## Detailed Assessment of Observance of KRONOS of the CPSS Core Principles for Systemically Important Payment Systems

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### Mission, scope, and methodology
- Assessment carried out as part of the first Financial Sector Assessment Program mission to Denmark, November 7–18, 2005.
- Assessment methodology: Guidance Note for Assessing Observance of Core Principles for Systemically Important Payment Systems of the IMF/World Bank.
- Main counterparties: Danmarks Nationalbank and Finanstilsynet (DFSA).
- Materials used: self-assessments by system overseers; interviews with Payment System Department of Danmarks Nationalbank and DFSA; documentation provided in advance including relevant laws, articles, brochures, guidelines, completed questionnaire, and two Danmarks Nationalbank books: Monetary Policy in Denmark, June 2003, and Payment Systems in Denmark, 2005.
- Additional assessment performed during the mission: observance of CPSS/IOSCO Recommendations for Securities Settlement System of Værdipapircentralen (VP).
- Assessor: Jan Woltjer, Monetary and Financial Systems Department (MFD), IMF.

### Scope of systems assessed
- Two systems declared systemically important by Danish authorities:
  - KRONOS — the real-time gross-settlement (RTGS) system for large-value payments.
  - Sumclearing — multilateral netting system for retail payments; deemed systemically important because it is the only retail payment system in Denmark and handles relatively large payments.
- Retail infrastructure described as “pyramid shaped”: two sub-clearings whose results (sum totals) are netted in Sumclearing.
- Retail infrastructure documentation: Aftalebog and Håndbog for Betalingsformidling (payment system manual) of the Danish Bankers Association (DBA), owner of Sumclearing.

### Institutional and market structure — key facts and usage statistics
- Sumclearing (2005): around 1.1 billion payments with a value of DKr 5,027 billion.
- Card use (2005): around 670 million payments; Denmark had the highest number of card transactions per capita in Europe.
- Recurrent bills paid via direct debits (2005): 168 million.
- Market penetration: 9 out of 10 households use Payment Business Services (PBS).
- E-banking: about 2.7 million Danish citizens have opened an e-banking account.
- Check usage (2005): average value per transaction cleared through Sumclearing was DKr 22.850; number and value of check payments have been halved since introduction of direct debit and Dankort in the early 1980s.
- Banknotes and coins remain important; holdings placed with banks are financed by interest free loans from Danmarks Nationalbank that are fully collateralized.

### Payment systems infrastructure — structure and operational links
- Sumclearing components:
  - Two sub-clearings: electronic clearing and truncation system; PBS clearing.
  - Sumclearing nets sub-clearing results and settles via accounts at Danmarks Nationalbank.
- Electronic clearing and truncation system: processes checks, credit transfers, and cash withdrawals; data processing centers exchange bilateral information and send evening balances into Sumclearing.
- PBS clearing: industry-owned common infrastructure; processes direct debits, EFTPOS transactions, and cross-border card transactions; calculates bilateral positions and sends them into Sumclearing.
- Sumclearing settles payments in both kroner and euro.
- KRONOS roles:
  - Settles participants’ clearing accounts at Danmarks Nationalbank.
  - Settles kroner leg of FX transactions cleared via CLS.
  - Channel for monetary policy transactions and interbank large-value transactions.
  - Multicurrency — settles Danish kroner and euro; euro settlement through link to TARGET.
  - Also settles Swedish kroner and Icelandic kroner in connection with VP securities settlement.
- Securities and derivatives clearing: VP (CSD) and FUTOP (futures and options clearing house) clear transactions; most bond trading occurs over-the-counter in informal interbank telephone markets.

### Legal and oversight framework — legal basis, finality, and documentation
- Legal basis categories for KRONOS:
  I. Danmarks Nationalbank Act;
  II. General Danish law of contracts and property;
  III. Regulations governing payment systems and collateral arrangements;
  IV. Contractual basis for KRONOS;
  V. Conditions of the ESCB for participation of non-euro area national central banks in TARGET.
- Legal basis for KRONOS described as consistent, complete, and reliable.
- Public availability: all relevant laws, rules, and regulations are publicly published on “Retsinformation” (Danish); most important financial sector legislation available in English on Finanstilsynet website; exception — outsourcing agreement between Danmarks Nationalbank and BEC is not publicly available.
- Legal certainty: rules, regulations, and contractual arrangements for KRONOS have never been challenged in court.
- Electronic processing: electronic transfers and book-entry of electronic payments and claims are recognized and accepted as evidence in Danish courts.
- Danmarks Nationalbank Act: mandates maintenance of a safe and secure currency system and facilitation/regulation of money traffic; Nationalbank interprets this as legal basis for operational, catalyst, and oversight roles; oversight role explicitly recognized in statute effective March 1, 2006 (STA).
- Section 57 et seq. of the STA implements the EU Settlement Finality Directive (directive 98/26 EC) objectives:
  - Protect finality of transactions in payment and securities settlement systems.
  - Protect collateral arrangements securing intraday credit and timely settlement in bankruptcy events.
- DFSA has notified the European Commission that KRONOS is a designated system under the Directive.
- Section 57c STA requires rules/participation agreements to specify when a payment is entered into the system and the point(s) after which a registered transfer order can no longer be revoked.
  - KRONOS: irrevocability and finality defined in system rules and assured even if an insolvency procedure is opened; finality occurs at the moment the account of the bank involved is debited and the receiving bank’s account is simultaneously credited; final payments cannot be challenged by a liquidator or third party.
- Participation agreements: system governed by Danish law; venue Denmark.
- Foreign participants from outside the EEA must document legal capacity and home-country recognition of finality, irrevocability, and enforceability of Danish netting/collateral.

### Collateral frameworks and categories (Section 57b STA and related)
- Collateral arrangements for payment and securities settlement systems fully enforceable under the STA for pledge or repo.
- Immediate realization of collateral to Danmarks Nationalbank permitted on default if written agreement exists; written agreement overrules the usual eight days respite under Section 538a (2) Administration of Justice Act.
- Five collateral categories within KRONOS:
  1. Certificates of deposits (CDs) — used automatically as collateral for monetary loans/overdrafts; can only collateralize obligations to Danmarks Nationalbank.
  2. “Traditional” pledged Danish securities — eligible securities transferred to a VP safekeeping account and pledged (Section 66 STA); Danmarks Nationalbank entitled to immediate fulfillment and to take ownership on default; interest/redemptions paid to a yield account in KRONOS that is pledged.
  3. Securities under the automatic collateralization system (Section 55 STA) — borrower designates VP securities account(s) as collateral without transfer; allows self-collateralization of securities to be received in a VP cycle; loans must be repaid before 1:30 p.m. same day or Danmarks Nationalbank may assert collateral and request VP to transfer securities before 3:00 p.m.; assertion must occur before 3:00 p.m. or right lapses.
  4. Eligible foreign securities — correspondent agreements with Sveriges Riksbank and Norges Bank allow intraday credit in DKr based on government securities pledges; reciprocal arrangements permit branches to pledge securities.
  5. Cash pledged under the Scandinavian Cash Pool (SCP) — intraday credit across Danish, Swedish, Norwegian RTGS systems based on pledged balances; haircut of 5 percent for exchange risk; SCP loans must be repaid by 2:00 p.m.; enforcement actions after 3:30 p.m.

### Contractual basis and documentation for KRONOS
- Contractual components include:
  - General terms and conditions for settlement of monetary-policy instruments and settlement payments in DKK, EUR, SEK, ISK, and bilateral participation agreement.
  - Terms and conditions for current account and specific VP, Sumclearing, and CLS settlement accounts.
  - Terms and conditions for pledging collateral and Danmarks Nationalbank deeds of pledge; collateral rights agreements for automatic collateralization and SCP loan agreement.
  - Settlement agreements between Danmarks Nationalbank, VP, and Sumclearing; Danmarks Nationalbank acts as guarantor that balances in settlement accounts are available for settlement even if participant has gone into administration.
  - Outsourcing agreement with Bankernes EDB Central (BEC) for IT services (not publicly available).
- Documentation availability and quality:
  - Rules and procedures documented in “Documentation for Monetary-policy instruments and settlement of payments in DKK, EUR, SEK and ISK” and supporting documents (including system specifications, manuals, eligible securities list in Danish).
  - Rules are clear, comprehensive, up-to-date; changes highlighted and published on Danmarks Nationalbank website.
  - Danmarks Nationalbank’s rules entitle it to certain discretionary powers (waive rules for monetary/foreign-exchange policy, grant access, terminate accounts, timing of realization of collateral, reject/accept collateral).

