Should balances kept on accounts related to TIPS (TARGET Instant Payment Settlement) and IP (Instant payments) in the encumbrance reporting, be reported as encumbered or not?
For both TIPS and Instant Payments (the last one also referred to as ‘SEPA Instant Credit Transfer’ by the European Payments Council), the bank holds accounts where a varying amount of funds is kept on the accounts to facilitate these instant payments. These 'instant payments' are initially settled via these accounts. Our understanding is that if the bank would remove these balances, then it is likely that instant payments could not be processed (i.e. batches would drop). Based on the instructions from Annex XVII and other EBA Q&A it is not clear to us whether (part) of these balances should be reported as encumbered.
We observe for example EBA Q&A 5475 regarding asset encumbrance in relation to the required minimum reserve assets held by institutions in their accounts with the central bank. Here EBA’s answer (specifically the last paragraph) suggests a more literal reading of the definition of encumbrance, i.e. if there are no formal restrictions to withdrawals, meaning the institution would be able to freely withdraw the amounts, then it should not be considered encumbered.
Similarly EBA Q&A 1491 (treatment of intraday) appears to take a consistent view, i.e. in our view a more formal interpretation of 'arrangement' in the context of 'arrangement to secure, collateralise or credit enhance any transaction from which it cannot be freely withdrawn'.
EBA Q&A 1817 however does appear to apply a broader interpretation. It states that in the context of covered bonds, when the withdrawal of assets from the cover pool would impact the rating of an ECAI for a covered bond in any way, there is a presumption that the assets cannot be freely withdrawn (and should therefore be considered encumbered).
The above Q&As, to us, show a mixed image whether situations, where there is no formal/contractual arrangement in place that would prevent us from being able to freely withdraw amounts, but where there are business reasons (either commercial or risk driven) why the bank would not want to withdraw (full) amounts, should be reported as encumbered or not.
Instant payments (IP) are defined by the European Central Bank (ECB) as “electronic retail payments that are processed in real time, 24 hours a day, 365 days a year, where the funds are made available immediately for use by the recipient”.
The ECB defines TARGET Instant Payment Settlement (TIPS) as “a market infrastructure service launched by the Eurosystem in November 2018. It enables payment service providers to offer fund transfers to their customers in real time and around the clock, every day of the year”. This institution also indicates that “TIPS was developed as an extension of TARGET2 and settles payments in central bank money”, “TIPS offers final and irrevocable settlement of instant payments in euro” and “participating payment service providers can set aside part of their liquidity on a dedicated account opened with their respective central bank, from which instant payments can be settled”.
Annex XVII of Commission Implementing Regulation (EU) 2021/451 (ITS 2021/451) includes a definition of encumbrance in point 11. This definition states that “…an asset shall be treated as encumbered if it has been pledged or if it is subject to any form of arrangement to secure, collateralise or credit enhance any transaction from which it cannot be freely withdrawn. It is important to note, that assets pledged that are subject to any restrictions in withdrawal, such as for instance assets that require prior approval before withdrawal or replacement by other assets, shall be considered encumbered”.
Therefore, account balances kept to facilitate those instant payments, do not comply, by themselves, the definition of encumbrance assets indicates in ITS 2021/451.
So, balances kept on accounts related to TIPS and IP in the encumbrance reporting, should be reported as not encumbered.