Danmarks Nationalbank's Policy for Oversight of the Danish Financial Infrastructure

Danmarks Nationalbank oversees the financial infrastructure in Denmark in order to promote safe and efficient settlement of payments, securities trades, etc. Oversight is part of Danmarks Nationalbank's contribution to the stability of the Danish financial system.

The focus of Danmarks Nationalbank's oversight is on three systems that together comprise the core of the Danish financial infrastructure: the payment systems Kronos and the Sumclearing, and the VP Settlement for clearing and settlement of securities. Primarily incidents in this part of the infrastructure are assessed to have a potential widespread economic impact that could ultimately jeopardise financial stability in Denmark.

Oversight is based on international standards for respectively payment and securities settlement systems. These standards lay down the overall requirements that a well-functioning system should fulfil in relation to risk management and efficiency.

Danmarks Nationalbank has prepared its oversight policy in accordance with the general principles for oversight by central banks. In addition, the management of oversight is conducted within the scope laid down in the Danmarks Nationalbank Act and the Securities Trading Act.

Oversight of the financial infrastructure affects many areas, including the remits of other Danish authorities. This applies particularly to the Danish Financial Supervisory Authority, with which the cooperation has been regulated by a Memorandum of Understanding since 2001.

INTERNATIONAL STANDARDS FOR OVERSIGHT

Since the late 1980s international organisations have issued standards in order to contribute to safe and efficient payment and settlement systems. In most countries, oversight of the financial infrastructure by central banks is now based on these common standards, cf. Box 4. This also applies to oversight by Danmarks Nationalbank.

INTERNATIONAL STANDARDS FOR FINANCIAL INFRASTRUCTURES

Box 4

The international standards for financial infrastructures determine the overall requirements to be met by a well-functioning system in relation to risk management and efficiency.

With regard to risk management in a system, it must comprise and limit the following four types of risk:

Credit risk, i.e. the risk of financial loss as a consequence of a counterparty's inability to meet its obligations in connection with the settlement of payments, securities transactions, etc. Credit risk depends on the value of the assets that are being settled but have not yet been received, the quality of the collateral received and the credit rating of the counterparty. Credit risk increases with the maturity of the exposure.
Liquidity risk, i.e. the risk of incurring a loss because a payment is not received at the expected time. The loss can occur if the liquidity has already been deployed and liquidity therefore has to be obtained from another source at short notice. This often entails extraordinary costs, e.g. a higher interest rate.
Legal risk, i.e. the risk of suffering a loss as a consequence of unforeseen interpretations of the systems' contractual basis or the legislation on which the contracts between the parties are based, e.g. in connection with a court ruling.
Operational risk, i.e. the risk of economic loss resulting from inadequate or failed internal processes and systems, human errors, or from external events such as natural disasters, terrorism, etc. Operational risks entail loss of tangible (hardware) and intangible (software) assets, or unexpected credit and liquidity exposures.

Likewise, the efficiency with which a system settles financial transactions can be described and assessed on the basis of:

Costs, which are a key element in the assessment of whether the system is efficient for the participants. Besides the cost level, the assessment comprises the financing of the costs, including whether the fee structure is appropriate and transparent.
Applicability, i.e. whether the services offered to the participants in connection with settlement meet the participants' business needs. In addition, the applicability of the system depends on whether the services are easy to fit into the participants' own systems, so that the indirect costs of using the system are kept as low as possible.

In parallel with the issue of standards, principles have also been developed for the central banks' oversight of the systems' compliance with international standards. These principles were clarified and elaborated on in 2005, and formulated in five general principles in the report Central Bank Oversight of Payment and Settlement Systems.^[1] The principles are listed in Box 5. The principles in the report are generalised so as to be applicable to all types of payment and settlement systems. Danmarks Nationalbank's policy for oversight has been prepared in accordance with these principles.

GENERAL PRINCIPLES FOR OVERSIGHT

Box 5

A. Transparency: Central banks should set out publicly their oversight policies, including the policy requirements or standards for systems and the criteria for determining which systems these apply to.

B. International standards: Central banks should adopt, where relevant, internationally recognised standards for payment and settlement systems.

C. Effective powers and capacity: Central banks should have the powers and capacity to carry out their oversight responsibilities effectively.

D. Consistency: Oversight standards should be applied consistently to comparable payment and settlement systems, including systems operated by the central bank.

