DANMARKSNATIONALBANK 3 0 A P R I L 2 0 1 8 — N O. 4

REPORT

Denmarkhasanup-to-dateandefficientpaymentsinfra-structure.Thecoresystemsandsolutionsextensively complywithinternationalsecurityandefficiencystandards.Theinfrastructurerequirementsareregularlytightened.

DanmarksNationalbankmonitorstheeffortsofkeyactorstocomplywithinternationalcybersecurityguidelines.Notallhavemadethesameheadwayintheseefforts.Partoftheworkregardingcyberresiliencetakesplaceatsectorlevel.

AttherecommendationofDanmarksNationalbank,col-laborationwasestablishedtoidentifyandaddressrisksrelatedtointerdependenciesbetweenKronos,theVPsettlementsystemandtheretailpaymentsystems.Afinalmodelisexpectedtobeinplacebymid-2018.

Oversight of the financial infrastructure

Room for improvement

Important infrastructure

Cyber risks have been a focus area of Danmarks Nationalbank’s oversight in 2017

Payments averaging kr. 502 billionare settled each banking day

Cyber risks Kr. 502 billion

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CONTENT

2 SECUREANDEFFI- CIENTINFRASTRUC-TUREINDENMARK

5 INTERBANKPAY- MENTSINKRONER

8 INTERBANKPAY- MENTSINEURO

9 RETAILPAYMENTS

12 CLEARINGANDSETTLEMENTOF RETAILPAYMENTS

13 SECURITIESSETTLEMENT

17 SETTLEMENTOFFOREIGNEXCHANGETRANSACTIONS

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Secureandefficient infrastructureinDenmark

Denmarkisoneofthemostdigitisedcountriesintheworld,andpaymentsandfinancialtransactionsarewidelysettledbyelectronicmeans.Itisimport-anttosocietyandtoindividualconsumersandfirmsthatthisexchangeiseffectedinasecureandefficientmanner.TheDanishpaymentsinfrastruc-tureisdescribedinBox1.

Byinternationalcomparison,Denmarkhasanup-to-dateandefficientpaymentsinfrastructure.AsdemonstratedbyDanmarksNationalbank’soversight,thecoreinfrastructuresystemsandsolutionsextensivelycomplywithinternationalstandardsforsecureandefficientsystemsandsolutions1.

Instantpaymentscanbemadewithinseconds,andsecuritiesaresettledinaccordancewithbestpractice.Theperformanceofinfrastructuresystemsandsolutionsisstable,andsignificantbreakdownsordelaysarerare.Liquiditycanbedistributedsmoothlyamongthevariouspaymentandsettlementsystems,andgenerallythereisampleliquiditytosettlepaymentsbetweenbanks.Allthesame,thereisroomforimprovement.

Room for improvementDanmarksNationalbankhaspreviouslymaderecommendationsthathavenotyetbeenfullycompliedwith.Atthesametime,theworldandthepotentialinfrastructurethreatsareconstantlychanging,sowhatwassufficientyesterdaymaynotnecessarilybeadequatetomorrow.Bestprac-ticeisevolving,therebyenhancingrequirementsforinfrastructuresystemsandsolutions.

DanmarksNationalbankkeepsupanongoingdialoguewiththoseresponsibleforthecoresys-temsandsolutionssubjecttooversightabouttheworkregardingopenrecommendationsandotherareaswithpotentialforimprovement.Effortsaremadeonacurrentbasistoimprovethesecurityandefficiencyofthecoreinfrastructuresystemsandsolutions.

1 ForadescriptionofDanmarksNationalbank’soversight, seeDanmarksNationalbank,Oversight Policy,2015(link).

Danmarks Nationalbank’s oversight

DanmarksNationalbankoverseesthatpaymentsand

financialtransactionsinDenmarkcanbeeffectedina

safeandefficientmanner.Oversightcomprisesthecore

systemsandsolutionsintheDanishpaymentsinfrastruc-

ture:

• Kronos(interbankpayments)

• theSumclearing,IntradagclearingandStraksclearing

(retailpayments)

• theVPsettlementsystem(securitiestransactions)

• Dankort,Betalingsserviceandcredittransfers(the

mostimportantpaymentsolutions)

• InternationalsystemsofrelevancetoDenmark.

