In 2007, the International Monetary Fund (IMF) released a detailed assessment of Denmark's real-time gross settlement system for large-value payments, the KRONOS, and its retail payments system, Sumclearing as both these systems were categorized as SIPS by the Danish authorities. Both systems were assessed against the Committee on Payment and Settlements' Core Principles for Systemically Important Payment Systems (CPSIPS). KRONOS, according to the report observes seven CPSIPS, broadly observes two, and principle V is not applicable since KRONOS settles in real time. The Sumclearing system, on the other hand, observes six CPSIPS, broadly observes three, and partly observes one CPSIPS. The IMF assessors concluded that the payment system infrastructure in Denmark is "highly developed and technologically well advanced." The country has a strong legal infrastructure, and payment systems are overseen by the Danish National Bank (DNB). The DNB's oversight responsibilities are regulated by the Securities Trading Act. KRONOS was a participant in the Euro area's now defunct Trans-European Automated Real-time Gross Settlement Express Transfer (TARGET) system. Denmark participated in TARGET as a non-euro area European Union (EU) member state. TARGET was replaced by TARGET2 in November 2007 and Denmark joined TARGET2 in May 2008. According to information provided on the DNB's website the terms and conditions for Danish participation in TARGET2 remain unchanged and the country is still subject to the restrictions for non-euro area EU member states, such as lack of access to euro liquidity overnight. While with TARGET, the large value interbank payment systems of member countries were interlinked, TARGET2 provides harmonized payment services under a single shared platform across its member countries. However, there is little information assessing TARGET2's compliance with the CPSIPS except for a statement in a 2008 European Central Bank (ECB) report on TARGET2, in which it indicates that the system is expected to fully observe all the CPSIPS. Despite the lack of information on TARGET2, it is generally believed that the system is an improvement over its predecessor and its component systems.

General Overview

The Danish National Bank (DNB) designates three payment systems as systemically important on its website, namely the Real Time Gross Settlement (RTGS) system for large-value payments, KRONOS; the retail payment system, Sumclearing; and the securities settlement system, Danish Central Securities Depository (VP). The International Monetary Fund (IMF) conducted a detailed assessment of Denmark's payment systems against the Committee on Payment and Settlement Systems' (CPSS) Core Principles for Systemically Important Payment Systems (CPSIPS) in which it assessed the KRONOS and Sumclearing systems. The VP system was assessed against separate standards and is beyond the purview of this report. The 2007 IMF assessment concluded that KRONOS observes seven of the CPSS' CPSIPS. It broadly observes two, and principle V is not applicable since KRONOS settles in real time. KRONOS is owned and operated by the DNB and is a multicurrency system that settles transactions in Danish kroner and euro. For the settlement of euros, KRONOS was linked to the Trans-European Automated Real-Time Gross Settlement Express Transfer (TARGET) system, the payment system for the Euro area. In May 2008 Denmark joined TARGET2, the successor to TARGET. However, there is little information publicly available regarding the effects of this transition on payment systems in Denmark. Sumclearing is of systemic importance as it is the only retail payment system in Denmark and also handles relatively large payments. It is owned by the Danish Bankers Association (DBA) and operated by the Payment Business Services (PBS). According to the 2007 IMF assessment the Sumclearing system observes six CPSIPS, broadly observes three, and partly observes one CPSIPS. The KRONOS, Sumclearing, and VP settle through clearing accounts their participants have opened with the DNB.

In its 2007 report, the IMF found "that all relevant prerequisites for effective payment and settlement systems are fulfilled in Denmark. The payment system infrastructure in Denmark is highly developed and technologically well advanced" (p. 8). Information provided on the DNB website indicates that the DNB oversees payment systems in the country. According to the 2007 IMF report "recently, an amendment of the STA [Securities Trading Act] has been approved by the parliament, spelling out that Danmarks Nationalbank [Danish National Bank] will be the sole authority responsible for overseeing systemically important payment systems" (p. 53). According to its website and its 2008 Financial Stability report , the DNB in its oversight of SIPS in Denmark relies on international standards, the Danish National Bank Act and the Securities Trading Act (STA). The 2008 Financial Stability report states that the DNB "has prepared its oversight policy in accordance with internationally recognized principles for oversight by central banks" (p. 64).