E. Cooperation: Central banks, in promoting the safety and efficiency of payment and settlement systems, should cooperate with other relevant central banks and authorities.

In addition, central banks that participate in the oversight of cross-border systems or systems that settle in several currencies should observe the principles of international cooperative oversight.¹

¹See Report of the Committee on Interbank Netting Schemes of the Central Banks of the Group of Ten Countries (Lamfalussy Report), BIS, 1990. The report can be downloaded from www.bis.org/cpss.

THE FINANCIAL INFRASTRUCTURE IN DENMARK

In a modern economy, the settlement of payments, securities, etc. is concentrated on a few large systems, via which very large amounts are settled every year. This is also the case in Denmark, where the following three systems are at the core of the financial infrastructure:

Kronos, Danmarks Nationalbank's real-time gross settlement system^[2], which is used for large, time-critical payments in kroner between banking institutions, etc., monetary-policy transactions, net payments concerning the VP Settlement, the Sumclearing and the international currency-settlement system CLS, as well as the pledging of collateral when using the Scandinavian Cash Pool^[3].
The VP Settlement, which is VP Securities Services' multilateral net settlement system1 for clearing and settlement of securities transactions, etc.
The Sumclearing, which is the Danish Bankers Association's multilateral net settlement system for settlement of retail payments, e.g. Dankort (debit card) transactions and Betalingsservice (direct debit).

In addition, transactions in Danish kroner are to a large extent settled in the international multilateral clearing and settlement system for foreign-exchange transactions, CLS^[4]. Another system of major importance to the Danish financial sector is the trans-European payment system, Target, which is used for settlement of payments in euro.

The value of transactions in these systems far exceeds Denmark's gross domestic product, cf. Table 4.

TRANSACTIONS IN DANISH SYSTEMS			Table 4
Kr. billion	2004	2005	2006
Kronos	53,040	60,633	66,089
VP-settlement	27,951	25,198	23,581
Sumclearing	4,421	5,027	5,349
CLS (krone-denominated payments)	19,812	31,333	47,596
TARGET (payments by Danish participants)	24,362	28,123	23,520
Gross domestic product	1,459	1,552	1,638
Source: VP Securities Services, PBS, Statistics Denmark and Danmarks Nationalbank.

Danmarks Nationalbank's oversight of the financial infrastructure focuses first of all on the three Danish systems. The reason is that primarily incidents in these systems are assessed to have a potential widespread economic impact that could ultimately jeopardise financial stability in Denmark, cf. Box 6. Danmarks Nationalbank participates in the oversight of CLS and Target, cf. the description below of Danmarks Nationalbank's cooperation with other authorities and central banks in relation to oversight.

CONSEQUENCES OF INCIDENTS IN PAYMENT AND SETTLEMENT SYSTEMS

Box 6

Modern payment and settlement systems are characterised by a high degree of stability due to the extensive measures taken to enhance system security. Consequently, the probability of a prolonged system disruption is very small.

If disruption nevertheless occurs – e.g. due to the failure of a key system or insufficient liquidity among participants – the consequences may be considerable.¹ The reason is that large, unforeseen outstandings may build up rapidly if transactions are not settled as planned.

Generally, the consequences of a disruption in the settlement of payments, securities transactions, etc. may be grouped under two headings:

The disruption may have a widespread economic impact by interrupting the settlement of payments and financial transactions – e.g. due to delays or because transactions are not executed as expected.
In a worst-case scenario, the disruption may jeopardise financial stability – if the inability of one or more banking institutions to honour their obligations triggers a chain reaction whereby other banking institutions cannot meet their obligations either.

Systems are referred to as systemically important if a system incident could have such consequences.

¹This is clearly illustrated by incidents in payment and settlement systems worldwide within the last few decades. A description of some of these incidents can be found in Payment Systems in Denmark, Danmarks Nationalbank, 2005, Chapter 1.