ThisreportpresentstheconclusionsofDanmarksNation-

albank’soversightoftheDanishpaymentsinfrastructure

in2017.

Againin2017,DanmarksNationalbank’soversighthadparticularfocusonthemanagementofcyberrisksandrisksarisingfrominterdependenciesbetweentheinfrastructuresystems.Animportantpartofthisworktakesplaceatsectorlevel,i.e.incollaborationbetweenfinancialsectorpartici-pants.

Focus on cyber resilienceRecentyearshaveseenseveralseriouscyberat-tacks.TwoclearexamplesaretheattacksontheBangladeshicentralbanktwoyearsagoandonMaersklastyear.Accordingly,bothpublicauthor-itiesandprivateactorsacrossthefinancialsectorhavehadstrongfocusonestablishingthebestpossibledefenceagainstcyberattacks.

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The Danish payments infrastructure Box1

Eachbankingday1,paymentsaveragingkr.502billion,cor-

respondingtoalmostonefourthofGDP,aresettledviathe

Danishpaymentsinfrastructure.

Thepaymentsinfrastructureisthenetworkofsystemsthat

enablesconsumers,firmsandpublicauthoritiestoex-

changepaymentsandfinancialtransactions.

DanmarksNationalbank’spaymentsystem,Kronos,playsa

centralroleinthisinfrastructure,bothinrelationtosettle-

mentoflarge,time-criticalpaymentsbetweenbanks(inter-

bankpayments)andbyvirtueofDanmarksNationalbank’s

roleassettlementbankforotherpaymentandsettlement

systems.Interbankpaymentsamountingtokr.74billionare

settledinKronosonadailybasis.

Retailpaymentsarepaymentsbetweenconsumers,firms

andpublicauthorities,e.g.byDankortorascredittrans-

fers.Dependingontheirtype,retailpaymentsaresettled

throughtheSumclearing,theIntradagclearingorthe

Straksclearing.

ForeignexchangetransactionsinCLScomprisee.g.FXspot,

FXforwardandFXswaptransactions.

SecuritiestransactionsinVPcomprisetradinginbonds,

equitiesandinvestmentfundshares.Somesecurities

transactions,suchasequitiestransactions,areclearedvia

acentralcounterparty,CCP.However,thisappliestoonlya

limitedshareofthetotalturnover.

Thepaymentandsettlementsystemsintheinfrastructure,

i.e.CLS,VPandthethreeretailpaymentsystems(theSum-

clearing,theIntradagclearingandtheStraksclearing),settle

theirparticipants’netpositionsinKronos.Netpositionsare

calculatedbyoffsettingparticipants’claimsandobligations

intherespectivesystems.Nettingreducestheparticipants’

liquidityrequirementforsettlementconsiderablycompared

withasituationinwhichallpaymentsaresettledindividual-

ly.Forinstance,nettingreducesthedailyliquidityrequire-

mentforthesettlementofretailpaymentsfromkr.38billion

tokr.8billion,equivalenttoareductionof79percent.In

CLSandVP,nettingreducestheliquidityrequirementby97

percentand94percent,respectively.

Payment flows, billion kroner, averages per banking day in 2017

KronosInterbank payments

Retrailpayments

Sumclearing,Intradagclearingand

Straksclearing8

74

FXtransactions

CLS

Securities transactions

VP CCPs

10

155 10

7

225

8

38

1. Sometypesofpaymentcanbemade24/7/365,othersonlyduringbankopeninghours.However,forallpayments,finalsettlement

andexchangeofamountsbetweenbankstakeplaceonbankingdays,i.e.whenbanksareopenforbusiness.

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In2016,CPMI-IOSCOissuedguidanceoncybersecurityinpaymentandsettlementsystems.2TheguidancespecifiesthemoregeneralCPMI-IOSCOprinciples3of2012inviewofincreasingcyberrisk.DanmarksNationalbankregularlymonitorstheef-fortstocomplywiththeguidance.Notallhavemadethesameheadwayintheseeffortsasdescribedinmoredetailinthesectionbelowonoversightofindi-vidualpaymentandsettlementsystems.

