## _cr07117

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---

### VP scope, market structure, and settlement arrangements
- VP is the sole central securities depository (CSD) in Denmark; registers ownership and clears and settles:
  - treasury bills; all other negotiable money market instruments; public and private sector bonds; mortgage bonds; equities; investment certificates issued by mutual funds.
- Derivatives:
  - Derivatives trades in Danish securities conducted through OMX Derivatives Markets (secondary name to Stockholm Stock Exchange Ltd (SSE)); OMX acts as CCP for that market.
  - Market size (mid-2005): around 700,000 contracts outstanding with an average daily settlement of DKr 1.5 million.
- Trading venues and volumes (2004 data unless stated):
  - Mortgage bonds turnover 2004: 282.5 percent of GDP.
  - Government paper turnover 2004: 157.5 percent of GDP.
  - Total turnover of bonds and treasury bills 2004: 486.7 percent of GDP.
  - Turnover in listed equities 2004: 40.9 percent of GDP.
  - Trading in derivatives 2004: 1.3 percent of GDP.
- MTS Denmark (launched 2003):
  - Participants: 16 (2 are clearing members of Euroclear Bank).
  - Daily turnover: approximately DKr 2 billion (US$325 million).
- VP ownership and links:
  - Owned by the financial sector and Danmarks Nationalbank.
  - Effective DVP links with Euroclear and Clearstream enabling back-to-back same day value; bilateral FOP links with Sweden (VPC) and Iceland (VS).

### Transaction volumes and participation (2001–05)
- Transactions settled in VP increased rapidly:
  - 2001: Instructions (in millions) 4.7; Value (in billions DKr) 19,914
  - 2002: Instructions (in millions) 4.9; Value (in billions DKr) 18,927
  - 2003: Instructions (in millions) 6.2; Value (in billions DKr) 24,537
  - 2004: Instructions (in millions) 7.4; Value (in billions DKr) 23,576
  - 2005: Instructions (in millions) 10.2; Value (in billions DKr) 30,924
    - of which Bonds (in billions of DKr): 27,485
- Accounts and membership:
  - Number of investor accounts opened in VP: 3.0 million.
  - VP had 131 clearing members (2004); 31 were remote members.
  - Foreign investor holdings: Stocks 28.4 percent of all stocks; Bonds 15.9 percent of all bonds.
  - Approximately 56 percent of turnover in stocks in VP related to foreign investors.

### Legal framework, dematerialization, and finality (Recommendation 1, 7, 8)
- Legal foundations:
  - Major rules/regulations: the Danish STA; executive orders; VP’s Clearing Rules; VP’s participation agreement.
  - Dematerialization supported by Part 19 of the STA; transfers are book-entry only; Section 59 STA basis for dematerialization.
  - Netting recognized (Sections 50 and 57 STA); European Finality Directive protection applied; VP notified as designated system.
  - Collateral realization allowed immediately (Section 58j STA).
  - Finality: Section 69 STA supports irrevocability/finality when book-entry registered.
- Dematerialization and registration:
  - All securities in VP are dematerialized; registration in VP is sole proof of ownership and is final when purchaser’s securities account is credited.
  - Physical securities remain in circulation but cannot be traded in regulated markets or settled in VP.
- DVP and settlement mechanics:
  - VP settles predominantly on multilateral netting basis (BIS DVP model 3) with settlement on a security-by-security (ISIN) basis and six daily net settlement cycles/blocks.
  - Around 95 percent of all transactions settle in the first block at 6:00 p.m. (value date T+3 if no other time agreed).
  - RTGS facility (BIS model 1 DVP): transactions between 8:00 a.m. and 3:00 p.m.; only primary cash providers (with Danmarks Nationalbank account) can execute real-time transactions on own behalf.
  - Except the two percent FOP transfers, all transactions in VP are settled on a DVP basis in central bank money.

### Matching, settlement cycles, and performance (Recommendations 2–5, 3)
- Matching and confirmation:
  - Trades on SAXESS and MTS Denmark matched/confirmed automatically on trade date (T+0); matching in VP is real-time during opening hours.
  - Mandatory matching prior to settlement; no settlement without matching (except FOP).
- Observed matching/confirmation statistics prior to settlement day(s):
  - S-3: 88,70 percent
  - S-2: 97,70 percent
  - S-1: 99,80 percent
- Settlement cycles and fail rates (January–March 2004):
  - Percent settled on contractual date by number: 99.288; by value: 99.287
  - S+1: 0.570 (number); 0.496 (value)
  - S+2: 0.107 (number); 0.197 (value)
  - S+3: 0.016 (number); 0.016 (value)
  - S+4: 0.015 (number); 0.004 (value)
  - S+5: 0.003 (number); 0.001 (value)
  - Implied settlement failure rate on contractual settlement date: 0.712 percent by number and value.
- Settlement cycles used:
  - Market practice: T+3 for bonds and shares; T+2 for treasury bills and money market transactions.
  - VP supports settlement days from T+0 to T+365; rolling settlement adopted with final settlement no later than T+3.

### Liquidity, collateral, securities lending, and CCP considerations (Recommendations 4–5, 9, 10)
- Automatic collateralization and liquidity:
  - Settlement agreement with Danmarks Nationalbank includes collateral management via “Automatic Collateralization Agreement.”
  - Securities in trading accounts can be used as collateral; self-collateralization allowed (using securities to be received as collateral).
  - Only government bonds and mortgage bonds are eligible collateral.
  - Sum of cash in VP settlement account in KRONOS plus liquidity raisable under automatic collateralization forms cash cover and liquidity buffer.
- Securities lending and repos:
  - Securities lending, repos, and securities swaps clearly supported by law (Part 18a STA); VP may arrange securities lending under Section 53 STA.
  - Danish government offers securities lending for government bonds at 20 basis points.
  - Danmarks Nationalbank acts as lender-of-last-resort for borrowing government and mortgage bonds at a rate set above market rates.
- Central counterparty (CCP):
  - No CCP established for securities settlement in Denmark; market participants view a CCP as potentially not adding value.
  - Assessment: Broadly observed. Recommendation: benefits and costs of a CCP should be assessed.
- Settlement bank and cash settlement assets:
  - Cash settlement in kroner occurs in Danmarks Nationalbank payment system KRONOS in central bank money.
  - Of VP’s 131 clearing members, 87 have VP settlement accounts in KRONOS; 44 use a “primary cash provider.”
  - Recommendation: Danmarks Nationalbank and DFSA should monitor concentration risks related to use of the same primary cash provider.

### Risk controls, stress testing, and default handling (Recommendations 6–10)
- Default handling and limits:
  - No mandatory guarantee fund, margin, or buy-in/sell-out procedure specifically to ensure timely settlement if the largest deferred netting participant defaults.
  - VP may eliminate transactions by fixed elimination rules and defer transactions up to five settlement days.
  - Participants required to hold a liquidity buffer; sanctions for repeated settlement failure can increase to DKr 50,000 and result in DFSA notification.
- Stress testing conducted:
  - Danmarks Nationalbank analyzed removal of participant with largest obligation on January 2, 2004 and a randomly chosen settlement day; effects relatively small; failed settlements in first block would have risen by about 10 percentage points.
  - Replacement cost losses in worst-case scenario would have been 8 percent of the excess capital of the largest counterparty.
  - Effects of multiple failures were not analyzed.
- VP exposures:
  - VP does not grant credit; intraday credit is granted by Danmarks Nationalbank via automatic collateral accounts administered by VP; no limits imposed by Danmarks Nationalbank on intraday credit extensions.
- Recommendations to achieve full observance:
  - Analyze effects of the failure of the largest participant and of multiple participant failures.
  - Determine costs of guaranteeing settlements or preventing losses (e.g., collateralization of market risks, establishment of a CCP).
  - Account for changing risk profiles due to cross-border trading and order-driven platforms.

### Operational risk, contingency, and capacity (Recommendation 11)
- IT security and operations:
  - VP has an IT security policy approved by the Board; threats reassessed annually; SPRINT model used for change-risk evaluation.
  - Adequate data protection: access control, encryption, firewalls; external tests twice a year.
  - Development/testing/production separation and formal change management via Change Management Forum.
- Contingency and availability:
  - Hot stand-by remote site with real-time mirrored data; reallocation within one hour; data stored at several locations.
  - Outsourced central data processing to DMdata A/S (IBM); IT capacity for five times average consumption.
- Operational targets and performance:
  - uptime target: 99.7 percent; average delays per year: not more than on two-days a year.
  - Availability and incidents:
    - 2002 — Availability 99.9 %, Incidents 2
    - 2003 — Availability 99.9 %, Incidents 0
    - 2004 — Availability 99.9 %, Incidents 2
    - Jan-Oct 2005 — Availability 99.9 %, Incidents 1
  - Assessment: Observed. Recommendation: coordinate and test contingency procedures jointly with KRONOS and Sumclearing operators.

### Custody, investor protection, governance, disclosure, and access (Recommendations 12, 14–18)
- Custody and investor protection:
  - Securities normally registered in VP in the name of the end-investor; segregation rules for omnibus accounts (Section 72 Danish Financial Business Act).
  - Direct participant accounts contain only investor’s own securities; 3.0 million investor accounts opened in VP.
  - Liability and compensation schemes:
    - VP liability scheme up to DKr 1 billion (backed by VP’s capital and direct participants’ guarantees).
    - Liability scheme up to DKr 500 million per event for wrongful book-keeping/errors/misuse; other direct participants liable for outstanding amounts if account operator cannot cover.
- Governance and access:
  - VP is a limited company with a 15-member Board (10 appointed by general meeting, 5 by employees); shareholder groups guaranteed representation; Danmarks Nationalbank represented.
  - Participation criteria published; access open to supervised securities dealers and entities clearing on own behalf.
  - Termination procedures: clearing member may terminate with three months’ notice provided obligations discharged; VP may terminate for gross/repeated breaches.
  - Assessment: Observed.
- Disclosure and standards:
  - VP completed and disclosed the CPSS/IOSCO questionnaire in 2002; DFSA and Danmarks Nationalbank published self-assessments (2004); disclosure in Danish and English; answers reviewed regularly.
  - VP supports SWIFT (ISO 15022) and ISIN (ISO 6166) identification.
  - Assessment: Observed — VP provides participants sufficient information to identify risks and costs.