Payments and financial transactions outside the systems
In practice, the value of payments and financial transactions in Denmark is even higher than Table 4 shows. This applies particularly to payments and financial transactions where one of the parties is a non-resident. These transactions may, for example, be executed via foreign payment and settlement systems or via correspondent banks. Since such transactions are, however, less concentrated on a few systems, and are not in Danish kroner, the consequences of a possible failure of one of these systems for the Danish financial sector and economy will in normal circumstances be far less pronounced.^[5]

Finally, many transactions, primarily retail payments, are internalised, i.e. funds are transferred between customers (accounts) in the same banking institution. In a financial sector such as Denmark's, which is dominated by a few large institutions, these transactions account for a considerable proportion of all transactions.^[6]

THE STATUTORY BASIS FOR DANMARKS NATIONALBANK'S OVERSIGHT

Oversight by Danmarks Nationalbank must comprise all elements that are of major significance to settlement of payments in Denmark, cf. section 1 of the Danmarks Nationalbank Act from 1936. Oversight is also conducted on the basis of the powers vested in Danmarks Nationalbank since 1 March 2006 pursuant to the Securities Trading Act.

In practice, however, oversight is seldom undertaken with direct reference to the powers under the Securities Trading Act. The reason is that the aim of Danmarks Nationalbank's oversight is typically to contribute to preparing the financial infrastructure for future challenges, so that problems in relation to the safety and efficiency of the systems are avoided as far as possible. In the experience of Danmarks Nationalbank, this is best achieved through ongoing dialogue with system owners, operators, participants and other stakeholders.

Oversight whereby central banks seek to implement system adjustments in a dialogue with stakeholders is internationally often referred to as moral suasion.

The Danmarks Nationalbank Act
Danmarks Nationalbank's role in relation to payment and settlement systems has historically been defined in section 1 of the Danmarks Nationalbank Act, which states that the role of the bank is to " maintain a safe and secure currency system in Denmark, and to facilitate and regulate the traffic in money and the extension of credit" . This section empowers Danmarks Nationalbank to pursue an objective of promoting safe and efficient payment and settlement systems in Denmark, including by overseeing the systems.

Section 1 of the Danmarks Nationalbank Act comprises a number of regulatory tasks that are not directed at any particular recipient. In relation to oversight of a payment and settlement system, this has in practice been interpreted as being aimed at the system owner and the system's management. In principle, requests for information about the system must therefore be addressed to these persons. Oversight is not the only means by which Danmarks Nationalbank can fulfil its objective in relation to payment and settlement systems, cf. Box 7.

DANMARKS NATIONALBANK'S ROLE IN PAYMENTS IN DENMARK¹

Box 7

Danmarks Nationalbank has been actively involved in the settlement of payments in Denmark for many years. Since the emergence of bank-based settlement of payments in Denmark in the mid-19th century, Danmarks Nationalbank has been at the hub of the settlement of payments between Danish banking institutions, both directly and as the settlement bank for payment and settlement systems outside Danmarks Nationalbank. Danmarks Nationalbank's initiatives to promote safe and efficient settlement of payments in Denmark have therefore often included adjustment of the terms and conditions for settlement of payments via accounts at Danmarks Nationalbank.

Likewise, Danmarks Nationalbank has been active in the development of the financial infrastructure in Denmark. In 1927, Danmarks Nationalbank thus participated in the establishment of a retail payment system in Denmark (the Checkclearing, a forerunner of the present Sumclearing). Danmarks Nationalbank also participated in the establishment of VP Securities Services in connection with the dematerialisation of Danish bonds in 1983. In both cases, the aim was to rationalise clearing and settlement – thereby enhancing safety, too.

The series of adjustments to Danmarks Nationalbank's monetary-policy instruments in the 1990s was also aimed at facilitating transactions in the interbank money market (e.g. by developing a repo market in Danish kroner) and to minimise the risk on settlement of payments (e.g. by requiring collateral on the settlement of payments on the basis of credit extended by Danmarks Nationalbank).

¹See Payment Systems in Denmark, Danmarks Nationalbank, 2005.

The objectives stated in section 1 of the Danmarks Nationalbank Act are also one of the reasons that Danmarks Nationalbank – like most other central banks – operates a payment system (Kronos). The role as both overseer and owner of a payment system requires special attention to how the central bank handles its oversight tasks, cf. Box 5 (principle D). This is reflected in Danmarks Nationalbank's general management and organisation of the oversight of the Danish systems, cf. below.