Sectoral collaborationCyberriskisalsoaddressedatsectorlevel,includ-ingthecyberresilienceworkoftheFinancialSectorforumforOperationalResilience,FSOR,cf.Box2.

Comprehensivemappingofthemostcriticalbusi-nessactivities,processes,systemsandfinancialsectorparticipantshasbeencarriedoutundertheauspicesoftheFSOR.Onthisbasis,adetailedan-alysisofpotentialrisksacrossinfrastructuresystemsandsolutionshasbeeninitiated,cf.belowontheworkconcerningrisksrelatedtointerdependencies.

TheFSORhasestablishedfinancialsectorcrisisresponseplanstoensurecoordinationacrossthesectorintheeventofe.g.anextensivecyberattack.DanmarksNationalbankchairsFSORandprovidessecretariatservices.Thecrisisresponseplansweretestedinboth2016and2017.Participationinthisworkservestoensure,forthesystemssubjecttooversight,compliancewiththeCPMI-IOSCOprin-cipleswhichrecommendparticipationinsectortests.

Furthermore,ithasbeendecidedatsectorleveltoestablishaDanishintelligence-ledredteamtestprogrammesettingoutcommonrequirementsforthetestingprocessthatparticipantsmustcomplete(link).Thepurposeoftheframeworkistoensurethatallparticipantswillbesubjecttoauniform

2 CPMI-IOSCOGuidanceoncyberresilienceforfinancialmarketinfra-structures(link)waspublishedbytheBankforInternationalSettle-ment,BIS,andInternationalOrganizationofSecuritiesCommissions,IOSCO.TheCommitteeonPaymentandMarketInfrastructures,CPMI,istheBIScommitteethatcontributedtoformulatingtheguidance.MembersoftheCPMIincluderepresentativesofalargenumberofcentralbankssuchastheECB,theFederalReserveBankandtheBankofEngland.

3 ThePrinciplesforfinancialmarketinfrastructures(link)werepublishedbyBIS/IOSCO.TheBIScommittee,CPMI,wascalledtheCommitteeonPaymentandSettlementSystems,CPSS,whentheprincipleswereformulated.Accordingly,theyarealsoreferredtoastheCPSS-IOSCOprinciples.

minimumlevelofcybertestingrequirements.AteamtosupporttheparticipantsduringthetestingprocesswillbeestablishedinDanmarksNational-bank.Redteamtestsareconductedasasimulatedcyberattackonsystemsinproduction,i.e.livetesting.

Assystemowners,DanmarksNationalbank,VPandFinanceDenmarkhaveallcommittedthemselvestoparticipatingintheupcomingDanishredteamtestprogramme.RedteamtestingisanimporttooltoverifyandstrengthencybersecurityandispartoftheCPMI-IOSCOcybersecurityguidance.

Financial Sector forum for Operational Resilience

Box2

TheFinancialSectorforumforOperationalResilience

(FSOR)wassetupin2016withthepurposeofincreas-

ingoperationalresilienceintheDanishfinancialsector,

includingcyberresilience.ParticipantsintheFSORin-

cludepaymentandsettlementsystems,dataprocessing

centres,thelargestDanishbanksandmortgagebanks,

financialindustryassociationsandauthorities.

ThetasksoftheFSORareto:

• ensureasharedoverviewofoperationalrisksthat

mayhaveanimpactacrossthesectorandcouldpo-

tentiallyposeathreattofinancialstabilityinDenmark

• decideonandensureimplementationofjointmeas-

urestoensurefinancialsectorresiliencetomajor

operationalincidents,includingcyberattacks

• createaframeworkforcollaborationandknowledge

sharing–withinthesector,betweendifferentsectors

andinternationally.

DanmarksNationalbankchairstheFSORandprovides

secretariatservices.

