3 of the Statute of the ESCB, the ECB will monitor and co-ordinate market transactions conducted with those assets. A similar monitoring framework has been prepared for transactions executed by euro area Member States with their foreign exchange working balances held outside the Eurosystem. Along the same lines, an agreement has been established between the ECB and the European Commission.

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2.6 The euro reference exchange rates

The ECB adopted the relevant conventions with regard to the procedures for the computation and publication of the reference exchange rates for the euro. According to these conventions, no euro area official fixing procedure involving the ESCB, i.e. the ECB and the NCBs, has been set up. However, given the need for the daily publication of reference exchange rates, the ECB decided to compute and publish reference exchange rates for the euro on a daily basis for a number of currencies. The reference rates are based on the regular daily concertation procedure between central banks, which normally takes place at 2.15 p.m. (C.E.T.), and are published via electronic market information providers shortly after the procedure is completed. Only one reference rate per currency is published (i.e. the mid rate), using the method E 1 = x foreign currency units. As a general rule, amounts are given to five significant figures. Euro area NCBs are free to publish more comprehensive lists of euro reference rates under a co-ordinated procedure.

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4 Payment systems

4.1 The TARGET system

In 1998 intensive work continued on the implementation of the TARGET (Trans-European Automated Real-time Gross settlement Express Transfer) system.

In July 1998 the ECB published two documents on the TARGET system. The first, the TARGET brochure, provides general information about TARGET in all 11 official EU languages. The second, entitled "The TARGET service level", is a document which provides the European banking community with a description of the service level offered to TARGET customers. The ECB has also devoted a special section of its Web site (http://www.ecb.int) to TARGET, with the intention of making the latest information available on a regular basis.

The "Third progress report on the TARGET project" was released by the ECB in November 1998 with the objective of providing information concerning the progress made on the TARGET project since the publication of the previous TARGET progress report in September 1997. The Report covers the following issues in particular: (1) access to euro RTGS systems linked to TARGET; (2) operating times; (3) the provision of intraday credit; (4) pricing policies; (5) bank-to-bank charges for customer payments; (6) intraday liquidity management in euro; (7) transparency during the changeover period; (8) return payments; (9) central bank correspondent banking relations; (10) progress made in the technical implementation of TARGET; and (11) the legal framework for TARGET.

The price structure for cross-border TARGET payments was established by the Governing Council of the ECB in June 1998. The fee to be charged by the sending NCB/ECB for cross-border payments effected via TARGET between direct participants is based on the number of transactions, according to the following degressive scale: E 1.75 for each of the first 100 transactions per month; E 1.00 for each of the next 900 transactions per month; and E 0.80 for each subsequent transaction in excess of 1,000 per month.

The Governing Council of the ECB decided in July 1998 to grant access to TARGET to NCBs and participants in RTGS systems operating in euro but located in non-euro area Member States. This decision was an innovation in the banking world since no central bank had previously granted access to settlement facilities to institutions located outside its currency jurisdiction.

To ensure the availability of intraday liquidity in their euro RTGS system, non-euro area NCBs have had to make arrangements to ensure that, under normal circumstances, they have a deposit with the Eurosystem before 8 a.m. ECB time (C.E.T.) each day.This deposit is of an amount of E 3 billion for the Bank of England and E 1 billion each for the Bank of Greece, Danmarks Nationalbank and Sveriges Riksbank. Overnight deposits held by the non-euro area NCBs with the Eurosystem will be remunerated at the ESCB’s deposit facility rate up to the aforementioned amounts.

Participation in TARGET has been designed in such a way as to give the ECB assurance that non-euro area participants will always be in a position to reimburse intraday credit by the due time, thus avoiding any need for overnight central bank credit in euro. The maximum amount of intraday credit granted to a non-euro area participant is E 1 billion. With regard to the TARGET operating times, in September 1998 the ECB published, in the form of a press release, a calendar of TARGET operating days for 1999. In addition to Saturdays and Sundays, in 1999 TARGET was originally scheduled to be closed only on the two public holidays that are common to all EU countries: Christmas Day and New Year’s Day. However, in order to enable banks to deal with the Year 2000 changeover, the Governing Council decided that TARGET should also be closed on 31 December 1999. TARGET will be open in all EU countries on all the other days of the year. The ECB will inform the financial community should any changes be made to the calendar of TARGET operating days after 1999.

