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Box 2: EMI reports on payment systems in 1997

vis-ā-vis the future European System of Central Banks, ESCB, so the Nationalbank will thus have no reason to develop the system.

At the request of the central banks the European securities depositories have established the European Central Securities Depositories' Association, ECSDA. Its principal long-term objective is to develop an alternative to the central banks acting as each other's correspondent banks. The securities depositories will establish mutual links like those today existing between VP and Euroclear. VP is participating in this work.

Work on payment systems is also taking place under the auspices of the  European Commission. The most important initiative in this area is the  work on the directive on settlement finality in payment and securities settlement systems which among other things will enable TARGET to function as intended. One of the purposes of RTGS systems such as TARGET is that a payment be immediate and final as soon as it is released by the party making the payment. However, this is not the case if bankruptcy rules in the country of the party making the payment make it possible to revoke effected payments within a certain period. Bankruptcy provisions vary considerably from country to country. In step with the increase in the number of cross-border payments it has become a growing concern that in the worst case the payment system, the pledged collateral, the payer and the payee may be subject to four different sets of bankruptcy legislation.

In 1997 the European Commission also worked on a directive on electronic money, e.g. prepaid cards and network money. This work has not yet reached its final phase. A central issue has been whether other parties than credit institutions should be allowed to issue electronic money. The Commission has taken a liberal standpoint and focused on issuer supervision and the need for consumer protection. This corresponds to Denmark's position in this area. The Danmønt Card is not issued by a credit institution, but by a subsidiary of PBS (Danish Payment Systems Ltd.).

In April 1997 the central banks of the G10 countries - the major industrialized countries - published a report on electronic money. In many areas the groups under G10 auspices discuss overall problems in the financial sector and make recommendations which later become de facto standards all over the world. This was the case for capital-adequacy requirements of credit institutions and with regard to many recommendations in the area of payment systems. The G10 report on electronic money is broad-based and embraces consumer protection, legislation, supervision, money laundering and problems related to cross-border use of electronic money. The report is first and foremost descriptive. This reflects the very different standpoints of the central banks of the various countries on these issues. The report also presents an overview of systems, providers, products and supervision within this area in the G10 countries.

In March 1997 G10 issued a report on settlement of financial derivatives which focuses on the many different sources of risk and puts forward recommendations on the minimization of such risks. Furthermore, the report

Box 3: PvP to reduce settlement risks in foreign-exchange transactions

describes institutions, practice and regulation in the G10 countries in this field.

In 1996 G10 published a report on settlement risks in foreign-exchange transactions in which banks in the private sector were encouraged to establish systems to reduce such risks, cf. the 1996 Annual Report, p. 70f. The largest banks have taken up this challenge and an international system is already beginning to emerge, cf. Box 3.

Settlement of Euro-Denominated Payments in Denmark after the Commencement of EMU

Although Denmark will not participate in the third stage of EMU the introduction of the euro will affect the Danish financial sector, not least the payment system.

Today, the D-mark and other future EMU currencies are used by the Danish business community and the euro will probably be used to at least the same extent after January 1, 1999. As Denmark will be connected to TARGET the basic infrastructure for euro-denominated inter-bank payments will be in place. The financial sector will among other things establish a euro retail clearing system and a VP clearing system for euro. The Nationalbank will make settlement accounts in euro available along the lines of the current system of settlement accounts in kroner for the retail clearing system and the VP clearing system, and in certain foreign currencies for the VP clearing system. Unless intra-day euro-denominated liquidity is made available to the Nationalbank by the ESCB the Nationalbank will be unable - even against collateral - to provide credit in euro. As a consequence the Danish banks will have to raise the necessary euro-denominated liquidity by e.g. furnishing their portfolios of foreign securities as collateral to the ESCB when they raise liquidity via branches and subsidiary banks within the euro area. Since the Nationalbank's foreign-exchange reserve must be available to stabilize the krone it may not also be used to create euro-denominated liquidity in the payment systems. The parties to a settlement must ensure advance cover of their drawings. Euro-denominated deposits to accounts with the Nationalbank will not accrue interest since this would correspond to conducting monetary policy in euro.

Since no interest is accrued to euro-denominated deposits the banks will seek to avoid overnight euro-denominated deposits with the Nationalbank. So there is every indication that in Denmark euro-denominated settlements will take place during daytime hours when the parties can draw liquidity into the country, use it in settlement transactions and return it to the euro countries, without losing interest days. Under the present system settlement in Danish kroner primarily takes place overnight while trading systems and other systems are closed.