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Finally,ajointCERT4,NordicFinancialCERT,NFCERT,hasbeenestablishedatsectorlevel.Theobjectiveistocollect,shareanduseinformationoncyberthreatsandcyberattacksacrosstheNordiccountries. NFCERTalsoprovidesexpertassistancetoaddressanycyberattacks.TheCPMI-IOSCOcybersecurityguidanceemphasisesknowledgesharingasan importantaspectofbeingcyberresilient.

Risks arising from interdependenciesDanmarksNationalbankhaspreviouslyrecom-mendedastrengtheningofthecollaborationtoidentifyandaddressrisksrelatedtointerdepend-enciesbetweenKronos,theVPsettlementsystemandtheretailpaymentsystems.

ThiscollaborationhasnowbeenformalisedasaworkinggroupwiththeparticipationofDanmarksNationalbank,VPandFinanceDenmarkandwiththeobjectiveofidentifyingandassessingrisksrelatedtointerdependenciesandensuringthatrobustmeas-uresareinplaceforaddressingandcounteringtherisksidentified.

Risksmayarisee.g.asaresultof:

• theinteractionbetweeninfrastructuresystemswhichentailsthatoperationalproblemsinonesystemmayaffectsettlementinothersystems,orthatexternalrisks,forinstanceacyberattack,mayspreadbycontagionbetweenthesystems

• thedependenceonjointcriticalcommunicationsnetworksandjointuseofkeyITserviceproviders.

Theworkinggrouponinterdependenciesisdevel-opingajointmethodformanagingrisksarisingfrominterdependencies5.Thejointmethodistobeanchoredintheriskmanagementpoliciesoftheindividualparticipants.

Throughout2017,theworkinggroupalsomappedexistinginfrastructureandbusinessprocessesandidentifiedanumberofrisksrelatedtointerdepend-

4 CERTstandsforComputerEmergencyResponseTeam.

5 Theworkinggrouphasdefinedinterdependenciesas:businessprocessesand/ordataflowsacrossinfrastructuresandunderlyingsystems,ornetworkssharedbyseveralparties,whereoperationalfailuresmayinteractinsuchawaythatoneormorepartiesareun-abletocarryontheirbusinesseswithoutcollaboratingonrecovery.

encies.Thoseriskswillbeassessed,andifariskisdeemedtoexceedthejointlyagreedriskappetite,initiativestocounterthiswillbelaunched.

RiskmanagementandmonitoringofrisksrelatedtointerdependenciesisanongoingprocesstobejointlyundertakenbyVP,FinanceDenmarkandDan-marksNationalbank.Thefinalcollaborationmodelisexpectedtobeinplacebymid-2018.

Interbankpaymentsinkroner

Interbankpaymentsarepaymentsbetweenfinancialinstitutions.Suchpaymentsaretypicallycharacterisedbybeingtime-criticalandofhighvalue,andhencetheyaresettledinreal-timegrosssettlement,RTGS,systemsthatsettlepaymentsindividuallyandimmediately.

KronosisDanmarksNationalbank’sRTGSsystemforinterbankpaymentsinDanishkroner.Itisalsousedforthesettlementofmonetarypolicyoperationsandnetpositionsfromconnectedpaymentandsettle-mentsystems.

UseThereare88directKronosparticipants,mainlyDanishbanks,mortgagebanksandbranchesofforeignbanks.

In2017,approximately5,000interbankpaymentsweresettledviaKronoseveryday,correspond-ingtoadailyvalueofkr.74billion,cf.Table1,comparedwithkr.83billionin2016.Thevalueofmonetarypolicyoperationsintheformofsaleofcertificatesofdepositincreased,butthatispri-marilyattributabletotheparticipants’depositswithDanmarksNationalbankoftenexceedingtheirindividualcurrentaccountlimits.DanmarksNa-tionalbankconvertsthatpartoftheparticipants’depositswhichexceedstheircurrentaccountlimitsintocertificatesofdeposit.

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Operational reliabilityKronosuptime6exceeded99.9percentin2017,whichissatisfactory.However,oneincidentcausedthesystemuptimeinonemonthtobelowerthantheagreedservicelevel.Asaresultofnetworkprob-lems,Kronosparticipantswereunabletosendandreceivepaymentsforashortperiodon30March2017.ManualprocedureswereinitiatedtoensurethatCLSsettlementcouldbecompletedwithinthetimelimitsset.