### Links and cross-border settlement (Recommendation 19)
- Links:
  - Direct DVP links with Euroclear and Clearstream; Euroclear holds a securities account at VP and a cash account at Danmarks Nationalbank.
  - Timing of VP settlement cycles corresponds with Euroclear settlement cycles to allow back-to-back same day value.
  - Clearstream holds a VP securities account serviced by Danske Bank; bilateral FOP links with VPC (Sweden) and VS (Iceland) exist with limited use.
- Re-use and finality:
  - Settlement via links is final; securities received via links can be re-used for settlement during the day.
- Credit and collateral:
  - VP does not extend credit to Euroclear or Clearstream; Euroclear elected not to participate in automatic collateralization to avoid pledging Danish securities in its VP omnibus account.
- Assessment: Observed.

### Summary observance and recommended actions
- Principles Grouped by Assessment Grade (Table 2):
  - Observed: 17 — 1, 2, 3, 5, 6, 7, 8, 10, 11, 12, 13, 14, 15, 16, 17, 18 and 19
  - Broadly observed: 2 — 4 and 9
  - Partly observed: none
  - Nonobserved: none
  - Not applicable: none
- Key recommended actions (selected from Table 4):
  - Analyze failure effects of the largest participant and effects of multiple failures; evaluate costs of guaranteeing settlements or preventing losses (e.g., collateralization, CCP).
  - Analyze spillovers to other systems (Sumclearing, money market exposures) in case of a participant failure.
  - Overseers should monitor concentration risk related to shared primary cash providers and take action if necessary.
  - Coordinate and test contingency plans with KRONOS and Sumclearing system owners/operators.
  - Allow overseers to supervise outsourced activities and conduct onsite inspections where necessary.

### Authorities’ response and intended follow-up
- Danmarks Nationalbank and DFSA largely agreed with the IMF assessment.
- Planned follow-up actions:
  - Review benefits and costs of introducing additional measures to reduce settlement risks, including evaluation of a CCP and effects of increased foreign participation.
  - Further formalize supervision of concentration risks from indirect participation and payment providers.
  - Strengthen central bank oversight via amendment to the STA effective March 1, 2006; revise MoU between Danmarks Nationalbank and DFSA; broaden oversight of the retail payment system (Sumclearingen) and formalize oversight procedures and guidelines with a view to achieve full observance in 2006.

*Source: IMF staff assessment based on Danmarks Nationalbank and Finanstilsynet materials used in the FSAP mission (November 7–18, 2005).*

### 1. Number and Value of Transactions Settled at VP, 2001–05 .........................................7

### 1. Number and Value of Transactions Settled at VP, 2001–05

### Introduction and Purpose
- Assessment carried out as part of the first Financial Sector Assessment Program (FSAP) mission to Denmark, November 7–18, 2005.
- Assessment based on a comprehensive self-assessment provided by Danmarks Nationalbank and Finanstilsynet (DFSA).
- Focus: observance of the Committee for Payments and Settlement Systems (CPSS) and the International Organization of Securities Commissions’ (IOSCO) Recommendations for Securities Settlement Systems (dated November 2001).

### Scope of VP’s Activities
- VP (Værdipapircentralen A/S) is the sole central securities depository (CSD) in Denmark and registers ownership of securities issued in the country and clears and settles securities transactions in regulated markets and in the over-the-counter (OTC) market.
- VP registers, clears, and settles:
  - treasury bills,
  - all other negotiable money market instruments,
  - bonds issued by the public and private sector,
  - mortgage bonds,
  - equities,
  - investment certificates issued by mutual funds.
- Derivatives trading and clearing:
  - Derivatives trades in Danish securities are conducted through OMX Derivatives Markets (secondary name to Stockholm Stock Exchange Ltd (SSE)).
  - OMX acts as the central counterparty (CCP) for derivatives trades in that market.
  - Market size (mid-2005): around 700,000 contracts outstanding with an average daily settlement of DKr 1.5 million.
  - Futures and options on Danish securities previously listed on FUTOP (CSE) have been transferred to SSE following merger into OMX Group AB.

### Institutional and Market Structure
- Denmark’s capital market characteristics (2004 data):
  - Mortgage bonds turnover 2004: 282.5 percent of GDP.
  - Government paper turnover 2004: 157.5 percent of GDP.
  - Total turnover of bonds and treasury bills 2004: 486.7 percent of GDP.
  - Turnover in listed equities 2004: 40.9 percent of GDP.
  - Trading in derivatives 2004: 1.3 percent of GDP.
- Mortgage bond features:
  - Issued by mortgage banks under tight regulation requiring matching of cash flows (principle of balance).
  - Outstanding mortgage bonds characterized as asset backed securities with priority recourse to underlying real estate in case of default.
  - High credit standing due to asset backing and high quality of underlying mortgages.
- Trading venues and systems:
  - Both bonds and equities can be traded on the Copenhagen Stock Exchange (CSE).
  - All stock exchanges use the common trading system SAXESS (also used by Iceland and Norway exchanges; part of NOREX).
  - CSE membership: 44 members (mostly local and foreign banks and some specialized broker firms).
  - Market value changes: total market value of stock exchange transactions increased by 23.8 percent from 2004 to 2005; equity trading increased 57.8 percent over same period.
  - Bond trading primarily OTC; OTC trades must be reported to CSE; realized prices and volumes published on an electronic bulletin board.
- MTS Denmark:
  - Launched in 2003 to promote international trading in Danish government securities.
  - MTS participants: 16, of which 2 are clearing members of Euroclear Bank.
  - Daily turnover: approximately DKr 2 billion (US$325 million).
  - Governance: committee composed of Government Debt Management at Danmarks Nationalbank, Danish Primary Dealers, and a representative of MTS S.p.A.

### VP’s Settlement Arrangements and Links
- VP settles all securities traded in regulated markets and OTC markets in Denmark.
- Ownership structure: VP is owned by the financial sector and Danmarks Nationalbank.
- Cross-border settlement links:
  - Effective link with Euroclear enables delivery-versus-payment (DVP) and settlement of back-to-back transactions without loss of value dates.
  - Link with Clearstream allows DVP settlement between VP participants and the ICSD.
- Securities in VP:
  - All securities are dematerialized.
  - Settled on a multilateral netting basis in several settlement cycles during the settlement day.
  - VP does not act as central counterparty (CCP), does not act as a settlement bank (does not offer cash services), and does not organize securities borrowing and lending arrangements.
  - Trades can be settled on a real-time gross basis.
  - All settlements conducted on a DVP basis with cash leg settled in central bank money.
- Settlement agreement with Danmarks Nationalbank:
  - Includes collateral management services by VP for intraday credit granted by the central bank under the “Automatic Collateralization Agreement.”
  - Legal foundation in the Securities Trading Act (STA).
  - Features:
    - Securities in trading accounts of clearing members can be used as collateral for intraday credit.
    - Allows self-collateralization (using securities to be received in a clearing cycle as collateral for intraday credit to finance securities bought).
    - No special procedures necessary to pledge securities; securities need not be earmarked and can be substituted if excess collateral exists.
    - VP has contractual obligation to check sufficiency of collateral in accounts before releasing securities or granting intraday credit on behalf of Danmarks Nationalbank.

### Transaction Volumes and Values (2001–05)
- Transactions settled in VP increased rapidly.
- 2005 totals:
  - Instructions (in millions): 10.2
  - Value (in billions DKr): 30,924
    - of which Bonds (in billions of DKr): 27,485
- Table 1 summary (Instructions and Values by year):
  - 2001: Instructions (in millions) 4.7; Value (in billions DKr) 19,914
  - 2002: Instructions (in millions) 4.9; Value (in billions DKr) 18,927
  - 2003: Instructions (in millions) 6.2; Value (in billions DKr) 24,537
  - 2004: Instructions (in millions) 7.4; Value (in billions DKr) 23,576
  - 2005: Instructions (in millions) 10.2; Value (in billions DKr) 30,924
- Source: Danmarks Nationalbank.

### Accounts, Participants, and Foreign Participation
- Securities in VP normally registered in the name of the end investor.
- Number of accounts opened in VP: 3.0 million.
- Account controllers:
  - Banks and other eligible financial institutions act as account controllers for investors (reporting trades to VP and offering cash settlement services).
  - Large customers (investment funds, pension funds) allowed to report directly to VP.
  - Account controllers may opt to become clearing members and settle on behalf of clients.
- Clearing members (2004): VP had 131 clearing members, of which 31 were remote members (foreign financial institutions acting as custodians abroad).
- Foreign investor holdings:
  - Stocks: foreign investors hold 28.4 percent of all stocks issued.
  - Bonds: foreign investors hold 15.9 percent of all bonds issued.
  - Approximately 56 percent of the turnover in stocks in VP related to foreign investors.

### VP’s Other Activities and International Cooperation
- VP conducting research on a paperless title registration and exchange system for real estate property.
- VP developing, in cooperation with the Soros Economic Development Fund, a system for issuing and handling mortgage bonds in Mexico based on the Danish model.