### System activity, concentration, and key statistics (2005 and related)
- KRONOS (2005):
  - 664,000 transactions executed with total value of DKr 60,633 billion (US$10,100 billion).
  - Transactions settled in euros amounted to €3,774 billion (US$4,685 billion).
- Concentration:
  - Market share of the largest two participants: nearly 65 percent.
  - Largest 10 participants account for 92 percent of turnover in the system.
- Sumclearing (2005):
  - Net payments related to Sumclearing: DKr 1,113 billion.
  - Netting ratio in Sumclearing: 22.1 percent → liquidity saving of 78 percent.
- CLS (2005 / April 2006):
  - DKr 1,596 billion paid to and received from CLS in KRONOS in 2005.
  - April 2006 average: 596 transactions per day in DKr with gross value DKr 154 billion.
  - Average daily pay-ins in April 2006: DKr 7,3 billion → liquidity saving of 95 percent.
- VP settlement (2005): net payments related to VP settlement cycles: DKr 2,873 billion.
- FUTOP (2004 turnover): DKr 0.4 billion.

### Risk management (credit, liquidity) and tools
- KRONOS design features:
  - RTGS settling in central-bank money with queuing, intraday liquidity facilities, and gridlock optimization routine (never applied).
  - Payments final and irrevocable on settlement; no retroactive action in bankruptcy.
  - No access criteria based on creditworthiness, credit limits, or loss-sharing arrangements; open access for banks, mortgage banks, investment firms, foreign credit institutions conducting cross-border activities.
- Liquidity provisions and collateral:
  - Traditional collateral scheme: securities transferred to VP safekeeping account pledged to Danmarks Nationalbank; value calculated as official price on preceding day minus haircuts.
  - Certificates of deposit (CDs) issued to absorb liquidity and automatically used as collateral; CDs can only collateralize Danmarks Nationalbank obligations.
  - Automatic collateralization and SCP provide intraday collateralized credit.
  - Intraday euro facilities: Danmarks Nationalbank deposits €585 million daily with a euro-area central bank for intraday credit; amount broken down into individual limits; collateralization required; all intraday euro credit repaid before TARGET closing; no overnight euro loans.
- Queuing and liquidity management:
  - Centralized FIFO queue with bypass option; payments not settled by end-of-day automatically rejected.
  - Participants can monitor queues online and set priorities.
  - No throughput guidelines or price incentives for early settlement.
  - Behavioral incentives: gentlemen’s agreement; normally more than 95 percent of payments settled before noon.

### Sumclearing-specific risk measures and practices
- Sumclearing is a deferred multilateral net settlement system with four kroner cycles and three euro cycles.
- Participants must open separate settlement accounts in KRONOS; funds must be transferred at specified times.
- Insufficient liquidity handling: payments involving failed participant are removed from clearing (postponed or canceled); fines levied for postponements:
  - Fine DKr 5,000; increases to DKr 25,000 on third omission and for each omission thereafter within 12 months.
- Transaction limits:
  - Typical limits for smaller participants/non-clearing members: DKr 25 million.
  - Larger banks: DKr 100 million.
  - Dankort transactions limit: DKr 1 million.
  - Euro clearing max limit: €15 million.
- Observed practice: banking sector reserved around six to eight times the amount needed in Sumclearing accounts in 2005 due to uncertainty and reputational/fine incentives.

### Operational reliability, contingency, and security
- Operational hours:
  - Payments in DKr: 7:00 a.m. to 3:30 p.m.
  - Euros: 7:00 a.m. to 6:00 p.m.
  - KRONOS re-opens 4:00 p.m. to 4:30 p.m. for Sumclearing and VP settlement account transfers for next business day value; system closed to other transactions during 4:00 p.m.–4:30 p.m.
  - SCP loans must be repaid by 2:00 p.m.; enforcement actions permitted after 3:30 p.m.
- IT security and contingency:
  - IT security management based on BS7799; ESCB requirements incorporated.
  - 2003 ECB-based comprehensive risk assessment performed; five threats with unacceptable residual risk addressed.
  - BEC provides hot standby and two sites with real-time mirroring; contractual restart within four hours, tests demonstrate restart within one and a half hours.
  - Emergency procedures tested biannually with current account holders and quarterly with CLS participants; some incidents revealed suboptimal communication between parties (Sumclearing/VP settlement issues).
  - Contingency plans do not fully cover large-scale absenteeism (pandemics, strikes) or massive wide-area disasters.
  - Data communication protections: firewalls, optional encryption in proprietary network; protection measures regularly tested by independent party.
  - Audit trails: end-to-end traceability; internal/external audits performed.
- Availability (observed):
  - System availability: 2003: 99.68 percent; 2004: 99.85 percent; 2005: 99.84 percent.
  - System capacity sufficient for peak volumes but number of incidents relatively high compared with other ESCB countries.

### Observance of CPSS Core Principles for KRONOS and Sumclearing
- KRONOS overall CPSS Core Principles fulfillment:
  - Seven CPs fully observed: I, II, III, IV, VI, IX, X.
  - Two CPs broadly observed: VII, VIII.
  - One CP not applicable: V.
- Sumclearing observance summary (Table):
  - Observed 6: 1, 4, 6, 8, 9, 10
  - Broadly observed 3: 2, 5, 7
  - Partly observed 1: 3
  - Non-observed None
  - Not applicable None

### Key recommended actions (preserving original wording/priorities)
- Cross-system contingency and operational recommendations:
  - Coordinate contingency plans of Danmarks Nationalbank, BEC, VP, and PBS and develop infrastructure for broad testing of emergency procedures.
  - Renegotiate with BEC the maximum restart time and agree to comply with international best practice of two hours.
  - Develop further and adapt the ECB securities analysis methodology according to new IT security insights.
  - Ensure communication via proprietary network observes international standards with respect to integrity.
  - Continue stress testing all parts of the system and ensure sufficient peak capacity.
  - Analyze how operational reliability can be enhanced to reduce incident frequency, considering the complexity and shared platform with BEC.
  - Analyze in depth the costs of KRONOS, define the part of cost to be borne by Danmarks Nationalbank, and develop a pricing strategy taking into account fees in comparable countries.
  - Reconsider discretionary powers regarding access and exit; analyze language-barrier effects for remote members; formulate explicit exit procedures in rules and regulations.
- Sumclearing-specific recommendations:
  - Reduce systemic risks by either:
    - maintaining present settlement procedures but implementing adequate loss-sharing and liquidity arrangements; or
    - lowering maximum individual-payment sizes and spreading clearing results across several batches during the day/night to reduce net positions.
  - Prevent booking of retail payments to customer accounts before final settlement where there is no guarantee of finality (especially in PBS ordinary clearing).
  - Implement procedures to reduce time to reverse defective payment instructions (may currently take up to a week to reverse all payments).
  - Publish a clear memorandum (English and Danish) describing system, roles, risks, procedures for extraordinary situations, and consequences of defaults; make it available to participants/public.
- Risk concentration and indirect participation:
  - Overseers should gather figures about possible concentration and deposit risk due to the use of settlement banks and analyze consequences if one of the larger settlement banks were to go bankrupt.
  - Mitigant noted: PBS and Danmarks Nationalbank have made it possible for nonclearing participants to quickly change clearing participant or become a direct clearing participant.

### CP VI — Assets used for settlement
- Principle: Assets used for settlement should preferably be a claim on the central bank; where other assets are used, they should carry little or no credit risk and little or no liquidity risk.
- KRONOS settlement: takes place in central bank money; smaller banks may voluntarily use another bank to clear and settle retail payment flows and thus expose themselves to settlement bank or deposit risks.
- Participation structure (figures):
  - 62 banks participate directly in the Sumclearing in kroner and 26 in the retail clearing in euro.
  - 104 smaller banks voluntarily settle retail payments in kroner via a clearing participant.
  - 142 banks use a settlement agent for clearing and settlement of their euro payments.
- Assessment: Observed.
- Recommendation: Overseers should gather figures about possible concentration and deposit risk and analyze consequences for smaller banks and trust in the system.

### CP VII — Security, operational reliability, and contingency arrangements
- PBS IT security governance:
  - IT security policy prepared in accordance with ISO17799; policy approved by PBS Board and assessed annually.
  - PBS has a special IT-security group and consulted with the Danish Security Intelligence Service; IT crime judged greatest threat.
- Back-up and recovery:
  - PBS back-up facility at short distance from primary site; direct data mirroring; restart target four hours (tests confirm restart within targeted four hours; EFPOS target two hours).
  - Contingency plans tested: critical IT systems tested once every three years; business continuity plans for management/information dissemination tested once a year.
  - Contingency plans focused on internal circumstances and not fully coordinated with participants, data processing centers, Danmarks Nationalbank, or major utility companies.
- Data protection and audits:
  - Exchange of data via PI-net proprietary network; messages encrypted and lines duplicated; firewalls and annual independent testing.
  - Audit trails and payment traceability exist for PBS clearing products; electronic clearing and truncation system lacks individual-payment visibility for PBS.
  - PBS subject to DFSA’s Executive Order no. 254 of April 10, 2005 on system audits in joint data processing centers.
- Assessment: Broadly observed.
- Recommendations:
  - Formally monitor availability targets and make statistics on availability (uptime) and major incidents available to system owner, participants, and overseers (quarterly reporting began in 2006).
  - Test contingency measures with participants and coordinate emergency measures with other system providers.
  - Overseers should assess operational reliability of clearing sub-systems and links between infrastructure parts.