In2017,Kronoswasalsoaffectedbyanumberofminorincidentsthatdidnothaveanyimpactonitsuptime,however.Itisassessedthatallincidentsweresatisfactorilyfollowedup.

6 TheuptimeisthetechnicaluptimesuppliedbyKronos’sITserviceprovider.Operationaldisruptionscausedbyothercircumstancesarenotincluded.

Payments in Kronos Table1

Kr.billion,averagesperbankingday

2013 2014 2015 2016 2017

Interbank payments 96.1 92.0 99.3 83.0 76.3

-Ofwhichcustomerpayments 10.3 11.0 12.8 11.5 11.8

Monetary policy operations 33.5 25.5 37.5 28.7 38.6

-Ofwhichsaleofcertificatesofdeposit 33.4 24.9 37.3 28.6 38.6

-Ofwhichmonetarypolicylending 0.2 0.6 0.2 0.1 0.0

Transfers to settlement systems 196.5 329.5 389.6 292.7 335.4

-OfwhichfortheSumclearing,IntradagclearingandStraksclearing 130.1 272.2 332.3 240.0 284.7

-OfwhichforVPsettlement 44.7 40.9 40.8 37.0 35.9

-OfwhichforCLS 21.8 16.5 16.5 15.7 14.8

Net positions settled 21.7 25.8 27.6 25.1 24.7

-OfwhichtheSumclearing,IntradagclearingandStraksclearing 3.1 7.0 7.6 7.6 7.8

-OfwhichVPsettlement 11.5 12.2 12.7 10.6 10.5

-OfwhichCLS 7.1 6.5 7.2 6.9 6.4

LiquidityOverall,Kronosparticipantshadampleliquidityforsettlementofpaymentsin2017.Chart1showstheparticipants’excessliquiditycover.

Traditionally,theliquidityrequirementisparticu-larlyhighondayswhenauctionsoffixedratebulletbondsforfinancingadjustableratemort-gageloansaresettled,i.e.typicallyatthestartoftheyearandattheendofthequarterlysettle-mentperiods.TheampleliquidityamongKronosparticipantscontributedtosmoothsettlementofpayments.

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International standardsKronosobservesthevastmajorityoftherequire-mentsintheCPMI-IOSCOprinciples.In2017,Dan-marksNationalbankcontinueditsworkonthefourareaswithpotentialforimprovementthatwereidentifiedinitsassessmentofKronosin2016.Thisincludestheworktomanagerisksarisingfrominter-dependencies,cf.above,andtoanalyserisksarisingfromindirectparticipation,cf.below.TheotherareaswithpotentialforimprovementareexpectedtobeaddressedwhenKronos2goeslive.

InNovember2017,DanmarksNationalbankpublishedananalysisofindirectparticipationinKronos.ThemajorityofindirectparticipantsareforeignbankssettlingpaymentsinDanishkronerviadirectparti-cipants.Indirectparticipationisagoodsolutionforbankswithoutin-depthknowledgeoftheDanishmar-ketorthenecessaryoperationalcapacityfordirectparticipation.Inthisway,settlementofkronerislefttoparticipantswhohaveDanishkronerasamajormarketandwhothereforehaveastronginterestinensuringthatsettlementisassmoothaspossible.

Byperformingthisanalysis,KronoscomplieswiththeCPMI-IOSCOrequirementforidentifyingandman-agingrisksassociatedwithindirectparticipation.

