5. Danmarks Nationalbank's Role in the Danish Payments infrastructure
Danmarks Nationalbank plays several key roles in the Danish payments infrastructure. From the general public's point of view, its most visible task is to issue Danish banknotes and coins. These are primarily used for small retail payments and are distributed to citizens and companies via banks in Denmark.
In addition, Danmarks Nationalbank acts as settlement bank for a number of financial institutions that hold accounts at Danmarks Nationalbank. Via these accounts and Danmarks Nationalbank's payment system, Kronos, the financial institutions settle their mutual accounts and their accounts with Danmarks Nationalbank. The financial institutions also use their accounts at Danmarks Nationalbank to settle payments in various Danish and international payment and settlement systems.
In relation to payment systems, Danmarks Nationalbank helps to ensure that there is always adequate intraday liquidity within the financial system to settle payments. To that end Danmarks Nationalbank extends intraday credit in kroner to the financial institutions. This credit must be covered by the end of the day. The financial institutions also have access to intraday credit in euro from Danmarks Nationalbank up to a fixed limit.
For all types of credit, Danmarks Nationalbank requires securities meeting certain criteria as collateral. This can be provided via traditional pledging of securities in a safekeeping account with VP Securities Services. In addition, the financial institutions may pledge collateral for intraday credit in kroner via two supplementary arrangements: automatic collateralisation and the Scandinavian Cash Pool.
Another important task for Danmarks Nationalbank is to oversee that the Danish payment and settlement systems are secure and efficient. As described in Chapter 4, problems within a systemically important payment or settlement system may spread to many participants and affect the entire financial system. Danmarks Nationalbank's oversight of such systems is described in further detail in Chapter 10.
Finally, Danmarks Nationalbank itself to a limited extent participates in the Danish payments infrastructure on a par with other financial institutions. This applies to e.g. settlement of retail payments and securities transactions. Danmarks Nationalbank's tasks in this connection do not differ from those performed by any other bank and will not be discussed further in this chapter.
5.1 BANKNOTES AND COINS
Danmarks Nationalbank has an exclusive right to manufacture and issue Danish banknotes and coins. Banknotes are printed by Danmarks Nationalbank's Banknote Printing Works, while coins are minted by The Royal Mint under Danmarks Nationalbank. These banknotes and coins are also used in Greenland. In addition, Danmarks Nationalbank prints banknotes denominated in Danish kroner for use in the Faroe Islands.
Banknotes and coins are put into circulation via a number of decentralised banknote holdings placed with banks in various parts of Denmark. These holdings are owned and operated by the banks and supply local banks with cash. In connection with the establishment of a decentralised banknote holding, a maximum limit is set for its size. Danmarks Nationalbank grants the bank in question an interest-free loan corresponding to the value of the banknotes held, but for practical reasons and insurance reasons collateral equivalent to the maximum limit must be pledged.
Banknotes and coins are primarily used for small retail payments. Despite the increasing use of electronic payment instruments, e.g. the Dankort (debit card), banknotes and coins remain an important means of payment in Denmark.
5.2 DANMARKS NATIONALBANK'S ROLE AS SETTLEMENT BANK
Danmarks Nationalbank is often referred to as banker to the banks. The reason is that a number of financial institutions hold accounts at Danmarks Nationalbank, from which they settle various payments. Danmarks Nationalbank acts as settlement bank for these institutions because claims on Danmarks Nationalbank are risk-free and liquid and can therefore always be used for settlement of accounts between the financial institutions.
The financial institutions holding accounts at Danmarks Nationalbank are mainly banks and mortgage-credit institutes, investment firms and foreign credit institutions conducting cross-border activities in Denmark.[1] In the following, these institutions are collectively referred to as "account holders".
An account holder's primary account at Danmarks Nationalbank is its current account. Deposits in current accounts can be used for immediate settlement of payments at the initiative of the account holder and are often referred to as liquidity, current-account liquidity or krone liquidity. The current-account deposits of banks and mortgage-credit institutes accrue interest at the current-account rate since these institutions are monetary-policy counterparties, cf. below. Other account holders' current-account deposits do not accrue interest.[2]
The current accounts are linked to a number of settlement accounts used for various payment and settlement systems. Account holders hold settlement accounts for the Sumclearing retail payment system, the VP securities settlement system and the CLS foreign-exchange settlement system.[3] The procedures for settlement of payments in the individual systems are described in more detail in section 5.6.
Danmarks Nationalbank also offers account holders the option to open current accounts and settlement accounts in euro. This allows them to settle payments in euro via the Sumclearing and VP settlement and to participate in Target, the trans-European payment system[4]. All deposits in current accounts in euro accrue interest at the rate fixed by the European Central Bank (ECB) for its marginal deposit facility.
Settlement of payments via current accounts and transfer of funds between account holders' current accounts and settlement accounts take place via Danmarks Nationalbank's RTGS system, Kronos. All account holders must therefore be connected to Kronos. Account holders with current accounts in euro must also subscribe to Kronos' Target module. Kronos and its facilities are described in Chapter 6.
