Settlement finality — what the directive actually does

Settlement finality is insolvency law wearing a payments hat. Directive 98/26/EC exists to stop one participant’s failure from unwinding everyone else’s settled payments, using three linked ideas — enforceability against third parties, a defined moment of entry, and a defined moment of irrevocability — each fixed by the rules of the system rather than by the directive itself. And since 9 April 2025 it matters directly to non-bank payment firms, because payment institutions and e-money institutions are now “institutions” for its purposes and can be participants in a designated payment system in their own right.

1. Enforceability despite insolvency

Article 3(1) provides that transfer orders and netting are legally enforceable and binding on third parties even in the event of insolvency proceedings against a participant, provided they were entered into the system before the moment of opening of those proceedings as defined in Article 6(1). It applies equally to insolvency of a participant in an interoperable system, or of the system operator of an interoperable system that is not itself a participant.

Orders entered after the moment of opening are not automatically void. Where they are carried out within the business day, as defined by the rules of the system, in which the proceedings opened, they remain enforceable and binding on third parties only if the system operator can prove that, at the time the orders became irrevocable, it was neither aware nor should have been aware of the opening. That evidential burden is why timestamping inside a system is a legal control, not an operational nicety. And Article 2(n) says a “business day” covers day and night-time settlement and all events in a system’s business cycle — so this is not a calendar day.

Article 3(2) closes the other flank: no rule or practice on setting aside contracts concluded before the moment of opening may lead to the unwinding of a netting. Article 7 denies insolvency proceedings any retroactive effect on rights and obligations arising from participation before that moment, and Article 8 fixes the conflict-of-laws answer: they are determined by the law governing that system, not the participant’s own insolvency law. Article 4 lets Member States allow funds or securities on the settlement account — and a connected credit facility against existing collateral — to be used to meet obligations on the business day of opening.

2. Three moments, two of them set by the system’s own rules

For interoperable systems, Articles 3(4) and 5 require each system to set its own moment of entry and irrevocability, coordinated as far as possible — and unless the rules of all the systems party to the arrangement expressly provide otherwise, one system’s rules on those moments are not affected by another’s. An arrangement between interoperable systems is expressly not itself a system under Article 2(a).

Recital 13 marks the boundary that reconciles finality with everyday exception handling: nothing prevents a participant or third party exercising a right or claim under the underlying transaction — recovery or restitution on fraud or technical error — so long as it neither unwinds a netting nor revokes the order in the system. Finality bites on the settlement leg, not the commercial relationship.

3. What changed on 9 April 2025

For a quarter of a century the definition of “institution” in Article 2(b) covered credit institutions, investment firms, public authorities and publicly guaranteed undertakings and certain third-country equivalents. Payment institutions and e-money institutions were absent, which effectively barred them from designated systems. The Instant Payments Regulation — Regulation (EU) 2024/886 of 13 March 2024 — added them, and its Article 5 required Member States to adopt, publish and apply the implementing measures by 9 April 2025.

The extension is deliberately narrow, and each limit is worth reading twice:

• It covers a payment institution as defined in Article 4, point (4), of Directive (EU) 2015/2366, excluding a person benefitting from an exemption under PSD2 Article 32 or 33 — so small-PI and AISP-registration regimes do not qualify.
• It covers an electronic money institution as defined in Article 2, point (1), of Directive 2009/110/EC, excluding a legal person benefitting from a waiver under Article 9 of that directive.
• It applies only where the institution participates in a system whose business consists of the execution of transfer orders as defined in point (i), first indent — payment transfer orders. Recital 15 puts it plainly: the amendment is “only for the purpose of defining participants of a payment system.” Securities settlement is untouched.

Article 2(f) was amended in the same act to add a clearing member of a CCP authorised under Article 17 of Regulation (EU) No 648/2012 to the list of participants, and to spell out that treating an indirect participant as a participant does not limit the responsibility of the participant through which its orders pass.

4. The price of admission: PSD2 Article 35a

Access is not automatic. The Instant Payments Regulation inserted a new Article 35a into PSD2 setting out what a payment or e-money institution must have in place when requesting participation and while participating:

• A description of the measures taken for safeguarding users’ funds. Where safeguarding is by segregated account or low-risk assets, that means the investment policy, the number of people with access to the safeguarding account and their functions, the administration and reconciliation process insulating users’ funds from other creditors in insolvency, a copy of the draft contract with the credit institution, and an explicit declaration of compliance with PSD2 Article 10. Where it is by insurance or comparable guarantee: confirmation the provider is outside the firm’s group, the reconciliation process proving sufficiency at all times, duration and renewal terms, and the agreement or draft.
• A description of governance arrangements and internal control mechanisms — administrative, risk-management and accounting procedures — and of the arrangements for using ICT services, expressly tied to Articles 6 and 7 of Regulation (EU) 2022/2554 (DORA), including a mapping of identified risks and the procedures to assess and prevent them.
• A winding-up plan in case of failure.

