Payment Systems

The number and value of krone-denominated payments made via Danmarks Nationalbank's payment system, Kronos, increased in 2004.

In 2004 Denmark's securities settlement system, the VP System^[1], was assessed in relation to international recommendations for securities settlement systems and was deemed to comply with the recommendations.

In December 2004 the Governing Council of the European Central Bank, ECB, accepted the offer made by the central banks of France, Germany and Italy to develop and operate the platform for the new pan-European payment system, Target2, which is expected to be implemented in 2007.

The value and number of krone-denominated payments via Kronos, Danmarks Nationalbank's RTGS system^[3], increased in 2004. Kronos has 124 participants, of which 31 also participate in Target, a pan-European RTGS system for settlement of cross-border payments in euro. The number and value of euro-denominated payments made via Target also increased in 2004. The number of euro-denominated payments via Kronos decreased, but their value increased.

The Sumclearing, the Danish retail payment system, is used for settlement of Dankort (the Danish debit card) transactions, credit transfers and Betalingsservice (direct debit), etc. Both the value and number of Sumclearing transactions increased in 2004.

In 2004 the number of securities transactions settled by Denmark's central securities depository, VP, rose to 7.3 million.

CLS Bank, which is owned by large private banks, is an international settlement system for foreign-exchange transactions.^[4]After the introduction of four new currencies – New Zealand dollars, Hong Kong dollars, Korean won and South African rand – in December 2004, 15 important currencies worldwide can now be settled via CLS Bank. After the Danish krone joined CLS Bank in September 2003 the volume of transactions in Danish kroner soon reached a relatively stable level. In 2004 an average of 330 transactions per day were settled.

FUTOP is the Danish system for settlement of trades in futures and options listed on the Copenhagen Stock Exchange. The number of transactions is relatively modest and fell slightly in 2004.

Scandinavian Cash Pool, SCP^[5], is an automated system for pledging of cross-border collateral between Denmark, Norway and Sweden. The development in SCP since its implementation in March 2003 shows that SCP is primarily used by Danish banks that pledge collateral to Danmarks Nationalbank for loans to Norwegian and Swedish group affiliates on a daily basis.

An important central-bank task is oversight of systemically important payment and securities settlement systems. The objective is to contribute to stable and effective systems and to minimise the potential risk that credit and liquidity problems spread within the systems. Three payment and securities settlement systems are deemed to be systemically important in Denmark: Kronos, the Sumclearing and the VP System.

Oversight of payment and settlement systems is based on internationally recognised standards and recommendations. On the basis of these standards and recommendations, assessment guidelines have been prepared to ensure uniform assessment. Kronos and the Sumclearing have previously been assessed by Danmarks Nationalbank and both comply with the international standards. In 2004 Danmarks Nationalbank and the Danish Financial Supervisory Authority jointly reviewed the VP System in terms of the 19 Recommendations for Securities Settlement Systems^[6]. Overall, the VP System is deemed to comply with the recommendations^[7].

ESCB-CESR standards
In September 2004, the European System of Central Banks, ESCB, and the Committee of European Securities Regulators, CESR, published the report on Standards for Securities Clearing and Settlement in the European Union^[8]. In a number of areas, this report has led to tightening of the G10/IOSCO^[9] recommendations. For example, contingency requirements have been tightened so that a central securities depository must be capable of recommencing operations within two hours in the event of a disaster.

The work of ESCB-CESR, in which both the Danish Financial Supervisory Authority and Danmarks Nationalbank are active, will continue in 2005 with the preparation of new assessment guidelines. In this connection the issue of the extent to which the standards should apply to banks with significant securities settlement activity is also being addressed. The assessment guidelines are expected to be agreed on by the end of 2005.

DEVELOPMENT OF THE PAYMENTS INFRASTRUCTURE

The new Dankort
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. One advantage of chips over magnetic strips is that they are more difficult to counterfeit. The chip used complies with international standards for chip cards.

This initiative should be viewed against the background of the Act on Certain Means of Payment, adopted in 2003. Among other things, the Act enabled banks to charge a fee of up to 0.50 kr. per transaction from payment recipients for payments by Dankort or Visa/Dankort from 1 January 2005.

The fee became an issue during the Danish general election in February 2005. After the election, political agreement was achieved to remove the kr. 0.50 fee as from 1 March 2005. Retailers will instead pay an annual subscription fee that is dependent on their transaction volume, and the banks will make a higher contribution to the operation of the card.

The new cards do not have laser-engraved signatures and photographs. On behalf of the Consumer Ombudsman, the Danish Consumer Council contacted Danmarks Nationalbank to request its comments in this respect. Danmarks Nationalbank submitted its consultation response on 7 June 2004, see www.nationalbanken.dk.