Potential account holders are free to choose whether they want to participate directly in the Danish payment systems by holding accounts at Danmarks Nationalbank. Alternatively, they may opt to participate indirectly via other account holders. In practice all major Danish banks and mortgage-credit institutes hold accounts at Danmarks Nationalbank.
Finally, the Danish central government also holds an account at Danmarks Nationalbank, which acts as banker to the central government. The government's liquid funds are deposited in this account, which is also used for settlement of large central-government disbursements. Handling the government's retail payments has been outsourced to a commercial bank, which receives a lump sum from Danmarks Nationalbank and then distributes it to the recipients. Typically incoming payments to the central government are also received via banks, which then forward them to Danmarks Nationalbank. Deposits in the central government's account accrue interest at the discount rate[5].
5.3 DANMARKS NATIONALBANK PROVIDES KRONE LIQUIDITY
The account holders' total current-account deposits in kroner are affected by a number of transactions relating to items on Danmarks Nationalbank's balance sheet. For instance, purchase and sale of foreign exchange by Danmarks Nationalbank results in immediate changes in the current-account deposits. Another example is payments to and disbursements by the central government, which are also reflected in immediate fluctuations in the account holders' current-account deposits.
An important task for Danmarks Nationalbank is to offer account holders krone liquidity so that adequate liquidity is always available within the financial system to settle payments. This task can be broken down into two closely linked functions:
- A monetary-policy function to ensure that there is sufficient liquidity available when the account holders' balances are settled at the end of the monetary-policy day. The monetary-policy day in kroner runs from 4.00 p.m. to 3.30 p.m. the following banking day. Within the monetary-policy day, all payments in kroner between current accounts at Danmarks Nationalbank have the same value date.
- A payment systems function to ensure that sufficient liquidity is available within the financial system during the monetary-policy day.
5.3.1 THE MONETARY-POLICY FUNCTION
At the end of the monetary-policy day, i.e. at 3.30 p.m., account holders may not have negative balances (overdrafts) in their current accounts. Each account holder must seek to cover any negative balance by borrowing in the money market. If this is not possible for all account holders because the aggregate current-account deposits are insufficient, Danmarks Nationalbank provides extra liquidity via monetary-policy operations.
Danmarks Nationalbank's monetary-policy operations are conducted with the monetary-policy counterparties, i.e. banks and mortgage-credit institutes in Denmark. Monetary-policy operations comprise lending against securities as collateral, and purchase and sale of certificates of deposit. If the aggregate current-account deposits are insufficient, Danmarks Nationalbank usually provides liquidity by buying back certificates of deposit. Box 5.1. outlines Danmarks Nationalbank's monetary-policy instruments.[6]
The key liquidity concept in monetary policy is the monetary-policy counterparties' current-account deposits at the end of the monetary-policy day. Overall, the monetary-policy counterparties do not have access to more liquidity than Danmarks Nationalbank has provided. The counterparties can trade liquidity among themselves, but they cannot create liquidity.
| DANMARKS NATIONALBANK'S MONETARY-POLICY INSTRUMENTS |
Box 5.1
|
|
In practice, Danmarks Nationalbank's monetary policy is conducted via its monetary-policy instruments. This term covers the facilities used by Danmarks Nationalbank to manage and pay interest on accounts with monetary-policy counterparties, i.e. banks and mortgage-credit institutes. The monetary-policy counterparties have access to two facilities:
The rate of interest on the two types of 14-day transactions is usually the same and is referred to as, respectively, the lending rate and the rate of interest on certificates of deposit. Current-account deposits accrue interest at the current-account rate, which is lower than the lending rate. Between the weekly market operations, Danmarks Nationalbank can conduct extraordinary market operations to prevent the total current-account deposit from becoming too low, which would impede the functioning of the money market. Extraordinary market operations usually take place in certificates of deposit, which can be purchased or sold with an immediate liquidity impact. If there are indications towards the end of the monetary-policy day that current-account deposits will exceed the total limit, Danmarks Nationalbank opens for the sale of certificates of deposit. If the total limit is exceeded at the end of the monetary-policy day, the part of the deposit that exceeds the individual current-account limits will be converted into certificates of deposit. |
|
| Source: Danmarks Nationalbank (2003). | |
5.3.2 THE PAYMENT SYSTEMS FUNCTION
To facilitate settlement of payments, Danmarks Nationalbank extends credit to account holders within the monetary-policy day, i.e. intraday credit. This credit comprises overdrafts on their current accounts at Danmarks Nationalbank and is extended against securities or certificates of deposit as collateral. No interest is charged for account holders' intraday credit, which is in step with the practice in other EU member states.
Access to intraday credit makes it relatively easy for account holders to settle outgoing and incoming payments at different times during the day. For instance, an account holder may have to settle a bond purchase in the morning and receive an incoming payment in the afternoon. The account holder can then borrow from Danmarks Nationalbank in the morning and cover the credit in the afternoon.
The key liquidity concept in relation to payment systems is thus the sum of the account holders' current-account deposits and their maximum access to intraday credit. The account holders' maximum intraday credit depends on their portfolios of securities that can be pledged as collateral to Danmarks Nationalbank. In relation to payment systems overall, account holders can therefore increase their liquidity by acquiring a larger portfolio of eligible securities.