### Regulatory Structure and Oversight
- Danish Securities Council (the Council):
  - Overall responsibility for the framework for securities market operations and market supervision.
  - Issues rules relating to general conditions of the Danish securities market and rules regulating clearing and settlement institutions and CSDs.
  - Composed of representatives of securities dealers, issuers, investors, including Danmarks Nationalbank.
- Danish Financial Supervisory Authority (DFSA / Finanstilsynet):
  - Responsible for regulating the Danish financial sector.
  - Charged with authorization and prudential supervision of market participants and market institutions, including CSE and VP.
  - Tasks and responsibilities outlined in the Securities Trading Act (STA).
- Danmarks Nationalbank:
  - Objectives include maintaining a safe and secure currency and facilitating/regulating circulation of money and credit.
  - Monitors stability and efficiency of payments and securities settlement systems.
  - Oversight role acknowledged by Danish Parliament via amendment of the STA (effective March 1, 2006); prior to that, oversight based on agreements and moral suasion.
  - Nationalbank as settlement bank for VP set specific requirements in settlement agreement obliging VP to observe CPSS/IOSCO Recommendations for Securities Settlement Systems.
- Cooperation between authorities:
  - Danmarks Nationalbank and DFSA work closely on oversight and have concluded a memorandum of understanding (MoU) on cooperation and coordination concerning oversight.
  - Role of the central bank and cooperation between authorities to be laid down in law and in amendment to the STA effective March 1, 2006.

*Source: IMF staff assessment based on Danmarks Nationalbank and Finanstilsynet materials used in the FSAP mission (November 7–18, 2005).*

### 23.      The assessment was based on the following:

### _cr07117 - 23.      The assessment was based on the following:

### Assessment basis
- Self-assessment carried out by the Danish authorities, using the CPSS/IOSCO assessment methodology for Recommendations for Securities Settlement Systems.
- Self-assessment conducted by VP and the completed questionnaire of the European Central Securities Depository Association (ECSDA) (not yet published).
- Discussions with Danmarks Nationalbank, the DFSA, VP, and with market participants.
- Reference materials used to enhance the assessment:
  - Relevant laws, rules, and regulations; MoUs; and VP’s annual reports.
  - Payment Systems in Denmark, a book published by Danmarks Nationalbank, which provides an excellent description of Danish clearing and settlement infrastructure.
  - Several articles by Danmarks Nationalbank staff on: (i) the legal basis for clearing and settlement of securities and the provision of collateral; (ii) financial institutions’ accounts at and pledging of collateral to Danmarks Nationalbank; (iii) assessment of settlement risk in VP; (iv) contagion risk in the Danish interbank market; and (v) the Danish mortgage market.
  - A questionnaire on securities markets completed by Danmarks Nationalbank.
- All parties were fully cooperative; documentation was provided well in advance.

### Executive summary — Legal risk (Recommendation 1)
- Findings:
  - There is a consistent set of laws, regulations, and contracts forming the legal foundation for custody and clearing and settlement of securities.
  - All relevant laws and regulations are publicly available.
  - Finality is well regulated, including in bankruptcy; a zero-hour rule does not exist.
  - Customer assets are protected by law against the bankruptcy of an account controller or custodian.
  - Dematerialization, netting, securities lending arrangements, and establishment of collateral interest are well regulated.
  - All laws, regulations, and contractual arrangements are fully enforceable.
  - VP is fully aware of possible conflicts of laws for linkages and remote participation and indicates Danish law will apply to each aspect of settlement; conflicts of law are identified through legal opinions if relevant.

### Executive summary — Pre-settlement risk (Recommendations 2–5)
- Findings:
  - Matching and confirmation trigger settlement in VP; all transactions are matched prior to settlement, mostly on trading day.
  - Transactions in regulated and OTC markets are settled on a rolling settlement procedure on T+3 or on a shorter settlement cycle in VP.
  - Incentives ensure timely settlement; settlement failures are closely monitored.
  - No central counterparty (CCP) exists for settlement of securities transactions in Denmark; market participants view a CCP as possibly not adding value and potentially impairing efficient settlement.
  - Cost-benefit studies for a CCP were never published; it is unclear whether liquidity and replacement cost risks were adequately balanced against CCP setup costs, or whether alternatives were studied.
  - Uncertainty exists whether changing risk profiles from order driven platforms and internationalization (NOREX, MTS-Denmark) were considered.
  - Securities lending is well established, fully supported by legal, accounting, and tax framework.
  - A well developed securities lending market exists; Danmarks Nationalbank acts as lender-of-last-resort if participants cannot borrow securities in the market.

### Executive summary — Settlement risk (Recommendations 6–10)
- Findings:
  - Electronic registration of securities introduced in 1983; Denmark has promoted dematerialization of all outstanding securities.
  - All shares and bonds traded in regulated markets and in the OTC market are dematerialized, as well as a large amount of unlisted unit trusts.
  - All transactions in VP are settled on a DVP basis in central bank money between clearing members.
  - Smaller participants use a primary cash provider and are exposed to deposit risk.
  - Netting cycles during the long opening day and a trade-for-trade RTGS facility result in almost all trades being settled with intraday finality and reusable intraday funds.
  - No rigorous risk control measures in place to ensure timely settlement in the event of participant bankruptcy for the largest obligations in deferred netting schemes.
  - Danmarks Nationalbank stress tests indicate participants can raise sufficient liquidity under the automatic collateralization arrangement to reduce liquidity pressure in the present situation; effects of multiple failures were not analyzed.

### Executive summary — Operational risk (Recommendation 11)
- Findings:
  - VP has an appropriate IT security policy and proactively assesses threats to system and organization.
  - Risk control measures are reviewed annually.
  - Adequate contingency plans and back-up facilities are available and tested periodically.
  - Operational reliability is high and sufficient capacity exists to handle stress volumes.

### Executive summary — Custody risk (Recommendation 12)
- Findings:
  - Investors are protected against claims of an account controller, custodian, or VP.
  - Securities are normally registered in VP in the name of the end-investor; account segregation rules apply for omnibus/trustee accounts.
  - Custodians must segregate their own investments from clients’ securities in VP.
  - Liabilities of account controllers and custodians are clearly defined and monitored.
  - Ample compensation schemes exist for theft, misuse, or errors.

### Executive summary — Other issues (Recommendations 13–19)
- Findings:
  - VP governance is clearly specified, transparent, ensures fulfillment of public interest requirements, and promotes objectives of owners and users.
  - Access criteria limit access only on grounds of legal risk to finality.
  - Operations of the CSD are cost effective and VP provides participants sufficient information to identify risks and costs of using the system.
  - VP has efficient and safe DVP links with Euroclear and Clearstream and FOP links with Iceland and Sweden; no provisional deliveries take place over these links.
  - VP is supervised and regulated by the DFSA under the STA; Danmarks Nationalbank is involved in oversight based on its central bank act responsibilities.
  - Cooperation and coordination between DFSA and Danmarks Nationalbank are effectively organized and laid out in a MoU.

### Steps to be taken to achieve full observance
- Required analyses and actions:
  - Analyze effects of the failure of the largest participant in more depth.
  - Analyze effects of multiple participant failures.
  - Determine costs involved in guaranteeing settlements or preventing losses in the event of significant failures (for example, by collateralization of market risks and establishment of a CCP).
  - Take into account changing risk profiles due to cross-border trading and use of order driven trading platforms, since these complicate management of counterparty risk.

### Key statistics and summary observance (Table 2)
- Principles Grouped by Assessment Grade
  - Observed: 17 — 1, 2, 3, 5, 6, 7, 8, 10, 11, 12, 13, 14, 15, 16, 17, 18 and 19
  - Broadly observed: 2 — 4 and 9
  - Partly observed: none
  - Nonobserved: none
  - Not applicable: none
- Specific numeric detail noted:
  - 3.0 million investor accounts have been opened in VP.

### Detailed assessment excerpt — Recommendation 1 (legal basis)
- Description highlights:
  - Major rules/regulations: (i) the Danish STA; (ii) executive orders based on this law; (iii) VP’s Clearing Rules; and (iv) VP’s participation agreement.
  - VP’s Clearing Rules and standard participation agreement form the contractual framework; all relevant documents are public and accessible on the websites of the Finanstilsynet, the DFSA (www.finanstilsynet.dk), and VP (www.vp.dk).
- Legal assurance findings:
  - Transactions are legally binding after matching and instruct; observance of agreements under Danish Contract Law.
  - Customers’ assets are protected in insolvency; securities in customer accounts form no part of the account controller’s assets and stay outside bankruptcy per Danish STA provisions.
  - Section 72 of the Danish Financial Business Act extends protections to nominee-accounts; custodians must separate client holdings from own holdings in VP and have no title to securities in nominee accounts.
  - Section 59 of the STA provides basis for dematerialization and electronic book-entry; transfers in VP are book-entry only and legally binding.
  - Netting arrangements recognized (Sections 50 and 57 of the STA); European Finality Directive protection applied; VP is notified to the European Commission as a designated system.
  - Collateral realization on breach is allowed immediately without prior public authority approval (Section 58j of the STA).
  - Securities lending and repos are legally binding; European Collateral Directive implemented in Danish law (Part 18a of the STA); VP may arrange securities lending under section 53 STA.
  - Finality: Section 69 of the STA supports irrevocability and finality once an agreement is finally registered by book-entry; VP’s rules render transactions irrevocable after matching and instruct; settlement final when the netting block is completed or upon RTGS transfer/registration.
  - Danish bankruptcy regulation does not include a zero hour clause; Part 18a of the STA offers protection of finality of netting except in case of fraud.
  - DVP principle supported by section 14 of the Danish Sales of Goods Act.
- Cross-border participation:
  - Of 131 direct members, 31 are remote members operating from abroad; they open accounts in their own names with a Danish account controller and act as clearing members via omnibus accounts.
  - Two foreign participants have opened a cash account with Danmarks Nationalbank (primary cash provider).
  - Danish law prevails for VP registration, clearing, and settlement; EEA implementation of the European Finality Directive supports choice of Danish law for EEA members.
  - For members outside the EEA, a legal opinion is required to ensure enforceability; presently one participant exists from outside the EEA.
  - Under Danish property law, law of the country where the security is registered in a book-entry account governs property effects; Section 58n of the STA makes Danish property law applicable for securities issued abroad transferred to a VP account via linkage with another CSD.
- Assessment: Observed.

