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"Monetary review - 1st Quarter 2002"

Danmarks Nationalbank's New Payment System, Kronos

Thomas Angelius and Astrid Henneberg Pedersen, Payment Systems

Introduction

Danmarks Nationalbank's new payment system for kroner and euro, Kronos, was launched on 19 November 2001. Kronos has been designed in close cooperation with current-account holders, taking into account the requirements of modern payment systems. For instance, the system includes a number of features to facilitate financial institutions' liquidity management. Kronos replaced the DN Inquiry and Transfer System as the krone payment system, as well as the DEBES euro payment system.

This article first outlines the background to the development of Kronos. After a description of the characteristics of modern RTGS systems the structure and functionality of Kronos are described.

From dn inquiry and transfer system to Kronos

For 20 years, Danmarks Nationalbank's current-account holders have been able to access their accounts via the DN Inquiry and Transfer System. When the system was introduced back in 1981, it was one of the world's first real-time gross settlement (RTGS) systems.

In RTGS systems, transactions are settled individually, instantly and finally to the participants' accounts. Consequently, RTGS systems offer a very high degree of security that payments can be settled in due time.^[1] RTGS systems are used by financial institutions for exchanging large, time-critical payments such as money-market transactions and other inter-bank settlements.

The DN Inquiry and Transfer System thus gave Danmarks Nationalbank's account holders a "home banking system" whereby they could access their accounts directly. Initially the DN Inquiry and Transfer System was used for transactions related to inter-bank settlements, but later it also became possible for account holders to transfer liquidity^[2] to their settlement accounts for the Danish clearing and settlement operations.

Danmarks Nationalbank's account holders have increasingly required mechanisms that can reduce their liquidity requirements and facilitate their liquidity management, as the clearing and settlement operations have become more complex over the years^[3]. The forthcoming introduction of the international currency settlement system, CLS^[4], will further increase account holders' focus on liquidity management.

Even though the DN Inquiry and Transfer System had been subject to ongoing development, it could not meet the requirements resulting from developments in the financial sector. Danmarks Nationalbank therefore decided to develop a new RTGS system, Kronos, for both kroner and euro. In 1999, Danmarks Nationalbank began to analyse how the requirements of a modern RTGS system could be met. Kronos was developed in close cooperation with Danmarks Nationalbank's account holders. The new system was launched on 19 November 2001 and replaced both the DN Inquiry and Transfer System and the DEBES euro payment system as the home banking system of Danmarks Nationalbank's approximately 130 current-account holders. Participation in Kronos is mandatory for current-account holders.

The section below outlines the characteristics of modern RTGS systems, and the following section outlines the features of Kronos.

Characteristics of modern RTGS systems

Modern RTGS systems offer participants features to support their liquidity management, and may also include liquidity-saving mechanisms.^[5] 

The desire for instant and secure settlement of payments has increased focus on the networks used to send payment messages. RTGS systems increasingly use the international financial network, SWIFT, to exchange payment messages with participants. SWIFT offers a standardised messaging format, fast handling of messages and a very high degree of security against unauthorised persons gaining access to the messages in the network.

Today, many RTGS-system participants have their own automated payment systems which transmit payments to and receive payments from other financial institutions via SWIFT. The systems are designed to settle payments with as little manual interference as possible. This fully-automated processing is called STP (Straight Through Processing). A modern RTGS system must be able to support participants' STP.

Technological advances require RTGS systems to offer a state-of-the-art interface which must be user-friendly, graphical and interactive, as seen in standard software such as Windows.

In view of the ongoing technological development, an RTGS system is also required to be easy to upgrade. A modular structure makes it easier to add new systems or features, or to alter existing components.

Finally, a shared characteristic of modern RTGS systems is that they are financed by participants as a general rule. In most cases the systems are developed and operated by central banks, whose costs are reimbursed by the participants. However, there are examples of participants joining forces to develop and operate a system.

Features in Kronos

The structure of Kronos is based on current-account holders' requirement for e.g. liquidity-management features, and emphasis is on ensuring that Kronos includes the features account holders would expect to find in a modern RTGS system. It has also been important to ensure that Kronos meets the requirements of both large and smaller account holders. Kronos thus operates with two networks aimed at different groups of account holders, and the account holders may choose business modules with various features.

The following section outlines the key features of Kronos, with focus on the liquidity-management options.

Liquidity management in Kronos
Kronos is designed to facilitate account holders' liquidity management, and inter alia offers queuing facilities which account holders can monitor and manage via their Kronos terminals.

Liquidity queue
Each account holder has a liquidity queue in which payments awaiting cover on the account are placed. There are separate queues for payments in kroner and in euro. In principle, Kronos settles payments on a first-come-first-served basis. However, account holders can, via the Kronos terminal, change the order of payments in the liquidity queue, or delete payments. Kronos always settles payments in the order in which they are listed in each account holder's liquidity queue.

On settling payments in the liquidity queue Kronos in principle attempts to settle the first payment in the queue first using the first-in-first-out principle. If there are insufficient funds to settle the first payment, the subsequent payments in the queue will not be settled either. Account holders can, however, choose for Kronos to attempt settlement of the next payment in the queue if the preceding one cannot be settled.