5.4 DANMARKS NATIONALBANK OFFERS INTRADAY CREDIT IN EURO
To facilitate settlement of euro payments, Danmarks Nationalbank also offers intraday credit in euro against collateral.[7] Danmarks Nationalbank can extend intraday credit in euro by on a daily basis depositing an amount in euro with a euro-area central bank[8]. This amount constitutes the total limit for account holders' intraday credit in euro from Danmarks Nationalbank. Danmarks Nationalbank does not extent credit in euro overnight, i.e. monetary-policy loans in euro, which is the prerogative of the euro-area central banks.[9]
The total limit for intraday credit in euro is broken down on individual limits for account holders. These limits cannot be exceeded. Account holders pay a price for the individual limits corresponding to Danmarks Nationalbank's costs of procuring euro liquidity. In the 1st quarter of 2005, the price was 0.06 per cent p.a.
Individual limits are usually allocated quarterly on the basis of the account holders' own requests. If the sum of the requested limits does not exceed the overall limit, all account holders' requests are complied with. If the sum of the requested limits is greater than the overall limit, account holders are allocated limits on the basis of their connection fees to the Target module in Kronos, cf. Chapter 6.
Account holders have access to intraday credit in euro between 7.00 a.m. and 5.15 p.m. After 5.00 p.m., an account holder cannot increase its intraday credit in euro. If the current account in euro still shows a debit balance after 5.15 p.m., Danmarks Nationalbank is entitled to enforce the pledged assets. In addition, the account holder must pay interest at a rate that is fixed by Danmarks Nationalbank and that is equivalent to the costs of procuring extra liquidity.[10]
5.5 PLEDGING OF COLLATERAL TO DANMARKS NATIONALBANK
Danmarks Nationalbank extends credit as monetary-policy loans, loans for decentralised banknote holdings, and intraday credit in kroner and euro. For all types of credit, Danmarks Nationalbank requires securities as collateral.[11] The purpose is to avoid losses on the credit extended if the borrower cannot meet is obligations vis-à-vis Danmarks Nationalbank.
Account holders can pledge collateral for credit from Danmarks Nationalbank in the traditional manner, by pledging securities meeting certain criteria. The pledged securities can serve as collateral for all types of credit. In addition, account holders can pledge collateral for intraday credit in kroner and euro via a number of other arrangements.
5.5.1 TRADITIONAL PLEDGING OF COLLATERAL
Traditional pledging of securities may serve as collateral for any type of credit from Danmarks Nationalbank. The securities pledged by the individual account holder are registered in an account, called a safekeeping account, with VP Securities Services (VP). The safekeeping account is pledged to Danmarks Nationalbank. For practical reasons, securities pledged as collateral for intraday credit in euro are registered in a separate account.
Safekeeping accounts are linked to yield accounts with Danmarks Nationalbank in kroner and euro. Incoming interest and repayments pertaining to the pledged securities are deposited to these accounts. Like the safekeeping accounts, they are pledged to Danmarks Nationalbank and are included in the calculation of the collateral value. Amounts in yield accounts are transferred to current accounts on a daily basis, provided that the individual account holder's credit does not exceed the collateral value of the remaining collateral.
To pledge securities, the account holder transfers them to the safekeeping account via Kronos. Account holders can remove and replace securities in the pledged safekeeping account on an ongoing basis. When pledged securities are removed or replaced, Kronos automatically checks for adequate cover to ensure that the account holder's credit does not exceed the collateral value of the remaining securities in the safekeeping account.
Collateral basis
The collateral basis for pledging to Danmarks Nationalbank comprises the following securities denominated in kroner or euro, registered at VP and listed on the Copenhagen Stock Exchange (CSE):
- Danish government securities, including bonds issued by the Fisheries Bank and the Mortgage Bank of the Kingdom of Denmark.
- Bonds guaranteed by the Kingdom of Denmark.
- Bonds issued by KommuneKredit and Danish Ship Finance.
- Mortgage-credit bonds issued by institutions subject to the Financial Business Act.
Danmarks Nationalbank may reject certain securities within these categories as eligible collateral, e.g. share-indexed bonds. On the other hand, Danmarks Nationalbank may also include other assets in the collateral basis for credit in Danish kroner, subject to specific assessment.[12]
Collateral value
The collateral value of the pledged securities is calculated as their official price (all trades) on CSE on the preceding day, less securities-specific valuation haircuts[13]. The haircut is intended to reduce the risk that the total value of the pledged securities falls below the value of the outstanding credit if market prices fall.
