Danmarks Nationalbank's Oversight of the Financial Infrastructure in Denmark

The current financial crisis has had a negative impact on the banking institutions' liquidity. Settlement of payments in Denmark is, however, generally secure and efficient. The crisis nevertheless underscores the need for effective liquidity management, taking into account unforeseen events such as temporary failure of core settlement systems and delayed receipt of liquidity from other system participants.

In general, the participants have not found it difficult to meet their payment obligations in the core systems overseen by Danmarks Nationalbank, cf. Box 18. Thus, most payments have constituted only a modest share of the disposable amount in the participant's current account at Danmarks Nationalbank at the time of settlement. Even on the peak settlement day in connection with the turn of the year 2008/09, when the liquidity requirement exceeded kr. 200 billion, settle ment could take place without major problems due to the participants' flexible access to liquidity at Danmarks Nationalbank. On this day, Danmarks Nationalbank and the financial sector had jointly established contingency measures to resolve any problems.

Several times during the crisis, payments in foreign exchange by Danish banking institutions have been affected by the increased pressure on the global money markets. Danmarks Nationalbank's oversight disclosed an increase in the number of days when difficulties in raising euro liquidity delayed settlement in VP Securities.

The crisis has not halted the current development in retail payments. The trend is shorter settlement times, and new payment instruments are being introduced, e.g. payment by mobile phone.

Since March 2009 it has been possible to settle equity transactions in Denmark via a central counterparty that assumes the counterparty obligations in relation to both the buyer and the seller on NASDAQ OMX Copenhagen. Moreover, VP Securities has set up a central securities depository in Luxembourg to enable Danish issuers to issue euro-denominated bonds within the euro area so that they can be pledged as collateral to the Eurosystem. Danmarks Nationalbank participates actively in this process so as to ensure that the Danish infrastructure meets international standards and best practice.

The financial system's payments via Danmarks Nationalbank

Settlement of krone-denominated payments via Danmarks Nationalbank is of major significance to liquidity redistribution in the Danish financial system. Therefore, it is important for banking institutions to ensure robust management of intraday liquidity risks. It is also important that Kronos has systems and procedures in place to ensure settlement of time-critical payments in the event of a system failure, and that normal operation can be resumed within 4 hours.

The current crisis has not caused any major problems for Danish banking institutions in terms of meeting payment obligations in kroner in Kronos, the Sumclearing and VP settlement. On the other hand, 2008 and early 2009 have witnessed an increase in the number of occasions where settlement of payments in euro via Danmarks Nationalbank has been delayed – albeit without significant consequences to system participants.

Sustained increase in settlement of payments via accounts at Danmarks Nationalbank
The total volume of payments settled via accounts at Danmarks Nationalbank rose by almost 13 per cent in 2008, to kr. 76,933 billion, equivalent to kr. 308 billion per day, cf. Table 7 in the Tables section. The observed increase is to a large extent attributable to transactions related to market operations, which rose by 62 per cent, to a total of kr. 22,181 billion. This reflects how the financial turmoil has led participants to place excess liquidity at Danmarks Nationalbank rather than in the money market. Danmarks Nationalbank reinvests these deposits in the form of monetary-policy loans to participants whose liquidity requirements cannot be met in the money market. In this way, Danmarks Nationalbank de facto acts as a central counterparty in the money market, as do many other central banks.

In the RTGS system, Kronos, payments are settled in real time via the participants' accounts at Danmarks Nationalbank when payment instructions are received. In practice, this eliminates the credit risk on settlement in Kronos, but it also increases the liquidity requirement – compared with settlement at fixed times after netting of opposite payments. To meet this requirement, Danmarks Nationalbank offers participants intraday credit against collateral, typically government, mortgage-credit or covered bonds. In view of the financial turmoil, the range of securities eligible as collateral has been extended to facilitate access to liquidity at Danmarks Nationalbank, cf. the section on Danmarks Nationalbank's lending, p. XX.