The Securities Trading Act
Since 1 March 2006, Danmarks Nationalbank's powers to oversee payment systems have been defined in the Securities Trading Act. Pursuant to section 86 (2), Danmarks Nationalbank must oversee the payment systems that it deems to be of major significance to the settlement of payments in Denmark or the achievement of Danmarks Nationalbank's monetary-policy transactions. The 2006 amendment to the Securities Trading Act also regulates the division of work between Danmarks Nationalbank and the Danish Financial Supervisory Authority, in that Danmarks Nationalbank has taken over a number of regulatory tasks from the Danish Financial Supervisory Authority in relation to the systems that are subject to oversight, cf. section 57 a (7). For registered systems not subject to oversight by Danmarks Nationalbank, these tasks are still undertaken by the Danish Financial Supervisory Authority, cf. section 86 (1).

The amendment to the Securities Trading Act has not changed the purpose of the oversight. The explanatory notes to the Bill presented to the Folketing (Parliament) thus state that oversight is still based on the Danmarks Nationalbank Act and international standards.

The payment systems that are subject to oversight by Danmarks Nationalbank are listed in an executive order issued by the Danish Financial Supervisory Authority, cf. section 86 (3).^[7] Oversight takes place on the basis of information requested in accordance with the provisions of section 87.

Section 93 (2) empowers Danmarks Nationalbank to order the owner and management of a payment system to supply the information that Danmarks Nationalbank finds necessary for its oversight of the system, and to make the necessary adjustments so that the system complies with section 86 (2). Failure to do so is a criminal offence.

In addition, section 95 empowers Danmarks Nationalbank to impose default fines on the persons responsible for a systemically important payment system in the event that an order issued in connection with oversight is not observed. Danmarks Nationalbank has never previously had access to this remedy. The Danish Financial Supervisory Authority has similar powers in relation to the payment systems that it supervises.

Unlike the activities of the Danish Financial Supervisory Authority, oversight by Danmarks Nationalbank is not subject to the authority of the Danish Securities Council. This difference is attributable to the independence of Danmarks Nationalbank. Likewise, Danmarks Nationalbank's oversight decisions cannot be appealed to the Company Appeals Board. Should a payment system find it necessary to have a decision made by Danmarks Nationalbank in its oversight capacity reversed, the case must be referred to a court of law.

Danmarks Nationalbank's oversight of the VP Settlement is not explicitly regulated by the Securities Trading Act. Since oversight of this system takes place in cooperation with the Danish Financial Supervisory Authority, it will, however, be possible to apply similar provisions to this system in accordance with the powers vested in the Danish Financial Supervisory Authority. The explanatory notes to the Securities Trading Act acknowledge Danmarks Nationalbank's oversight of other systems than payment systems, including securities settlement systems such as the VP Settlement.

DANMARKS NATIONALBANK'S ADMINISTRATION OF ITS OVERSIGHT

Oversight by Danmarks Nationalbank is a regulatory task undertaken in accordance with Danish administrative practice. This applies irrespective of whether the oversight is based solely on section 1 of the Danmarks Nationalbank Act or the powers defined in the Securities Trading Act.

Framework for undertaking oversight
Danmarks Nationalbank obtains the information it requires in order to oversee payment and settlement systems, including confidential information. Such information is protected by the rules of confidentiality to which Danmarks Nationalbank's employees are subject, i.e. sections 27-31 of the Public Administration Act and section 152 of the Danish Penal Code.

Information obtained in connection with oversight may be passed on to another administrative authority if it can be assumed that the information will be of major significance to the activities of this authority, or to a decision the authority is to take.

All decisions by Danmarks Nationalbank in its oversight capacity will be given in writing, stating the reasons. In this connection an account will be given of all significant facts and circumstances of relevance to the decision, including the legal provisions and administrative assessments on which it is based. In connection with oversight it is of particular relevance how international standards have been implemented in a decision, cf. below.

Before a decision in relation to a system is taken, the management of the system in question will always be given the opportunity to submit a statement.

The implementation of oversight by Danmarks Nationalbank in practice is described in Box 8.

DANMARKS NATIONALBANK'S OVERSIGHT IN PRACTICE

Box 8

Danmarks Nationalbank's oversight of payment and settlement systems can overall be split into three tasks.

The first task is to monitor the development in the systems by collecting information. There are multiple sources of information, including:

The statutory basis for the systems
Agreements between system owners, operators, participants and settlement banks
System descriptions, user guidelines and procedures
Contingency plans
Outcome of security analyses, scenario analyses and stress tests
Statistics of transaction values and volumes and system performance
Management reporting and accounts, including audit reports.

