T2 – the market infrastructure for high-value payments in central bank money

In March 2023, T2 replaced TARGET2, the platform previously provided by Eurosystem central banks for settling high-value payments in real time. With the launch of the T2 service, participants now have two components at their disposal: one for central liquidity management (CLM) across all TARGET Services and one for traditional high-value payments (real-time gross settlement, RTGS).

Together, these two components form the backbone of euro payments in central bank money. Every five days, T2’s RTGS component alone processes transaction sums close to the entire euro area gross domestic product.

T2 – a central liquidity management tool and an RTGS settlement service

T2 comprises two components.

• The first is Central Liquidity Management, or CLM for short, where main cash accounts (MCAs) are held. MCAs are used, for example, to settle monetary policy operations. An MCA can also have a credit line. In addition, MCAs play a key role in maintaining minimum reserves, with balances on other dedicated cash accounts (DCAs) held in TARGET Services also being included when determining compliance with the minimum reserve requirements.
• High-value payments and ancillary system settlement are processed via the DCAs belonging to the RTGS settlement service. RTGS stands for real-time gross settlement and refers to the rapid settlement of payments in real time. All payments are settled on a gross basis, which means the following: 
  • cover principle;
  • settlement in central bank money;
  • immediate booking;
    with the liquidity required coming from the MCA.

This structure clearly separates these two aspects and maps them in the Central Liquidity Management module and the RTGS settlement service. In addition, the CLM takes on the central liquidity management function for the other TARGET Services, i.e. for TARGET2-Securities (T2S) and TARGET Instant Payment Settlement (TIPS). In these TARGET Services, the balance is also held on DCAs and, as in T2, these accounts are supplied with the necessary liquidity via the MCA account.

Besides providing a better overview of the available liquidity, T2 also boasts other liquidity management functions and liquidity-saving elements. Participants can assign different priority levels to payments or arrange to have them settled at pre-defined points in time. What is more, the T2 service offers the option of setting sender limits – i.e. the account holder defines the amount up to which they are prepared to send payments without receiving payments beforehand. This can prevent unilateral liquidity outflows. In addition, liquidity can be reserved for specific purposes. Furthermore, minimum and maximum amounts can be set in the RTGS settlement service which, if undershot or overshot, can trigger a transfer of liquidity from or to the MCA.

The Eurosystem Collateral Management System (ECMS), which is currently still in the realisation phase, will complement TARGET Services and be the single collateral management system for collateralising the Eurosystem’s monetary policy operations. ECMS will also communicate with the CLM in future.

T2 – a modern market infrastructure for the Eurosystem

ISO 20022-compliant messages are used to communicate with and within TARGET Services. This communication standard is already being used in many markets worldwide and was adopted by Swift as its standard for the settlement of cross-border payments in March 2023. TARGET2-Securities and TIPS have been using this standard since 2015 and 2018, respectively. With the introduction of the new T2 service, all live TARGET Services are now using the same message standard for communications. The messages used by T2 are based on uniform standards developed by market infrastructures worldwide: High-Value Payments Systems Plus (HVPS+).

In addition to these aspects, the new T2 service offers further improvements aimed at achieving the Eurosystem’s objective of providing a modern, secure and efficient market infrastructure. For example, T2 has multi-currency capability and, compared with TARGET2, has expanded settlement windows for customer and interbank payments: the RTGS component is available from 2:30 to 17:00 for customer payments and until 18:00 for interbank payments.

These improvements are enhancing the T2 experience for participants both in Germany (ca. 1,200) and throughout the Eurosystem (ca. 2,300). These include credit institutions, ancillary systems, investment service providers and central banks. Taking into account branches and subsidiaries, approximately 43,000 participants around the world can be reached via T2.

T2 – a secure market infrastructure

In order to ensure that the system operates smoothly at all times, a comprehensive business continuity plan is in place, which includes, amongst other things, double redundancy for operating the necessary data centres: the “two regions/four sites” concept. If, despite these measures, T2 is temporarily unavailable, (very) critical payments can be commissioned via the Enhanced Contingency Solution II (ECONS II).