A calculation of the size of the participants' interbank payments in relation to their disposable amounts at the time of settlement shows that participants continue to reserve considerable liquidity for settlement of payments. The intraday credit extended by Danmarks Nationalbank is not the only explanation; the participants' payment behaviour is equally important, as over 90 per cent of all payments are settled by noon. Even on days with large payment volumes, e.g. the first banking day of the year, most payments constitute only a modest share of the participant's disposable amount at the time of payment, although on the first banking day in 2009 an increasing number of payments constituted more than 40 per cent of the disposable amount, cf. Chart 51.

interbank payments in per cent of disposable amount at time of settlement	chart 51
Note: Payments have been weighted by size. Payments below kr. 1 million have been omitted. In the Chart, each payment has been related to the participant's disposable amount at the time the payment was settled. A participant's disposable amount is calculated on an ongoing basis during Kronos' opening hours and corresponds to the participant's maximum credit line at Danmarks Nationalbank plus the balance of the participant's current account. Source: Danmarks Nationalbank.

Chart 52 shows that liquidity redistribution among participants was considerably greater on the first banking days in both 2008 and 2009 than on other days. This is attributable to annual refinancing of adjustable-rate mortgages, which takes place on this day, as do considerable mortgage and dividend payments¹ .

Redistribution of krone liquidity between banking institutions	chart 52
Note: The total krone liquidity redistributed via accounts at Danmarks Nationalbank is derived from the participants' net positions in connection with retail payments, as well as securities and foreign-exchange trading – linked to the Sumclearing, VP settlement and CLS, respectively. Source: Danmarks Nationalbank.

The first banking day in 2009 was a Friday, a day when liquidity redistribution among participants is systematically greater than on other days – which could explain the substantially higher redistribution on the first banking day of the year compared with previous years. Friday is the day when Danmarks Nationalbank conducts its ordinary market operations with banking institutions and mortgage-credit institutes, and in addition liquidity redistribution in the VP settlement is normally somewhat greater than on other days of the week due to greater securities and repo activity.

The banking institutions' intraday liquidity requirement at Danmarks Nationalbank
The substantial redistribution of krone liquidity via payment and settlement systems makes great demands on the banking institutions' ability to monitor and manage intraday liquidity. This can be seen from Chart 53, which illustrates the fluctuations in the banking institutions' daily liquidity requirements for settlement of payments at Danmarks Nationalbank during the Kronos opening hours (7:00 a.m. to 3:30 p.m.). Since the beginning of 2008, the minimum daily liquidity requirement has averaged kr. 12 billion, but on some days it has been much higher, notably on the first banking days in 2008 and 2009, when it reached kr. 92 and 103 billion, respectively. In practice, however, the banking institutions made extensive use of their intraday overdraft facilities on their current accounts at Danmarks Nationalbank as their maximum liquidity requirements within the day reached kr. 189 and 207 billion, respectively. Even on these days, the maximum liquidity requirement constituted only a limited share of the liquidity reserved by the banking institutions for settlement of payments at Danmarks Nationalbank, i.e. kr. 361 and 416 billion, respectively.

liquidity required for kronos settlement	chart 53
Note: Liquidity reserved for settlement of payments at Danmarks Nationalbank is equivalent to the banking institution's maximum credit line plus its current-account balance when Kronos opened (7:00 a.m.) and is often referred to as its disposable amount. The maximum liquidity requirement corresponds to the liquidity needed by the banking institutions for settling all outgoing payments over the day without delay. The calculated maximum liquidity requirement depends on the order in which payments were settled during the day. Likewise, the minimum liquidity requirement corresponds to the liquidity needed by the banking institutions for settling all payments over the day with maximum netting of incoming and outgoing payments. Source: Danmarks Nationalbank.

Against this background, Danmarks Nationalbank still believes that the banking institutions overall have sufficient liquidity scope to meet their payment obligations as they fall due. Nevertheless, the current financial crisis has shown that intraday liquidity risk remains an important element of the risk management of banking institutions, etc. This is reflected in the Principles for Sound Liquidity Risk Management and Supervision published by the Basel Committee in September 2008. Here, intraday liquidity risk has been given much more attention than in the Committee's 2000 report on managing liquidity risk, cf. Box 19.