Per the 2007 IMF report "Denmark has a sound legal infrastructure for payments and securities settlement transactions that covers issues as finality, netting, and delivery-versus-payment (DVP). The enforceability of collateral arrangements is well regulated, electronic signature and use of electronic data is recognized in court, and all contractual relationships are enforceable. A zero hour rule does not exist and finality of payments is ensured in case of bankruptcy" (p. 8). Specific laws governing the KRONOS are the Danish National Bank Act, state [thus] the business relationship with the users and their accounts remain with the national central banks" (p. 4). In its 2002 report on TARGET2, the ECB states that "TARGET2 is expected to fully comply with the BIS [Bank for International Settlement] CPSS report on Core Principles for Systemically Important Payment Systems" (p. 7).

The Danish Financial Supervisory Authority (DFSA) and the DNB oversee payment systems in Denmark. The 2007 IMF report notes that both agencies cooperate well and "the cooperation and consultative arrangements between the two overseers are laid down in a memorandum of understanding (MOU) that is publicly available." (p. 8). The DFSA's and DNB's payment systems' oversight responsibilities are regulated by the Securities Trading Act (STA) of Denmark. The STA was amended in March 2006, which further clarified the oversight authority. As noted earlier the 2007 IMF report mentions that this amendment clarifies that the Danish National Bank will be the sole authority responsible for overseeing systemically important payment systems.

The Principles

I. The system should have a well-founded legal basis under all relevant jurisdictions.

FC

Both KRONOS and Sumclearing, observe this principle, per the 2007 detailed assessment by the IMF. Both the systems' operations are "embedded into a solid legal framework of laws and contractual arrangements that is complete, reliable, and enforceable in all relevant circumstances" (p. 15, 31). The legal framework for KRONOS comprises of the Danish National Bank Act; the General Danish law of contracts and property; regulations governing payment systems and collateral arrangements; the contractual basis for KRONOS; and the conditions of the European System of Central Banks for the participation of non-euro area national central banks in TARGET2. The legal framework for Sumclearing comprises of the General Danish law of contracts and property; specific Danish rules of law directed at payment systems and collateral arrangements; regulations with respect to payment instruments such as the laws on checks and bills of exchange and the act on certain means of payments; and the contractual basis for Sumclearing, including its rules and regulations. Funds in neither system carry any legal risk or vulnerability to retroactive action in case of bankruptcy of the participant. The 2004 ECB assessment of KRONOS and the 2005 DNB assessment of Sumclearing also concluded that the two systems observe this principle.

II. The system's rules and procedures should enable participants to have a clear understanding of the system’s impact on each of the financial risks they incur through participation in it.

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Per the 2007 detailed assessment by the IMF, KRONOS observes this principle, while Sumclearing broadly observes this principle. KRONOS' rules and regulations are spelled out in the DNB's publication "Documentation for Monetary-policy instruments and settlement of payments in DKK, EUR, SEK and ISK." As the IMF notes, "the available documentation and the publications of Danmarks Nationalbank [Danish National Bank] enable participants to understand the system's impact on each of the financial risks they bear through their participation in KRONOS" (p. 18). Sumclearing's rules and procedures are spelled out in the DBA's Book of Agreements and its Payment System Manual. However, the clearing and settlement of payments in the system are difficult for the outsiders to comprehend mainly due to the number of different parties involved and their various roles, the operation of two clearing subsystems and their different ways of processing different payment instruments, the interrelationship structure between the Sumclearing and its subsystems, the clearing of Kroner and Euro payments, the role played by different settlement cycles, the DNB's intraday credit facility, and the system's dealing with defaults and their consequences. By way of recommendation, the IMF calls upon the DBA to publish a memorandum for the system participants as soon as possible outlining the roles of the different parties in the system, the rules and procedures to handle extraordinary circumstances, and the consequences of default of a participant. The IMF also advises that the memorandum be published on the DBA's website for public access. The 2004 ECB assessment of KRONOS and the 2005 DNB assessment of Sumclearing concluded that the two systems observe this principle.

III. The system should have clearly defined procedures for the management of credit risks and liquidity risks, which specify the respective responsibilities of the system operator and the participants and which provide appropriate incentives to manage and contain those risks.