### CP VIII — Practicality and efficiency for users and the economy
- Systemic importance: Sumclearing declared systemically important as it is important to the economy, widely used, and there are no alternatives.
- Instrument variety and volumes (2005):
  - Around 1.1 billion payments with a value of DKr 5,027 billion cleared and settled.
  - Annual value of checks cleared peaked at DKr 1,237 billion in 1998 and declined to DKr 522 billion in 2004.
  - Direct debit well developed; 9 out of 10 households use the Direct Debit Services.
  - Denmark has the highest number of debit card transactions per capita in Europe.
- Costs and pricing:
  - PBS (system-operator) is fully cost recovering (profit in 2005 after taxes DKr 192 million).
  - Sumclearing participant fees:
    - Annual fee of DKr 25,000 for clearing of kroner payments.
    - Annual fee of DKr 50,000 for clearing of euro payments.
  - Transaction fee for a Dankort transaction: DKr 0.05 per transaction to be paid by the issuer bank.
  - No figures available about total costs of running Danish retail payments or cost division among banks, firms, and consumers.

### Access, participation criteria, and exit (CP IX)
- Sumclearing access:
  - Open to all banks, saving banks, cooperative banks, and foreign banks active in Denmark (subject to supervision and legal opinion for foreign banks).
  - Participants must settle as direct members via one or both clearing sub-systems and have opened a current and a settlement account with Danmarks Nationalbank.
  - No minimum requirements with respect to credit rating or capital ratios beyond supervisory requirements.
  - No remote access capabilities; foreign banks must access through agreement with direct participant.
- Exit rules:
  - Participants failing requirements can be removed by decision of the DBA board; no formal arrangements exist to facilitate participant exit.
- Recommendations:
  - DBA should facilitate public disclosure of access criteria and formalize exit rules and decision procedures in the recommended memorandum.

### Governance, oversight responsibilities, and recommended actions for Danmarks Nationalbank
- Danmarks Nationalbank main roles:
  - Issue banknotes and coins; banker to government; settlement bank and provider of KRONOS; catalyst to promote payments efficiency and security; overseer of payments and securities settlement systems.
- Disclosure: role defined in 2001 Financial Stability Report and on Bank’s website; book on payment and securities settlement systems includes role and policies.
- Internal responsibilities:
  - Division of operational responsibilities across departments; Payment System Department houses separated oversight section to ensure Chinese Walls.
  - Oversight: oversight section staffed by four persons; oversight planned to be performed on a “continuous basis” from 2006 onwards.
- Assessments and recommendations (Responsibility B, C, D):
  - Responsibility B (Operations and oversight of KRONOS): Assessment Broadly observed. Recommendations include drafting a mission statement; work out oversight methodology and implementation plan; ensure continuous oversight; ensure sufficient resources and expertise; organize regular meetings with system providers; establish crisis management and data gathering.
  - Responsibility C (Oversight of systems not operated by the central bank): Assessment Broadly observed. Recommendations include formalizing oversight policy for externally operated systems; broaden scope of oversight with respect to Sumclearing; establish crisis management framework; ensure oversight adequacy in outsourcing; strengthen cooperation with other Danish and foreign authorities; increase involvement of participants; strengthen reporting in Financial Stability Report.
  - Responsibility D (Cooperation): Assessment Observed. Danmarks Nationalbank cooperates with DFSA via a publicly available MOU and participates in international MOUs (Nordic crisis management MOU, June 2003).
- Danmarks Nationalbank observance summary (Table 8):
  - Observed 2: A and C
  - Broadly observed 2: B and D

### Authorities’ response and planned actions
- KRONOS:
  - Authorities agree assessments reflect Danmarks Nationalbank findings.
  - Regarding maximum restart time: numerous tests show KRONOS can be restarted in less than one and a half hours; Danmarks Nationalbank has started negotiations to reduce legal binding maximum restart time from four to two hours.
  - Regarding efficiency analysis: Danmarks Nationalbank notes large number of direct participants suggests appropriate balance between security and efficiency; cost recovery less than full but adequate and in line with similar RTGS systems in small- to medium-sized European countries.
- Sumclearing:
  - Authorities broadly agree with recommendations; emphasize participants have far more eligible collateral than needed for daily net payments.
  - Danmarks Nationalbank and DFSA agree to terminate practice of booking retail payments in customer accounts before settlement is final and will start discussions with the banking sector to change practice.
  - Danmarks Nationalbank and DFSA will further analyze proposals to lower financial risks (loss-sharing, collateral pools, restructuring settlement cycle) and will start discussions with system owner to identify costs and benefits.
  - DFSA will take steps to gather information on possible concentration risk and supervise settlement agents and indirect participants on a more formalized and recurrent basis.
- Central bank planned actions:
  - Legal basis strengthened by STA amendment effective March 1, 2006.
  - Revision of MOU between Danmarks Nationalbank and DFSA to enhance cooperation.
  - Danmarks Nationalbank will broaden oversight of Sumclearing to cover all major components and formalize oversight via written procedures and guidelines.
  - Full observance expected to be achieved in 2006.

*Source: IMF staff assessment document — Detailed assessment of observance of KRONOS of the CPSS Core Principles for Systemically Important Payment Systems (excerpts provided).*

### 1. Detailed Assessment of Observance of KRONOS of the CPSS Core Principles for

### 1. Detailed Assessment of Observance of KRONOS of the CPSS Core Principles for Systemically Important Payment Systems

### Mission, scope, and methodology
- Assessment carried out as part of the first Financial Sector Assessment Program mission to Denmark, November 7–18, 2005.
- Assessment methodology: Guidance Note for Assessing Observance of Core Principles for Systemically Important Payment Systems of the IMF/World Bank.
- Main counterparties: Danmarks Nationalbank and Finanstilsynet (DFSA).
- Materials used: self-assessments by system overseers; interviews with Payment System Department of Danmarks Nationalbank and DFSA; documentation provided in advance including relevant laws, articles, brochures, guidelines, completed questionnaire, and two Danmarks Nationalbank books: Monetary Policy in Denmark, June 2003, and Payment Systems in Denmark, 2005.
- Additional assessments performed during the mission: observance of CPSS/IOSCO Recommendations for Securities Settlement System of Værdipapircentralen (VP).

### Scope of systems assessed
- Two systems declared systemically important by Danish authorities:
  - KRONOS — the real-time gross-settlement (RTGS) system for large-value payments.
  - Sumclearing — multilateral netting system for retail payments; deemed systemically important because it is the only retail payment system in Denmark and handles relatively large payments.
- Retail payment infrastructure described as “pyramid shaped”: two sub-clearings whose results (sum totals) are netted in Sumclearing.
- Retail infrastructure documentation: Aftalebog and Håndbog for Betalingsformidling (payment system manual) of the Danish Bankers Association (DBA), owner of Sumclearing.

### Institutional and market structure — key facts and usage statistics
- In 2005, Sumclearing processed around 1.1 billion payments with a value of DKr 5,027 billion.
- Card use in 2005: around 670 million payments; Denmark had the highest number of card transactions per capita in Europe.
- Recurrent bills paid via direct debits in 2005: 168 million.
- Market penetration: 9 out of 10 households use Payment Business Services (PBS).
- E-banking: about 2.7 million Danish citizens have opened an e-banking account.
- Check usage: average value per transaction cleared through Sumclearing in 2005 was DKr 22.850; number and value of check payments have been halved since introduction of direct debit and Dankort in the early 1980s.
- Banknotes and coins remain important; holdings placed with banks are financed by interest free loans from Danmarks Nationalbank that are fully collateralized.

### Payment systems infrastructure — structure and operational links
- Sumclearing infrastructure comprises three parts: two sub-clearings (electronic clearing and truncation system; PBS clearing) and the Sumclearing that nets results and settles via accounts at Danmarks Nationalbank.
- Electronic clearing and truncation system: processes checks, credit transfers, and cash withdrawals; data processing centers exchange bilateral information and send evening balances into Sumclearing.
- PBS clearing: industry-owned common infrastructure; processes direct debits, EFTPOS transactions, and cross-border card transactions; calculates bilateral positions and sends them into Sumclearing.
- Sumclearing settles payments in both kroner and euro.
- KRONOS: settles participants’ clearing accounts at Danmarks Nationalbank; also settles kroner leg of FX transactions cleared via CLS; channel for monetary policy transactions and interbank large-value transactions; multicurrency — settles Danish kroner and euro; euro settlement through link to TARGET; also settles Swedish kroner and Icelandic kroner in connection with VP securities settlement.
- Securities and derivatives clearing: VP (CSD) and FUTOP (futures and options clearing house) clear transactions; most bond trading occurs over-the-counter in informal interbank telephone markets.