The valuation haircut depends on the remaining maturity and liquidity of the asset. The haircuts applied vary from 0.5 per cent to 9 per cent and are determined on the basis of the same principles as applied by the ECB.[14] Box 5.2 provides an overview of Danmarks Nationalbank's valuation haircuts on calculation of the collateral value.
| HAIRCUTS ON CALCULATION OF COLLATERAL VALUE |
Box 5.2
|
||||||||||||||||||||||||||||||||
|
Danmarks Nationalbankhas adopted the same valuation haircuts on calculation of the collateral value of securities as the ECB. The valuation haircut depends on the asset's liquidity and remaining maturity, which is used as an indicator of interest-rate sensitivity. When fixing Danmarks Nationalbank's valuation haircuts, eligible securities are broken down on the following three liquidity tiers1:
For securities with fixed coupon rates, valuation haircuts are fixed in accordance with the following Table:
For eligible securities with no coupon rates or with variable coupon rates, Danmarks Nationalbank's valuation haircuts can be found in ECB (2005a). The same applies to eligible securities issued by KommuneKredit. |
|||||||||||||||||||||||||||||||||
| 1 The ECB also operates with a fourth liquidity tier, asset-backed bonds. However, Danmarks Nationalbank does not extend credit against securities in this tier, however. | |||||||||||||||||||||||||||||||||
If euro-denominated securities are pledged as collateral for credit in Danish kroner, a currency haircut is also deducted. The same applies if krone-denominated securities are pledged as collateral for credit in euro.
5.5.2 OTHER COLLATERAL FOR INTRADAY CREDIT IN KRONER
For intraday credit in kroner, account holders have a number of alternative options to traditional pledging of securities.
Certificates of deposit
Account holders' certificates of deposit are automatically included in the calculation of the total collateral value for intraday credit in kroner. Since certificates of deposit can only be traded among monetary-policy counterparties, only banks and mortgage-credit institutes can in practice own certificates of deposit, cf. Box 5.1.
Automatic collateralisation
Under the automatic collateralisation arrangement, account holders may pledge collateral for intraday credit in kroner for settlement of payments in the Sumclearing, VP settlement for securities transactions and periodic payments (interest, repayments and dividend) and CLS. In many ways, automatic collateralisation is a more flexible credit arrangement than traditional pledging of collateral, and in practice it is widely used by account holders. Box 5.3 outlines the automatic collateralisation arrangement.
| AUTOMATIC COLLATERALISATION |
Box 5.3
|
|
Automatic collateralisation relates to collateral for intraday credit in Danish kroner. Under the automatic collateralisation arrangement, account holders pledge collateral in the form of securities in one or more appointed safekeeping accounts at VP, typically their trading accounts. Automatic collateralisation can be used for settlement of payments in the Sumclearing, VP settlement for securities transactions and periodic payments, and CLS.1 In many ways, automatic collateralisation is a more flexible credit arrangement than traditional pledging of collateral. Firstly, unlike traditional pledging of collateral, automatic collateralisation does not bind specific assets in the safekeeping account. Under the automatic collateralisation arrangement, part of the value of the account holder's securities – corresponding to the credit extended – is pledged to Danmarks Nationalbank. The account holder is free to dispose of the securities in the safekeeping account, provided that the total value of the account exceeds the total credit under the automatic collateralisation arrangement. Another feature of automatic collateralisation is that securities purchased can be used as collateral for intraday credit in the settlement cycle in which they are received. Traditionally, securities cannot be used as collateral for intraday credit until later settlement cycles. Owing to this facility, automatic collateralisation binds fewer securities on settlement of securities transactions than traditional pledging of collateral. An account holder wishing to make use of automatic collateralisation must conclude an automatic collateralisation agreement with Danmarks Nationalbank and open an automatic collateralisation account in Danish kroner. Credit extended under the automatic collateralisation arrangement is debited to the automatic collateralisation account, while reductions are credited to the account. The balance of the automatic collateralisation account thus reflects Danmarks Nationalbank's collateral in the account holder's assets. VP administers the collateral in the safekeeping accounts on behalf of Danmarks Nationalbank. Danmarks Nationalbank notifies VP of the securities that can be pledged under the automatic collateralisation arrangement. In principle, the same securities are accepted as for traditional pledging of collateral. Credit under the automatic collateralisation arrangement must now be repaid by 1.30 p.m. on the same monetary-policy day. Any outstanding loan at 1.30 p.m. will automatically be sought to be covered by transferring an amount from the account holder's current account to the automatic collateralisation account. If there are insufficient funds in the current account, Danmarks Nationalbank requests VP to transfer securities with a total collateral value matching the value of the outstanding credit from the account holder's automatic collateralisation account to an account held by Danmarks Nationalbank. The credit procedures for automatic collateralisation vary with its use. In connection with settlement of securities transactions in VP, the proceeds of the loan are used directly in the settlement process. On settlement of payments in the Sumclearing, VP settlement for periodic payments and CLS, the proceeds are first credited to the borrowers' settlement accounts at Danmarks Nationalbank and then used as required. The different procedures in connection with the various uses are elaborated on in section 5.6. |
|
| 1 The option to use automatic collateralisation on settlement of securities transactions in VP was introduced in July 1998. After a statutory amendment, which enables the use of automatic collateralisation in designated payment systems and payment systems operated by Danmarks Nationalbank, the scope was extended in November 2002 to include the Sumclearing and VP settlement of periodic payments. Since September 2003, when the Danish krone joined CLS, automatic collateralisation has also been used for settlement of payments in CLS. | |
Scandinavian Cash Pool
Account holders can also pledge collateral for intraday credit in kro-ner via the Scandinavian Cash Pool (SCP). SCP is an automated sys-tem for pledging of cross-border collateral between Denmark, Norway and Sweden. The main principle of SCP is that liquidity raised in the central bank of one country can be pledged as collateral for credit from the central bank of another country. SCP is elaborated on in Box 5.4.
