Payment Systems

The number and value of krone-denominated payments made via Danmarks Nationalbank's payment system, Kronos, increased in 2005. Settlement of krone-denominated payments in CLS Bank, the international foreign-exchange settlement system, has increased considerably.

In March 2006 Danmarks Nationalbank's responsibility for oversight of systemically important payment systems was enshrined in the Danish Securities Trading Act.

It is planned for Denmark to join the new pan-European payment system, Target2, in May 2008. Target2 will replace the euro module of Kronos, and the Sumclearing and VP Settlement will be modified to settle euro-denominated payments via Target2.

DEVELOPMENT IN PAYMENT AND SETTLEMENT SYSTEMS

The Danish payments infrastructure comprises several systemically important payment and settlement systems, i.e. systems that are important in relation to financial stability. These systems settle various types of transactions in kroner and euro. Danmarks Nationalbank acts as settlement bank for the systems, since settlement takes place via accounts at Danmarks Nationalbank. Tables 6 and 7 show the transaction volumes in these systems in, respectively, kroner and euro.^[1]

Kronos is Danmarks Nationalbank's system^[2] for settlement of payments in kroner and euro. The value and number of krone-denominated payments via Kronos increased in 2005. Kronos is the Danish part of the pan-European euro payment system, Target. The number and value of euro-denominated payments transmitted via Kronos increased considerably in 2005 after weaker development in the preceding year. Around half of the Danish euro-denominated payments are transmitted to Germany . The transaction volume in the overall Target system continued to rise in 2005.

The Sumclearing is the Danish retail payment system for settlement of Dankort (debit card) transactions, credit transfers, Betalingsservice (direct debit), etc. The Sumclearing transaction volume rose in 2005. The Sumclearing is also used for settlement of a small, but growing number of euro-denominated credit transfers.

VP Securities Services (VP) settles securities transactions and other transactions related to securities. The number of krone-denominated transacttions settled via VP rose substantially in 2005, while the total transaction value decreased. On the other hand, the number of euro-denominated transactions fell, but their total value increased.

CLS Bank is an international system for settlement of foreign-exchange transactions in 15 currencies, including Danish kroner. Settlement of transactions in kroner rose significantly in 2005. Among other things, this reflects that an increasing number of banks use CLS for settlement of their foreign-exchange transactions.

FUTOP settlement comprises clearing and settlement of trading in futures and options in Danish kroner.^[3] The number of contracts rose considerably in 2005, partly as a result of increased activity on the part of foreign participants.

OVERSIGHT

Danmarks Nationalbank oversees systemically important payment and securities settlement systems in Denmark . The objective is to contribute to a secure and effective payments infrastructure and thus to minimise the potential risk that problems in payment and securities settlement systems jeopardise financial stability. Oversight by Danmarks Nationalbank comprises Kronos, the Sumclearing and VP settlement, in the last-mentioned case in cooperation with the Danish Financial Supervisory Authority. The ongoing oversight activities are described in the publication Financial Stability, while reports on the individual systems are published on Danmarks Nationalbank's website.

In order to distinguish more clearly between the tasks of Danmarks Nationalbank and the Danish Financial Supervisory Authority in relation to systemically important payment systems, in March 2006 Danmarks Nationalbank's responsibility for oversight was enshrined in the Danish Securities Trading Act. The amendment to the Act will be followed by a revision of the Memorandum of Understanding (MoU) relating to this area between Danmarks Nationalbank and the Danish Financial Supervisory Authority, cf. p. 58. The MoU is to ensure a clear delineation of the elements of the payments infrastructure that are subject to oversight, as well as an appropriate division of work and exchange of information.

In November 2005, Kronos, the Sumclearing and VP Settlement were reviewed by the IMF as part of its assessment of the financial system in Denmark , cf. p. 85. The IMF's assessment of the Danish payments infrastructure will be published in the autumn of 2006.

INFRASTRUCTURE FOR KRONE-DENOMINATED PAYMENTS

Dankort with chip
In 2004, all holders of a Dankort or Visa/Dankort received a new card with both a chip and a magnetic strip. The new card replaced the old card with a magnetic strip only. A chip card is considerably more difficult to counterfeit than a card which only has a magnetic strip.