Intraday liquidity requirements in kroner outside Danmarks Nationalbank
Due to the large number of direct Kronos participants, krone-denominated transactions between Danish banking institutions without the involvement of Danmarks Nationalbank – and the associated liquidity requirements – are insignificant when compared with the situation in other small European countries.² Only very small banking institutions do not participate in Kronos.

A number of banking institutions have significant transactions in kroner with abroad. Such transactions are settled via correspondent banks, which may give rise to substantial settlement risks.

For krone transactions linked to foreign-exchange trades, the establishment of CLS has limited the need for liquidity considerably due to substantial netting of opposite payments prior to settlement. In 2008, netting of opposite payments, e.g. Danish kroner purchased and sold with the same value date, meant that the participants' pay-ins in kroner constituted less than 4 per cent of the gross value of kroner settled in CLS, cf. Table 10 in the Tables section. To support liquidity in CLS settlement, all pay-ins to CLS take place via central-bank payment systems so that, if necessary, the payments can be financed immediately through credit lines granted by the central banks. This is a core feature of CLS settlement as pay-ins – from banks worldwide – must meet fixed deadlines.

The banking institutions' payments in foreign exchange
In the course of 2008, it became increasingly difficult for banking institutions to conduct payments in foreign exchange due to mounting pressures in the money markets that made it hard to raise the necessary liquidity to meet short-term requirements, including payment obligations in foreign exchange. Payments in euro and dollars are particularly important to Danish banking institutions, and consequently in the autumn of 2008 Danmarks Nationalbank, like the central banks of several other small countries, established temporary mutual swap lines with the Federal Reserve and the ECB.³

In Denmark, one consequence of the pressure on the euro money market was that VP Securities settlement with the cash leg in euro was more frequently delayed in 2008 than in previous years. Danmarks Nationalbank was also affected on one occasion in 2008, cf. Box 20.

Unmet liquidity requirements in case of full-day failure of Kronos	chart 54
Note: The participants' liquidity requirements have been calculated as the minimum liquidity required to settle one day's interbank payments after maximum netting of incoming and outgoing payments adjusted for the liquidity requirements met by payments settled under the contingency procedure. The Chart has been compiled on the basis of interbank payments settled on 22 days in January 2008. Source: Kristian Sparre Andersen and Irene Madsen (2009), A quantitative assessment of international best practice for business continuity arrangements in payment systems, in Harry Leinonen (ed.), Proceedings from the Bank of Finland Payment and Settlement System Seminars 2007-2008, Bank of Finland Scientific monographs E:42, 2009 (forthcoming).

Business continuity in Kronos
Because payment systems are so important to liquidity redistribution between banking institutions, the requirements for the operational stability and business continuity of such systems are high. Against that background, Danmarks Nationalbank has analysed the need for settlement of payments via manual contingency procedures (processing of payment requests sent by fax) in the event that normal settlement of payments in Kronos is not possible.

As regards liquidity redistribution between system participants, settlement of all CLS payments and the largest 200 payments would comprise a reasonable share of the banking institutions' liquidity requirements that are met through payment settlement in Kronos, cf. Chart 54. This also applies on days with large liquidity requirements. CLS payments and the largest 200 payments constitute approximately 10 per cent of the daily transactions and can be settled without major delays to participants within the normal Kronos opening hours.

Besides systemwide failures, other incidents also affect the banking institutions' ability to meet liquidity requirements via Kronos settlement. If internal problems prevent a participant from remitting payments via Kronos, this could mean that other participants must raise considerably more liquidity elsewhere, cf. Chart 55.

Participants' liquidity requirements when a large participant is unable to settle payments in Kronos	chart 55
Note: The participants' liquidity requirements have been calculated as the minimum liquidity required to settle one day's interbank payments after maximum netting of incoming and outgoing payments adjusted for the increase in the liquidity requirement arising when a large bank is unable to settle payments in the normal way, taking into account the payments settled under the contingency procedure. The Chart has been compiled on the basis of interbank payments settled on 22 days in January 2008. Source: Kristian Sparre Andersen and Irene Madsen (2009), A quantitative assessment of international best practice for business continuity arrangements in payment systems, in Harry Leinonen (ed.), Proceedings from the Bank of Finland Payment and Settlement System Seminars 2007-2008, Bank of Finland Scientific monographs E:42, 2009 (forthcoming).