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KRONOS observes this principle, while Sumclearing only partly observes this principle, per the 2007 detailed assessment by the IMF. The KRONOS' design and the DNB's liquidity facilities "enable participants to manage and contain their credit and liquidity risk appropriately" (p. 22). Nevertheless, the assessment does note that the structuring of the settlement of ancillary systems, the design of its liquidity management system, and the organization of its communication infrastructure could potentially make this sophisticated yet complex system vulnerable to operational risks and hamper the liquidity flow in the system. The Sumclearing has been assigned a partly observed rating because its method of addressing shortfalls of funds is considered unacceptable for a systemically important payment system. The practice of removing all payments involving the failed participant can have an adverse impact on the remaining participants in the system. Further, the system has the practice of making funds available to its customers the day before the settlement is final. This can result in potential credit and operational risk and make the system vulnerable in a crisis because reversing a payment is lengthy and cumbersome. The system has not been assigned a no-compliance rating because although it is relatively large by international standards, its size is not comparable to a large-value payment system in a developed country. Further, it is only a customer-to-customer payment system, and to add, it has abundant liquidity in its reserves. Also, settlement in the system takes place in the night and early morning providing a participant to cover its liquidity position with interbank money market loans. The IMF assessment makes three recommendations in this regard: (1) reduce potential systemic risks in the system by enhancing the loss-sharing and liquidity arrangements, or by lowering net positions to be cleared; (2) prevent the transfer of funds in a customer's account before the settlement is final; and (3) strengthen the procedures for reversal of defective payments to make them smooth and less time-consuming. The 2004 ECB assessment of KRONOS concluded that KRONOS observes this principle while the 2005 DNB assessment of Sumclearing concluded that it broadly observes this principle.

IV. The system should provide prompt final settlement on the day of value, preferably during the day and at a minimum at the end of the day. (Systems should seek to exceed the minima included in this Core Principle.)

FC

Both KRONOS and Sumclearing observe this principle, per the 2007 detailed assessment by the IMF. KRONOS provides prompt final settlement during the day. As for Sumclearing, it is a netting system with several settlement cycles during the day, the major part of the process taking place during midnight/early morning of the settlement day. Settlement is final on the same day as it is totaled and netted and the two are not too apart from each other. Nevertheless, the assessment does note that "this does not imply that retail payments are settled with same day finality. The time between the moment payment orders of their clients are received by the banks and are submitted for processing or are submitted directly by retailers, and the moment they are finally settled is normally one day due to the overnight settlement" (p. 41). The 2004 ECB assessment of KRONOS and the 2005 DNB assessment of Sumclearing also concluded that the two systems observe this principle.

V. A system in which multilateral netting takes place should, at a minimum, be capable of ensuring the timely completion of daily settlements in the event of an inability to settle by the participant with the largest single settlement obligation. (Systems should seek to exceed the minima included in this Core Principle.)

CP

This principle is not applicable to KRONOS since it is an RTGS system and settles continuously during the day with intraday finality. The 2007 IMF assessment notes that Sumclearing broadly observes this principle. According to the report although the systemic risk in the Sumclearing system is low during normal situations, it may not be the case under more stressed financial condition when liquidity is scarce. This situation is all the more likely to arise per the IMF report as "credit risk and operational risk exist due to the crediting of customers accounts well in advance of the final settlement" (2007, p. 42). The 2004 ECB assessment of KRONOS also concluded that Principle V is not applicable to this system. The 2005 DNB assessment of Sumclearing concluded that Sumclearing observes this principle.

VI. Assets used for settlement should preferably be a claim on the central bank; where other assets are used, they should carry little or no credit risk and little or no liquidity risk.

FC

Both systems, KRONOS and Sumclearing observe this principle per the 2007 IMF assessment. Both systems settle in central bank money. The 2004 ECB assessment of KRONOS and the 2005 DNB assessment of Sumclearing also concluded that the two systems observe this principle.

VII. The system should ensure a high degree of security and operational reliability and should have contingency arrangements for timely completion of daily processing.

CP

According to the 2007 IMF report, KRONOS broadly observes this principle. As reported by the IMF, the "DNB has established an effective security policy and has defined clear objectives to ensure a high degree of operational reliability" (2007, p. 26). Sumclearing per the 2007 IMF assessment also only broadly observes this principle. The report notes that the system operator, PBS has effective policies in place to ensure security and operational reliability, and has adequate contingency arrangements for timely completion of daily processing. However, the IMF report also mentions that a full assessment of operational reliability of the system was not undertaken due to the lack of data, and furthermore the report cited PBS' lack of broadened focus with regards to contingency measures as another drawback with the Sumclearing system's full adherence to this principle. The 2004 ECB assessment of KRONOS concluded that the system observes this principle. The 2005 DNB assessment of Sumclearing concluded that the system broadly observes this principle.

