Payment Systems

The number of krone-denominated payments in Danmarks Nationalbank's payment system, Kronos, has declined, while the number of euro-denominated payments continues to rise.

As part of its oversight of payment and settlement systems, Danmarks Nationalbank in 2002 reviewed Kronos and the Sumclearing in relation to international standards for security and efficiency in payment systems. Kronos complies with the standards, and overall the Sumclearing is assessed to comply with the standards.

The international settlement system for currency trades, CLS, was put into operation in September 2002. The Scandinavian currencies are expected to be included in CLS in 2003. The automatic collateralisation agreement has been extended to include the Sumclearing and CLS.

The Governing Council of the ECB has made a decision concerning the main principles for the next generation of Target, the joint European system for euro payments.

The Sumclearing is the system that handles retail payments (including Dankort (debit card) payments, cheques, transfers via BetalingsService (direct debit) and account-to-account transfers). Unlike Kronos, which is a gross settlement system, the Sumclearing is a net settlement system. This means that the participants' net mutual positions are compiled at fixed times, after which the payments are settled via the participants' accounts at Danmarks Nationalbank. The number of payments is considerably higher than in Kronos, although the total transaction value is significantly lower, cf. Table 6. The Sumclearing is owned by the Danish Bankers Association, but the day-to-day operation is handled by PBS.

The VP System is VP Securities Services' settlement system for trades and other securities transactions. Like the Sumclearing, it is a net settlement system where the participants' net positions in terms of money and securities are calculated at fixed times. The resulting net securities positions are exchanged via the participants' VP safekeeping accounts, while the net monetary positions are exchanged via the participants' accounts at Danmarks Nationalbank. The increase in the number of trading transactions in 2002 was equally distributed on shares and bonds.

The FUTOP Clearing Centre A/S settles trades in options and futures (derivatives). The participants' net positions are settled by means of Kronos via accounts at Danmarks Nationalbank. After a strong decline in the number of contracts settled in 2001, a modest increase was registered in 2002.

Payments in euro can be effected via Target^[3], the joint European system for euro payments. Target is a decentralised system where the participants hold accounts with their national central banks. The system connects the individual EU member states' RTGS systems via an interlinking module, in Denmark's case via a special Target module in Kronos.

Use of Target, including Danish participants' use of the system, continues to increase, cf. Table 7. Target may be used for both domestic and cross-border payments in euro. Since Denmark does not participate in EMU, the number of domestic euro payments is limited (approximately 9.5 per cent of euro transactions in 2002).

Small-value domestic euro payments can be settled via the Sumclearing, which has a separate settlement run in euro. Payments are solely account- to-account transfers. PBS thus does not offer settlement of products such as Dankort or BetalingsService in euro. The volume of euro payments in the Sumclearing is increasing steadily, but is very modest compared to payments in Danish kroner. Cross-border euro payments cannot be settled via the Sumclearing.

Euro payments relating to securities trades can be settled via the VP System according to the same principles as settlement in kroner. Cross-border securities trades may be settled via VP's links to securities centres abroad. The volume of trading transactions settled in euro is still very low, although in 2002 the number had doubled from the previous year.

Danmarks Nationalbank's oversight of the security and efficiency of systemically important payment systems has resulted in reviews of two payment systems: Kronos and the Sumclearing.^[4] The reviews are based on the systems' compliance with a number of international standards which are broadly accepted by central banks.^[5]

The review of Kronos was a follow-up to a review in connection with the implementation of the system in November 2001. The follow-up focused on the outstanding issues identified at the first review. At the second review in the spring of 2002 these issues had been resolved, and the system was assessed to comply with the standards.

The review of the Sumclearing disclosed few outstanding issues in relation to procedures for minimising credit and liquidity risks and operational risks. These issues are not generally assessed to affect the system's overall compliance with the standards.

Finally, Danmarks Nationalbank has initiated a review of the VP System in relation to the G10/IOSCO^[6] recommendations from 2001.