Although most of the daily liquidity requirement that the participants cover via Kronos can be met by settling a limited number of transactions, it would not be prudent to rely on contingency procedures to mitigate the impact of a system failure. If the system is down for a full day or more, settlement of payments in contingency mode and the subsequent "tidying up" (settlement of postponed payments) will involve a considerable manual effort on the part of Danmarks Nationalbank and Kronos participants. It is therefore important that normal settlement of payments can be resumed within a few hours following a failure.

For Kronos, 75-90 per cent of all payments during a day are settled within 4 hours and before 1 p.m. (2½ hours before the system closes).

Since a day's planned payments can easily be processed within a very short interval (1-2 hours), system failure within the peak 4 hours can be handled by settling time-critical payments and large-volume payments using the contingency procedure while the system is down and postponing other payments until normal operation has been resumed. The combined effect of ample system capacity and the modest number of transactions in the last few opening hours, cf. Chart 56, imply a timeframe of 4 hours, which is long by international standards, for resumption of normal settlement.⁴

Effect on payment settlement of Kronos failures of short duration	chart 56
Note: The left-hand chart has been compiled on the basis of interbank payments settled on 22 days in January 2008. The right-hand chart shows the time profile for settlement of payments on 16 November 2006, when Kronos was down for 6½ hours, compared with the normal time profile. Source: Kristian Sparre Andersen and Irene Madsen (2009), A quantitative assessment of international best practice for business continuity arrangements in payment systems, in Harry Leinonen (ed.), Proceedings from the Bank of Finland Payment and Settlement System Seminars 2007-2008, Bank of Finland Scientific monographs E:42, 2009 (forthcoming).

Foreign-exchange settlement

Third-party participation in CLS, the international settlement system for foreign-exchange transactions, has grown substantially. The number of Danish foreign-exchange dealers that joined CLS as third-party participants in 2007 and 2008 was greater than at any other time since the system was established in 2002. A major contributing factor is that a number of dealers – including Danish banks – that have not been connected to CLS have found it difficult to trade foreign exchange during the financial crisis. The reason is that transactions settled outside CLS typically involve settlement risk for the parties, cf. Box 21.

In order for a foreign-exchange transaction to be settled via CLS, both parties must be connected to the system, either directly as members or indirectly as third-party participants, and therefore it has become a challenge for foreign-exchange dealers not connected to CLS to find trading partners who are willing to take on the settlement risk during the financial crisis. CLS is currently the only global foreign-exchange settlement system that eliminates settlement risk.

The increasing number of third-party participants, primarily small foreign-exchange dealers, affects e.g. the number and value of transactions settled via CLS, as illustrated in Chart 57. The average value of transactions settled via CLS has thus declined.

Number and value of foreign-exchange transactions settled in CLS	chart 57
Note: Value of foreign-exchange transactions in the current 17 CLS currencies converted into US dollars. Source: CLS Bank

Moreover, the number of transactions settled via CLS soared during September-October 2008 – when the financial market turmoil culminated following the collapse of Lehman Brothers. This episode highlights the need for central banks whose currencies are settled in CLS regularly to oversee and ensure that CLS' IT system capacity is dimensioned to allow CLS to process a very high number of foreign-exchange transactions in periods of financial turmoil.

The Federal Reserve acts as lead overseer, coordinating CLS oversight by the central banks with CLS currencies. The framework for coordinated oversight is laid down in a protocol.

Retail payments

Payments settled in the Sumclearing, the Danish Bankers Association's retail settlement system, increased by 2 per cent in 2008, to a total of kr. 5,876 billion, the lowest rate of increase in several years, cf. Chart 58. This is primarily attributable to a slowdown in credit transfers, which rose by only 1 per cent in 2008 compared with 10 per cent in the preceding two years. As regards card transactions, use of foreign cards continues to rise more rapidly than use of the Dankort, although foreign cards still account for only a small share – 15 per cent in 2008 – of the aggregate card turnover.