The second task is to assess whether the systems comply with international standards. The assessment of whether the functioning of the systems is satisfactory will not be limited to compliance with international standards. If specific circumstances are of major significance to the functioning of the systems, these circumstances will be taken into account in Danmarks Nationalbank's oversight, even if they are not described in international standards.

The third task is to induce changes to the systems if such changes are considered necessary. Depending on the circumstances and the statutory basis, Danmarks Nationalbank may bring about changes in several ways, including by:

Dialogue with the stakeholders to promote adjustments to the systems and the financial infrastructure that Danmarks Nationalbank finds desirable.
Publishing assessment reports on the systems with recommendations for improvements.
Indicating its position on payment and settlement services and the financial infrastructure in Denmark in articles and publications.¹
Cooperation with other authorities and central banks. This may e.g. be necessary if the change relates to circumstances within the remit of other authorities, e.g. supervisory or competition authorities.
Issuing orders – when legally empowered to do so – concerning system improvements, possibly supplemented with fines.

¹An example of this can be found in Torben Nielsen, Risks on Settlement of Large Payments, Danmarks Nationalbank, Monetary Review, 1st Quarter 2005.

Organisation of Danmarks Nationalbank's oversight
The basic administrative principles concerning the impartiality of Danish authorities are of special significance in relation to oversight of the financial infrastructure since Danmarks Nationalbank itself operates the Kronos payment system.

The operation of Kronos is part of Danmarks Nationalbank's fulfilment of its overall objectives, as stated in section 1 of the Danmarks Nationalbank Act, including promoting safe and efficient payment and settlement systems. In this connection, great importance is attached to consistency in the oversight of the Danish systems, cf. Box 5 (principle D), i.e. that oversight of Kronos and the privately owned systems, the VP Settlement and the Sumclearing, takes place in accordance with the administrative principles of equal treatment and proportionality.

In terms of the practical planning of the oversight tasks, including observation of the general principles for oversight, Danmarks Nationalbank has chosen to segregate the oversight function from the development and operation of Kronos. The aim is to prevent irrelevant considerations from influencing the decisions made by the staff of the oversight function in relation to Kronos.

As regards oversight of Kronos, importance is also attached to enabling participants to give their assessment of whether the system is sufficiently safe and efficient. This is based on a long-standing tradition not to implement major system amendments until after consultation with the participants has taken place.

The scope of Danmarks Nationalbank's oversight
As described above, oversight of the financial infrastructure in Denmark is concentrated on the three systemically important payment and settlement systems, Kronos, the VP Settlement and the Sumclearing. For these systems, it is necessary to clarify the limits to the oversight with a view to specifying the responsibility incurred by Danmarks Nationalbank in connection with oversight. This raises three issues:

Oversight must include all elements of significance to settlement via the systems. The extent thereof – and thus the scope of the information requested by Danmarks Nationalbank – will depend on how the systems are delimited.
Danmarks Nationalbank defines a payment system as " the total set of payment instruments, procedures and IT systems used in the settlement of payments" . Correspondingly, a securities settlement system is defined as " the total set of institutional arrangements used for confirmation, clearing and settlement of securities transactions and provision of custody services for securities".
Danmarks Nationalbank's oversight is normally directed at those responsible for the systems (system owners). This raises special issues if settlement has been outsourced to a service provider.
Outsourcing of services does not in any way limit the system owner's responsibility for the system, so in that situation Danmarks Nationalbank's oversight takes the system owner's contracts with the service provider as the point of departure. If these contracts do not make it possible for Danmarks Nationalbank to determine whether the system is safe and efficient, the system owner will be requested to adjust the contracts to the extent required.
Correspondingly, Danmarks Nationalbank's oversight cannot be directed at subcontractors to the systems.

If the circumstances of a subcontractor (e.g. a telecom or electricity company) constitute a weakness for the system's safety and efficiency, and the system owner has done everything it can to remedy the weaknesses, Danmarks Nationalbank may, where relevant, involve other authorities that have the necessary powers in relation to the subcontractors.