*IMF staff report content.*

### 1. What percentages of trades between direct market participants is submitted to a

### _cr07117 - 1. What percentages of trades between direct market participants is submitted to a

### Trade confirmation and matching practices
- Trades conducted on the SAXESS trading platform of the CSE and on MTS Denmark are matched and confirmed automatically on trade date (T+0).
- Straight-through-processing with automatic notification of the trade to VP is not always possible; an account operator must add additional information on the client’s account and the cash account (primary cash provider) in VP, which can cause delay.
- In the informal telephone market (largest part of trading, mainly bonds including mortgage bonds), the general practice among securities dealers is to seek confirmation of all trades on T+0, normally immediately after trade execution, to satisfy obligations to immediately notify CSE of terms and conditions for listed securities (per an Executive order of the DFSA).
- OTC market process:
  - Both securities dealers first report the trade to VP as a pre-advice.
  - VP matches pre-advices and makes output data available to parties that must report a confirmation (“instruct”) to make the trade ready for settlement.
  - If trade already matched elsewhere, participants can submit pre-advice and instruct together.
  - After matching price, volume, etc., the trade is reported to the CSE.
- Matching in VP is performed in real-time and results are communicated continuously during VP’s opening hours.

### Observed matching/confirmation statistics prior to settlement day(s)
- S-3:   88,70 percent
- S-2: 97,70 percent
- S-1: 99,80 percent
- Figures for matching on trade day or the days thereafter are not available, since VP does not know the day on which securities are traded by its participants.
- Interpretation notes:
  - The table seems to suggest confirmation on trade day might be substantially below international practices (98 percent confirmed on trade day), but:
    - Not all securities use a T+3 cycle (e.g., treasury bills and money market transactions use T+2 and are normally submitted to VP on S-2).
    - A small part of trades are matched, confirmed, and settled on a same-day basis (T+0).
    - On regulated markets (CSE and MTS) matching takes place automatically at trade execution.
    - In the OTC market participants are obliged to report trades to the Stock Exchange the same day and normally, before reporting, enter trades in the VP-system for matching and confirmation.
  - Conclusion: the largest part of all trades are matched and confirmed on trade day, thereby conforming with international practices.

### CSD requirements and indirect participants
- The CSD requires settlement instructions to be matched prior to settlement; matching is mandatory and no settlement can take place without matching.
- A matching service is available and use is mandatory for all indirect market participants who have an agreement with VP about clearing and settlement.
- Institutional investors may report trades themselves to VP.

### Assessment and Recommendation (Recommendation 3)
- Assessment: Observed. Matching and confirmation are essential to trigger settlement in VP. Except FOP transfers, no settlement occurs without matching/confirmation; most trades are matched and confirmed on trade day.
- Recommendation 3: Rolling settlement should be adopted in all securities markets. Final settlement should occur no later than T+3. The benefits and costs of a settlement cycle shorter than T+3 should be assessed.

### Settlement cycle, fail rates, and incentives
- VP applies a rolling settlement cycle, supporting settlement days from T+0 to T+365. Market practice: T+3 for bonds and shares, T+2 for treasury bills and money market transactions.
- Settlement performance (period January to March 2004), percentages of trades settled on the contractual date or on subsequent days:
  - Percent by number: 99.288 (Settlement day)
  - Percent by value: 99.287 (Settlement day)
  - S+1: 0.570 (Percent by number); 0.496 (Percent by value)
  - S+2: 0.107 (Percent by number); 0.197 (Percent by value)
  - S+3: 0.016 (Percent by number); 0.016 (Percent by value)
  - S+4: 0.015 (Percent by number); 0.004 (Percent by value)
  - S+5: 0.003 (Percent by number); 0.001 (Percent by value)
- Implied settlement failure rate on contractual settlement date: 0.712 percent by number and value.
- In case of failures, the largest part of delayed settlement was settled the next day.

### Incentives, sanctions, liquidity and collateral arrangements
- VP participants must ensure sufficient securities and cash cover for timely settlement; in addition to cash cover of total net purchase, there must be a liquidity buffer.
- Failure to settle due to insufficient cash or inability to raise intraday credit from Danmarks Nationalbank is subject to a sanction:
  - For repeated violation over a six-month period, the sanction is gradually increased to DKr 50,000.
  - VP will inform the company’s management and report the violation to the DFSA.
- Automatic collateralization scheme:
  - Allows VP participants with a settlement account with Danmarks Nationalbank to use the bulk of securities in their trading account, as well as securities to be delivered in the netting (self collateralization) as collateral to obtain intraday credit from the central bank.
  - The amount of available collateral under the automatic collateral scheme is taken into account in calculating the liquidity buffer.
  - Only government bonds and mortgage bonds are eligible (but these are the most common tradable securities in Denmark).
  - Participants can transfer eligible securities in VP to a pooling pledge account to collateralize overdrafts on their Danmarks Nationalbank current account and monetary policy transactions.
  - The sum of cash in the VP settlement account in KRONOS and liquidity that can be raised under the automatic collateralization scheme forms the cash cover and the liquidity buffer.
- Market conventions stipulate delay beyond value date incurs interest claims; it is not allowed to change the market price with respect to accrued interest.
- No additional steps other than requirement to hold a liquidity buffer are taken to mitigate effects of delayed settlements or permanent default, neither in terms of liquidity nor market risks.
- VP monitors the settlement process and will impose fines in case of insufficient liquidity to settle.

### Assessment of settlement cycle shortening
- A 2001 investigation found the system likely able to handle a shorter settlement cycle, but market participants deemed shortening from T+3 to T+2 too cumbersome and too costly relative to benefits:
  - Bulk of securities traded in Denmark are bonds (relatively low price volatility).
  - Large number of cross-border trades and many parties involved imply fail rate would substantially increase.
  - Bulk of T+3 transactions are settled at the beginning of VP’s 24-hour opening hours with value date T+3, which starts at 6:00 p.m. T+2.
  - 95 percent of the trades are settled at 6:00 p.m. and during the night to ensure timely cross-border delivery via direct links with Euroclear and Clearstream.
- Assessment: Observed. VP executes a rolling settlement cycle with final settlement no later than T+3. Shortening has been evaluated; possible risk reduction benefits are deemed not to outweigh substantial investment and communication costs.

### Central counterparty (CCP) assessment and Recommendation 4
- No CCP is established in Denmark; no indemnification scheme introduced for SAXESS, OTC market, or MTS.
- Replacement costs risk and liquidity risk are borne by counterparties; market participants manage credit risk by setting credit lines on counterparties (potentially impaired by anonymous trading on order-driven platforms).
- Introduction of a CCP has been discussed in national working groups and within the Nordic Alliance; conclusion to date: establishment of a CCP would not be cost-effective for market participants at a national level due to:
  - Large share of transactions in informal telephone market where counterparties know each other and manage credit risk.
  - Additional operational costs and possible overlaps between a CCP and VP.
  - No liquidity benefits compared with efficient multilateral netting in VP supported by the automatic collateralization scheme.
- Different assessments were documented but not published or made available to the assessor.
- Assessment: Broadly observed. No CCP is established; it is difficult to observe whether assessments were carefully carried out or incorporated market developments and alternatives (e.g., indemnification arrangements).
- Recommendation 4: The benefits and costs of a central counterparty should be assessed. Where such a mechanism is introduced, the central counterparty should rigorously control the risks it assumes.

### Securities lending and Recommendation 5
- Legal and regulatory framework:
  - Securities lending in the form of repos and securities swaps is clearly supported by Danish law and treated as a financial collateral arrangement under Part 18a of the STA.
  - Implementation of the European Collateral Directive in Danish law expanded scope/protection of claims via collateral, allowing margin calls and substitution of collateral.
  - VP is explicitly allowed to arrange a securities lending and borrowing scheme under Section 53 STA.
  - Tax rules form no impediment; accounting rules require treating transactions as collateralized loans (securities remain in transferring undertaking and are included in exposure).
- Market facilities and usage:
  - Major domestic and foreign banks offer securities lending services. All major listed equities and a number of bonds are offered on a repo basis.
  - The Danish government offers a securities lending scheme for government bonds on a market rate basis (20 basis points).
  - Participants can borrow a large range of government bonds and mortgage bonds from Danmarks Nationalbank as a lender-of-last-resort (rate set is above market rates).
  - Market participants use these facilities intensively to ensure timely settlement.
  - Given existing securities lending services by major participants/custodians, the government and central bank, an automatic lending and borrowing scheme by VP was not deemed cost effective given already low failure rates.
- Supervision:
  - DFSA regulations specify how repos and reverse repos are taken into account for calculating exposures and allow for netting (Executive order no 1487 of December 13, 2004).
  - Regular on-site inspection of risk management procedures has been laid down.
- Assessment: Observed. Securities lending is well established in Denmark as a method for expediting settlement and fully supported by legal and tax framework.
- Recommendation 5: Securities lending and borrowing (or repurchase agreements and other economically equivalent transactions) should be encouraged as a method for expediting the settlement of securities transactions. Barriers that inhibit the practice of lending securities for this purpose should be removed.

