Designated payment system — what designation means
Designation is a legal status conferred by a Member State, not a description of how big or important a system is. Article 2(a) of Directive 98/26/EC defines a “system” as a formal arrangement meeting three cumulative conditions — participants, governing law, and designation notified to ESMA. Once designated, the settlement finality protections attach; and under PSD2 the access rules that apply to ordinary payment systems are switched off.
1. The three conditions
| Condition | Requirement |
|---|---|
| Participants | A formal arrangement between three or more participants — excluding the system operator, a possible settlement agent, central counterparty, clearing house or indirect participant — with common rules and standardised arrangements for clearing or executing transfer orders between them |
| Governing law | Governed by the law of a Member State chosen by the participants, who may only choose a Member State in which at least one of them has its head office |
| Designation | Designated as a system and notified to ESMA by the Member State whose law applies, after that state is satisfied as to the adequacy of the system’s rules — without prejudice to more stringent national conditions |
Two relaxations sit underneath. A Member State may designate an arrangement whose business is executing transfer orders and which to a limited extent executes orders relating to other financial instruments, where it considers designation warranted on grounds of systemic risk. And it may, case by case, designate an arrangement between only two participants on the same grounds. An arrangement entered into between interoperable systems is expressly not a system.
2. Who counts as an institution — and the change that matters
Article 2(b) lists the entities that can be “institutions” in a system: credit institutions as defined in Article 4(1), point (1) of Regulation (EU) No 575/2013 including the entities listed in Article 2(5) of Directive 2013/36/EU; investment firms as defined in Article 4(1), point (1) of Directive 2014/65/EU, excluding those in its Article 2(1); public authorities and publicly guaranteed undertakings; and third-country undertakings whose functions correspond to those of Union credit institutions or investment firms.
Those two indents come with a scope limit worth reading carefully: they apply where the firm participates in a system whose business consists of executing transfer orders of the payment kind, and where it is responsible for discharging the financial obligations arising from those orders within that system.
3. Why designation changes the access question
Article 35(1) of PSD2 requires rules on access of authorised or registered payment service providers to payment systems to be objective, non-discriminatory and proportionate, and prohibits three specific requirements — restrictive rules on effective participation in other systems, rules discriminating between authorised or between registered providers, and restrictions on the basis of institutional status.
Article 35(2) then disapplies all of that for payment systems designated under Directive 98/26/EC, among others. That is why direct participation in a designated system has historically been a different conversation from access to an ordinary payment system — and why the amendment bringing payment and e-money institutions into the Article 2(b) definition is the structural change rather than a technical one.
FAQ
Does designation require a minimum size?
No. It requires three or more participants, a chosen Member State law with a head-office connection, and designation notified to ESMA. Systemic risk is the ground on which the two-participant and mixed-business relaxations are available.
Can a payment institution participate in a designated system?
The consolidated Article 2(b) includes payment institutions and e-money institutions as institutions, excluding those benefiting from the small-institution exemptions or waivers, for systems executing payment-type transfer orders.
Do the PSD2 access rules apply to designated systems?
No — Article 35(2)(a) disapplies Article 35(1) to payment systems designated under Directive 98/26/EC.
Related: Settlement finality · Payment system access for EMIs and PIs · Verification of Payee