Translation of international standards into system requirements
An important element of Danmarks Nationalbank's oversight is to assess whether the Danish systems comply with international standards in respect of risk management and efficiency, as described in Box 4. For Kronos and the Sumclearing, such assessments are based on the Core Principles for Systemically Important Payment Systems, while the VP Settlement is assessed in relation to the Recommendations for Securities Settlement Systems.^[8]

If a system does not fully comply with a specific standard, Danmarks Nationalbank may decide that this must be remedied within a given time horizon. To the extent that a decision is not fully in favour of a system, the grounds will be stated, cf. section 22 of the Public Administration Act. The grounds must clearly state what is required in order to rectify the matter, cf. section 24 of the Act.

This entails that the international standards must be adequately translated into specific, measurable requirements, since in many aspects the standards are formulated as overall principles that cannot immediately be applied to the Danish systems. One reason for this is that the standards are aimed at a wide range of financial infrastructures and system designs. In addition, the international standards have in many respects been formulated to allow for special circumstances, including country-specific circumstances. There may thus be requirements that should be fulfilled by one system, but not necessarily by another system.

The translation of standards is e.g. based on the extensive notes provided in connection with the publication of the standards. In addition, more specialised standards will be incorporated in a number of areas.

In relation to securities settlement systems, the translation of the standards into specific requirements has already taken place to a great extent. The Recommendations for Securities Settlement Systems have thus been supplemented with an Assessment Methodology that elaborates on and amplifies the standards with which safe and efficient securities settlement systems should comply. The Assessment Methodology also qualifies the degree of non-compliance in the event that a system does not comply with all of the requirements.

The scale used by Danmarks Nationalbank in its assessment of the compliance of the Danish systems with international standards is described in Box 9.

SCALE OF ASSESSMENT FOR OBSERVANCE OF INTERNATIONAL STANDARDS

Box 9

The assessment of whether the systems comply with international standards is based on the following scale:

Observed: Only less significant issues and shortcomings, if any, found. Danmarks Nationalbank will appropriately follow up on the issues found, e.g. in connection with the ongoing dialogue with the system owner.
Broadly observed: The issues and shortcomings found can only jeopardise financial stability to a limited extent. Nevertheless, the issues and shortcomings are deemed to be so significant that the system owner is recommended to find a solution. No binding deadline is set for implementation of the solution. Danmarks Nationalbank will follow up on the recommendation from time to time so as to ensure that the situation does not deteriorate.
Partly observed: Serious issues and shortcomings found that may jeopardise financial stability and should therefore be remedied. If this is not done, Danmarks Nationalbank can issue an order to a payment system, cf. its power under the Securities Trading Act. A deadline is set for implementation of a solution in cooperation between Danmarks Nationalbank and the system owner. Close follow-up on the part of Danmarks Nationalbank, often including regular status reports by the system owner.
Non-observed: Very serious issues and shortcomings found that may to an unacceptable degree jeopardise financial stability and must therefore be remedied as soon as possible. If this is not done, Danmarks Nationalbank will issue an order concerning the payment system, cf. its power under the Securities Trading Act. The order will include a tight deadline for the system owner's implementation of a solution. Very close follow-up, including frequent status reporting.

Trade-off between safety and efficiency
A key issue in connection with Danmarks Nationalbank's oversight is to ensure a suitable trade-off between respectively the safety and the efficiency of the Danish payment and settlement systems. The international standards for payment and settlement systems thus state that a significant element in the design of the systems should be not only to ensure low risk, but also to provide a high degree of efficiency, cf. Box 4.

In many cases, ensuring efficiency and limiting risks are complementary objectives since the increased safety of a system only contributes to reducing risk if the systems are used as envisaged. This will only be the case if the participants perceive the systems as efficient. However, there will always be a certain trade-off between safety and efficiency since the investment in enhanced safety measures could otherwise have been used for improved services to participants, or the reduction of their fees for using the system.

It cannot be assumed either that all stakeholders will share the same view on the optimum safety level.^[9] In certain situations society in general calls for a higher level of safety than the participants consider to be optimal from a commercial point of view. This is among other things because the probability of payment system disruptions is very little, but on the other hand the consequences for the Danish economy will be significant if the systems are not well-functioning. The small probability means that it does not always make a good business case for participants to dedicate considerable resources to the safety of the systems, while the potential consequences for society mean that from an economic point of view the optimum solution is to make sure that the systems are sufficiently safe.

COOPERATION WITH OTHER AUTHORITIES AND CENTRAL BANKS

Pursuant to section 1 of the Danmarks Nationalbank Act, Danmarks Nationalbank's oversight affects many areas, including the remits of other Danish authorities.