A single retail payments infrastructure in the euro area
The introduction of euro banknotes and coins in 2002 laid the foundations for a single euro payments area. In the interbank area, the EU currently has a well-functioning euro payment system, Target. In the retail payments area, the service level for cross-border retail payments is, however, considerably lower than for national retail payments.

The European banks are working to create the Single Euro Payments Area, SEPA, with the goal of raising the service level and reducing the costs of cross-border payments in euro. This work is carried out by the European Payment Council, EPC. As an observer in the EPC and most of its task forces the ECB indicated in 2004 that by 2010 it should be just as easy, safe, efficient and cheap to make payments throughout the whole euro area as it is to make national payments today^[10].

A single legal framework for retail payments in the EU will support the development of the pan-European infrastructure. Today there are considerable differences between the national regulations covering retail payments within the EU. The European Commission is working on a draft directive on retail payments to harmonise national regulations. This directive is part of the European Commission's Financial Services Action Plan^[11]. The proposal is expected to be tabled in the autumn of 2005.

The development of Target2
The Eurosystem's central banks have decided to develop a new RTGS system, Target2, for settlement of euro-denominated payments. The new EU member states and Denmark, Sweden and the UK have also been offered participation. Danmarks Nationalbank has decided to participate in the single shared platform. Target2 is to replace the existing RTGS system, Target. In December 2004 the Governing Council of the ECB accepted the offer from the central banks of Germany, Italy and France to develop and operate Target2. Unlike the existing, decentralised system, Target2 will be based on a single shared platform, which is expected to be implemented on 1 January 2007.

The single shared platform will comprise a number of modules as seen in other RTGS systems, including Kronos. Some modules will be mandatory for the participating central banks, while others will be optional. Direct and indirect participation in Target2 will be possible. Communication between the direct participants and the single shared platform will take place via the international payments network, SWIFT.

Target2 will also offer participants a wide range of facilities for liquidity management, including prioritisation of payments, reservation of liquidity and setting of bilateral and multilateral limits vis-à-vis other participants.

The RTGS part of the single shared platform will be operated in both Germany and Italy on a rotation basis. The region not operating the system will act as the back-up region. In each of the two regions a primary and a secondary operations centre will be established, and data will be transferred between the two operations centres on a continuous basis (real-time data mirroring). If both centres in a region fail, it must be possible to resume operations in the other region within two hours. France will operate selected modules such as a data warehouse.

According to the plan, the final technical specifications for the single shared platform will be ready by the end of June 2005. The platform will be developed in the period until April 2006, and the rest of 2006 will be reserved for testing and implementation. A number of systemic adjustments to the Danish euro payments infrastructure will be required during the same period. Danmarks Nationalbank will coordinate this task in close dialogue with the financial sector.

Revision of the framework for ECB credit operations
In 2004 the ECB decided to operate with only one common list of eligible assets for credit operations. So far the eligible assets have been listed in two categories, approved by the ECB and the national central banks in the Eurosystem, respectively. The ECB also decided that this list should be extended to include bank loans, but not shares. The common list will be introduced gradually from May 2005.

Danmarks Nationalbank currently applies the same rules for calculation of the collateral value of securities as the ECB. However, in a number of respects the rules that determine which securities can be pledged to Danmarks Nationalbank deviate from the ECB's rules since Danmarks Nationalbank e.g. does not accept corporate bonds as collateral. There are currently no indications of a shortage of pledgeable securities. Consequently, Danmarks Nationalbank has no immediate plans to change its rules concerning pledgeable securities.

In January 2005 the ECB decided that it should be possible to transfer securities used as collateral for Eurosystem credit operations between two central securities depositories via a third central securities depository, i.e. relayed links. The ECB requires that the links between central securities depositories meet a number of conditions that are stated in a newly-developed methodology.

The decision of the ECB increases opportunities to pledge cross-border collateral within the euro area and improves the prospects for Danish bonds issued in euro to become pledgeable in the euro area. The reason is that in principle the ECB already accepts Danish euro-denominated bonds as collateral for euro-denominated credit from the Eurosystem central banks. However, it is a requirement that the securities are immediately accessible to counterparties in all euro area member states. The Danish central securities depository, VP, currently has a link to Euroclear, an international central securities depository, so that securities issued by VP can be transferred to Euroclear. The ECB's decision entails that securities transferred to Euroclear can be transferred to other central securities depositories with links to Euroclear. Euroclear does not currently have links to central securities depositories in all euro area member states. If Danish euro-denominated bonds are to be pledgeable in the euro area, it is a prerequisite that VP is linked to central securities depositories in all euro area member states, e.g. via Euroclear.

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