| SCANDINAVIAN CASH POOL |
Box 5.4
|
|
Scandinavian Cash Pool (SCP) is an automated system for pledging of cross-border collateral for intraday credit in Danish and Norwegian kroner and Swedish kronor.1 The system was established in the spring of 2003 and is available to credit institutions in Denmark, Norway and Sweden with activities in several Scandinavian countries. The core principle of SCP is that liquidity raised from the central bank of one country can be pledged as collateral for intraday credit from the central bank of another country. Via SCP, a credit institution (the principal enterprise) can pledge collateral by transferring an amount deposited at its national central bank to an account pledged to the central bank of the other country. For instance, a credit institution in Sweden may pledge collateral for credit from Danmarks Nationalbank by transferring an amount deposited at Sveriges Riksbank to an account pledged to Danmarks Nationalbank. Sveriges Riksbank then automatically notifies Danmarks Nationalbank of the amount pledged, and on this basis Danmarks Nationalbank extends credit to the Swedish credit institution's subsidiary or branch in Denmark. A subsidiary or branch may also pledge cross-border collateral for credit to the principal enterprise. For instance, the Swedish credit institution's branch or subsidiary in Denmark may transfer an amount from its current account at Danmarks Nationalbank to an account pledged to Sveriges Riksbank. Danmarks Nationalbank automatically notifies Sveriges Riksbank of the amount pledged, and Sveriges Riksbank extends credit to the principal enterprise in Sweden. Under SCP, the Scandinavian central banks extend credit in other currencies than the currency of the collateral. To avoid losses on the credit extended as a result of exchange-rate fluctuations, the central banks deduct an exchange-rate haircut when calculating the collateral value. Danmarks Nationalbank currently operates with a 5-per-cent haircut in relation to both Swedish kronor and Norwegian kroner. An account holder wishing to obtain intraday credit in Danish kroner from Danmarks Nationalbank via SCP, must open an SCP loan account at Danmarks Nationalbank. The account holder's credit under SCP is registered in this account. At the same time, an amount equivalent to the registered credit is transferred to the account holder's current account. If the account holder wishes to obtain intraday credit from Norges Bank or Sveriges Riksbank on the basis of liquidity raised from Danmarks Nationalbank, the account holder must also open an SCP pledged collateral account at Danmarks Nationalbank. Credit under SCP must be repaid by 2.00 p.m. on the same monetary-policy day. Any outstanding loan at 2.00 p.m. will automatically be sought to be covered by transferring an amount from the account holder's current account to the SCP loan account. If the balance of the SCP loan account remains negative at 3.30 p.m., Danmarks Nationalbank will seek to enforce the assets pledged at Sveriges Riksbank or Norges Bank. An important motif for the establishment of SCP was to facilitate Scandinavian CLS participants' access to intraday liquidity in the Scandinavian currencies. The introduction of CLS has led to increasing requirements for participants to be able to raise liquidity at short notice, cf. Chapter 8. SCP has also made it possible for credit institutions operating in several Scandinavian countries to centralise liquidity management and pledging of collateral in one of the countries. SCP is primarily used by Danish banks pledging collateral at Danmarks Nationalbank for loans to subsidiaries or branches in Norway and Sweden. |
|
| 1 In addition to SCP, agreements also exist concerning a manual arrangement, whereby Danish branches of Norwegian and Swedish credit institutions can obtain credit in Danish kroner from Danmarks Nationalbank on the basis of Swedish and Norwegian government securities pledged to Danmarks Nationalbank. This arrangement, which is mutual, is only used to a very limited extent, however. | |
Maximum for intraday credit and disposable amount
The traditional krone-denominated collateral pledged by account holders is primarily used to cover any monetary-policy loans and loans for decentralised banknote holdings. The remaining collateral value is included in the calculation of the account holders' potential intraday credits.
An account holder's maximum intraday credit in kroner can thus be calculated residually as:
Collateral value of traditionally pledged securities
+yield-account deposits
=total collateral value of the collateral pledged
- monetary-policy loans
- loans for decentralised banknote holdings
=Excess collateral
+collateral value of certificates of deposit
=Maximum intraday credit in Danish kroner.
The account holder's disposable amount in Danish kroner, i.e. the amount the account holder can withdraw from the current account in Danish kroner, can then be calculated as:
Maximum intraday credit in Danish kroner
+ current-account balance in Danish kroner
= disposable amount in Danish kroner.
5.5.3 COLLATERAL FOR INTRADAY CREDIT IN EURO
As stated above, account holders can pledge collateral for intraday credit in euro from Danmarks Nationalbank as traditionally pledged securities in a special account. The accounts are linked to separate yield accounts at Danmarks Nationalbank in kroner and euro, respectively.