As regards the technical implementation of the TARGET system, 1998 was mainly devoted to testing. All the NCBs and the ECB moved on 1 July 1998, as scheduled, to the penultimate test phase known as simulation testing. The aim of the simulation phase was to test operations in a technical environment which resembled the "production" environment as closely as possible, integrating operational staff and operational infrastructures. Credit Institutions were invited to participate in end-to-end simulation testing on specified dates. In the volume testing in November 1998 almost 100,000 test payments were processed during the normal business hours of TARGET. The final test period – "migration to production" – took place in November and December 1998. TARGET testing was designed and conducted to ensure that the technical specifications were implemented correctly and to enable the TARGET service level – as published in July 1998 – to be met.

At 7 a.m. ECB time (C.E.T.) on Monday, 4 January 1999, after a smooth conversion to the euro, the ESCB successfully began operating the TARGET system, with more than 5,000 credit institutions participating directly in the system. TARGET immediately started contributing to the integration of the euro money market and made possible the consolidation of the treasury management of institutions with different activity centres throughout Europe. There were some teething troubles, mainly because several RTGS participants experienced difficulties in adapting to the TARGET rules. However, most of these problems had limited business implications in TARGET. TARGET handled more cross-border payments than anticipated. From the very first week of its operation TARGET processed transactions of a value in excess of E 1 trillion daily, of which E 340 billion was cross-border traffic.

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4.2 Securities settlement systems

In 1998 preparatory work for Stage Three of EMU in the field of securities settlement systems (SSSs) focused on: (1) the assessment of EU SSSs against certain standards for their use in the Eurosystem’s credit operations; (2) the assessment of links between EU SSSs; and (3) the ongoing implementation of the correspondent central banking model (CCBM) for the cross-border use of collateral.

Assessment of EU SSSs against the standards for their use in the Eurosystem’s credit operations

After publication of a report on "Standards for the use of EU securities settlement systems in ESCB credit operations" in January 1998, work concentrated on assessing the EU SSSs against these standards in order to determine whether or not they qualified for use by the Eurosystem in monetary policy and intraday credit operations. A key objective of the assessment was to allow careful analysis to be carried out, with the aim of ascertaining whether there were any risks to which the Eurosystem would be exposed in using these systems in the context of its credit operations.

The subsequent report ("Assessment of EU securities settlement systems against the standards for their use in ESCB credit operations"), which was published in September 1998, gave the results of the assessment and clarified the manner in which the systems had been analysed and assessed against the standards.

The assessment covered 29 EU SSSs, all of which were found to be eligible for use from the start of Stage Three of EMU, although at the time of the assessment, in July 1998, not all SSSs complied fully with all the standards. Most were in the process of implementing changes in order to ensure full compliance from the start of Stage Three. At present, additional steps to comply with the standards are still being taken. Therefore, the use of most SSs as from the start of Stage Three is subject to certain conditions. In future the eligibility of SSSs will be subject to periodic reviews to take into consideration developments and changes in the systems and market needs.

Assessment of links between EU SSSs

A link between SSSs can be defined as the technical, legal and organisational arrangements established between different SSSs in order to transfer securities from one system to another. The use of links can facilitate the cross-border use of eligible collateral for the Eurosystem’s monetary policy and intraday credit operations. The aim of the assessment is to analyse the risks that are specific to links, such as potential conflicts of law resulting from the applicability of different legal systems, in order to ensure the safe and efficient transfer of securities on a cross-border basis.

Thus far the ECB has focused only on those direct links which (1) would facilitate the cross-border use of eligible collateral in its monetary policy and intraday credit operations; (2) have been established between those SSSs which were assessed by the Eurosystem as being eligible for use in the Eurosystem’s monetary policy and intraday credit operations; and (3) were operational as from 4 January 1999 at the latest. Other links will be assessed in 1999. All links will be monitored and periodically reviewed.

Implementation of the correspondent central banking model

The correspondent central banking model (CCBM) was originally established as an interim means of facilitating the cross-border use of collateral in the Eurosystem’s monetary policy and intraday credit operations. The most important characteristics of the CCBM have been summarised in a brochure that was made available to the public in December 1998. In the CCBM each NCB may act as a correspondent bank (for the delivery of securities) at the request of any other NCB. Thus, when a Eurosystem counterparty (in country A) wishes to obtain credit from its home NCB (NCB A) using collateral held in another country (country B), the counterparty will arrange for the collateral to be transferred to a specified securities account of the NCB of country A with the NCB of country B. Once confirmation of the final, irrevocable delivery of the collateral has been received by NCB A, the latter will release the credit to the counterparty.