In 2001, ESCB and CESR^[7] commenced the adaptation of the G10/IOSCO recommendations to European conditions. This work is still underway and is expected to result in a tightening of certain recommendations.

At end-2002 CLS had 49 direct participants that settle their mutual currency trades via the system in US, Australian and Canadian dollars, euro, Japanese yen, pounds sterling and Swiss francs. More participants are expected to join CLS in the coming months, as either direct or indirect participants, and at the end of the 2nd quarter of 2003 four new currencies are expected to be included: Danish and Norwegian kroner, Swedish kronor and Singapore dollars.

Settlement in Danish kroner in CLS will make it imperative for Danish participants to be able to raise liquidity at short notice. Large amounts are to be paid to CLS early in the morning and thereafter at fixed times before noon. This is one reason for the extension of the automatic collateralisation agreement to include collateral for CLS settlement, cf. below.

The principle is that a participant pledges collateral to and raises liquidity in one central bank and thereafter pledges this liquidity as collateral for loans from a foreign central bank in that country's currency. SCP will solely be available for collateralisation of intra-day liquidity.

SCP will enable participants to centralise collateralisation and liquidity management in one single country and nonetheless cover their liquidity requirements in the other Scandinavian countries. SCP, which is paid for by its users, will be implemented before the Danish krone is included in CLS. SCP may also be used for other purposes than CLS, and the system is open for participation by other banks besides the CLS banks.

Extending the automatic collateralisation agreement
The automatic collateralisation agreement is a special procedure for the pledging of collateral. Previously it was used solely in connection with securities trading in the VP System. Under the automatic collateralisation agreement, the borrower is free to dispose of any asset in a pledged safekeeping account, provided that there are still assets with an adequate collateral value left in the safekeeping account.

On 18 November 2002 the automatic collateralisation agreement was extended to include the pledging of collateral for credit from Danmarks Nationalbank in connection with the Sumclearing, CLS, and settlement of periodical payments and securities drawn for early redemption in the VP System. The extension meets a wish among participants in the Danish payment systems to have access to a more flexible method to pledge collateral vis-à-vis Danmarks Nationalbank. In future, collateral may be pledged for these purposes via the automatic collateralisation agreement, by transferring amounts from current accounts to settlement accounts, or via a combination of the two methods.

At the end of 2002, 41 participants had concluded agreements with Danmarks Nationalbank relating to the use of automatic collateralisation in connection with securities trading in the VP System. Three of these have also concluded agreements with Danmarks Nationalbank relating to automatic collateralisation in connection with the Sumclearing and/or settlement of periodical payments and securities drawn for early redemption in the VP System.

The future of Target
At the meeting of the ECB's Governing Council on 24 October 2002 a strategic decision was made concerning the elements of the next-generation Target, known as Target2.

Currently Target is a decentralised system whose users experience how services are not uniform across national borders. The overall cost efficiency of the system is low, and it is doubtful whether it can meet the challenges of the future, including the enlargement of the EU.

The strategic decision entails that, in addition to the continuing national subsystems, a common platform is to be established which may be used by central banks, including those of the non-euro-area member states and accession countries. In the first three years of Target2 there will be only this one common platform. Subsequently, the individual central banks may choose to continue with their own respective subsystems, join the existing common platform, or establish a new platform that may be shared with other central banks. The national central banks will still be able to hold accounts for the national credit institutions, irrespective of their choice of system.

The strategic decision also entails that the service level in Target2 must become more harmonised. Consequently a broad range of core services must be defined, to be offered by all central banks. In relation to these core services, which include both domestic and cross-border payments, a common pricing structure will be laid down on the basis of the most cost-efficient RTGS system.

To ensure that Target2 meets the users' requirements, a statement of the principles for and structure of Target2 was published for public consultation on 16 December 2002. The consultation deadline is 25 April 2003.

The system cannot be expected to be fully implemented before the second half of this decade.