Danmarks Nationalbank - Report and Accounts 2001

Face - Index - Top/Bottom - Previous/Next

"Report and Accounts 2001"

Payment Systems

Danmarks Nationalbank's new payment system, Kronos, is now operational. The system is a central element of Denmark's payments infrastructure and serves as a home banking system for current-account holders at Danmarks Nationalbank. The system can be used for settlement of both krone- and euro-denominated payments. In the sum clearing and VP settlement systems the volume of euro payments is still moderate compared to krone payments.

During the past year, Danmarks Nationalbank has worked on achieving fulfilment of new international principles for the role of central banks in relation to payment systems. Danmarks Nationalbank has assessed Kronos against international standards and has worked with system owners to establish fora for oversight of the sum clearing system and the VP system. In 2001, international recommendations were prepared concerning the safety and efficiency of securities settlement systems. These recommendations will formthebasisforDanmarksNationalbank'sfutureoversightoftheVPsystem.

In 2002, the international currency settlement system (CLS) is expected to be launched. The krone will participate from the following year. Work is also in progress to extend the scope of the automatic collateralisation agreement to include the sum clearing system and CLS.

Kronos

Kronos is Danmarks Nationalbank's new RTGS^[18] system for kroner and euro. Kronos was launched on 19 November 2001^[19], replacing the outdated DN Inquiry and Transfer System from 1981, and the DEBES euro payment system, as the backbone payment system in Denmark.

On the launch of Kronos it became mandatory for all current-account holders at Danmarks Nationalbank to participate in the system. In that connection, approximately 130 financial institutions chose to join Kronos, including almost 30 account holders that had not participated in the DN Inquiry and Transfer System. Almost 30 current-account holders terminated their accounts at Danmarks Nationalbank.

Kronos is the current-account holders' "home banking system", whereby they can manage their accounts at Danmarks Nationalbank, e.g. transmit payments to other current-account holders. Kronos is structured to give current-account holders the option to load payments manually via the Kronos terminal, the interactive graphic user interface for Kronos, or to transmit payments via the international payments network, SWIFT.

Kronos is designed to facilitate account holders' liquidity management, and thus offers a number of queuing facilities that the current- account holders can manage via the Kronos terminal. In addition, a liquidity-saving mechanism has been introduced that can facilitate the settlement of payments when liquidity is scarce and payments are mutually awaiting each other's settlement (called gridlock resolution^[20]).

With Kronos, Danmarks Nationalbank has enhanced its opportunities to monitor payment settlement in the system with a view to ensuring the smooth and efficient settlement of payments.

Krone payment systems

There are four payment systems that can handle krone payments. The nature of the payment normally determines which of the four systems is used. Large and small payments are typically settled in separate systems, while payments related to securities trading and trading in futures and options are handled in dedicated settlement systems. Danmarks Nationalbank owns and operates the system for large payments (Kronos). For all of the other systems, Danmarks Nationalbank makes accounts available for participants to exchange payments. The transaction volumes in the krone payment systems are shown in Table 6.

Kronos is Danmarks Nationalbank's RTGS system, cf. the above. In an RTGS system, payments are settled individually and each payment is booked immediately. This makes the system particularly well-suited for settlement of large-value payments.

The sum clearing is the Danish retail payment system and handles payments via Dankort (debit card), cheques and BetalingsService (direct debit). ThesystemisownedbytheDanishBankersAssociationandoperatedby PBS. The sum clearing system is a net settlement system. Once a day, PBS calcu-lates the net mutual positions of the banks, and the amounts are settled via the banks' accounts with Danmarks Nationalbank. Far more transactions pass through the sum clearing system than through Kronos. On the other hand, the individual payments are considerably smaller – almost kr. 5,000 on average, compared to approximately kr. 90 million in Kronos, cf. Table 6.

The VP System is the system of VP A/S – the Danish Securities Centre, for settlement of trades and other securities transactions. At fixed times each day, the participants' net positions in terms of both securities and money are calculated. The net positions in securities are exchanged via the participants' VP safekeeping accounts, while the net positions in money are exchanged via the participants' accounts at Danmarks Nationalbank. The large fluctuations in the number of transactions can be attributed to a strongly varying number of share trades, while the number of bond trades has fluctuated moderately during the last three years.