Sums settled in the Sumclearing	chart 58
Source: Danish Bankers Association.

Low liquidity risk in the Sumclearing
The Sumclearing is a multilateral net settlement system in which retail payments on behalf of customers are settled during the night. Netting of payments between participants prior to each settlement meant that in 2008 the cash sums exchanged constituted only 24 per cent of the underlying gross payments, cf. Table 8 in the Tables section.⁵

Compared with Kronos, Sumclearing settlement involves relatively modest liquidity risk on most days. However, the Sumclearing plays a key role in the banking institutions' liquidity management, as liquidity received in the Sumclearing has often been reserved for other payment obligations the same day. On certain days with extensive liquidity redistribution among participants, it is therefore important that Sumclearing settlement is not delayed.⁶

Improved Sumclearing operations
In recent years, cash settlement in the Sumclearing has not been fully satisfactory as it has often been impossible to complete night-time settlement in a timely manner.⁷ This was the case on 21 days in both 2007 and 2008 because some banking institutions had not reserved sufficient liquidity beforehand to meet their payment obligations in the system. As of 1 January 2009, the Danish Bankers Association has therefore increased the fee for postponement due to insufficient liquidity reservation considerably and emphasised the importance of settlement discipline to participants. These measures seem to have had the desired effect as only two postponements were seen in the first four months of 2009.

In 2007, one incident experienced by a participant meant that a very substantial number of transactions were not settled on time; in fact, they were not finalised until several days later. This episode led to the establishment of a special contingency procedure to address such incidents. Moreover, the Danish Bankers Association has introduced mandatory control of credit transactions so that they do not exceed an upper limit set by the participants. This control is expected to be implemented by all participants in mid-2009. Finally, PBS – on behalf of the participants – has developed an enhanced solution for handling reversal transactions that will facilitate the process of "tidying up" after such incidents in future. Implementation of this solution has begun and is expected to be completed in early 2010.

Settlement times for payment transfers
Retail payment solutions are undergoing rapid development. In many European countries it is now possible to execute and settle retail payments intraday, and in several countries – including the Netherlands and the UK – such payments can be completed almost in real time. In addition, the retail payment infrastructures in countries such as Belgium, Finland and the Netherlands permit same-day settlement of all retail payment instruments.

Against that background, the Minister for Economic and Business Affairs has asked Danmarks Nationalbank to chair a working group with representatives from relevant stakeholders to analyse settlement times in Denmark. Shorter settlement times would also reduce the participants' risks in connection with settlement of retail payments and support the use of new payment instruments.

Sector agreement on bank transfers via Danmarks Nationalbank on behalf of customers
The need to look into settlement times was highlighted in May 2008, when a foreign financial enterprise contacted Danmarks Nationalbank concerning execution and settlement of retail payments. The enterprise found it inexpedient that, apparently, it was not able to make payments between accounts at two Danish banks with the same value date at both the remitting and receiving bank.

A sector agreement on "good value in connection with group transfers at Danmarks Nationalbank" is aimed at ensuring that customers need not suffer value-date losses on transfer of kr. 5 million or more via current accounts at Danmarks Nationalbank.

When the foreign financial enterprise contacted Danmarks Nation albank, the Danish Bankers Association became aware that a few members had misinterpreted the agreement to the effect that it was not possible to execute and settle payment transfers below kr. 5 million via current accounts at Danmarks Nationalbank without value-date loss. After having been contacted by Danmarks Nationalbank, the Danish Bankers Association therefore sent out a letter to the managements of its member banks, stipulating that the agreement did not prevent customers from negotiating arrangements whereby payments below kr. 5 million could be executed and settled with the same value date.

New payment instruments
In many countries – including Denmark – considerable development and innovation is taking place within payment instruments. A case in point is payments initiated by mobile phone, i.e. mobile payments.