The CCBM is open for instructions from counterparties from 9 a.m. to 4 p.m. ECB time (C.E.T.) in order to cover the normal time frame in which regular open market operations are carried out by the Eurosystem. In very exceptional circumstances the closing time may be delayed, if that is deemed necessary by the ECB for monetary policy purposes or for the smooth closing of TARGET.

The fee to be charged by the home NCB to a counterparty for each cross-border transfer has been set at E 5. This fee only covers the costs of the correspondent NCB and does not include local fees that are charged separately by the home NCB. In drawing up the list of assets eligible for use in the monetary policy operations of the Eurosystem, it was also decided to include assets in various countries which are of particular importance for their national financial markets and banking systems, the tier two assets. In some countries these eligible assets also include non-marketable assets, such as private bank claims, bills of exchange and non-marketable bonds. Owing to the specific characteristics of these non-marketable assets, two methods have been developed to enable their mobilisation through the CCBM. The first method was developed for the mobilisation of certain French non-marketable tier two assets and implies the transfer of property to the correspondent NCB for its own account. The second method was developed for certain non-marketable German, Austrian, Spanish and Dutch tier two assets and implies the transfer of property or a pledge in favour of the home NCB.

In addition, the Governing Council decided on 7 September 1998 that certain assets from non-euro area Member States may be used as collateral to obtain intraday credit in euro for payment systems purposes, subject to the approval of the Governing Council. This collateral can be mobilised by euro area counterparties through the CCBM.

Although the CCBM was originally designed as an interim solution, it may continue to operate, in particular for non-marketable assets which cannot be transferred across borders by alternative means.

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4.3 Other payment arrangements

Oversight of the preparatory work for Stage Three of the EBA Euro Clearing and Settlement System

During 1998 the ECB followed closely the preparatory work conducted by the Euro Banking Association (EBA) on its Euro Clearing System (Euro 1) for Stage Three of EMU, in order to ensure that Euro 1 complied with the safety standards laid down in the 1990 G10 Report on Interbank Netting Schemes (the Lamfalussy standards).

In particular, the ECB monitored the design and implementation of the liquidity, collateral and loss-sharing arrangements, the setting-up of operational procedures for the settlement process in both normal and emergency circumstances and, from the technical viewpoint, the implementation of the hardware and software changes required for the new system.

Euro I began operating on 4 January 1999, with the ECB acting as the settlement agent and holder of a liquidity pool for Euro I. The EMI Council also envisaged that NCBs would be able to offer settlement services to the EBA Clearing Company, should they wish to do so. Only the Banque de France has indicated its intention to open a local settlement account for the EBA.

Other large-value systems

In compliance with the policy line endorsed by the Committee of Governors of the Central Banks of the Member States of the European Economic Community in 1993, whereby large-value net settlement systems should meet the Lamfalussy standards and settle at the central bank, the NCBs of the countries in which large-value settlement systems are in place also assessed these systems in the light of the Lamfalussy standards. The four systems assessed were: Euro Access Frankfurt (EAF) in Germany; Servicio Español de Pagos Interbancarios (SEPI) in Spain; Système Net Protégé (SNP) in France and Pankkien On-line Pikasiirrot ja Sekit-järjestelmä (POPS) in Finland. The assessment was co-ordinated and reviewed by the ECB. On the basis of the overall satisfactory outcome of this assessment, the Governing Council agreed that all four systems mentioned above (as well as Euro I) complied with the Lamfalussy standards and could operate in euro as from 4 January 1999.

Policy statement of the ECB on payment and settlement systems located outside the euro area

In November 1998 the ECB published a policy statement on euro payment and settlement systems located outside the euro area. In line with the G10 Report on Interbank Netting Schemes, the statement underlined the fact that, as in any other monetary system, central bank money in euro can only be provided by the central banks that belong to the euro area. oreover, the Governing Council invited all central banks outside the euro area to contact the ECB whenever they become aware of a planned settlement arrangement in euro, be it domestic, cross-border or multi-currency in nature. The policy statement makes it clear that the arrangement by which non-euro area NCBs can offer limited intraday liquidity in euro to their participants, subject to the binding conditions set out in an agreement with the NCBs concerned, should be seen as a very specific exception to the rule.

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