### Legal and oversight framework — key findings
- Legal basis categories for KRONOS:
  I. Danmarks Nationalbank Act;
  II. General Danish law of contracts and property;
  III. Regulations governing payment systems and collateral arrangements;
  IV. Contractual basis for KRONOS;
  V. Conditions of the ESCB for participation of non-euro area national central banks in TARGET.
- The legal basis for KRONOS described as consistent, complete, and reliable.
- Public availability: all relevant laws, rules, and regulations are publicly published on “Retsinformation” (Danish); most important financial sector legislation available in English on Finanstilsynet website; exception — outsourcing agreement between Danmarks Nationalbank and BEC is not publicly available.
- Legal certainty: rules, regulations, and contractual arrangements for KRONOS have never been challenged in court.
- Electronic processing: electronic transfers and book-entry of electronic payments and claims are recognized and accepted as evidence in Danish courts.
- Danmarks Nationalbank Act: mandates maintenance of a safe and secure currency system and facilitation/regulation of money traffic; Nationalbank interprets this as legal basis for operational, catalyst, and oversight roles; oversight role explicitly recognized in statute effective March 1, 2006 (STA).
- Law of contracts and property: Danish law broadly protects enforceability of agreements; Danish law lacks a “zero hour” or similar retroactive insolvency rule.
- Regulations on finality, netting, and collateral enforceability: found in part 18 of the Securities Trading Act (STA; March 17, 2005) and applicable to KRONOS.
- EU Settlement Finality Directive (directive 98/26 EC) is implemented in Danish law (reference made in assessment).

### Oversight and cooperation
- Payment systems overseen by DFSA and Danmarks Nationalbank; cooperation specified in a publicly available memorandum of understanding (MOU).
- Oversight powers regulated in the Securities Trading Act (STA); STA amended effective March 1, 2006 to further clarify oversight authority.
- Close cooperation on crisis management between central banks and banking supervisory authorities in the Scandinavian region and the EU.
- Market-driven development of payment infrastructure; no major reform since KRONOS introduction in November 2001 and no major changes planned in the near term.

### Assessment process and limitations
- Assessment relied heavily on comprehensive self-assessments by overseers and in-depth interviews; assessor had access to all necessary documentation and faced no problems limiting the assessment process.
- Assessor: Jan Woltjer, Monetary and Financial Systems Department (MFD), IMF.

### Initiation of CPSS Core Principles assessment
- The document begins detailed assessment of Core Principle I (CP I) on KRONOS legal basis, describing completeness, public availability, court upholding, and legal support for electronic processing; subsequent parts of the assessment continue through the CPSS Core Principles framework.

*Source: IMF staff assessment document — Detailed assessment of observance of KRONOS of the CPSS Core Principles for Systemically Important Payment Systems (excerpts provided).*

### Section 57 et seq. of the STA. The primary objectives of the Directive are: (i) to protect the

### _cr07120 - Section 57 et seq. of the STA. The primary objectives of the Directive are: (i) to protect the

### Primary objectives of the Directive
- Protect the finality of transactions settled in payment systems and in securities settlement systems (SSS), whether settled on a gross basis or on a multilateral netting basis.
- Protect possible collateral arrangements within the framework of a payment and settlement system to secure intraday credit and/or to guarantee the timely settlement in case of a bankruptcy event.

### Designation under the Directive
- The DFSA has notified the European Commission (EC) that KRONOS is a designated system under this Directive.

### Irrevocability and finality
- (Heading present in source: "h. Irrevocability and finality") 

*Document: _cr07120 - Section 57 et seq. of the STA. The primary objectives of the Directive are: (i) to protect the*

### Section 57c of the STA prescribes that the rules and regulations and participation agreements

### _cr07120 - Section 57c of the STA prescribes that the rules and regulations and participation agreements

### Legal basis, finality, and irrevocability
- Section 57c STA requires rules/participation agreements to set out: (i) when a payment is considered entered into the system; and (ii) the point(s) in time after which a registered transfer order can no longer be revoked.
- In KRONOS:
  - Irrevocability and finality are defined in system rules and are assured even if an insolvency procedure is opened against a participant.
  - Payments in the queue can be revoked by the participant until settlement takes place. From settlement onward, the payment is irrevocable and cannot be reversed by the participant or any third party.
  - Finality occurs at the moment the account of the bank involved is debited; the receiving bank’s account is simultaneously credited.
  - Final payments cannot be challenged by a liquidator or third party and no retroactive action is possible.

### Netting arrangements and ancillary-system links
- Bilateral and multilateral netting are recognized under Danish law (Section 50 and 57 STA). After implementation of the European Finality Directive, netting arrangements are protected in insolvency.
- KRONOS, though an RTGS, settles multilateral netting results from ancillary systems including:
  - CLS (international FX clearing and settlement)
  - VP (Danish CSD)
  - FUTOP (derivatives clearing)
  - Sumclearing (retail clearing)
- After clearing results are settled in KRONOS, participants may immediately use amounts received for other KRONOS obligations or lend them in the interbank market.

### Applicable law, conflict of law, and foreign participants
- Participation agreements: system governed by Danish law; venue Denmark.
- Foreign participants from outside the EEA must document:
  - legal capacity;
  - their home country’s recognition of finality and irrevocability of payments via KRONOS;
  - recognition of Danish netting arrangements and enforceability of collateral arrangements even if insolvency proceedings open under their home country law.

### Enforceability of collateral arrangements (Section 57b STA and related)
- Collateral arrangements in payment and securities settlement systems fully enforceable under the STA for pledge or repo.
- Collateral provided to Danmarks Nationalbank for present or future debts (securities or deposit) may be realized immediately on default without public-authority or pledgor approval if a written agreement to that effect exists (Section 57b (2) STA).
- The written agreement overrules the usual eight days respite before liquidation under Section 538a (2) Administration of Justice Act.
- Within KRONOS there are five collateral categories (specific legal regimes):
  1. Certificates of deposits (CDs) – deposits held for monetary policy transactions on accounts with Danmarks Nationalbank.
     - CDs are automatically used as collateral for monetary loans/overdrafts in the current account.
     - CDs can only collateralize obligations to Danmarks Nationalbank and be traded between banks counterparty in monetary-policy transactions or between banks and the central bank.
  2. “Traditional” pledged Danish securities – eligible securities (government bonds, mortgage bonds) transferred to a safekeeping account in VP registered in the pledgor’s name; account pledged to Danmarks Nationalbank (Section 66 STA).
     - Danmarks Nationalbank entitled to immediate fulfillment and to take ownership on default.
     - Interest/redemptions related to pledged securities paid to a yield account in KRONOS that is pledged and available for redemption of debts.
     - Margins and haircuts apply; pledgor obliged to re-establish margin if market value drop exceeds margin.
     - Provision of collateral cannot be revoked pursuant to Insolvency Act Section 70 (1) or Section 72C.
  3. Securities under the automatic collateralization system (Section 55 STA) – enables liquidity for settlement of Sumclearing, VP, and CLS; borrower designates VP securities account(s) as collateral without transfer to dedicated pledge account; self-collateralization of securities to be received in a VP cycle permitted.
     - Borrower opens an “automatic collateralization account” at Danmarks Nationalbank where loans under scheme are booked.
     - VP notifies Danmarks Nationalbank of mark-to-market collateral minus margins/haircuts; collateral value forms the debit cap for the automatic collateralization account.
     - If borrower does not repay a loan under the scheme before 1:30 p.m. same day, Danmarks Nationalbank may assert collateral and request VP to transfer pledged securities to a VP account in Danmarks Nationalbank’s name; assertion must occur before 3:00 p.m. or right lapses. After transfer Danmarks Nationalbank may release collateral after 3:00 p.m. without eight-day respite.
  4. Eligible foreign securities – correspondent agreements with Sveriges Riksbank and Norges Bank allow intraday credit in DKr based on government securities pledges; reciprocal arrangements permit branches to pledge securities; ESCB-eligible EMU securities could in principle be used but channel not used in practice.
  5. Cash pledged under the Scandinavian Cash Pool (SCP) – intraday credit across Danish, Swedish, Norwegian RTGS systems based on pledged balances; haircut of 5 percent for exchange risk; SCP loans must be repaid by 2:00 p.m.; if unpaid by 3:30 p.m. Danmarks Nationalbank may enforce pledged amount (sell or currency swap).