*Source: _cr07117 - 1. What percentages of trades between direct market participants is submitted to a (IMF PDF).*

### 1. Are securities issued on a dematerialized basis or as a physical certificate? If the

### _cr07117 - 1. Are securities issued on a dematerialized basis or as a physical certificate? If the

### Dematerialization, registration, and transfer finality
- All Danish securities issued in VP are dematerialized. These encompass all securities listed on the Stock Exchange and a large number of unlisted investment funds.
- Electronic securities issuance is regulated in Part 19 of the STA.
- Electronic securities must be issued through a CSD approved by the DFSA.
- Transfer of ownership of electronic securities is only possible via book-entry.
- Physical securities (e.g., mortgage deeds and unlisted shares) remain in circulation in Denmark but:
  - cannot be traded in the regulated markets or in the informal telephone market (OTC),
  - cannot be cleared and settled in VP.
- There is no legal time lag between settlement and registration.
- Registration in VP’s book-entry system alone is valid as proof of ownership; transfer of ownership is final as soon as the buyer’s securities account in VP is credited.
- Shareholders may additionally register with the company’s board (which can act as registrar), but such company registration is not mandatory.
- If a shareholder requests company registration, VP forwards the request and necessary data after completing the VP book-entry.
- Registration in VP is the only proof of ownership rights; transfer must take place in VP and is final upon crediting the purchaser’s securities account.

### DVP implementation and settlement mechanics (Recommendation 7)
- VP settles on both a multilateral netting basis and on a gross settlement basis; participants choose the mode.
- Netting is the primary way of clearing and settlement with multilateral netting on both cash and securities sides (BIS DVP model 3).
- On the securities side the clearing position is calculated on a security-by-security basis (ISIN by ISIN).
- Settlement occurs during “blocks”: there are six daily net settlement cycles/blocks during the 24 hour settlement day of VP; three night blocks and three daytime blocks.
- Market convention: settlement takes place in the first block at 6:00 p.m. at T+2 with value date T+3 if no other time is agreed.
- Around 95 percent of all transactions settle in this first block.
- Prior to clearing cycles, participants must transfer cash from their current account to their VP settlement account in KRONOS (Danmarks Nationalbank large value system).
- Danmarks Nationalbank notifies VP of actual balances before each settlement cycle; VP adds potential intraday credit under the automatic collateral agreement to form settlement lines.
- The sum of VP settlement account balances and potential intraday credit forms the “settlement lines,” recalculated each cycle.
- If net debit positions remain within settlement lines and securities are sufficient, VP notifies Danmarks Nationalbank and books net debits in automatic collateral accounts administered by VP on behalf of Danmarks Nationalbank.
- If insufficient cover, VP sends orders to Danmarks Nationalbank to settle remaining amounts on VP settlement accounts.
- Participants with net credit positions receive amounts in their VP settlement account simultaneously with securities transfers from seller to buyer.
- During execution of a settlement cycle, no FOP or real-time gross transactions are executed.
- VP’s rules: a securities transaction is final when the settlement cycle in which it is settled is completed; securities and cash received can be used without risk in subsequent cycles or the RTGS facility (intraday finality).
- In case of lack of securities and/or cash, VP may remove transactions in accordance with fixed “elimination rules”; transactions with insufficient cash or securities are automatically shifted to the next block and can be deferred up to five settlement days.
- RTGS facility (BIS model 1 DVP):
  - Transactions can be reported for settlement between 8:00 a.m. and 3:00 p.m.
  - Only clearing members who are primary cash providers (have a settlement account with Danmarks Nationalbank) can execute real-time transactions and only on their own behalf.
  - After match and confirmation, settlement takes place immediately: VP blocks seller’s securities and submits a payment order on behalf of buyer to Danmarks Nationalbank.
  - If sufficient liquidity exists in buyer’s current account, cash leg is settled online in real time and VP transfers securities with intraday finality.
  - If insufficient liquidity, the transaction is cancelled and securities are de-blocked.
  - Payment orders for securities are not placed in a waiting queue as in KRONOS, preventing legal challenge of blocked securities by a third party; no legal risk occurs in this DVP procedure.
- Except the two percent FOP transfers (which include transfers of collateral), all transactions in VP are settled on a DVP basis.

### Final settlement timing, intraday finality, and operating hours (Recommendation 8)
- VP offers six multilateral netting cycles per operating day and RTGS continuous settlement from 8:00 a.m. to 3:00 p.m.
- Timing of finality:
  - Multilateral netting cycles: final once the settlement cycle/block is completed.
  - RTGS: final at the moment the buyer’s securities account is credited.
  - Free-of-payment (FOP) transfers: final when securities are credited in beneficiary’s account.
  - FOP orders may be sent and executed from 5:00 a.m. till 1:45 a.m. the following night with value date changing at 6:00 p.m. in accordance with VP’s 24-hour settlement period.
- Settlement cycles (finality times): 6:00 p.m., 11:45 p.m., 6:00 a.m., 10:15 a.m., 12:00 noon, and 1:35 p.m.
- All aforementioned cycles and RTGS transactions settle with value date S for both securities and cash legs.
- Securities and cash received can be used without risk for settlement of other transactions or other purposes during the rest of the day (intraday finality).
- Identified needs for intraday finality in Denmark:
  - (i) timely settlement of cross border transactions;
  - (ii) execution of monetary transactions;
  - (iii) money market transactions between participants;
  - (iv) delivery of collateral during the day to secure intraday and monetary policy loans.
- VP scheduling accommodates cross-border timing (correspondence with Euroclear night settlement blocks) to enable back-to-back same day value.
- Danmarks Nationalbank does not provide overnight loans; banks use the interbank money market to cover overdrafts in KRONOS at the end of the monetary policy day; some interbank transactions are repos requiring intraday finality.
- Danmarks Nationalbank offers flexible collateral arrangements:
  - Banks may transfer securities to their pooling pledge account during the day to obtain intraday credit or cover monetary policy loans.
  - Securities can be withdrawn from pledge account if excess collateral exists.
  - KRONOS participants may substitute collateral during the day.
- VP permits continuous transfers for most of the 24-hour settlement day (7 hours for RTGS transactions and almost 21 hours for FOP transactions) plus six settlement cycles.
- VP does not allow unilateral revocation of unsettled transactions; transactions are irrevocable once confirmed and ready for settlement.
- VP does not receive provisional transfers from other CSDs; all securities are delivered with finality and can be reused without risk in later cycles.

### Risk controls, default handling, stress testing, and collateralization (Recommendation 9)
- No measures are in place to ensure timely settlement by replacing failed transactions via buy-in/sell-out if the participant with the largest obligation defaults (no requirement for sufficient margins, guarantee fund, or other indemnification arrangement specific to this scenario).
- No specific market-wide limits on trading or clearing positions to limit potential losses or liquidity pressure are in place.
- Institutional effects on bankruptcy:
  - Danmarks Nationalbank will close the accounts of the bankrupt participant in KRONOS and block access to the automatic collateralization scheme upon receiving notification.
  - VP will remove transactions lacking sufficient cover from the clearing according to elimination rules.
  - The liquidator will likely freeze the bankrupt participant’s securities accounts in VP.
- Factors that reduce liquidity pressure on surviving participants in case of an unwind:
  - largest part of transactions normally settle at the beginning of the settlement day, likely before notification of bankruptcy;
  - upon receiving notification Danmarks Nationalbank will respect the settlement line as calculated by VP for the bankrupt participant before notification and will settle the clearing result within this line even after notification;
  - surviving participants are required to hold a liquidity buffer in excess of their own payment obligations for these events;
  - automatic collateralization scheme keeps many securities that would have been delivered to the bankrupt participant in surviving participants’ accounts and enables automatic intraday liquidity from Danmarks Nationalbank;
  - long opening hours and multiple settlement facilities give survivors time and options to replace failed settlements same day or borrow securities not received but due for delivery.
- Stress testing:
  - Danmarks Nationalbank analyzed the impact of removing the participant with the largest obligation on January 2, 2004 (a high-volume day due to mortgage redemptions/refinancings) and performed a stress test for a randomly chosen settlement day.
  - In both tests the effects were relatively small; failed settlements in the first settlement block would have risen by about 10 percentage points.
  - Main cause of fails was lack of liquidity on the securities side (securities to be delivered were not received).
  - Replacement cost losses were calculated and would have had only minor effects on survivors’ available capital (in the worst-case scenario 8 percent of the excess capital of the largest counterparty would have been at stake).
  - The limited scale of replacement losses relative to market turnover is attributed to the large share of bonds traded in Danish markets.
- Exposures of VP in bankruptcy:
  - VP does not grant credit to participants.
  - VP operates automatic collateralization accounts on behalf of Danmarks Nationalbank but is not itself exposed to credit risks.
  - Intraday credit in these accounts is granted by Danmarks Nationalbank.
  - VP assures the central bank that intraday credit granted is always fully collateralized by eligible securities, taking into account applicable haircuts.
  - No limits are imposed by Danmarks Nationalbank on intraday credit extensions.
- Additional notes:
  - The STA allows other institutions meeting specified conditions to seek approval from the DFSA to operate as a CSD and compete with VP; to date no other institution has requested approval.

*Source: _cr07117 - 1. Are securities issued on a dematerialized basis or as a physical certificate? If the*

### 2. Does the CSD permit overdrafts or debit balances in securities?

### _cr07117 - 2. Does the CSD permit overdrafts or debit balances in securities?

### Overdrafts / debit balances in securities
- VP does not allow overdrafts or debit balances in securities.

### Multiple failures: evaluation and stress testing
Findings
- In the aforementioned stress tests, the effects of multiple failures were not studied.
- Although no rigorous risk control measures are in place, two features may reduce liquidity stress: (i) the requirement for participants to have a liquidity buffer available; and (ii) the liquidity stress reducing effects of the automatic collateralization arrangement.
- The effects of multiple failures were not analyzed.