Technological advances in recent years have transformed mobile phones into efficient payment instruments and in many countries mobile phones are now used as direct replacements for payment cards and cash.

This innovation has also reached Denmark. Today, it is possible to buy e.g. tickets for certain types of public transport via a mobile phone. The price payable is then added to the user's next phone bill.

In several European countries, including France, projects have been launched to promote the use of mobile phones in retail trade. With Near Field Communication technology, the mobile phone is swiped past a terminal and payment is effected immediately. The settlement procedures are the same as for traditional card systems.

Although the volume of mobile payments is Denmark is still modest, mobile phones could potentially become an important payment instrument for consumers.

New act to comprise all types of retail payments
On 28 January, the Minister for Economic and Business Affairs presented a Payment Services Bill. The Bill is currently being processed by the Folketing (Danish parliament).

The aim is to lay down uniform rules for all payment services, both those that are comprised by the existing Act on Certain Means of Payment and those that are not, e.g. credit transfers.

If the Bill is passed, it will implement the EU Payment Services Directive, which was adopted in 2007 and must be transposed into national legislation by 1 November 2009. The Directive is the legal foundation for the efforts by European banks to establish a Single Euro Payments Area, SEPA.

Securities settlement

The value of trading transactions in the VP settlement increased by 1.7 per cent in 2008, to kr. 23,555 billion, cf. Chart 59, on account of an increase by 2.8 per cent in the bond trading volume. In contrast, the value of equity transactions fell by 6.5 per cent during 2008, to kr. 2,701 billion as a result of the lower general price level. Due to higher activity in the Danish stock market, the number of VP settlement transactions set a new record in 2008, reaching 17.2 million, which was an increase of 4.5 per cent on 2007. The number of equity trades rose by 5.2 per cent to 15.9 million, while the number of bond transactions fell by 3.1 per cent.

Equities and bonds settled in the VP settlement	chart 59
Note: Exclusive of transactions denominated and settled in euro. Source: VP Securities.

High operational stability in VP Settlement
The rising number of trades in 2008 meant that at times the VP settlement had to process extraordinarily large numbers of transactions, up to five times the normal volume of securities. During a few spells, the subsequent cash settlement on participants' accounts was therefore eight times as high as usual. In spite of these few peak days, settlement was very stable, as in previous years, and VP Securities got through 2008 without major disruptions or delays. On one day in early 2009, VP settlement was, however, affected by IT problems experienced by a large participant, which led to delays and postponements.

Participants' handling of securities settlement has improved slightly
For a number of years, the settlement rate, i.e. the percentage of securities transactions settled on the agreed date, has been falling marginally, cf. Chart 60, particularly for equities. The main reason is an increasing number of foreign participants who have not met their delivery obligations. 

Settlement rates for securities transactions in the VP settlement	chart 60
Source: VP Securities.

VP has monitored developments and in mid-August 2008 introduced a sanctions scheme at the request of the financial sector. The first step has been to contact participants who do not meet their deadlines. Actual fees are expected to be introduced during 2009.

The settlement rate for equity transactions improved slightly after the scheme was introduced, rising by 3.2 percentage points from 94.4 per cent in August to 97.6 per cent in December 2008, but subsequently fell back a little in early 2009. The target is that 98 per cent of all transactions should be settled on time, equivalent to the European benchmark, and equivalent to the percentage for bond trading.

Timely settlement of the individual blocks
VP settlement is divided into two separate settlement procedures, for securities and periodic payments (interest, dividends, etc.) respectively, each comprising a number of settlement blocks. In addition, transactions can be settled in real time.

In general, the individual blocks are settled in a timely manner with very few delays. However, a review of all delays in VP settlement shows that the block for settlement of liquidity in euro against kroner, VP33, has been delayed more frequently in recent years than it used to be, cf. Table 6. All delays in 2008 were attributable to one or more participants having reserved euro liquidity too late. This development continued into the 1st quarter of 2009.