Table 6 Krone payments

	1999	2000	2001
Kronos / DN Inquiry and Transfer System
Number of transactions, '000	368	388	398
Amount per transaction, kr. million	57.0	66.2	90.3
Sum clearing
Number of transactions, '000	765,216	810,544	852,734
Amount per transaction, kr. '000	5.0	5.0	4.8
VP settlement
Number of trading transactions, '000	3,530	6,815	5,315
Amount per transaction, kr. million	6.2	3.3	3.8
FUTOP settlement
Number of contracts, '000	1,735	1,042	493

Sources:Danmarks Nationalbank, the Danish Bankers Association, VP A/S – The Danish Securities Centre and the Copenhagen Stock Exchange.

Trades in options and futures (derivatives) are settled by the FUTOP Clearing Centre A/S. Participants' net positions are settled via Kronos to accounts at Danmarks Nationalbank. The number of settled contracts has been reduced by half from 2000 to 2001.

Euro payment systems

In Denmark, payments in euro can be effected via three different payment systems, depending on the type of payment. A distinction is made between large cross-border payments, small payments and payments related to securities trading in euro. Table 7 shows the transaction volume in euro.

Cross-border payments in euro can be processed in Target^[21], the joint European system for euro payments. Target interlinks the national RTGS systems, in Denmark's case via a special Target module in Kronos.

Use of Target, including Danish participants' use of the system, has increased year by year. In Denmark, Target is still used predominantly for cross-border payments, while the EU member states that have adopted the euro as their national currency also use the system for domestic payments to a considerable extent^[22].

Table 7 Euro payments

	1999	2000	2001
Target – all participating countries
Number of transactions, '000	42,258	47,980	53,666
Value of transactions, euro billion	239,472	263,291	330,031
Of which Danish participants
Number of transactions, '000	61.0	80.0	106.3
Value of transactions, euro billion	1,223	1,456	1,431
Sum clearing
Number of transactions, '000	2.5	10.4	23.6
Value of transactions, euro billion	0.07	0.27	0.46
VP settlement
Number of transactions, '000	6.8	5.8	79.1
Value of transactions, euro billion	1.3	1.4	11.8

Sources:ECB, the Danish Bankers Association and VP A/S – The Danish Securities Centre.

Retail payments in euro can be settled via the sum clearing which has separate settlement runs in euro. The transaction volume in euro is very small compared to the transaction volume in kroner. Since the sum clearing system only has domestic participants it cannot settle cross-border euro payments.

Securities trades in euro are handled via the VP settlement system according to the same principles as trades in kroner. Cross-border securities trades may be settled via VP's links to securities centres abroad. The volume of transactions in euro has increased considerably, but is still modest compared to the transaction volume in kroner.

Oversight

For some years, the international focus has been directed at the role of the central banks in relation to payment systems, and in mid-2000 the central banks of the G10 countries published a report on safety and efficiency in payment systems entitled Core Principles for Systemically Important Payment Systems^[23] (CPSIPS). The report sets out ten Core Principles for systemically important^[24] payment systems, and four principles governing the role of central banks in this respect^[25]. The four principles, A-D, are shown in Box 5. On assessing the stability of a member country's financial sector, the International Monetary Fund, (IMF) may choose to include an assessment of whether systemically important systems comply with the Core Principles, and whether the country's central bank adheres to the four principles of CPSIPS, cf. the description of the IMF's FSAP programmes on page 86.

Box 5 Central banks and principles for oversight

CPSIPS sets out four principles for the central banks' role in relation to systemically important payment systems:

A: The central bank should define clearly its payment-system objectives and should disclose publicly its role and major policies with respect to systemically important payment systems.
B: The central bank should ensure that the systems it operates comply with the Core Principles.
C: The central bank should oversee compliance with the Core Principles by systems it does not operate and it should have the ability to carry out this oversight.
D: The central bank, in promoting payment system safety and efficiency through the Core Principles, should cooperate with other central banks and with any other relevant domestic or foreign authorities.