Firms must also respect the rules of the designated system itself. Article 35a is a floor set by EU law, not a substitute for the operator’s own admission criteria.

5. Indirect access, and the new non-discrimination rule

The same regulation reworked PSD2 Article 35. Paragraph 2 now confines the exemption from the access rules to payment systems composed exclusively of payment service providers belonging to a group. A new paragraph 3 addresses sponsored access: where a participant in a system designated under Directive 98/26/EC lets an authorised or registered PSP that is not a participant pass transfer orders through the system, that participant must, when requested, give the same opportunity in an objective, proportionate and non-discriminatory manner to other authorised or registered PSPs — with full reasons for any rejection.

That converts indirect access from a commercial matter into a regulated one, and it is the fallback for any firm that decides direct participation is not yet worth the Article 35a build.

6. Designation is a status, not a description

The protections attach only to a designated system. Under Article 2(a) that is a formal arrangement between three or more participants (excluding the system operator and any settlement agent, CCP, clearing house or indirect participant) with common rules for clearing or executing transfer orders; governed by the law of a Member State in which at least one participant has its head office; and designated and notified to ESMA by that Member State, after it is satisfied as to the adequacy of the system’s rules. A two-participant arrangement may be designated case by case on systemic-risk grounds.

Article 10 requires Member States to notify systems and their operators to ESMA, which publishes the list. An institution must, on request, tell anyone with a legitimate interest which systems it participates in and the main rules governing them — a useful and under-used diligence route.

7. Three worked examples

Example one: the EMI weighing direct participation. Facts: an authorised EMI settles euro instant credit transfers through a sponsor bank and wants to join a designated payment system directly. Rule: since 9 April 2025 it is an “institution” under Article 2(b), provided it is not waived under Article 9 of Directive 2009/110/EC and the system executes payment transfer orders; PSD2 Article 35a then applies. Action: treat the application as three deliverables, not one form — safeguarding description with the reconciliation process and the PSD2 Article 10 declaration, governance and ICT description mapped to DORA Articles 6 and 7, and a winding-up plan — then layer the operator’s admission criteria on top. Outcome: the firm applies against the actual checklist instead of discovering the winding-up plan late.

Example two: the sponsor that said no. Facts: a PI asks a participant bank for indirect access; the bank already sponsors a competitor and declines without explanation. Rule: PSD2 Article 35(3) requires the participant to offer the same opportunity objectively, proportionately and without discrimination on request, and to give full reasons for any rejection. Action: put the request in writing, cite Article 35(3) as transposed locally, and ask for the reasons the provision requires. Outcome: a refusal has to be justified on stated grounds — a materially different negotiation from a commercial no.

Example three: the recall after irrevocability. Facts: a customer is defrauded and asks for a payment back an hour after it settled. Rule: from the moment defined by the system’s rules the order cannot be revoked by a participant or a third party, but recital 13 preserves claims under the underlying transaction so long as they neither unwind a netting nor revoke the order in the system. Action: route the case through scheme recall and commercial recovery rather than a settlement-level reversal, and drive customer cut-off messaging from the system’s irrevocability moment, not your internal batch. Outcome: the money may still come back by agreement, but nothing is promised that the settlement layer cannot deliver.

8. What to do, today

• Find the irrevocability moment in the rules of every system you settle through, and drive customer cut-offs and recall messaging from it, not from internal processing times.
• If direct participation is on the roadmap, scope PSD2 Article 35a as three deliverables — safeguarding description, governance and ICT description mapped to DORA Articles 6 and 7, winding-up plan — and check no PSD2 Article 32/33 exemption or Article 9 e-money waiver disqualifies you.
• If you use sponsored access, keep the Article 35(3) request in writing and insist on the full reasons a rejection must carry.
• Check on ESMA’s published list that a system you rely on is actually designated.
• For interoperable arrangements, do not assume a single irrevocability point: by default the systems’ rules do not affect each other.

Related: Designated payment systems · Payment system access for EMIs and PIs · The Instant Payments Regulation · Payment exception management — rejects, returns, recalls