CCP for clearing of trades concluded at NASDAQ OMX
On 16 October 2008, NASDAQ OMX announced the introduction of a central counterparty (CCP) for clearing of equity trades concluded in the Nordic stock markets. Since March 2009, participants have thus been able to settle their equity trades through a CCP, and from 9 October 2009 CCP clearing will be mandatory for equity trades. A CCP acts as an intermediary by stepping in after the conclusion of the trade and taking over the counterparty obligations vis-à-vis both the buyer and the seller. In this way, the CCP assumes the settlement risk (counterparty risk) on the trade.

The rapid introduction of a CCP reflects the fact that CCP clearing of trades in Danish equities already exists on various trading platforms that have emerged after the implementation of the Markets in Financial Instruments Directive (MiFID). This makes it more difficult for the Danish market to maintain a non-standard settlement model. In the EU, CCP clearing is the standard for all large stock markets, and the crisis has amplified the wish to trade via a central counterparty rather than a number of more or less familiar counterparties.

As part of its oversight of Danish payment and settlement systems and to follow up the IMF's assessment thereof in 2005-06, Danmarks Nationalbank performed an analysis of the pros and cons of introducing a central counterparty in the Danish securities market⁸ . The conclusion was, that the need for a central counterparty seemed to be limited as regards spot trading. However, it was recommended that an investigation be performed of whether the introduction of a CCP would be expedient in the repo market, where the risk is greater and the advantages of a CCP in terms of administration and capital adequacy are more pronounced. The recently introduced CCP clearing comprises NASDAQ OMX Copenhagen's Large Cap equity market. Danmarks Nationalbank therefore recommends that market participants investigate the potential advantages of extending CCP clearing to include not only the equity market, but also the repo market.

The central counterparties that will undertake CCP clearing in the Danish equity market are based abroad. To some extent they already clear trades in Danish equities concluded on existing trading platforms, so equity trades on these platforms can be included in the same CCP clearing as trades on NASDAQ OMX. Danmarks Nationalbank and the Danish Financial Supervisory Authority are therefore working with the authorities of the jurisdictions where these CCPs are based or are active to prepare a memorandum of understanding (MoU) on oversight in accordance with the international standards for CCP activities.

VP Lux S.à r.l.
VP Securities (VP) has established a central securities depository in Luxembourg. The main aim is to give Danish banks and mortgage-credit institutes access to issue euro-denominated bonds in the euro area so that these bonds can be pledged as collateral to the Eurosystem with a view to obtaining euro liquidity – a need that has increased strongly as a result of the financial crisis.

For securities to be pledged as collateral to the Eurosystem, they must be on the ECB's list of eligible assets. An application to this effect must be sent to the central bank of the country where the securities are quoted. As most of the securities issued in VP Lux are quoted on NASDAQ OMX Copenhagen, Danmarks Nationalbank is responsible for accepting them. Danmarks Nationalbank thus ensures that the ECB's eligibility requirements are met, and if so Danmarks Nationalbank transfers the relevant securities data to the ECB's list, after which the securities can be pledged to the Eurosystem.

At end-2008, total bond issuance in VP had a market value of kr. 3,372 billion, of which approximately 5 per cent was denominated in euro, equivalent to approximately kr. 168 billion (23 billion euro). Around half of the bonds are short-term mortgage-credit bonds to finance adjustable-rate loans, the majority of which are refinanced at the end of each year. In connection with refinancing at end-2008 new issuance took place in VP Lux, whose outstanding issuance now totals approximately 14 billion euro.

Securities issued in VP Lux can also be pledged to Danmarks Nationalbank as collateral for krone liquidity as well as intraday liquidity in euro, since they can be transferred to VP via a link from VP Lux and can then be pledged in accordance with Danmarks Nationalbank's existing procedures.

The Luxembourg authorities supervise and oversee VP Lux. As operation of VP Lux has on the whole been outsourced to VP, Danmarks Nationalbank and Banque Centrale du Luxembourg have concluded an MoU on oversight of VP Lux. The MoU defines the framework for cooperation between the two central banks in terms of oversight of securities settlement with a view to ensuring effectiveness and stability in accordance with international recommendations.