### Contractual basis and documentation for KRONOS
- Contractual components:
  - General terms and conditions for settlement of monetary-policy instruments and settlement payments in DKK, EUR, SEK, ISK, and bilateral participation agreement.
  - Terms and conditions for current account and specific VP, Sumclearing, and CLS settlement accounts; no CLS settlement accounts in EUR, SEK, ISK; no retail payments in SEK, ISK.
  - Terms and conditions for pledging collateral and Danmarks Nationalbank deeds of pledge; collateral rights agreements for automatic collateralization and SCP loan agreement.
  - Settlement agreements between Danmarks Nationalbank, VP, and Sumclearing; Danmarks Nationalbank acts as guarantor that balances in settlement accounts are available for settlement even if participant has gone into administration.
  - Outsourcing agreement with Bankernes EDB Central (BEC) for IT services.
- Documentation availability and quality:
  - Rules and procedures documented in “Documentation for Monetary-policy instruments and settlement of payments in DKK, EUR, SEK and ISK” and supporting documents (including system specifications, manuals, eligible securities list in Danish).
  - Rules are clear, comprehensive, up-to-date; changes highlighted and published on Danmarks Nationalbank website.
  - Additional publications (articles, book "Payment Systems in Denmark") explain legal basis, risks, and infrastructure.
  - Danmarks Nationalbank’s rules entitle it to certain discretionary powers (waive rules for monetary/foreign-exchange policy, grant access, terminate accounts, timing of realization of collateral, reject/accept collateral).

### System activity, concentration, and key statistics
- 2005 activity:
  - 664,000 transactions executed with total value of DKr 60,633 billion (US$10,100 billion).
  - Transactions settled in euros amounted to €3,774 billion (US$4,685 billion).
- Concentration:
  - Market share of the largest two participants: nearly 65 percent.
  - Largest 10 participants account for 92 percent of turnover in the system.
- Sumclearing (2005):
  - Net payments related to Sumclearing: DKr 1,113 billion.
  - Netting ratio in Sumclearing: 22.1 percent → liquidity saving of 78 percent.
- CLS (2005/April 2006 figures):
  - DKr 1,596 billion paid to and received from CLS in KRONOS in 2005.
  - April 2006 average: 596 transactions per day in DKr with gross value DKr 154 billion.
  - Average daily pay-ins in April 2006: DKr 7,3 billion → liquidity saving of 95 percent.
- VP settlement (2005): net payments related to VP settlement cycles: DKr 2,873 billion.
- FUTOP (2004 turnover): DKr 0.4 billion.

### Risk management (credit, liquidity) and tools
- KRONOS design:
  - RTGS settling in central-bank money with queuing, intraday liquidity facilities, and gridlock optimization routine (never applied).
  - Payments final and irrevocable on settlement; no retroactive action in bankruptcy.
  - No access criteria based on creditworthiness, credit limits, or loss-sharing arrangements; open access for banks, mortgage banks, investment firms, foreign credit institutions conducting cross-border activities.
- Liquidity provisions and collateral use:
  - Traditional collateral scheme: collateral transferred to VP safekeeping account pledged to Danmarks Nationalbank; value calculated as official price on preceding day minus haircuts.
  - Certificates of deposit (CDs) issued to absorb liquidity and automatically used as collateral; CDs can only collateralize Danmarks Nationalbank obligations.
  - Automatic collateralization and SCP provide abundant intraday collateralized credit.
  - Intraday euro facilities: Danmarks Nationalbank deposits €585 million daily with a euro-area central bank for intraday credit; amount broken down into individual limits; collateralization required; all intraday euro credit repaid before TARGET closing; no overnight euro loans.
- Queuing and liquidity management:
  - Centralized FIFO queue with bypass option; payments not settled by end-of-day automatically rejected.
  - Participants can monitor queues online and set priorities.
  - No throughput guidelines or price incentives for early settlement.
  - Behavioral incentives: gentlemen’s agreement; normally more than 95 percent of payments settled before noon.
- Sumclearing-specific risk measures:
  - Sumclearing is a deferred multilateral net settlement system with four kroner cycles and three euro cycles.
  - Participants must open separate settlement accounts in KRONOS; funds must be transferred at specified times.
  - If insufficient liquidity, payments involving failed participant are removed from clearing (postponed or canceled); fines levied for postponements:
    - Fine DKr 5,000; increases to DKr 25,000 on third omission and for each omission thereafter within 12 months.
  - Transaction limits used to cap exposure:
    - Typical limits for smaller participants/non-clearing members: DKr 25 million.
    - Larger banks: DKr 100 million.
    - Dankort transactions limit: DKr 1 million.
    - Euro clearing max limit: €15 million.
  - Observed practice: banking sector reserved around six to eight times the amount needed in Sumclearing accounts in 2005 due to uncertainty and reputational/fine incentives.

### Operational reliability, contingency, and security
- Operational hours:
  - Payments in DKr: 7:00 a.m. to 3:30 p.m.
  - Euros: 7:00 a.m. to 6:00 p.m.
  - KRONOS re-opens 4:00 p.m. to 4:30 p.m. for Sumclearing and VP settlement account transfers for next business day value; system closed to other transactions during 4:00 p.m.–4:30 p.m.
  - SCP loans must be repaid by 2:00 p.m.; enforcement actions permitted after 3:30 p.m.
- IT security and contingency:
  - IT security management based on BS7799; ESCB requirements incorporated.
  - 2003 ECB-based comprehensive risk assessment performed; five threats with unacceptable residual risk addressed.
  - BEC provides hot standby and two sites with real-time mirroring; contractually restart within four hours, tests demonstrate restart within one and a half hours.
  - Emergency procedures tested biannually with current account holders and quarterly with CLS participants; some incidents revealed suboptimal communication between parties (Sumclearing/VP settlement issues).
  - Contingency plans do not fully cover large-scale absenteeism (pandemics, strikes) or massive wide-area disasters.
  - Data communication protections: firewalls, optional encryption in proprietary network; protection measures regularly tested by independent party.
  - Audit trails: end-to-end traceability; internal/external audits performed.
- Availability (observed):
  - System availability: 2003: 99.68 percent; 2004: 99.85 percent; 2005: 99.84 percent.
  - System capacity sufficient for peak volumes but number of incidents relatively high compared with other ESCB countries.

### Observance, assessments, and key recommendations
- Overall assessment:
  - KRONOS operations embedded in a solid legal framework; funds received can be used immediately and no retroactive actions are possible in bankruptcy.
  - Fulfillment of CPSS Core Principles: seven CPs fully observed (I, II, III, IV, VI, IX, X); two broadly observed (VII, VIII); one not applicable (V).
- Key recommended actions (selected, preserving original wording and priorities):
  - Coordinate contingency plans of Danmarks Nationalbank, BEC, VP, and PBS and develop infrastructure for broad testing of emergency procedures.
  - Renegotiate with BEC the maximum restart time and agree to comply with international best practice of two hours.
  - Develop further and adapt the ECB securities analysis methodology according to new IT security insights.
  - Ensure communication via proprietary network observes international standards with respect to integrity.
  - Continue stress testing all parts of the system and ensure sufficient peak capacity.
  - Analyze how operational reliability can be enhanced to reduce incident frequency, considering the complexity and shared platform with BEC.
  - Analyze in depth the costs of KRONOS, define the part of cost to be borne by Danmarks Nationalbank, and develop a pricing strategy taking into account fees in comparable countries.
  - Reconsider discretionary powers regarding access and exit; analyze language-barrier effects for remote members; formulate explicit exit procedures in rules and regulations.
- Sumclearing-specific recommendations:
  - Reduce systemic risks by either:
    - maintaining present settlement procedures but implementing adequate loss-sharing and liquidity arrangements; or
    - lowering maximum individual-payment sizes and spreading clearing results across several batches during the day/night to reduce net positions.
  - Prevent booking of retail payments to customer accounts before final settlement where there is no guarantee of finality (especially in PBS ordinary clearing).
  - Implement procedures to reduce time to reverse defective payment instructions (may currently take up to a week to reverse all payments).
  - Publish a clear memorandum (English and Danish) describing system, roles, risks, procedures for extraordinary situations, and consequences of defaults; make it available to participants/public.

*Assessment and content drawn exclusively from the provided KRONOS/Sumclearing CP Report content.*

### introduction of loss-sharing arrangements seems to exist among bankers, whether for

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### Loss-sharing arrangements and moral hazard
- Introduction of loss-sharing arrangements seems to exist among bankers, whether for payments or for securities settlement systems, because these arrangements are identified with survivor pay schemes that could result in moral hazard and hence distort competition.

### CP VI – Assets used for settlement
- Principle: Assets used for settlement should preferably be a claim on the central bank; where other assets are used, they should carry little or no credit risk and little or no liquidity risk.
- Description: The system settles fund transfers over accounts participants have opened with Danmarks Nationalbank. The funds received are a claim on Danmarks Nationalbank itself.
- Participation structure and concentration risks:
  - No restrictions on access for banks in the Sumclearing, nor in KRONOS.
  - Participation rates: 62 banks participate directly in the Sumclearing in kroner and 26 in the retail clearing in euro.
  - Voluntary indirect participation:
    - 104 smaller banks have chosen voluntarily to settle their retail payments in kroner via a clearing participant.
    - 142 banks use a settlement agent for the clearing and settlement of their euro payments.
  - These banks are exposed to settlement bank risk should their settlement agent default.
  - No specific requirements set by the system owner or overseers and no figures were available about concentration risks, the amounts cleared and settled via the larger settlement banks, and possible deposit risks.
- Mitigants:
  - PBS and Danmarks Nationalbank have made it possible for nonclearing participants to quickly change clearing participant or become a direct clearing participant.