The chip Dankort has had many technical teething problems, including long response times when the chip is read. This has led many retailers to block use of the chip in their terminals, so that only the magnetic strip can be used. At present the chip is only used in approximately 2 per cent of all Dankort transactions. The banks have launched a project aimed at solving the chip Dankort problems in order to encourage chip-based payments. The work will be undertaken by PBS in dialogue with retailers and their organisations.

New settlement cycle in VP
In order to enhance interaction between the Danish and international securities markets, in June 2005 VP introduced a new settlement cycle, VP60, for securities transactions in Danish kroner. VP60 takes effect at noon, which is now the final deadline for settlement of transactions in kroner. The introduction of VP60 extended the Danish settlement day by 1.5 hours. At the same time, the link from Euroclear, the international central securities depository, to VP was upgraded, so that securities can be transferred in real time, i.e. without any delay, between a participant's securities account in VP and Euroclear.

INFRASTRUCTURE FOR EURO-DENOMINATED PAYMENTS

Retail payments in Europe
In 2005, the European banks continued to develop a common infrastructure for retail payments in euro. The objective is to create a Single Euro Payments Area (SEPA), in which there is no distinction between national and cross-border payments. In 2005 the banks developed a common set of rules for credit transfers, direct debit and payment cards. According to the roadmap for SEPA, the banks must offer these payment services as from 2008. The establishment of SEPA will contribute to reducing the costs of cross-border retail payments within the EU and support the development of the single market for goods and services.

In December 2005, the European Commission presented a proposal for a directive on retail payments in the EU (New Legal Framework). The directive is to harmonise the national rules for retail payments in the EU, thereby supporting the development of SEPA. It is the intention of the European Commission that the directive cover both national and cross-border payments, not only in euro but in all currencies.

Also in December 2005, the EU Council of Ministers achieved political agreement on the Regulation on information on the payer accompanying transfers of funds. The regulation implements an international recommendation to combat the financing of terrorism.^[4] The essence of the regulation is that in future transfers of funds must be accompanied by information enabling the payer to be identified. Transfers of funds within the EU must include information on the payer's account number, while transfers between EU member states and other countries must also include information on the payer's name and address.

Target2
The development of a new pan-European system, Target2^[5], for settlement of euro-denominated payments continued in 2005. The central banks of Germany , Italy and France , which are jointly to develop and operate Target2, have now completed the functional and technical specifications for the system.

In mid-2005 it proved necessary to postpone the implementation of Target2. Furthermore, it was decided that member states will migrate from the existing Target to Target2 in three groups, since it is deemed to be too risky, technically and operationally, for all member states to join the system at the same time. The postponement entails that the first member states will migrate to Target2 in November 2007, while Denmark will join the system in May 2008 as part of the final group.

At the same time, Denmark has decided to reorganise its payments infrastructure for euro-denominated payments. This implies that the Kronos euro module will be replaced by Target2, and that the Sumclearing and VP Settlement will be modified to settle euro-denominated payments via Target2. The link to the Sumclearing and VP Settlement will be established via a special interface in Target2. This allows a choice of different settlement models, including models that allow VP Settlement and the Sumclearing in euro to continue according to the same principles as applied today. For the participants it is an advantage that multiple systems settle euro-denominated payments via Target2, since a participant will in principle be able to settle all positions via a single account, thereby using its liquidity more efficiently. Danmarks Nationalbank will coordinate the Danish migration to Target2.

Sveriges Riksbank and the Bank of England have announced that they do not wish to participate in Target2. This does not affect Danmarks Nationalbank's decision to participate, one reason being that Denmark has a different banking structure to Sweden and the UK . Only few of the current 30 participants in the euro-denominated settlement have the option to settle euro-denominated payments and gain access to intraday liquidity in euro via branches/subsidiaries in the euro area. In Sweden and the UK , on the other hand, most participants in euro-denominated settlement are represented in the euro area.