SEPA Clearing and Settlement

SEPA Clearing and Settlement Mechanism:

CSMs are very important for the transfer of funds from one bank account to another if both the accounts are not with the same bank. PSPs who are part of the SEPA payment scheme have to choose a CSM in order to comply with the reachability requirements of the scheme in which they are participating.

PSPs can have a choice of different participation in CSM. There are two types of CSM participants

  1. Direct participants
  2. Indirect participants

Direct Participants:

They are the PSPs that connect directly with the CSM and they settle funds with the CSM at the central bank level. When direct participants send and receive funds via their CSM their account with the CSM will be debited or credited (Ultimately).


Indirect Participants:

These are PSPs that connect to the CSM through direct participants. These PSPs will have an accounting relationship with a direct participant which in turn has a direct link to the CSM. The CSM will just have the details of the Indirect participants and who their direct participant is? so when a payment is sent to the indirect participant the CSM will know to which direct participant the payment must be routed.

Banks choose to become indirect participants if they are just starting out and their transaction volume is less so that they can save on cost. Some large banks, if they have a presence in multiple countries will be a direct participant from one country, and branches of other countries act as indirect participants.

Indirect participants send Pacs.008 messages to direct participants which in turn is sent to CSM by direct participants.

Although the term “Participant” is used, Indirect participants are not participants of the CSM but they are reachable by the CSM. It is the responsibility of the direct participant to ensure that indirect participants comply with the rules of the CSM. Only the direct participant’s account with the CSM will be debited or credited even if the payment is initiated by an indirect participant.



Simply put, Clearing is the process of validating and confirming payment messages when it is sent from one PSP to another.

Clearing services for the different SEPA payment schemes are provided by various companies. Some of these clearinghouses work at the national level and there is a Pan-European clearing house as well. Here is a list of clearinghouses from EPC’s official website

All Automated Clearing Houses(ACH) in SEPA have to follow the procedures developed by The European Automated Clearing House Association (EACHA) so that interoperability between CSMs is possible. These clearinghouses should also be compliant with the EPC rules.

STEP2 is the first Pan-European automated clearing house (PE-ACH) and it is managed by EBA.

There are 3 types of clearing in SEPA:

  1. Automated clearing house(ACH)
  2. A decentralized bi-lateral or multilateral clearing (Not using an ACH)
  3. Intra PSP or Intra-group clearing


SEPA payments are cleared and settled among the members of the ACH. They provide a clearing service that is compliant with the different governing bodies. They act like a hub that banks can connect to and clear payments.

Bilateral/Multilateral clearing:

PSPs clear and settle funds with each other directly. This type of clearing must also be compliant with the rules of the SEPA payment schemes.

Intra PSP/Intra-group clearing:

Here PSPs are branches or subsidiaries of another PSP and uses their accounting relationship with the parent company to clear and settle funds.

SEPA settlement :

Settlement is the process through which the actual movement of funds happens between the payer’s PSP and the payee’s PSP.     

Funds are settled between the CSMs and the PSPs or between PSPs at the central bank level. In SEPA the central bank is the ECB. We should also be aware of the Eurosystem which consists of the ECB and the national central banks of the Eurozone countries. Target2 is the RTGS system operated by Eurosystem and funds between CSMs and PSPs are settled through Target2.

Let us take an example of a payment to understand the how clearing and settlement works for SCT payment scheme

  1. John from Finland imitates a payment for 1000 EUR to his landlord Jim who is from Germany
  2. John’s bank (PSP A) sends a payment message (Pacs.008) to Jim’s bank (PSP B) via STEP2
  3. STEP2 clears the payment and sends it to the Jim’s bank
  4. STEP2 aggregates all the payments transfers made between PSP A and PSP B at the end of the given set of hours and calculates the net position of these two banks
  5. At the end of the settlement cycle funds are settled between STEP2 and PSP A & PSP B
  6. Funds are available in Jim’s account


In the next set of articles, we will take a deep dive into the SEPA credit transfer scheme.

Blog Comments

Hi Santosh,

In the bilateral settlements,whether the banks should maintain mirror accounts of the corresponding accounts held with the other bank..?



Hi Santosh,
Excellent article. But I am still a bit unclear on how clearing models #2 and #3 are different. Could you please elaborate that a bit more?

They could be the same #2 will help you understand what an Indirect participant is

Great article Santosh! 🙂

Am I correct in understanding that SEPA enables participants to make both net and real time gross settlements? If yes, then all net settlements happen via STEP2? And all RTGS Euro settlements happen via TARGET2?

If this is true, then probably the final settlement won’t “necessarily” happen at ECB, since there are other nations too (outside of ECB’s purview) that participate in SEPA. In such cases, is there a higher level of settlement over and above settlement between banks, say e.g. a settlement between ECB and SNB (Switzerland’s central bank)?

SCT which is a SEPA scheme only allows net settlement. Gross settlement that happens via target 2 is outside any sepa scheme.

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