- Assessment: Observed
- Comment: Settlement takes place in central bank money, albeit that smaller banks have voluntarily chosen to use another bank to clear and settle their retail payment flows and thus expose themselves to settlement bank or deposit risks.

- Recommendation:
  - The overseers should gather figures about possible concentration and deposit risk due to the use of settlement banks and analyze what will happen to the smaller banks and the trust in the system as a whole, if, one of the larger settlement banks were to go bankrupt. Within this context, it should be taken into account that the same settlement bank might also be used for other services, such as cash provider in VP.

### CP VII – Security, operational reliability, and contingency arrangements
- Principle: The system should ensure a high degree of security and operational reliability and should have contingency arrangements for timely completion of daily processing.

- IT security governance and policies:
  - PBS has a general IT security policy prepared in accordance with international standards (ISO17799).
  - Policy elements: descriptions of responsibilities and organization in relation to IT security, classification of data and documents by degree of confidentiality, requirements for data during transmission (e.g., encryption), and guidelines for data access and physical security.
  - The security policy has been approved by the Board of PBS and its observance is assessed on an annual basis.
  - PBS has a special IT-security group including several PBS executives with overall responsibility for IT security, implementation of the IT-security policy, and discussion of operational incidents.
  - PBS consulted with the Danish Security Intelligence Service; IT crime is deemed the greatest threat, while extreme operational events (e.g., terrorist attacks, flooding) are assessed to be very unlikely.

- Risk management, documentation, and testing:
  - Annual comprehensive security analysis of all PBS systems, and security analyses in connection with major system changes.
  - Approved security descriptions exist for all PBS systems, including the Sumclearing in both kroner and euro and its underlying systems.
  - User manuals exist for all essential IT systems relating to the Sumclearing; all manuals are up-to-date.
  - Security descriptions have been approved by the Board of PBS.

- Back-up facilities and recovery times:
  - PBS has established back-up facilities (a second site) at a relatively short distance from the primary facility, which may make it vulnerable for a wide area disaster.
  - The back-up facility can handle all key functions in relation to the Sumclearing and the underlying systems.
  - Direct data mirroring occurs between the two facilities.
  - After measures implemented in 2003/04, the Sumclearing can be restarted at the second site within 4 hours, compared to 24 hours previously.
  - PBS’ tests of the business continuity plans have confirmed that the Sumclearing can be restarted within the targeted four hours, and for EFPOS transactions PBS has set a target of two hours.

- Contingency and emergency procedures:
  - Contingency plans for the Sumclearing and key underlying systems describe practical handling of disaster situations and are documented and tested on a regular basis.
  - Plans concerning critical IT systems at PBS are tested once every three years; results reported to PBS’ IT security group.
  - Business continuity plans for management and information dissemination are tested once a year.
  - PBS’ contingency plans have focused primarily on internal circumstances and have not been coordinated with participants, data processing centers, Danmarks Nationalbank, or major utility companies (e.g., electricity and telephone companies).
  - PBS has an uninterruptible power supply and continued operations during the power outage in 2003.

- Coordination and operational incidents:
  - BEC, VP, PBS, and Danmarks Nationalbank have held meetings to be familiar with each other’s emergency procedures.
  - Experience from two incidents within the past year shows emergency procedures do not always function optimally, particularly regarding communication between parties concerning problems arising from settlement in Sumclearing or VP settlement.

- Protection of data communication:
  - Exchange of data between PBS and participants’ data processing centers takes place in an agreed data standard via the PI-net, a proprietary network.
  - All messages are encrypted and all communication lines are duplicated.
  - PBS has measures to ensure integrity, authentication, and non-reputability; issues are addressed in the PBS security policy that conforms to legal requirement and generally accepted business standards.
  - Adequate firewalls are in place and safety measures are tested annually by independent experts; results and a yearly risk assessment are used for evaluating enhancements.

- Audit trails and payment traceability:
  - Sumclearing processes total balances (sum totals) rather than individual payments in principle.
  - PBS can trace an individual payment in the PBS clearing that is made on the basis of PBS’ own products, but has no information on individual payments in the electronic clearing and truncation system.
  - PBS’ logging and investigation of individual payments in the PBS clearing are mainly intended to discover and prosecute those responsible for fraud and abuse.

- Development, procurement, availability, scalability:
  - Changes to PBS’ systems are subject to change management procedures and testing in special testing environments.
  - Manual procedures exist for testing whether system changes affect interfaces to VP Securities Services and BEC.
  - Capacity of the Sumclearing is monitored and assessed on an ongoing basis; no significant capacity problems observed in recent years.
  - CPUs used are owned by PBS, with a contractual obligation on the provider to expand capacity at very short notice.
  - If indications of potential capacity problems arise, development and testing activities can be suspended.
  - Beginning 2006, PBS introduced quarterly reporting to the DBA of incidents, transaction volumes, etc.; the quarterly reporting will probably be complemented by an annual report.
  - PBS has sufficient skilled staff available, even in cases of severe epidemic-related absences.

- Audits:
  - PBS, as joint data processing center, is subject to the DFSA’s Executive Order no. 254 of April 10, 2005 on system audits in joint data processing centers.
  - Internal and external system auditors conduct ongoing inspection of Sumclearing procedures, user manuals, Håndbog for Betalingsformidling, and security analyses.
  - Extensive reporting by system auditors takes place; identified issues are followed up closely by both system operator and auditors.
  - Sumclearing has been reviewed by PBS’ internal auditors in cooperation with internal auditors of a large clearing participant; all issues identified have been addressed.

- Assessment: Broadly observed
- Comments:
  - PBS as system operator has established an effective security policy and adequate contingency arrangements for timely completion of daily processing.
  - A full assessment of operational reliability was not possible due to lack of data on availability and incidents at the time of the assessments.
  - Functioning of the system should be formally monitored and availability and incidents should be given appropriate attention by management.
  - PBS appears to focus more on internal problems; contingency measures should be broadened by testing with participants and coordination with other system providers (KRONOS, VP).
  - The operational reliability of the whole infrastructure for the settlement of retail payments is as strong as the weakest link in the chain; overseers should assess operational reliability of clearing sub-systems and links between different parts of the infrastructure.

- Recommendations:
  - The targets set for availability should be formally monitored and statistics on availability (uptime) and major incidents and their consequences should be made available to the system owner, the participants, and the overseers. (As indicated, quarterly reporting began in 2006.)
  - The contingency measures should be tested with participants and the emergency measures should be coordinated with other system providers. Danish authorities have started work on the latter issue.
  - Sumclearing should be seen in a broader context: overseers should assess the operational reliability of the clearing sub-systems and the links between different parts of the infrastructure.

### CP VIII – Practicality and efficiency for users and the economy
- Principle: The system should provide a means of making payments which is practical for its users and efficient for the economy.
- Systemic importance:
  - The overseers have declared the system for clearing and settlement of retail payments systemically important, since it is important to the functioning of the economy, widely used, and there are no alternatives.
- Variety of instruments and volumes:
  - A broad variety of payment instruments are processed, varying from checks and paper based credit transfers to card transactions and direct debits.
  - In 2005, around 1.1 billion payments with a value of DKr 5,027 billion were cleared and settled in the system.
- Trends and usage:
  - The number of checks has declined since the introduction of direct debits and the Dankort.
  - Annual value of checks cleared peaked at DKr 1,237 billion in 1998 and declined to DKr 522 billion in 2004.
  - Direct debit is well developed and 9 out of 10 households use the Direct Debit Services for paying regular bills.
  - Denmark has the highest number of debit card transactions per capita in Europe.
  - Use of credit cards is limited due to the strong position of Dankort and the fee structure for retailers: no transaction fee for retailers per debit card transaction against an average transaction fee of 3.25 percent for credit card transactions.
  - Retailers pay an annual fee for Dankort that is related to the size of their transactions and varies between DKr 500 and DKr 10,000 (US$80 and US$1,600 respectively).
  - Electronic banking is very popular; 2.7 million Danish citizens (of a total population of

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### Open infrastructure and automation
- All Danish banks operate on one network standard called PI-net and use Edifact standards to communicate with customers.
- The Sumclearing is part of the Danish banks’ joint payments infrastructure, in which all banks in Denmark participate.
- Advantages of joint payments infrastructure:
  - Fixed operating costs can be distributed among all participants.
  - Uniform processing of retail payments, irrespective of the remitter and recipient’s choice of bank.
  - Facilitates change of bank because agreements such as BetalingsService (the Danish direct debit service) can be transferred to the new bank.
- Denmark’s retail infrastructure is characterized by:
  - A high degree of automation.
  - Use of data standards that promotes straight-through-processing and helps to reduce costs.
- Assessment comment: The Danish banking sector and its interbanking service provider, PBS, offer a broad and modern package of retail payment services. The infrastructure is open and technologically relatively advanced. The development of new products is very innovative. The settlement cycle is not exceptionally long. Customer satisfaction with some of the services is very high.