Stress tests DanmarksNationalbankperformsannualstresstestsofliquidityinKronos.Thepurposeofthestresstestsistomeasuretheeffectonthesettlementofpaymentsandtheliquidityoftheparticipantsundervariousformsofstress.Astressscenariomayincluderemov-ingamajorparticipantfromthesettlementofpay-ments,orlimitingtheparticipants’intradaycredit.Inpractice,apaymentssimulatorisusedtocomparetherespectivestressscenariostoabenchmarkscenariocorrespondingtotheactualsettlementofpaymentsinKronos.In2017,thetestshowedthatKronosisresilienttotheliquidityshocksinflictedonthesystembythestressscenarios.TheeffectofthesettlementofpaymentsislimitedandcanbemitigatedbymeansofKronos’contingencyprocedurestosettlecriticalpay-ments.Byperformingannualstresstests,DanmarksNationalbankcomplieswiththeCPMI-IOSCOrequire-mentforstresstestingliquidityinthesystem.

Participants’ liquidity requirements in Kronos Chart1

0

100

200

300

400

500

600

Kr.billion,dailyobservations

2013 2014 2015 2017 20182016

Available liquidity

Maximum liquidity requirement

Minimum liquidityrequirement

Note: Availableliquidityistheparticipants’totallineplustheircurrentaccountbalanceswhenKronosopensat7:00am,from24June2013includingamountsreceivedinVPsettlementcycle30at7:05am.Themaximumliquidityrequirementcorrespondstotheliquiditythattheparticipantsneedforsettlementofallthatday’spaymentswithoutdelay.Theamountdependsonthesequenceofthepaymentswithintheday.Theminimumliquidityrequirementiscalculatedastheliquiditythattheparticipantsneedforsettlementofalltheday’spaymentsaftermaximumnettingofincomingandoutgoingpayments.

Source: DanmarksNationalbank.

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Cyber resilience In2017,DanmarksNationalbankpreparedacybersecuritystrategytostrengthenthecyberresilienceofitscriticalbusinessactivities,includingKronosandtheforthcomingKronos2,cf.below.

Kronos2willstrengthencyberresilience,asthesys-temisimplementedonanewIToperatingplatformdesignedtomeethighsecurityrequirementsandcapableofcontinuousadjustmenttocomplywithrelevantrequirements.

Kronos’/Kronos2’scompliancewiththeCPMI-IOSCOcyberguidancehasbeenmapped,andthesecurityoftheforthcomingKronos2isbeingreviewedbyexternalexperts.DanmarksNationalbankiscontinu-ouslyworkingtoaddressanydeficienciesidentified.

System updates – New system underwayDanmarksNationalbankisreplacingKronoswithKronos2.ThenewsystemconsistsofanRTGSmod-uleforhandlingcriticalpaymentsandtransfersforsettlementofretailpayments,securitiestransactions,etc.,amoduleforhandlingmonetarypolicyoper-ationsandamoduleforcollateralmanagement.ThePeragosystemisusedforpaymentsandmon-etarypolicyoperationsandisalsousedbySverigesRiksbankandNorgesBank,amongothers,whiletheCalypsosystemisusedforcollateralmanagement.

InDecember2017,DanmarksNationalbankdecidedtopostponetheimplementationofKronos2.TheITplatformdidnotyethavethedesiredstabilitywhichisessentialduetothecentralroleofKronosinDan-ishpaymentservices.Moreover,DanmarksNational-bankfoundthesystemmanagementprocessestobeinsufficientlyresilient.ThedateforimplementationofKronos2is20Augustthisyear.

Interbankpaymentsineuro

DenmarkisconnectedtoTarget2,thetrans-EuropeanRTGSsystemforsettlementofinterbankpaymentsineuro.PaymentsbetweenfinancialinstitutionsandtransfersforsettlementinothereuropaymentandsettlementsystemsaresettledinTarget2.

UseThereare28DanishparticipantsinTarget2.In2017,Danishparticipants’dailyinterbankpaymentsaver-

Interbank payments in Target2 Chart2

0

5

10

15

20

25

30

Billioneuro,averagesperbankingday

2014 2015 2016 20172013

Intergroup

To foreign participants

Between Danish participants

Note: ThechartshowspaymentssubmittedbyDanishpartici-pantsviaTarget2.Dailyaverageshavebeencalculatedonamonthlybasis.

Source: DanmarksNationalbank.

aged16.7billioneuro.ExchangeofeuromostlytakesplacewithparticipantsinGermany,Finland,FranceandtheNetherlands.