Danmarks Nationalbank's oversight takes place in cooperation with the Danish Financial Supervisory Authority, which is responsible for the supervision of financial institutions in Denmark. This responsibility comprises both Danish system participants and data processing centres owned by the financial institutions. In addition, the Danish Financial Supervisory Authority supervises the securities markets. Against this background, in 2001 Danmarks Nationalbank concluded a Memorandum of Understanding (MoU) with the Danish Financial Supervisory Authority. This MoU was revised on the incorporation in the Securities Trading Act as of 1 March 2006 of the rights and obligations vested in Danmarks Nationalbank in connection with the oversight of payment systems. The MoU lays down the overall framework for this cooperation, including:

The statutory framework for Danmarks Nationalbank's oversight and the Danish Financial Supervisory Authority's supervision of payment systems, clearing centres, etc.
The international standards to be observed by the systems, etc.
Organisation of the cooperation so that all relevant matters are subject to oversight and supervision in a manner whereby no excessive administrative burdens are imposed on the system owners, etc.
The payment systems, clearing centres, etc. comprised by the MoU.^[10]

The oversight of the VP Settlement and the Sumclearing also affects areas within the remit of the Danish Competition Authority. This e.g. applies to the element of oversight that relates to the systems' efficiency. The same applies in relation to the Consumer Ombudsman, who is responsible for the rules on payment instruments laid down in the Act on Certain Means of Payment. However, it has not been deemed necessary to formalise the cooperation with these authorities in the same way as for the Danish Financial Supervisory Authority.

Internationally, Danmarks Nationalbank participates in the oversight of Target, the ECB's RTGS system for settlement of large, time-critical payments in euro. Oversight of this system is undertaken by the central banks that are connected to the system, headed by the European Central Bank (ECB). Likewise, Danmarks Nationalbank participates in the oversight of CLS, the international system for settlement of foreign-exchange transactions. Oversight of this system is undertaken by the national central banks for the participating currencies^[11]. The Federal Reserve Bank of New York holds the overall responsibility for the oversight of CLS. Oversight of Target and CLS are based on the principles for international cooperative oversight laid down in connection with the publication of the Lamfalussy Report in 1990, cf. Box 5.

[1] The report is available at www.bis.org/cpss.

[2] In a real-time gross settlement system, payments and securities are settled finally and irrevocably during the system's opening hours immediately after receipt of payment or settlement instructions, while payments and securities in a multilateral net settlement system are settled on a net basis at fixed times during the settlement day. For further descriptions of the systems, see Danmarks Nationalbank, Payment Systems in Denmark, 2005, Chapters 3 and 6.

[3] For a description of the Scandinavian Cash Pool, see Danmarks Nationalbank, Payment Systems in Denmark, 2005, Chapter 5.

[4] Continuous Linked Settlement.

[5] Transactions in foreign systems equivalent to Kronos, VP Settlement and the Sumclearing are also fundamentally subject to oversight by the host country's central bank in the same way that Danmarks Nationalbank oversees the Danish systems.

[6] In general, the central banks' oversight of payment and settlement systems is directed at the overall system complex. As regards the circumstances of the participants and system operators, oversight is based on that they are subject to financial supervision. This also applies in situations where the settlement process is internalised in an institution that is subject to supervision.

[7] Executive Order No. 769 of 5 July 2006 on the payment systems that are subject to oversight by Danmarks Nationalbank. At present the Executive Order only lists the Sumclearing. However, the principle that oversight must be consistent implies that Danmarks Nationalbank's own system is subject to equivalent oversight, cf. Box 5.

[8] The reports are available at www.bis.org/cpss.

[9] For a description of the impact of network effects, externalities and economies of scale on the design of payment and settlement systems, see Payment Systems in Denmark, Danmarks Nationalbank, 2005, Chapter 1.

[10] The MoU is included as Annex 3 of the general MoU between Danmarks Nationalbank and the Danish Financial Supervisory Authority and is available at http://www.nationalbanken.dk/ under Rules/Memorandum of Understanding.

[11] For further information on CLS, see Lone Natorp and Tina Skotte Sørensen, Settlement of Foreign-Exchange Transactions, Danmarks Nationalbank, Monetary Review, 4th Quarter 2006.

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