### Decision-taking structure and governance of retail payments infrastructure
- Ownership:
  - Main parts of the infrastructure for clearing and settlement are owned by the banks collectively.
  - The Sumclearing is owned by the DBA.
  - PBS shares are held by the banks including Danmarks Nationalbank.
- Participation and influence:
  - Participants influence development via task forces and committees under the DBA.
  - Smallest participants are usually represented via the Association of Local Banks in Denmark.
- DBA role:
  - The DBA is the trade organization for the Danish banking sector; members include Danish commercial banks, savings banks, cooperative banks, and subsidiaries and branches of foreign banks.
  - DBA coordinates further development of the infrastructure and the mutual agreements behind it. Consensus is normally reached in task forces and committees.
- PBS objectives:
  - To develop, sell, and operate systems and services in the market for payment cards and payment services, and to provide services as subcontractor to the common infrastructure for the banks.
  - Mission: to make payments simple and secure.
- Transparency:
  - DBA’s ownership of the Sumclearing is publicly known; board and management structure can be found on its website; the appointment process of a board member is described in the organization’s articles.
  - PBS is a public limited company obliged to publish an annual report available on its website, giving information on activities, structure of the Board, and income statement.

### Settlement cycle, liquidity use, and operational timing
- The Sumclearing uses an overnight settlement cycle.
  - Overnight settlement enables processing when liquidity withdrawal and use of IT capacity are at their lowest.
  - Mortgage payments to mortgage-credit institutions via the Sumclearing are usually settled before the disbursement of interest and redemptions in the VP settlement, which occurs in the morning.
- Limitation:
  - Overnight settlement in the Sumclearing means retail payment from one customer account to another cannot be carried out on the same day.
  - Some countries allow intraday settlement while others take longer to settle.
- Use of liquidity:
  - Extensive liquidity reserved by clearing participants for settlement can be seen as a—currently cost-free—inefficiency in the system.
  - Participants pledge collateral in the form of securities when reserving liquidity; present substantial excess cover reflects that there are no costs connected with pledging securities as collateral for the settlement.

### Cost recovery and pricing
- Exact costs for Sumclearing itself were not available.
- PBS (system-operator and operator of PBS clearing and common supplier of several payment products for banks) is fully cost recovering (profit in 2005 after taxes DKr 192 million).
- Sumclearing participant fees:
  - Annual fee of DKr25, 000 for the clearing of kroner payments.
  - Annual fee of DKr 50,000 for the clearing of euro payments.
  - Annual fee is fixed by the DBA and covers all costs.
  - Difference in fees reflects that the Sumclearing in Euro has approximately half as many clearing participants as the Sumclearing in kroner.
- Additional participant payments:
  - Connection fee and an annual fee for participation in the electronic clearing and truncation.
  - Connection fee and a number of annual fees and transaction fees to PBS depending on subscription level of the common infrastructure.
  - Annual fee for institutions that issue a Dankort is based on participants’ working capital as defined by the DFSA, adjusted to make the fee an increasing but regressive function of participant’s size.
  - Transaction fee for a Dankort transaction is a fixed amount per transaction of DKr 0.05 to be paid by the issuer bank.
- Fees and consumer contributions:
  - Customers and retailers organizations have no influence on the fee structure.
  - Contributions to the costs of debit card transactions by the retailers are from an international point of view very low, and customers do not yet pay a fee at all for the use of their debit card.
- Data availability:
  - No figures are available about the total costs of running the Danish retail payments at the moment, or on the division of the costs over banks, business firms/retailers, and consumers/clients.

### Access, participation criteria, and exit
- Sumclearing participation requirements (CP IX):
  - Requirements are clearly defined in the Sumclearing participation agreement.
  - Access is open to all banks, saving banks, and cooperative banks.
  - Access is also open to foreign banks that are active in Denmark, provided that they are well supervised.
  - Participants must be able to settle their payments as direct members via one or both clearing sub-systems and have opened a current and a settlement account with Danmarks Nationalbank.
  - Foreign banks must provide a satisfactory legal opinion with respect to the recognition of the finality rules and the netting agreement under their bankruptcy laws.
  - Sumclearing does not have remote access capabilities; foreign banks must access Sumclearing infrastructure remotely through an agreement with a direct participant.
- Limitations and non-clearing members:
  - No minimum requirements with respect to credit rating or capital ratios, other than the normal requirements by the banking supervisory authority (fulfillment of the capital adequacy rules).
  - Fee structure or technical requirements do not form a barrier to access.
  - Smaller banks can choose to settle payment flows via a clearing participant while still accessing the payment infrastructure; such banks are nonclearing members and have no direct relationship with Sumclearing.
- Exit rules:
  - Participants that no longer fulfill the requirements for access will be removed via a decision by the board of the DBA as owner of the system.
  - No formal arrangements exist to facilitate a participant’s exit from Sumclearing.

### Assessments of observance (Sumclearing Core Principles)
- Table 5 — Summary Observance of the Sumclearing of the CPSS Core Principles:
  - Observed 6: 1, 4, 6, 8, 9, 10
  - Broadly observed 3: 2, 5, 7
  - Partly observed 1: 3
  - Non-observed None
  - Not applicable None
- Assessment comments:
  - The Sumclearing has objective criteria for participation, which permit fair and open access and do not restrict competition in the banking sector.
  - In the retail area banks do not compete on infrastructure but on fees and services. Smaller banks can provide their clients with a full package of payment services.

### Recommended actions to improve Sumclearing observance (excerpts from Table 6)
- Legal foundation (CP I): None.
- Understanding and management of risks (CP II - III) — The DBA should as soon as possible:
  - Draw a memorandum that provides a comprehensive description of the functioning of the system; the risks involved; the risk and liquidity management measures, and tools for participants; the consequence of an unwinding; and the main rules and regulations and procedures, especially in abnormal situations. The memorandum should be published on its open website in English and in Danish.
  - Lower the risks in the system by either implementing a loss-sharing and liquidity arrangement or lowering the positions in the netting by setting lower maximum limits for individual transactions and dividing the payment flows effectively in batches during the settlement day instead of concentrating them in the first normal settlement cycle at 1.30 a.m.
  - Take measures to prevent the booking of the retail payments in the account of customers before the settlement is final, as long as the settlement is not guaranteed by adequate risk management measures. Alternatively, the results of the ordinary clearing could be settled immediately after the processing is finished, whereupon the data on the underlying retail payments could be distributed.
- Settlement (CP IV-VI) — The overseers of the system should:
  - Gather information on possible concentration risk, the amounts settled and the deposit risk for the smaller banks that use a specific settlement bank, and analyze the consequences for smaller banks and the trust in the system in case of a default of one of the larger settlement banks.
- Security and operational reliability, and contingency arrangements (CP VII):
  - The contingency measures should be tested with participants and the emergency measures should be coordinated with other system providers.
- Efficiency and practicality of the system (CP VIII): None.
- Criteria for participation (CP IX) — The DBA should:
  - Facilitate the public disclosure of the access criteria by stating the rules in the memorandum mentioned under CP II.
  - Make the exit rules more formal by drafting exit criteria and work out decision procedures and procedures to facilitate the exit of a participant and publish them in the aforementioned memorandum.
- Governance of the payment system (CP X) — The DBA:
  - May want to enhance the transparency of the infrastructure for clearing and settlement of retail payments by making the memorandum, as indicated under CP II, available to the public by publishing it on its open website.
  - Should take action to comply in full with all Core Principles.