During the past year, Danmarks Nationalbank has worked to comply with the principles governing the responsibility of central banks in connection with systemically important payment systems. In addition to Danmarks Nationalbank's system, Kronos, the sum clearing and VP settlement systems are regarded as systemically important systems.

Principle A: Danmarks Nationalbank's role and policy in relation to oversight of systemically important payment and securities settlement systems was published in the Monetary Review, 2nd Quarter 2001.
Principle B: Danmarks Nationalbank has furthermore reviewed Kronos in relation to CPSIPS, which is presented in Box 6. Overall, Kronos complies with the Core Principles, as eight of the Principles are fully observed, while Principle 7 is deemed to be broadly observed. Principle 5 is irrelevant to Kronos, as the system does not apply multilateral netting, but real-time gross settlement. The assessment of Kronos can be found on Danmarks Nationalbank's Web site^[26].
Principle C: As regards oversight of the sum clearing and VP settlement systems,aworkinggrouphasbeensetup,headedbyDanmarksNationalbank and with representatives of the system owners. The latter provide input and material regarding their respective systems. Initially efforts are focused on the sum clearing system, as the final principles for securities settlement systems were not published until the 4th quarter of 2001, cf. below.

Box 6 Core principles for payment systems

CPSIPS sets out ten Core Principles for systemically important payment systems:

Core Principle 1: The system should have a well-founded legal basis under all relevant jurisdictions.
Core Principle 2: The system's rules and procedures should enable participants to have a clear understanding of the system's impact on each of the financial risks they incur through participation in it.
Core Principle 3: The system should have clearly defined procedures for the management of credit risks and liquidity risks, which specify the respective responsibilities of the system operator and the participants, and which provide appropriate incentives to manage and contain those risks.
Core Principle 4: The system should provide prompt final settlement on the day of value, preferably during the day and at a minimum at the end of the day.
Core Principle 5: A system in which multilateral netting takes place should, at a minimum, be capable of ensuring the timely completion of daily settlements in the event of an inability to settle by the participant with the largest single settlement obligation.
Core Principle 6: Assets used for settlement should preferably be a claim on the central banks; where other assets are used, they should carry little or no credit risk and little or no liquidity risk.
Core Principle 7: The system should ensure a high degree of security and operational reliability and should have contingency arrangements for timely completion of daily processing.
Core Principle 8: The system should provide a means of making payments which is practical for its users and efficient for the economy.
Core Principle 9: The system should have objective and publicly disclosed criteria for participation, which permit fair and open access.
Core Principle 10: The system's governance arrangements should be effective, accountable and transparent.

· Principle D: Finally, in early summer 2001, Danmarks Nationalbank and the Danish Financial Supervisory Authority (DFSA) concluded a coperation agreement^[27] regarding oversight of the systemically important systems not operated by Danmarks Nationalbank itself. The agreement sets out the framework for cooperation and exchange of information and is aimed inter alia at avoiding duplicated work by Danmarks Nationalbank, DFSA and the system owners whenever possible.

International work on payment systems

On 12 November 2001, the central banks of the G10 countries and the IOSCO^[28] published a report on the safety and efficiency of securities settlement systems, Recommendations for securities settlement systems.^[29] The report states 19 minimum recommendations for all securities settlement systems, including their legal framework, risk controls, access, governance, efficiency, transparency and regulation and oversight. The recommendations thus relate to functions which may involve several players, including securities centres, stock exchanges, custodian banks, issuers and investors.

The ECB will work with the CESR^[30] to coordinate the implementation of the recommendations in the securities settlement systems of the EU member states. The ECB and the CESR will e.g. investigate whether the EU securities settlement systems should also observe other or more stringent recommendations than the minimum requirements outlined in the report. Danmarks Nationalbank participates in this work.

The G10/IOSCO recommendations and any further recommendations from the ECB/CESR will form the basis for Danmarks Nationalbank's assessment of the VP securities settlement system.