VIII. The system should provide a means of making payments which is practical for its users and efficient for the economy.

CP

According to the 2007 IMF report, KRONOS broadly observes this principle. The less that full observance rating was assigned to this principle as the 2007 IMF report noted that "KRONOS provides a reliable service to its participants that appear to fit the needs of its users

and fulfils the public interests by reducing systemic risks and offering an efficient channel for the execution of monetary policy. It does not, however, achieve full cost recovery" (p. 27). The Sumclearing system, according to the 2007 IMF report, observes this principle. The report notes that "the Danish banking sector and its interbanking service provider, PBS, offer a broad and modern package of retail payment services... [and] customer satisfaction with some of the services is very high" (p. 48). The 2004 ECB assessment of KRONOS also concluded that the system broadly observes this principle. The 2005 DNB assessment of Sumclearing concluded that the system observes this principle.

IX. The system should have objective and publicly disclosed criteria for participation, which permit fair and open access.

FC

The IMF in 2007 report notes that KRONOS observes this principle. According to the report "the access rules for KRONOS are in general clear, publicly disclosed, fair and objective, and do not have a restrictive impact on competition. However, the discretionary powers could within this framework be questioned, although they have not been applied in practice" (p. 28). Similarly, the IMF finds the Sumclearing system also to observe this principle. "The Sumclearing has objective criteria for participation, which permit fair and open access and do no restrict competition in the banking sector"(p. 49). The 2004 ECB assessment of KRONOS and the 2005 DNB assessment of Sumclearing also concluded that the two systems observe this principle.

X. The system's governance arrangements should be effective, accountable and transparent.

FC

Both systems, KRONOS and Sumclearing observe this principle according to the 2007 detailed assessment by the IMF. Their governance structures are "effective, accountable, and transparent" (pp. 29, 50). However, for Sumclearing the IMF recommends enhancing the transparency of the system by publishing the memorandum on the system's rules and procedures, and taking steps to fully observe all the CPSIPs. The 2004 ECB assessment of KRONOS and the 2005 DNB assessment of Sumclearing also concluded that the two systems observe this principle.

A. The central bank should define clearly its payment system objectives and should disclose publicly its role and major policies with respect to systemically important payment systems.

FC

The 2007 IMF assessment finds the DNB to observe this principle and states that the "Danmarks Nationalbank [Danish National Bank] has clearly defined its objectives with respect to Systemically Important Payment Systems and clearing and settlement systems for securities within the responsibilities it has been charged with in the Danish National Bank Act and has disclosed its role, and major policies" (p. 53).

B. The central bank should ensure that the systems it operates comply with the Core Principles.

CP

According to the 2007 IMF report, the DNB broadly observes this principle. The report states that there is a sound framework in place to ensure that KRONOS complies with the CPSIPS. The less than full observance rating has been assigned since the DNB's "oversight of KRONOS has not yet been formalized in written procedures and manuals describing the sources and methodologies used. Also, the information gathering could be improved" (IMF 2007, p. 54).

C. The central bank should oversee compliance with the Core Principles by systems it does not operate and it should have the ability to carry out this oversight.

CP

According to the 2007 IMF report, the DNB broadly observes this principle. The report notes that DNB and DFSA together oversee the two SIPS not operated by the DNB, namely the Sumclearing and VP systems. However, the IMF notes that the "oversight task is still in development and could be strengthened further" (p. 55).

D. The central bank, in promoting payment system safety and efficiency through the Core Principles, should cooperate with other central banks and with any other relevant domestic or foreign authorities.

FC

Denmark observes this principle as noted in the 2007 IMF assessment. The DNB and the DFSA cooperate in their responsibilities to oversee the payment systems and in this regard have laid out a memorandum of understanding (MoU) that is published on the website of the two institutions. Further the DNB has "regular meetings with other central banks and participates in forums with industry representatives for discussion of payment system issues" (p. 56) and has signed MoUs with central banks of other Nordic countries.