Payments in the liquidity queue are released for settlement if the amount available changes sufficiently, i.e. if the current-account is credited with sufficient liquidity, or if additional securities are pledged as collateral for overdrafts. In addition, a change in the order of the queue, or deletion of a payment may also lead to settlement of payments in the liquidity queue.

Gridlock resolution
Kronos enables ongoing monitoring of liquidity queues to detect any gridlocks, i.e. situations where several participants' payments are mutually awaiting each other's settlement^[6]. In Kronos, gridlocks can be resolved and the payments involved settled, without deviating from the individual account holders' requested settlement order. Gridlocks are resolved by settling a group of payments simultaneously, whereby no account holder incurs an overdraft.

Standing orders
In Kronos, account holders may register preset amounts which on a daily basis are to be transferred from the account holders' current accounts to their settlement accounts at preset times that match the clearing and settlement operations. These standing orders facilitate the account holders' work to manage the transfers in the various clearing and settlement blocks.

Value date queue
Kronos allows account holders with SWIFT to submit payments for settlement on a future value date. Forward-validated payments are placed in the individual account holder's value date queue for kroner or euro, so that the account holder can see the outgoing payments. Account holders can delete payments in their value date queue.

Stop Sending queue
Finally, Kronos has a Stop Sending queue for cross-border euro payments. This feature is used if a central bank in the European payment system, TARGET, cannot receive payments. The individual account holders' payments to banks in the country in question are placed in the account holder's Stop Sending queue. Account holders can delete payments in their Stop Sending queue.

Kronos’ structure
Box 1 illustrates the structure of Kronos. In the box, Kronos is divided into the current-account holders and their terminals, the two communication networks, and the key system features. The description of Kronos' features below is based on this division.

At the technical level, Kronos is modular, meaning that in principle the individual functions are contained in individual source code modules. This structure makes it easier to upgrade the system, e.g. by adding new systems and facilities.

The modular structure offers the extra advantage that account holders can select business modules as required. All account holders must have a mandatory basic RTGS module enabling them to send krone payments either via SWIFT or via the Kronos terminal. Account holders with SWIFT can, as described below, select a module (Poseidon) which supports STP. Finally, account holders with SWIFT may select a module (TARGET Interlinking) enabling them to send and receive domestic and cross-border euro payments via TARGET.

The Kronos terminal
Account holders have access to the Kronos terminal, which is a program running on one or several of the account holders' PCs in a web browser. The terminal has a graphic interactive user interface based on the principles used in standard software.

From the Kronos terminal account holders can submit payments to other account holders, transfer liquidity to their settlement accounts manually or as standing orders, view the entry lists, monitor clearing and settlement operations, use the queuing features, receive news and retrieve historical entry data.

In the Kronos terminal, account holders themselves create authorisations for users, accounts, etc.

Kronos IP network and SWIFT
In Kronos, account holders can submit payments via two different networks, either manually via the Kronos terminal, which small account holders generally prefer, or via SWIFT, which large account holders generally prefer.

Communication between Danmarks Nationalbank and a current-account holder's Kronos terminal takes place via a newly-established network dedicated to Kronos. The network is based on the communication form – IP (Internet Protocol) – used on the Internet, which supports graphics and interactivity. However, traffic is not via the Internet, but via a closed encrypted network which connects the computer centres with Danmarks Nationalbank. The closed solution eliminates many of the risks associated with the Internet.

Kronos supports the most common SWIFT payment messages. SWIFT payments can be used for payments to other current-account holders and for transfers to settlement accounts. In addition to the payments messages, a number of SWIFT service messages are supported.

Support for fully-automated payment processing
Kronos support a high degree of straight-through processing (STP) among participants. STP is typically used by large account holders who wish to send and receive all payments via SWIFT in order to fully automate the payment processing. Kronos includes a module, Poseidon, which "translates" between terminal payments and SWIFT payments. This allows account holders with SWIFT to send all payments via SWIFT, regardless of whether the recipient has SWIFT or only the Kronos terminal, and to receive all payments via SWIFT, regardless of whether they were sent via SWIFT or the Kronos terminal. Account holders with SWIFT can activate Poseidon themselves via a screen feature in the Kronos terminal.

Kronos is financed by the users
Kronos is user-financed in line with prevailing international practice. Account holders pay a connection fee and a fixed monthly fee, as well as for their actual use of the various transaction services. The development costs for Kronos total approximately kr. 18.5 million, and the total monthly operational costs are approximately kr. 765,000 in 2002. The transaction price of a domestic payment is 1 krone. Further information about prices in Kronos can be found at Danmarks Nationalbank's website, www.nationalbanken.dk.

The three modules in Kronos (Basic, Poseidon and Target Interlinking) are separately priced. Costs for the individual modules are distributed among the participants in each module.

The connection fee and the fixed monthly fee are distributed among the participants according to a distribution key based on adjusted working capital as a expression of the expected value of the system to the account holders. An equivalent distribution key is used by the members of the Danish Bankers Associations for the distribution of PBS costs.

Kronos in a long-term perspective

Kronos will be developed on an ongoing basis in cooperation with account holders. This is a natural consequence of the developments in the financial sector, as well as in the IT sector. Moreover, account holders' expectations of a modern RTGS system will naturally increase as other payment systems are upgraded with new features.

Footnotes

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Version 1.0 April 2002 Nationalbanken.
Published by Danmarks Nationalbank December 2002, http://www.nationalbanken.dk