In addition, collateral for intraday credit in euro from Danmarks Nationalbank may in theory be pledged via the Eurosystem's correspondent central banking model (CCBM). This model is used to obtain credit in euro against securities localised in the euro area as collateral, cf. Box 5.5. In practice this model is only used to a limited extent in Denmark.
| THE CORRESPONDENT CENTRAL BANKING MODEL |
Box 5.5
|
|
Like Danmarks Nationalbank, the Eurosystem, i.e. the ECB and the euro area central banks, only extends credit against collateral. To facilitate pledging of collateral, the Eurosystem has developed the correspondent central banking model, CCBM, for cross-border pledging of collateral. Under CCBM, an account holder in the euro area can obtain credit in euro from its central bank against securities placed in an account with the central bank of another euro area member state as collateral. The central bank of the other member state acts as the correspondent bank. The Chart below illustrates the CCBM flow. CCBM is also available for account holders at central banks in non-euro-area member states. Consequently, Danmarks Nationalbank's account holders can pledge collateral for intraday credit in euro in the form of securities held in an account in the euro area. In practice, CCBM is only used to a very limited extent in Denmark.1 Another option for pledging cross-border collateral in the Eurosystem is to transfer the eligible securities via links between the central securities depositories. This requires that the links comply with a number of standards laid down by the Eurosystem (see EMI (1998)). At the end of 2004, the Eurosystem had approved 59 links. In January 2005, the ECB decided that securities pledged as collateral for credit in the Eurosystem can also be transferred between two central securities depositories via a third central securities depository, i.e. relayed links. Like the direct links, such links must comply with a number of standards and be approved by the Eurosystem. The decision to allow relayed links has improved the prospects of Danish euro-denominated bonds becoming eligible in the Eurosystem. The ECB already recognises these bonds as eligible, but it is a requirement that they are immediately accessible to all account holders in the Eurosystem. This requirement will be met if central securities depositories in all euro area member states establish links to the international central securities depository, Euroclear (relayed link), which already has a link to VP Securities Services. |
|
| CCBM FLOW | |
 |
|
| 1 Via CCBM it was previously possible to pledge certain Danish bonds as collateral for intraday credit in euro from five euro area central banks (out-collateral). This arrangement ceased on 1 July 2003. | |
An account holder's potential intraday credit in euro can thus be calculated as:
Collateral value of traditionally pledged securities
+ collateral value of CCBM assets
+ yield-account deposits
= Calculated maximum intraday credit in euro
However, an account holder's intraday credit in euro cannot exceed the allocated individual limit, cf. section 5.4.
The account holder's disposable amount in euro can thereafter be calculated as:
Maximum intraday credit in euro (the lower amount of calculated maximum intraday credit in euro and the limit for intraday credit)
+ current-account balances in euro
= Disposable amount in euro.
5.6 SETTLEMENT PROCEDURE AT DANMARKS NATIONALBANK
Danmarks Nationalbank acts as settlement bank for the Sumclearing, VP settlement and CLS[15]. This means that settlement of the cash leg of transactions in these system takes place via accounts at Danmarks Nationalbank. This section describes payment settlement in each of the three systems, while the systems as such are described in more detail in Chapter 6 (Sumclearing and VP settlement) and Chapter 8 (CLS).
5.6.1 THE SUMCLEARING AND VP SETTLEMENT
The Sumclearing and VP settlement are net settlement systems. Settlement of payments in the two systems takes place in a number of fixed settlement cycles within each 24-hour period. Settlement cycles are run for both kroner and euro, and in VP settlement for both securities transactions and periodic payments[16]. Box 5.6 provides an overview of all settlement cycles in the two systems.
Account holders hold separate settlement accounts for the various settlement types. In these accounts, amounts can be reserved for each settlement cycle. This means that within a given period of time, lasting until after the settlement cycle has been run, the account holders cannot dispose of the funds in the accounts in question. In this way Danmarks Nationalbank can guarantee the amounts reserved for settlement without incurring any risk.
Settlement of payments in Danish kroner
Most of the krone-denominated payments in the two systems are settled in the overnight settlement cycles, which take place between 6.00 p.m. and 6.00 a.m., cf. Box 5.6. These settlement cycles are the primary reason that the monetary-policy day in kroner runs from 4.00 p.m. to 3.30 p.m. the following banking day, since this allows account holders to base overnight settlement on intraday credit in kroner, which can then be covered on the following day.
| SETTLEMENT CYCLES IN THE SUMCLEARING AND VP SETTLEMENT |
Box 5.6
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
The Table provides a full overview of the settlement cycles in the Sumclearing and VP settlement, stating the settlement time and deadline for transfers to settlement accounts. Between 4.00 and 4.30 p.m. account holders can transfer liquidity to settlement accounts for settlement cycles VP10 and SUM1. It is not possible subsequently to transfer funds to settlement accounts for VP20, VP30, SUM2 and SUM3, which are placed outside Kronos' opening hours. Consequently, the settlement-account balances prior to these cycles are equivalent to the balances before VP10 and SUM1 adjusted for the account holders' booked net positions in those two cycles.1
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 1 Before SUM1, the settlement-account balance for the Sumclearing also includes any assets reserved under the automatic collateralisation arrangement, cf. the description of the settlement procedure in section 5.6.1. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Account holders can provide liquidity for the settlement cycles in kroner in two ways. Firstly, account holders can transfer funds from their current accounts to their settlement accounts via Kronos. Transfer of liquidity for overnight settlement can take place between 4.00 and 4.30 p.m. Account holders cannot transfer more than amounts equivalent to their disposable amounts in kroner.