Assessment
- Broadly observed

Recommendations (multiple-failure and bankruptcy analysis)
- It is recommended that the effects of a bankruptcy be analyzed in more depth, taking into account:
  - the effects of multiple failures;
  - the losses over three settlement days instead of one;
  - a thorough evaluation of the costs of ensuring settlement in such events.
- Historical note: From the answers in the self-assessment by VP, the issue was discussed in 1996 and within this framework a survivor’s pay scheme was discussed; the study has not been published.
- Consider alternative loss-allocation or risk-limiting solutions:
  - A survivor’s pay scheme may incur moral hazard and hamper competition (participant view).
  - Other solutions that might prevent excessive risk taking at someone else’s expense, for instance a defaulter’s pay scheme or a set of limits on positions, may not have been considered.
- Although not required under the recommendations, it could be studied how liquidity pressure developed during the next two days after the bankruptcy is declared and how the still outstanding transactions conducted on the two preceding days influence the liquidity pressure.
- A bankruptcy will seldom influence only one financial system or market. It could also be analyzed whether there are possible systemic risks if the participant also fails in the Sumclearing and cannot pay back its uncollateralized loans in the money market.
- Consideration could be given to the effects of concentration in the financial system as a result of the use of settlement agents by smaller banks in VP and in the Sumclearing.

---

### Recommendation 10: Cash settlement assets and settlement agent risk
Description: Assets used to settle the cash leg of securities transactions between CSD members should carry little or no credit risk. If central bank money is not used, steps must be taken to protect CSD members from potential losses and liquidity pressures arising from the failure of a settlement bank.

Key findings and arrangements
- Settlement in Danish kroner:
  - Cash settlement in kroner takes place in central bank money via an account in Danmarks Nationalbank payment system KRONOS.
  - Access to KRONOS is open to all Danish credit institutions and investment firms; branches of foreign financial institutions can open an account; foreign financial institutions domiciled in another EU country can participate remotely, provided they are supervised in their member state or by the DFSA.
  - Of the VP’s 131 clearing members, 87 have a VP settlement account in KRONOS.
  - The other 44 VP’s clearing members have agreements with a “primary cash provider,” which settles the cash obligation on their behalf.
  - A primary cash provider guarantees payment up to a specified amount (the credit line) which is reported to VP. If obligations surpass this limit, VP removes transactions of this clearing member until the member is within the limit set by the cash provider.
- Settlement in euros:
  - Danmarks Nationalbank offers settlement facilities in euros for a number of bonds registered in VP.
  - The central bank has taken steps to ensure that settlement in euros poses little or no credit risk.
  - Most euro-denominated bond settlements take place during the night when TARGET is not open; participants have no access to euro liquidity during that night.
  - In practice, amounts due are calculated in DKr. Involved participants are obliged to exchange the paid kroner into euro at 9:20 a.m., when a special PVP cycle is executed, using the same exchange rate applicable during the night. This ensures parties are paid in euros.
  - During the day direct settlement in euros takes place at 1:35 p.m. Participants can obtain intraday credit in euros against collateral in this settlement cycle, but amounts granted are limited and participants cannot make use of the automatic collateral arrangements.
  - For larger transactions participants must fund themselves in advance via a currency swap or via a loan in the euro interbank market to avoid non-settlement due to lack of sufficient cash.
  - Intraday loans obtained from Danmarks Nationalbank must be repaid before closing time; Danmarks Nationalbank does not grant overnight loans in euros. If not repaid timely, a fine is levied and the collateral can be executed to redeem the loan.
- VP is not a financial institution and does not grant any credit to its participants.

### Settlement banks: supervision, choice, and concentration
Findings
- Primary cash providers are supervised by the DFSA.
- Clearing members are free to choose their own cash provider.
- Foreign participants typically choose one of the larger banks; smaller banks use regional banks.
- There is some concentration risk because a relatively large number of clearing members use the same cash provider.
- The net payment obligations of that cash provider on behalf of its clients seem to be modest relative to its own obligations and to the total payments in the clearing.
- Exposures are not monitored systematically by VP or by the overseers.
- The cash providers in question have a high credit standing and excess capital.

Recommendation
- Danmarks Nationalbank and DFSA, as overseers, should monitor and analyze the concentration risks in the system in more depth. If deemed necessary, appropriate action should be taken.

### Access to proceeds and use timing
- It is not precisely known how quickly recipients that use the services of a cash provider can use the proceeds of securities settlements.
- There is no reason to believe that unnecessary long credit exposures exist vis-à-vis their settlement bank.
- The proceeds can be used in the following settlement cycles and possibly can be withdrawn the same day.

### KRONOS and CPSS Core Principles
- KRONOS observes most of the CPSS Core Principles in full.

Assessment
- Observed
- Comments: VP settles in central bank money. The settlement system used observes most of the CPSS core principles in full. Although a large number of settlement agents use the same primary cash provider, the resulting concentration risk seems to be modest.

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### Recommendation 11: Operational risk identification and mitigation
Description: Sources of operational risk arising in the clearing and settlement process should be identified and minimized through appropriate systems, controls, and procedures. Systems should be reliable and secure, and have adequate, scalable capacity. Contingency plans and back-up facilities should be established to allow for timely recovery of operations and completion of the settlement process.

Key questions and answers — operational controls and practices
- Security policy and risk identification:
  - VP has developed a security policy with clear goals and written procedures/guidelines; the security policy is approved by the Board of VP.
  - Management has conducted a comprehensive assessment of possible risks and proposed measures; threats and protection measures are reassessed once a year.
  - System changes are evaluated for new risks using the SPRINT model; high risks lead to an action plan.
- Data management and protection:
  - Adequate data management facilities: access control (electronic keys) and encryption of external communication.
  - System protected by firewalls; protection measures (including protection of data communication channels and messages) are tested twice a year by a specialized internationally reputable IT securities firm.
- Audit trails and documentation:
  - Audit trails include logging of access to production data and changes of production programs.
  - Function descriptions, security responsibilities, written procedures, segregation of duties, and comprehensive system documentation are in place.
- Development and change management:
  - Development, testing, and production take place in separate environments; participants are involved in final testing.
  - Formal change management with change-requests; approval by VP’s Change Management Forum (CMF) is required.
  - Stress tests are performed before new applications go into live production.

Contingency plans and backup facilities
- VP has comprehensive contingency plans tested annually.
- Reallocation of production within one hour to a second site at suitable distance is provided.
- All data are mirrored in real-time to the remote site; a switch can be performed without loss of data (hot stand-by mode).
- Data are stored at several locations enabling relocation to a third or dark site within a few days with only limited data losses.
- Other office facilities are available from which systems can be operated.
- Confidentiality, integrity, authentication, non-reputability via VP CRYPTONET or VPN on the internet are ensured; participants can also use the protected SWIFT network.

Governance, audits, and review
- Operational reliability is reviewed annually by management; a report is sent to the Board and an annual statement by the CEO is provided to the Board of Directors.
- IT audits are performed continuously by VP internal auditors and by external auditor Deloitte Touche Tohmatsu International.
- Contingency plans and their testing are audited and monitored by auditors.
- Internal Systems Auditor is independent and sends annual audit plans and results to VP’s Audit Committee.
- VP’s Audit Committee consists of Chief Auditors and Audit Directors from the financial sector in Denmark as well as VP’s external auditor.

Operational reliability targets and incidents
- Targets and tolerance limits:
  - uptime of the overall system: 99.7 percent;
  - average delays per year: not more than on two-days a year;
  - delays in cross border transmissions: no delays should occur.
- Availability and incidents:
  - 2002 — Availability 99.9 %, Incidents 2
  - 2003 — Availability 99.9 %, Incidents 0
  - 2004 — Availability 99.9 %, Incidents 2
  - Jan-Oct 2005 — Availability 99.9 %, Incidents 1
- No key process has failed during the last four years.
- VP experienced a delay in processing caused by a failure in a batch management subsystem in 2004; processing was delayed for some hours, but no transaction data or messages were lost; all transactions were properly registered.

Capacity planning and outsourcing
- In 2002 VP outsourced central data processing operations to DMdata A/S (IBM); VP operates its own systems but leases hardware and operation from DMdata.
- The agreement provides IT capacity for five times VP’s average consumption.
- VP may obtain extra capacity within a few hours.
- Prior to changes of activity a test is conducted, including required capacity; performance is monitored on an ongoing basis.
- Service Level Agreements with DMdata also deal with possible disasters and business contingency issues.

Assessment
- Observed
- Comments: VP has developed an appropriate IT security policy and has pro-actively assessed possible threats. Risk and adequacy of risk control measures are reviewed annually. Adequate contingency plans and back-up facilities are available and tested each year. Adequate management controls are in place and internal and external audits are conducted continuously. Operational reliability is high and sufficient capacity is available to handle stress volumes.

Recommendation
- Taking into account VP’s central role as administrator of collateral accounts that play a crucial role in the granting of intraday credit by Danmarks Nationalbank for the settlement of large value payments, CLS payments, securities, and retail payments, the emergency procedures of VP, Danmarks Nationalbank as system-owner of KRONOS, BEC as system operator of KRONOS, and the Danish Bankers association and PBS as system-owner and system provider, respectively, of the Sumclearing, should be coordinated and tested simultaneously with the participants involved.