### Danmarks Nationalbank responsibilities, assessments, and recommendations
- Danmarks Nationalbank main roles in payments:
  - to issue banknotes and coins;
  - to act as banker to the government and fiscal agent for the issue of public debts;
  - to act as settlement bank and provider of KRONOS, the large-value payment system in Denmark;
  - to act as catalyst to promote the efficiency and security of the payments and settlement infrastructure via regular meetings with other parties, participation in working groups and committees, organizing ad hoc meetings, and using its position as shareholder of VP and PBS;
  - to act as overseer of payments and securities settlement systems.
- Disclosure:
  - In 2001, Danmarks Nationalbank formerly defined and disclosed its role and policies with regard to systemically important payments and settlement systems in the Financial Stability Report (pp. 89–90). Objectives and tasks are also outlined on the Bank’s website. Recently, Danmarks Nationalbank published a book on payment and securities settlement systems in Denmark that also comprises a paragraph on the role of Danmarks Nationalbank and its major policies.
- Responsibility B — Operations and oversight of KRONOS:
  - Division of operational responsibilities across departments: Payment Systems Department (system owner and oversight), Accounting Department (day-to-day operation), Information Technology Department (IT strategy and relations with BEC), Organization Department (business procedure framework, risk assessment, IT security, physical security, contingency plans), Internal Audit Department (audits).
  - The Payment System Department houses a separated oversight section to ensure Chinese Walls between overseers and system owners/project managers.
  - The oversight section has performed three self-assessments of KRONOS. Oversight from 2006 onwards is planned to be performed on a “continuous basis.”
  - Assessment: Broadly observed. Comments: sound framework exists, but oversight not yet formalized in written procedures and manuals; information gathering could be improved.
  - Recommendations:
    - Draft a mission statement and work out an oversight methodology and implementation plan.
    - Ensure continuous oversight by organizing regular meetings with system providers, establish crisis management, define information needs, organize data gathering, and set up a database.
    - Ensure sufficient resources and expertise either within the oversight section or by borrowing expertise from other departments.
    - Establish internal and external relationships within the oversight policy.
    - Analyze pros and cons of different Danmarks Nationalbank roles in the payments and securities area; coordinate use of different roles.
- Responsibility C — Oversight of systems not operated by the central bank:
  - Legal basis: Section 1 of Danmarks Nationalbank Act; recent amendment of the STA spells out Danmarks Nationalbank as the sole authority responsible for overseeing systemically important payment systems, with option to apply sanctions and perform on-site inspections.
  - Danmarks Nationalbank and the DFSA have agreed that Sumclearing and VP are systemically important and fall within oversight scope.
  - Oversight section is staffed by four persons with backgrounds in economics and legal.
  - Assessment: Broadly observed. Comments: oversight task still in development; legal basis and instruments are being spelled out in the STA.
  - Recommendations:
    - Formalize oversight policy for systems operated outside Danmarks Nationalbank by working out oversight methodology, written procedures and manuals, and ensure gathering of reliable information.
    - Ensure new strategies and plans for infrastructure development are discussed with overseers before implementation.
    - Broaden scope of oversight with respect to the Sumclearing.
    - Establish a crisis management framework for infrastructure problems.
    - Ensure oversight can be adequately performed in case of outsourcing by the system provider and enable on-site inspections if necessary.
    - Strengthen cooperation with other Danish authorities (Danish Securities Council, Danish Competition Authority, Consumer Ombudsman) and relevant foreign authorities.
    - Increase involvement of participants in oversight.
    - Strengthen reporting of oversight in the annual Financial Stability Report.
- Responsibility D — Cooperation:
  - Danmarks Nationalbank cooperates with the DFSA via an MOU published on both institutions’ websites covering identification of systemically important systems, applicable standards, coordination of verification of observance, consultation on vital rulings, and information exchange.
  - International cooperation: regular meetings with other central banks and participation in industry forums. In June 2003, governors of Nordic central banks signed an MOU on management of financial crises in a Nordic bank with activities in two or more Nordic countries; crisis group arrangements for joint access to and management of information are included.
  - Assessment: Observed.

### Danmarks Nationalbank observance summary (Table 8)
- Principles Grouped by Assessment Grade:
  - Observed 2: A and C
  - Broadly observed 2: B and D
  - Partly observed None
  - Non-observed None
  - Not applicable None

*Source: IMF staff report content from _cr07120 - 5.4 million) have an e-banking account. Home banking is fully supported by the (source PDF provided).*

### 21.      Information on other assessments of systemically important payment systems in other

### 21.      Information on other assessments of systemically important payment systems in other

### Overview
- Information on other assessments of systemically important payment systems in other industrialized countries can be found in Table 10.
- Based on 35 assessments of different payment systems in 25 industrialized countries, excluding Denmark. (The figures may not add up due to rounding.)
- Some principles may not be applicable.

### Table 10. Observance of Core Principles for Systemically Important Payment Systems in Selected Industrialized Countries — key figures
- Number of assessments: 35
- Percent of assessments by Core principle (Observed / Broadly Observed / Partly Observed / Non-Observed / Number of assessments)
  - 1. Well-founded legal basis: 63 / 20 / 14 / 3 / 35
  - 2. Clear rules and procedures: 80 / 11 / 9 / -- / 35
  - 3. Management of credit risks and liquidity risks: 80 / 11 / 6 / 3 / 35
  - 4. Prompt settlement: 89 / 6 / 3 / 3 / 35
  - 5. Same day settlement in netting or deferred gross settlement systems: 44 / -- / 33 / 22 / 9
  - 6. Settlement asset: 100 / -- / -- / -- / 35
  - 7. High degree of security and operational reliability: 83 / 17 / -- / -- / 35
  - 8. Practical and efficient for users: 74 / 23 / 3 / -- / 35
  - 9. Fair and open access: 80 / 14 / -- / 6 / 35
  - 10. Governance arrangements: 83 / 9 / 3 / 6 / 35
- Responsibilities (Observed / Broadly Observed / Partly Observed / Non-Observed / Number of assessments)
  - A. Objectives and disclosure: 68 / 12 / 4 / 16 / 25
  - B. Compliance with the core principles: 75 / 13 / -- / 13 / 24
  - C. Oversight: 62 / 10 / 10 / 19 / 21
  - D. Cooperation: 80 / 8 / -- / 12 / 25

### Recommended actions by Responsibility (as recorded)
- Responsibility A — Disclosure of objectives, role and major policy
  - None
- Responsibility B — Compliance of central bank systems
  - Draft a mission statement and work out the oversight methodology and an implementation plan;
  - Ensure that the oversight of KRONOS is performed on a continuous basis;
  - Ensure that sufficient resources and expertise are available;
  - to establish internal and external relationships within the context of the oversight policy; and
  - Analyze in more depth the pros and cons of the different roles and their usefulness to tackle specific issues in the Danish institutional context and coordinate the use of the different roles.
- Responsibility C — Oversight of non-central bank systems
  - Formalize the oversight policy with respect to systems operated outside Danmarks Nationalbank;
  - Broaden the scope of the oversight with respect to the Sumclearing;
  - Establish a crisis management framework with respect to problems in the infrastructure;
  - Ensure that the oversight can be adequately performed in case of outsourcing;
  - Strengthen the cooperation with other Danish authorities and relevant foreign authorities;
  - Increase the involvement of the participants in the oversight; and
  - Strengthen the reporting of oversight in the annual Financial Stability Report.
- Responsibility D — Cooperation with other authorities
  - None

### Authorities’ response — Large-value payment system (KRONOS)
- The assessments and recommendations for improvements in relation to KRONOS essentially reflect the findings of Danmarks Nationalbank.
- Regarding the recommendation to renegotiate with the system operator the legal binding maximum restart time so that it can be reduced from four to two hours:
  - Numerous tests in recent years consistently have shown that KRONOS can in practice be restarted in less than one and a half hours.
  - Danmarks Nationalbank agrees with the recommendation and has started negotiations with the system operator with the aim of resolving the issue.
- Regarding the recommendation to further analyze the system’s efficiency:
  - Danmarks Nationalbank notes that the large number of direct participants shows that an appropriate balance between security and efficiency seems to have been reached.
  - The cost recovery in the system is less than full, but seems adequate and in line with similar RTGS-systems in other small- to medium-sized European countries.

### Authorities’ response — Retail payment system (Sumclearing)
- The assessments and recommendations for improvements in relation to the Sumclearing are broadly in line with the findings of Danmarks Nationalbank and the DFSA.
- Emphasis: participants generally have far more eligible collateral than needed for their daily net payments in the Sumclearing, in the VP settlement and in CLS.
- Danmarks Nationalbank and the DFSA agree to the recommendation that the practice of booking retail payments in customer accounts before the settlement of the payments are final should be terminated.
  - Danmarks Nationalbank and the DFSA will start discussions with the banking sector with the aim of changing this practice.
- Danmarks Nationalbank and the DFSA take note of the recommendation to lower the financial risks in the system by implementing additional measures such as loss-sharing agreements or pools of collateral or by lowering the net positions settled, for instance, by restructuring the settlement cycle and introduce new settlement blocks during the day.
  - These proposals will in the near future be further analyzed.
  - Danmarks Nationalbank will start discussions with the system owner with a view to identifying costs and benefits associated with the various proposals.
- Supervision of settlement agents and indirect participants, and analysis of concentration risks:
  - Lies primarily with the DFSA.
  - The DFSA has taken note of the recommendation to gather information on possible concentration risk, etc., and analyze the consequences for smaller banks and the trust in the system in case of a default of one of the larger settlement banks.
  - The DFSA’s understanding of the recommendation is that such supervision should be carried out on a more formalized and recurrent basis.
  - Steps will be taken to this effect.

### Central bank responsibilities and planned actions
- 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 toward full observance of the international standards on central bank oversight already taken:
  - The legal basis has been strengthened by an amendment to the STA, 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 to further enhance cooperation between the two authorities.
  - Danmarks Nationalbank will take the necessary steps to broaden the oversight of the retail payment system (Sumclearingen) 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.
  - Full observance is expected to be achieved in 2006.

*IMF — country report section 21.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07120.pdf_