Developing the payments infrastructure

CLS
The international settlement system for currency trades, CLS (Continuous Linked Settlement), is expected to be in operation before the end 2002. CLS, which is owned by a private banking company, has been established by the world's largest commercial currency dealers to minimise the risk related to currency trades. Only shareholders can participate directly in CLS, which will initially handle trades in US, Australian and Canadian dollars, euro, Japanese yen, pounds sterling and Swiss francs. Subsequently Danish and Norwegian kroner and Swedish kronor will be included in CLS, probably early in 2003.^[31] Payment transactions relating to the currency trades settled in CLS will be settled via the national RTGS systems of the participating currencies and booked to accounts with the relevant central banks. When the Danish krone joins CLS, the system must thus be able to pay out/receive Danish kroner via Kronos. CLS must therefore participate in Kronos.

Extending the automatic collateralisation agreement
A working group under the Danish Bankers Association with representatives of the Danish Bankers Association, The Danish Securities Centre (VP) and Danmarks Nationalbank has recommended extending the scope of the automatic collateralisation agreement to include the provision of collateral in connection with sum clearing and CLS.

The automatic collateralisation agreement is a special procedure for provision of collateral. Currently it is used only in connection with securities trading in the VP settlement system. Under the automatic collateralisation agreement, credit may be obtained from e.g. Danmarks Nationalbank if a special VP safekeeping account contains sufficient collateral in the form of securities. In contrast to traditional collateral arrangements, a paper is not earmarked as collateral for credit facilities unless the borrower defaults. The automatic collaterisation is thus an extremely flexible method of pledging collateral, and the participants in the Danish payment systems would also like to be able to use this system in connection with the sum clearing system and CLS.

One consequence of the requirement for more efficient pledging of collateral vis-à-vis Danmarks Nationalbank is the greater interaction between the various systems, and thereby also a risk that events/problems in one system will affect the other systems. The recommended model for expanding the automatic collateralisation agreement weights the need for efficient pledging of collateral against the consideration of safety in the payment systems. The expansion of the automatic collateralisation agreement is expected to be implemented at the end of 2002.

Footnotes

^[18]RTGS – Real-Time Gross Settlement.

^[19]For a detailed description of Kronos, see Thomas Angelius and Astrid Henneberg Pedersen, Danmarks Nationalbank’s New Payment System, Kronos, Danmarks Nationalbank, Monetary Review, 1st Quarter 2002.

^[20]For a detailed description of gridlocks, see Morten Linnemann Bech and Kimmo Soramäki, Gridlock Resolution in Payment Systems, Danmarks Nationalbank, Monetary Review, 4th Quarter 2001.

^[21]Trans-European Automated Real-time Gross settlement Express Transfer system.

^[22]For further information, see Danmarks Nationalbank, Report and Accounts 2000, p. 77.

^[23]The report can be downloaded from www.bis.org.

^[24]A payment system is regarded as systemically important if system events could in themselves cause disruptions in the financial sector, or if financial problems could spread via the system to other areas of the financial sector.

^[25]For a detailed survey of the Core Principles and the principles governing central banks' responsibility, see Tobias Thygesen, International Standards for Payment Systems, Danmarks Nationalbank, Monetary Review, 1st Quarter 2001.

^[26]The assessment of Kronos can be found under About us, Transaction of payments, Danmarks Nationalbank's oversight of payment and securities settlement systems. The review of Kronos is based on the documentation available and the steps initiated when the system was launched on 19 November 2001. In the course of 2002, Kronos will be reassessed on the basis of operational experience and observation of the few outstanding issues identified at the first review.

^[27]See Danmarks Nationalbank, Monetary Review, 2nd Quarter 2001.

^[28]The International Organisation of Securities Commissions is an international forum for cooperation between authorities responsible for supervision of securities markets.

^[29]The report can be downloaded from www.bis.org.

^[30]The Committee of European Securities Regulators is a forum for cooperation between the authorities responsible for overseeing securities markets in the EU member states.

^[31]For a more detailed description, see www.nationalbanken.dk under About us, Transaction of payments.

	Face - Index - Top/Bottom - Previous/Next
	Version 1.0 March 2002 Nationalbanken. Published by Danmarks Nationalbank March 2002, http://www.nationalbanken.dk/