---

*Italic: Source — _cr07117 - 2. Does the CSD permit overdrafts or debit balances in securities?*

### 1. What arrangements are used to protect customers’ securities from theft, loss, or

### 1. What arrangements are used to protect customers’ securities from theft, loss, or

### Protection arrangements and legal basis
- Due to dematerialization, loss and theft of securities have been significantly reduced.
- Direct participants/account holders: investments of clients are kept in a single investor account in the name of the investor.
  - At the moment, 3.0 million investors accounts have been opened in VP.
  - These accounts only contain an investor’s own securities; investor securities are segregated from assets belonging to other investors and from assets belonging to account controllers.
- Omnibus accounts:
  - Section 72 of the Danish Financial Business Act requires segregation of customer securities from account controller/custodian’s own securities, unless the DFSA makes an exception in special cases.
  - Customers must be informed when securities are held in an omnibus account and of the legal consequences.
- In event of compulsory liquidation of an account controller:
  - Holdings in investor accounts will not be included in the estate; the same applies to omnibus accounts per Section 72.
  - Neither the account controller’s nor VP’s creditors can claim the securities of the investor.
  - If loss arises, the investor will be compensated by the compensation scheme given by law.
- Under Section 64 of the Danish STA:
  - An account controller in compulsory liquidation loses the right to undertake reporting to VP for book entry on these accounts with immediate effect; all VP accounts involved are moved to another account controller.

### Liability and compensation schemes (exact coverage)
- VP has a special liability for loss resulting from errors in registration, alteration, cancellation of rights on account, or payments related to accounts, even if accidental.
  - Liabilities up to DKr 1 billion are covered under this scheme, which is backed by VP’s capital and guarantees of the direct participants.
- For wrongful book-keeping, errors, misuse, and theft of securities by the account operator:
  - A liability scheme exists up to DKr 500 million per event.
  - If damage cannot be claimed in full from the account operator itself, the other direct participants shall be liable for the outstanding amount.
  - These additional liabilities are not applicable on securities in a nominee account.

### Reconciliation, audits, and oversight
- VP reconciliation:
  - VP checks regularly, at least once a week, that the volume in circulation corresponds with obligations of the issuers.
  - Accountholders receive information on transactions performed and can control bookings in their clients’ accounts.
- Supervision and audit requirements:
  - Article 86 of the STA: the DFSA shall supervise account controllers and ensure rules, procedures, and safeguard arrangements (including electronic data processing) are adequate and conform with the Act.
  - All Danish account controllers are required by law to employ one or more external auditors.
  - Major account controllers are obliged to have an internal audit regime.
  - Executive Order on audits based on the STA: where customer securities are held in an omnibus account, internal and external auditors shall in particular check whether the account controller’s own register clearly specifies each investor’s ownership of securities and whether procedures to update the register are adequate.

### Prudential supervision
- Direct participants are supervised by the DFSA or by a supervisory authority in their home country.
- Account controllers can be subject to onsite inspection by the DFSA.

### Assessment and summary comments (as stated)
- Observed
- Comments: In Denmark investors are protected by law against claims of creditors of an account controller/custodian or of VP. Normally, securities are registered directly in the name of the investor in VP. Liability of account controllers and VP are clearly defined and ample compensation schemes are in place in case of theft, misuse, or errors. Reconciliation, if necessary, takes place regularly and all direct participants are supervised.

### Governance of the CSD (VP)
- Corporate form and governance:
  - VP is a limited company whose shareholders represent agents in the securities market.
  - General meeting is VP’s supreme authority and appoints VP’s Board.
  - Management responsibilities are split: the Board handles general governance; management handles day-to-day operations and follows Board directions.
  - Unusual or significant transactions generally require Board approval.
- Board composition and appointment:
  - By shareholder agreement, all shareholder groups are guaranteed representation on VP’s Board.
  - VP’s Board consists of 15 members: 10 appointed by the general meeting and 5 by employees.
  - Shareholder-group distribution: banks and investment companies appoint four members; bond-issuing companies appoint three members; Danmarks Nationalbank, share issuers, and institutional investors each appoint one member.
  - Danmarks Nationalbank is represented to promote a stable and efficient VP, observance of international standards, fair and open access, and to safeguard central government interests as issuer of government bonds.
- Public information:
  - Government arrangements, vision and mission, and basic values are available on VP’s website and published in the annual report.

### Objectives, user representation, and accountability
- Regulatory objectives:
  - VP’s objectives are largely regulated by the Danish STA: ensure safe, sound, and transparent financial markets and protect investors’ rights.
- VP’s articles of association general objectives:
  - to carry out registration, clearing, and settlement business according to the Danish STA;
  - to ensure that the organization and functionality of VP are guaranteed for the future and meet international standards;
  - to ensure that VP through reasonable conditions for registration of securities supports a broad participation in the Danish securities market, including a broad cross-section of shareholders.
- User and public interest representation:
  - Shareholders represent users and owners and set objectives reflecting public interest.
  - Users are represented by shareholders and board members; a customer committee is consulted four times a year.
  - The DFSA oversees the public interest and must give consent for management decisions in specific areas.
- Management qualifications and approval:
  - Management appointed by the Board; appointees are professionals in financial markets.
  - The DFSA conducts fit-and-proper tests and must approve appointments with regard to expertise and criminal history.

### Access criteria and exit arrangements
- Access rules and publication:
  - Rules/criteria are regulated in parts 16 and 21 of the STA.
  - Participation is open to securities dealers, including credit institutions and investment companies (Danish and foreign companies under financial supervision entitled to clear and settle on behalf of third parties).
  - Companies clearing only on their own behalf (e.g., institutional investors) may also conclude a participation agreement with VP.
  - Section 54 of the STA: detailed conditions for participation are stipulated by the clearing center in the agreement.
  - Access rules are published on VP’s website and accessible in Danish and English with a special guide for foreign participants.
- Non-discrimination and legal enforceability condition:
  - Access differs by function sought but is the same for all applicants to a given function.
  - Exception: participants from countries outside the EEA must submit a legal opinion that VP’s rules are enforceable under their country’s laws to ensure enforceability of rules and settlement finality.
- Termination and exit procedures:
  - A clearing member may terminate participation with three months’ notice (to expire on the last day of a month), provided all obligations are discharged before expiry.
  - An account controller in compulsory liquidation loses reporting rights to VP immediately; breach provisions allow VP to report material/repeated breaches to the DFSA which may decide on termination; in case of termination, securities of account holders are transferred to other account controllers.
  - For clearing members that grossly or repeatedly disregard participation conditions or become subject to compulsory liquidation/suspension of payments, VP may terminate the Participation Agreement.
  - Termination and breach provisions of the Participation Agreement are accessible from VP’s website.
- Assessment: Observed — VP has objective, clearly stated, and publicly disclosed criteria for participation; criteria limit access only on grounds of legal risk to finality of settlement; orderly exit procedures are in place.

### Efficiency and cost control
- Cost control and benchmarking:
  - VP compares its prices and costs with other comparable systems where possible.
  - As a limited company, VP has a market/business-oriented approach and strives to achieve more than full cost coverage combined with low charges to customers.
- Service level reviews:
  - VP regularly reviews service levels and new initiatives in dialogue with participants, including via a standing customer forum.
  - VP conducted a customer satisfaction analysis in 2004 via questionnaire; results indicated considerable satisfaction overall and that VP is a reliable business partner.
- Operational reliability and capacity:
  - VP reviews operational reliability regularly and prior to activity changes, including capacity needs.
  - Central data processing is outsourced to DMdata A/S; sufficient capacity is available and extra capacity can be obtained at short notice.
- Assessment: Observed — VP is cost-effective, recovers its costs in full, and charges participants reasonably.

### International communication standards
- Messaging and identification:
  - VP uses its own message formats in a proprietary network but offers participants the option to communicate via SWIFT.
  - VP supports the most recent SWIFT standards ISO 15022.
  - Securities are identified in accordance with ISO 6166 (ISIN codes).
  - SWIFT is especially used by remote members and for cross-border communication.
- Assessment: Observed — VP uses international standard procedures and supports international standard message types to facilitate efficient settlement of cross-border transactions.

### Disclosure of rules, risks, and participant information
- Public disclosures:
  - VP discloses detailed information on its website in an “About VP” section with subsections on regulation and supervision, statutes and rule sets, and participation.
  - The subsection on statutes and rule sets includes VP’s Clearing Rules (part of the Participation Agreement) describing functionality and risks.
  - Clearing Rules outline settlement influences from inadequate securities/cash cover, participant compulsory liquidation, force majeure, settlement practices, mutual agreements on settlement practices, and rules on liquidity buffers.
- Additional resources for participants:
  - VP links to the legislation database at the DFSA’s website, which contains English versions of essential documents.
  - VP provides a comprehensive customer service web area (password-protected) for participants containing English versions of essential documents, business guides, price lists, registration and clearing guides, and a systems guide.

*Source: IMF assessment text contained in the provided content unit.*

### 2. Has the system completed and disclosed the questionnaire set out by the

### 2. Has the system completed and disclosed the questionnaire set out by the CPSS/IOSCO disclosure framework or the answers to the key questions set out in this assessment methodology?

### Disclosure and review
- In 2002, VP completed and disclosed the questionnaire on its website. Also, the answers to the key questions were published.
- Both the DFSA and Danmarks Nationalbank have published on their websites the self assessment of observance of VP of the CPSS/IOSCO recommendations for SSS, which they conducted in 2004.
- The disclosure framework and the answers to the key questions are published on the internet in Danish and English.
- The answers are reviewed at regular intervals by VP.
- In September 2005, VP completed the questionnaire of the European Central Securities Depositories Association (ESCDA) and, after having discussed the answers with the overseers, it will publish the questionnaire on its website.
  - The ESCDA questionnaire is based on the Disclosure framework for Securities Settlement Systems by the CPSS/IOSCO, the Depository Questionnaire 2000 by the association of Global Custodians and the ISSA 2000 recommendations.
  - It contains also relevant answers under the CPSS/IOSCO assessment methodology for the recommendations for Securities Settlement Systems.

