Payment Systems

In 1997 and at the beginning of 1998 major changes took place in the infrastructure on which Danish payment systems are based. The clearing of retail transactions has been restructured and the access to furnish collateral in the securities clearing system has been expanded considerably as a consequence of the introduction of automatic pledging.

At the European level an intensive effort is being made to complete the common European payment systems in time for the launch of EMU. This will affect payment systems in Denmark, even though Denmark will not participate in the third stage of EMU. The international work on electronic money and a reduction of settlement risks in connection with foreign-exchange trading has continued.

The Development in the Danish Payment Systems

Table 8 shows turnover in the three large payment systems which are settled via the banks' accounts with the Nationalbank.

The average daily turnover of the securities clearing system of the Danish Securities Centre, VP, rose to kr. 93 billion in 1997. An increasing proportion of Danish securities are settled in the international clearing centre Euroclear. In 1997 Euroclear handled almost half of all settlement of Danish securities.

In Denmark and abroad more and more financial institutions require collateral for any type of lending or credit to other financial institutions.

Table 8 Various payment systems, daily averages

An example is the Nationalbank's requirement of collateral in connection with overdraft facilities at the Nationalbank, cf. the 1995 Annual Report, p. 52f. The more rigorous collateral requirements have given rise to a strong wish in the financial sector to make the use of the collateral more flexible. For this purpose a new function in the VP clearing system has been developed, i.e. automatic pledging. The automatic pledging system gives banks and stockbroking companies the opportunity to furnish securities as collateral at the clearing when the securities are purchased. This reduces the need for other collateral. The new function was to have been introduced in the autumn of 1997, but the development of the new system involved more work than expected by VP. Instead, VP has announced that automatic pledging will be available as from March 9, 1998.

In 1997 the average daily turnover in the retail clearing system, where a large number of retail payments such as payroll transfers and purchases by cheque or Dankort payment card are settled, amounted to kr. 16 billion, cf. Table 8. In January 1998 the retail clearing system was restructured so that most payments are booked after it has been checked that the parties to the settlement transactions are able to meet their commitments, cf. Box 1. Under the previous system the retail payments were booked before the banks had covered their obligations. As an element of the restructuring the Danish Bankers Association took over the operational responsibility for the retail clearing system from the Nationalbank. As in the VP clearing system the Nationalbank's role is now solely to act as settlement bank.

Under both the VP clearing system and the retail clearing system the Nationalbank announces prior to each clearing the limit for each participant in

Box 1: The stages of payment settlement

the subsequent settlement, cf. Chart 31. The parties to the clearing inform the Nationalbank of their drawing requirement by transferring amounts from their current accounts with the Nationalbank to their settlement accounts. If the current accounts do not hold sufficient funds the participants have access to overdrafts. As from June 1998 collateralized securities will be a condition for overdrafts. In the event of a party's failure to repay an overdraft by the close of the day the Nationalbank may realize the furnished collateral and thereby avoid losses. The Nationalbank has postponed some stages of the gradual introduction of full collateralization, cf. also the 1996 Annual Report, p. 64.

The average daily turnover of the Nationalbank's payment system, the DN Inquiry and Transfer System, where the banks settle major inter-bank payments in kroner, e.g. inter-bank loans, amounted to kr. 72 billion in 1997. The DN Inquiry and Transfer System is a real-time gross settlement system (RTGS). On the introduction of the European payment system, TARGET, cf. below, the Nationalbank will modernize the DN Inquiry and Transfer System to match the standard of TARGET.

International Work on Payment Systems

In 1997 the European central banks and the EMI (the precursor of the European Central Bank) continued their work on several major payment-system projects. These projects are motivated by the need for an infrastructure to support the single monetary policy under EMU. The principal project is the future European payment system, TARGET, which is designed to ensure rapid and secure transfer of large euro-denominated amounts within the euro area. One effect of TARGET will be to equalize any interest-rate differentials between the euro markets of the various countries, since the system will enable rapid transfer of liquidity from one  market to another. Like the DN Inquiry and Transfer System TARGET is an RTGS system and is intended primarily for major inter-bank transfers. TARGET is described in more detail in the 1995 Annual Report, p.  56.

The preparation of TARGET is progressing according to plan and the system is expected to be ready by January 1, 1999 on the commencement of the third stage of EMU, cf. the EMI's Second Progress Report on the TARGET Project, described in Box 2. Both the EU member states which participate in EMU and the non-participating member states may be connected to TARGET. However, more restrictive terms will probably apply to the non-participating countries than to the euro countries. The terms for non-participating countries will not be adopted until after the establishment of the European Central Bank, ECB, in the summer of 1998. The draft models are described in more detail in the 1996 Annual Report, p. 65.

The EMI is also working on the structure of a system for cross-border provision of collateral. This is necessary because the ECB will not provide any type of credit without collateral. The central banks will act as each other's correspondent banks for this provision of cross-border collateral. If a German bank wishes to use securities deposited in the Netherlands as collateral for a credit facility from the German central bank the securities must be held in custody with the Dutch central bank. The latter will acknowledge receipt of the securities to the German central bank, which will then grant the credit facility to the German bank. Since Denmark has opted out of EMU Danish securities will probably not be eligible as collateral

(to be continued)