Secondly, account holders may provide liquidity for the settlement cycles in kroner via automatic collateralisation, cf. Box 5.3. In the Sumclearing, this is done by reserving a specific amount under the automatic collateralisation arrangement prior to a settlement cycle. The amount is credited to the account holder's settlement account for the Sumclearing and debited to the account holder's automatic collateralisation account at Danmarks Nationalbank.[17]
The procedure for automatic collateralisation in connection with VP settlement of securities transactions differs from the Sumclearing procedure. For securities settlement, the account holder's entire automatic collateralisation account is included, i.e. no specific amount is reserved. If liquidity is needed for settlement, the automatic collateralisation arrangement is first utilised to its full extent, and if this proves insufficient any settlement-account deposit is used.
Prior to each settlement cycle, Danmarks Nationalbank notifies the Sumclearing or VP of each individual account holder's settlement-account balance. In the Sumclearing, the settlement-account balance is equivalent to the account holder's line in the settlement cycle. In VP securities settlement the account holder's line also depends on the amount available under the automatic collateralisation arrangement.
The Sumclearing and VP then check that each individual account holder's net payment in the settlement cycle does not exceed its line. If this criterion is met, the Sumclearing and VP inform Danmarks Nationalbank of the account holders' net positions in that cycle. Danmarks Nationalbank then books the positions to the account holders' settlement accounts and automatic collateralisation accounts, and settlement has been concluded.
When settlement has taken place, the settlement accounts are emptied and the funds transferred to the current accounts. Any unused amounts reserved under the automatic collateralisation arrangement are, however, first used to reduce the credit under this arrangement. Any excess amount in a Sumclearing settlement account is deposited to the account holder's current account.
Box 5.7 illustrates payment settlement in the Sumclearing and VP settlement in kroner using an example, while Charts 5.1 and 5.2 illustrate the settlement procedures in the two systems.
| EXAMPLES OF PAYMENT SETTLEMENT IN THE SUMCLEARING AND VP SETTLEMENT |
Box 5.7
|
||||
|
Payment settlement in the Sumclearing and VP settlement for securities transactions can be illustrated via an example. At the beginning of the monetary-policy day, two banks, A and B, both have current-account deposits of kr. 100 million. Both banks make liquidity available for settlement under the automatic collateralisation arrangement. It is assumed that only one settlement cycle is run in the Sumclearing and VP settlement, respectively. Prior to settlement the two banks make the following dispositions: 1) A reserves kr. 300 million under the automatic collateralisation arrangement for the Sumclearing. 2) B reserves kr. 200 million under the automatic collateralisation arrangement for the Sumclearing. The banks' net positions are then calculated in both settlements. It is assumed that A pays kr. 100 million net to the Sumclearing and kr. 400 million to the VP settlement, while B receives the same amounts net. The check for adequate cover is met in the Sumclearing and is also assumed to be met in the VP settlement. Subsequently, both settlements are run with the following entries: 3) A's and B's Sumclearing settlement accounts are, respectively, debited and credited with kr. 100 million. 4) In connection with VP settlement, A obtains credit of kr. 400 million under the automatic collateralisation arrangement. An equivalent amount is transferred to B's settlement account for securities transactions. After settlement, A and B's settlement accounts are emptied, resulting in the following entries: 5) A's unused reserved amount under the automatic collateralisation arrangement, kr. 200 million (kr. 300 million less kr. 100 million), is used to reduce the credit under the automatic collateralisation arrangement. 6) B's unused reserved amount under the automatic collateralisation arrangement, kr. 200 million (kr. 200 million less kr. 0), is used to reduce the credit under the automatic collateralisation arrangement. 7) B's remaining balance on its Sumclearing settlement account, kr. 100 million, is transferred to its current account. 8) B's balance on its VP settlement account, kr. 400 million, is transferred to its current account. When the settlement accounts have been emptied, A's automatic collateralisation account shows an overdraft of kr. 500 million. This overdraft must be covered by 1.30 p.m., which can be achieved as follows: 9) A transfers kr. 500 million from its current account to its automatic collateralisation account. A's current-account balance is then negative by kr. 400 million, which must be found by 3.30 p.m. In the example this can be done by borrowing from B.
|
|||||
| SETTLEMENT OF PAYMENTS IN THE SUMCLEARING |
Chart 5.1
|
 |
|
| SETTLEMENT OF PAYMENTS FOR SECURTIES TRANSACTIONS IN VP |
Chart 5.2
|
 |
|
Settlement of payments in euro
Settlement of payments in euro in the Sumclearing and VP settlement takes place in daytime settlement cycles. This is done to facilitate the process, since Danmarks Nationalbank only extends credit in euro during the daytime, cf. section 5.4.
Securities transactions in euro are, however, to a large extent settled in the overnight VP settlement cycles. This is achieved by translating the value of the securities into kroner and settling them as krone-denominated securities. In the morning, when account holders again have access to euro credit, the parties then exchange kroner and euro in a Payment-versus-Payment (PvP) settlement cycle so that the net result is settlement in euro.