### Assessment
- Observed
- Comments: VP provides market participants with sufficient information to identify the risks and costs associated with using the system.

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### Recommendation 18. Securities settlement systems should be subject to regulation and oversight.

### Description — How is the system regulated / overseen? (Key questions and answers)
- VP is supervised by the DFSA and overseen by Danmarks Nationalbank.
- The system’s operation is authorized and regulated in the STA.
- In accordance with the STA, the DFSA shall monitor the business activities of VP and their rules, procedures, controls, and safeguard arrangements to ensure that they are adequate and in conformity with the STA and executive orders issued on the basis of this Act.
- Danmarks Nationalbank’s oversight power on payment and securities settlement systems was until recently of a more general nature.
  - The central bank, established pursuant to the Denmark Nationalbank Act, is entrusted with the task of maintaining a safe and secure currency system and to facilitate and regulate the traffic in money.
  - Danmarks Nationalbank considers this to include the stability and efficiency of payment and securities settlement systems.
  - Oversight of VP is made effective via the Settlement Agreement between VP and Danmarks Nationalbank as settlement bank of the system.
    - The agreement states that VP will fulfill the general requirements for clearing and settlement of securities made by Danmarks Nationalbank.
  - Danmarks Nationalbank and the DFSA have entered into a formal MoU concerning the cooperation on the oversight of payment and securities settlement systems.
- In February 2006, effective March 1, 2006, the Danish Parliament approved an amendment on the STA in which the oversight task of the central bank with respect to payments and clearing and settlement systems is explicitly set out.
  - The explanatory memorandum of the bill states that Danmarks Nationalbank also maintains the oversight of clearing and settlement systems.

### Roles, disclosure, and resources
- The supervisory function of the DFSA is clearly defined in the STA.
- The MoU stipulates that the joint oversight task on VP shall be based on relevant international standards, i.e., the observance of CPSS/IOSCO recommendation for Securities Settlement Systems.
- Danmarks Nationalbank and DFSA will coordinate their joint task concerning verification of VP’s compliance and will consult each other prior to any ruling or decision of vital importance to VP as well as exchange information.
- The MoU is published on the website of both parties involved.
- Danmarks Nationalbank has published an article on its oversight of payments and securities settlement systems.13
- For the DFSA, and to some extent also for Danmarks Nationalbank, the legal framework for oversight is based on a statute.
- The two overseers have experienced staff as well as proper resources and funding to carry out regulatory and oversight functions.

### International and crisis cooperation
- The MoU forms the basis for the cooperation between the DFSA and Danmarks Nationalbank.
- Links with Euroclear and Clearstream have been assessed in cooperation with de Nationale Bank van Belgie and the Banque Centrale du Luxembourg.
- In June 2003, the governors of the central banks of the Nordic countries (Denmark, Finland, Iceland, Norway, and Sweden) signed a MoU on the management of financial crises in Nordic banks with activities in two or more Nordic countries.
  - The agreement is based on the standard MoU developed within the E.U.
  - It contains principles for crisis management, the required flows of information and the practical aspects of supplying information.
  - In a potential crisis, the central banks establish a crisis group responsible for providing joint and rapid access to and management of information.
  - The crisis group contacts relevant authorities in the different countries, including the relevant supervisory authorities.
  - If a bank’s solvency is in doubt, the countries’ ministries of finance should be consulted.
- A MoU on high level principles of co-operation between the banking supervisors and central banks of the EU in crisis management situations has been signed.

### Assessment
- Observed
- Comments: VP is subject to transparent and effective regulation and oversight. This framework has to comply with international standards. Danmarks Nationalbank and DFSA cooperate effectively with each other and have signed an MoU with other relevant authorities.

### Recommendation (related to oversight)
- The overseers should be allowed to oversee activities and systems in case of outsourcing and should have the right to conduct onsite inspections, if deemed necessary.

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### Recommendation 19. CSDs that establish links to settle cross-border trades should design and operate such links to reduce effectively the risks associated with cross-border settlement.

### Links in operation and risk analysis (Key questions and answers)
- The two international European single-purpose banks acting as ICSDs, Euroclear, and Clearstream International, both have direct links with VP that allow for DVP.
  - Securities issued at VP can be registered at the respective ICSDs and be transferred and retransferred with concurrent cash settlement.
  - The Euroclear link is the most frequently used link.
  - Euroclear holds a securities account at VP and a cash settlement account at Danmarks Nationalbank.
  - The timing of the finality in the different settlement cycles/blocks are set in such a way that they correspond with settlement cycles in Euroclear, allowing the settlement of back to back transactions with same day value.
    - For instance securities finally settled in VP in the first settlement cycle at 6:00 p.m. can be delivered via the link to Euroclear for the delivery to a counterparty in that system during the first night batch in that system.
    - Securities could be transferred during the opening hours of both systems five to six times via the link, giving participants ample time to arrange their cross-border settlements.
  - The Clearstream link is also a direct link in the sense that Clearstream holds a securities account at VP in its own name, but this VP account is serviced by Danske Bank as account controller, just as Danske Bank undertakes cash settlement via its account at Danmarks Nationalbank.
    - This link allows also for delivery to a participant in Clearstream and receiving the securities back in an account in VP during the opening time of both systems.
- In addition, VP has bilateral direct FOP links with the Swedish CSD, VPC, and the Icelandic CSD, VS. These CSDs register securities issued at VP, and VP registers Icelandic and Swedish securities.
  - The use of these links is limited.
- Risk analyses have been undertaken in respect of the VP system, including the said links.

### DVP mechanics and re-use of securities
- Settlement of transactions via the link is final and no provisional deliveries take place.
- Securities received via all the links can be re-used for the settlement of other transactions during the day in the other system.
- DVP procedures in VP are exactly the same as for other transactions, with Euroclear and Clearstream as counterparty of the local participant who has a settlement obligation vis-à-vis a participant in the ICSDs.

### Credit extensions and collateral
- VP does not extend credit to Euroclear or Clearstream.
- Euroclear, as a participant of VP, can participate in the automatic collateralization scheme, but it has decided not to do so in order to prevent the Danish securities that Euroclear keeps in its VP omnibus account for its clients, from being pledged as collateral for the settlement of trades via the link.
- Euroclear has an agreement with a Danish bank for the providing of liquidity.
- Clearstream can obtain credit via its local agent in Denmark.
- Danmarks Nationalbank will always collateralize in full its credit extensions.

### Assessment
- Observed
- Comments: VP has established links with other CSDs for the settlement of cross border transactions that reduce effectively the risks associated with cross border settlements.

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### Table 4. Recommended Actions to Improve Observance of CPSS-IOSCO Recommendations for Securities Settlement Systems — Værdipapircentralen (selected entries)

- Settlement risk (Rec IV – X)
  - The effects of the failure of the largest participant and the effects of multiple failures should be analyzed in more depth, as should the costs of guaranteeing the settlements or preventing losses from such events, for instance by collateralization of market risks.
  - Within the framework of ensuring financial stability, an analysis should be undertaken of the effects of spillovers to other systems in case of failure of the largest participant and the losses related to this as well as to outstanding uncollateralized loans in the money market and the tiered structure of VP and the Sumclearing.
  - The overseers should monitor the effects of concentration risk related to the use of the same primary cash provider and assess this risk and, if deemed necessary, take appropriate action.
- Operational risk (Rec XI)
  - VP should coordinate and test its contingency plans and emergency procedures (including communication with participants) with the system owners and operators of KRONOS and the Sumclearing.
- Other issues (Rec XIV – XVIII)
  - The overseers should be allowed to oversee activities and systems in case of outsourcing and should have the right to conduct onsite inspection, if deemed necessary.

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### Authorities’ response

- Danmarks Nationalbank and the DFSA found that the IMF has made a very thorough and comprehensive assessment of the Danish securities settlement system (VP-afviklingen) and essentially agreed with the IMF’s recommendations.
- Although the need for a pool of collateral and a loss-sharing agreement historically have not been deemed necessary in Denmark, Danmarks Nationalbank will review the benefits and costs in introducing additional measures to reduce the settlement risks in Danish securities trading.
  - In this context benefits and costs of a central counterparty will also be evaluated.
  - Furthermore, we will address the potential effects of an increase in foreign participation in the system.
  - Emphasis that participants generally have far more eligible collateral than needed for their daily net payments not only in VP settlement, but also in the Sumclearing and CLS.14
- Supervision of concentration risks that may stem from indirect participation with regard to payments in the VP-system is already part of the supervision of the “indirect participants” and the payment providers by the DFSA. However, based on the recommendations of the IMF, steps will be taken to further formalize supervision in this area.
- Central bank responsibilities
  - The recommendations to further strengthen the oversight of the Danish payment and settlement systems are consistent with the self-assessment done by Danmarks Nationalbank.
  - Important steps towards full observance of the international standards on central bank oversight have already been taken.
  - The legal basis has been strengthened by an amendment to the Securities Trading Act, which has become effective from March 1, 2006.
  - Following this amendment, the “Memorandum of Understanding between Danmarks Nationalbank and the Danish Financial Supervisory Authority concerning Payment Systems and Clearing Centres” will be revised with a view to further enhancing the cooperation between the two authorities.
  - Danmarks Nationalbank will take the necessary steps to broaden the oversight of the retail payment system (Sumclearingen) with a view to cover all major components of the system, including different payment instruments and sub-clearings.
  - High priority will be assigned to formalize the oversight task through written procedures and guidelines. Thus, full observance is expected to be achieved in 2006.

*Source: IMF assessment text from the provided content unit.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07117.pdf_