For the euro settlement cycles, account holders cannot provide liquidity via the automatic collateralisation arrangement, but only by transferring funds from their current accounts in euro to their settlement accounts in euro. Apart from this difference, the settlement cycles in euro are in principle executed in the same way as the settlement cycles in kroner.
5.6.2 CLS-SETTLEMENT
Unlike the Sumclearing and VP settlement, CLS is a gross settlement system, i.e. transactions are settled on an ongoing basis via accounts with CLS. Netted payments for CLS settlement are transferred to CLS via the participating currencies' RTGS systems. For CLS payments in Danish kroner, participants transfer amounts from their own current accounts or CLS settlement accounts to CLS' current account at Danmarks Nationalbank. If the account holder has a CLS settlement account, payments from CLS' current account must always be made to this account.
An account holder must have a CLS settlement account in order to obtain credit for CLS settlement under the automatic collateralisation arrangement. As is the case for the Sumclearing, the account holder reserves a specific amount, which is then credited to its CLS settlement account and debited to the automatic collateralisation account.
Any deposit in the CLS settlement account at 1.30 p.m. is used to reduce the credit under the automatic collateralisation arrangement for CLS settlement. Any residual amount after cover of credit under the automatic collateralisation arrangement is transferred to the account holder's current account.
Payment settlement in relation to CLS is illustrated in Chart 5.3.
| PAYMENTS TO AND FROM CLS |
Chart 5.3
|
 |
|
LITERATURE
Andersen, Niels C. and Kirsten Gürtler, 2003. The Provision of Collateral to Danmarks Nationalbank in a Legal Perspective, Danmarks Nationalbank, Monetary Review, 3rd Quarter 2003.
Danmarks Nationalbank, 2001. Financial Institutions' Accounts at and Pledging of Collateral to Danmarks Nationalbank, Danmarks Nationalbank, Monetary Review, 4th Quarter 2001.
Danmarks Nationalbank, 2003. Monetary Policy in Denmark.
Danmarks Nationalbank, 2003. SCP – Scandinavian Cash Pool, Danmarks Nationalbank, Monetary Review, 4th Quarter 2003.
Danmarks Nationalbank, Documentation Basis for Monetary-Policy Instruments and Settlement of Payments in DKK, EUR, SEK and ISK (in Danish only).
ECB, 2005a, The implementation of monetary policy in the euro area – General documentation on Eurosystem monetary policy instruments and procedures, February 2005.
ECB, 2005b, Correspondent Central Banking Model (CCBM) – Procedures for Eurosystem counterparties, May 2005.
EMI, 1998, Standards for the use of EU Securities Settlement Systems in ESCB credit operations, January 1998.
[1] Others that, in the assessment of Danmarks Nationalbank, play a significant role in relation to settlement of payments at Danmarks Nationalbank may also open accounts.
[2] In other countries account holders that are not monetary-policy counterparties do not normally have access to interest-bearing current accounts either. Instead they may earn interest on their excess liquidity overnight in the private financial sector.
[3] The Sumclearing and VP settlement are described in Chapter 6, and CLS in Chapter 8.
[4] Target is described on in Chapter 8.
[5] The discount rate has been equivalent to the current-account rate from April 1992, when the current monetary-policy instruments were essentially introduced, until today (June 2005).
[6] For a more detailed review of Danmarks Nationalbank's monetary-policy instruments, reference is made to Danmarks Nationalbank (2003).
[7] Since the euro is not Denmark's national currency, euro payments in the Danish payment and settlement systems are in principle not settled via central-bank money, cf. Chapter 1, Box 1.5.
[8] The amount is deposited in the morning and withdrawn at the end of the day. Originally Danmarks Nationalbank deposited 1 billion euro, but due to lower demand for intraday credit in euro, the deposit has been lowered to 585 million euro at present (June 2005).
[9] Danish banks can obtain monetary-policy loans in euro via branches or subsidiaries in the euro area.
[10] If the current account in euro still shows an overdraft after 6.00 p.m., penalty interest is also imposed on the account holder. This penalty increases in the event of recurrence.
[11] For a review of pledging of collateral in a legal perspective, see Andersen and Gürtler (2003).
[12] A full list of eligible securities can be found at www.nationalbanken.dk.
[13] For securities that have not been traded on CSE within the last five banking days, a theoretical price fixed by Danmarks Nationalbank is applied.
[14] The rules for the ECB's calculation of the collateral value of securities for monetary-policy loans and intraday credit in the Eurosystem are described in ECB (2005a). Danmarks Nationalbank must apply these rules to intraday credit in euro and has chosen to apply the same rules for credit in kroner.
[15] Danmarks Nationalbank is also settlement bank for the Danish FUTOP Clearing Centre. Settlement of FUTOP payments takes place directly via the account holders' current accounts at Danmarks Nationalbank. FUTOP is described in Chapter 6.
[16] VP settlement also settles periodic payments in Icelandic kronur and Swedish kronor.
[17] For settlement of periodic payments in the VP settlement, automatic collateralisation is used in the same way as in the Sumclearing.