DanishparticipantsuseTarget2mainlyforinter-grouppaymentsandpaymentstonon-residentparticipants.AccordingtoChart2,therehasbeenadeclineinintergrouppaymentsinthesecondhalfof2017.Thiscanbeattributedtoachangeinmarketparticipants’liquiditymanagementprac-tice.

Operational reliability TheoperationalreliabilityofthelocalTarget2componentsforwhichDanmarksNationalbankisresponsiblewassatisfactoryin2017.Therewereonlyafewminorincidentsin2017.

System updatesTheEuropeanCentralBank,ECB,hasbeenwork-ingtowardsmodernisingtheEuropeanpaymentsinfrastructureinrecentyears.TheECBisdevelop-inganinstantpaymentsysteminTarget2calledTargetInstantPaymentSettlementorTIPS.ThiswillallowDanishbankstoclearandsettleinstantpaymentsineuro.TIPSwillsupportmulti-currency,meaningthatatalaterstageitwillalsobepos-sibletoclearandsettleinstantpaymentsinothercurrenciesthaneurothroughthesystem.TIPSineuroisexpectedtobelaunchedinNovember2018.

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On6December2017,theECB’sGoverningCouncilapprovedthemigrationofTarget2totheupgradedT2Splatform7,whichwillincreasesecurityandre-duceoperationalcosts.TheconsolidatedplatformoffersnewRTGSservices,includingimprovedliquid-itymanagementproceduresandamulti-currencyservice.TheTarget2-T2SplatformisexpectedtobeoperationalfromNovember2021.

TheGoverningCouncilalsoapprovedtheestab-lishmentofajointsystemcalledtheEurosystemCollateralManagementSystem,ECMS,forcollat-eralmanagementineuro,whichwillreplacetheexistingsystemsof19nationalcentralbanks.ThenewsystemisexpectedtobelaunchedinNovem-ber2022.

Retailpayments

Paymentsbetweenconsumersandfirmscanbemadeusingbanknotesandcoinsorvariouselec-tronicpaymentsolutions,forinstanceDankortforpaymentsinsupermarkets,Betalingsservice(directdebit)forpayingrentorcredittransfersviaonlinebankingorMobilePay.Onaverage,dailyretailpay-mentstotalledkr.26.4billionin2017.

DanmarksNationalbankoverseesthemostim-portantpaymentsolutionsinDenmark,cf.Box3.

Operational reliabilityTheoperationalreliabilityofNets’systemscon-cerningDankortandBetalingsservicewasoverallsatisfactoryin2017.However,twomajorincidentsoccurredinthe3rdquarter,affectingtheavail-abilityofthecardsystemwhereby250,000and1.2millionDankorttransactions,respectively,wererejected.InDanmarksNationalbank’sassessment,Netsfolloweduptheincidentsinasatisfactorymanner.

Incaseofextendeddowntime,retailersmayrunthepaymentterminalsinofflinemodeandthuscon-

7 TheITplatformthatsupportsthetrans-Europeansecuritiessettle-mentsystem,Target2-Securities,T2S.

Danmarks Nationalbank’s oversight of payment solutions

Box3

DanmarksNationalbankoverseesDankort,Betalingsser-

viceandcredittransfers.

OversightofDankortandBetalingsserviceisaimedat

Nets,theownerofthesesolutions.

Oversightofcredittransfersispartoftheoversightof

theretailpaymentsystems(theSumclearing,Intradag-

clearingandStraksclearing),cf.thesection“Clearingand

settlementofretailpayments”.

DanmarksNationalbankregularlymonitorsdevelopments

inthevariousotherpaymentsolutionstoassesswhether

targetedoversightofthemisrequired.

MobilePayisincreasinglyusedforshoppinginstores,

onlineshopping,paymentofrecurringinvoicesandtrans-

fersbetweenusers.However,theaveragedailyturnover

forMobilePayofkr.0.2billion1isstilllimitedcomparedto

thepaymentsolutionssubjecttooversight,e.g.Dankort,

accountingforkr.1.2billionperday.

Moreover,themostsystem-criticalpartsofMobilePay

arecoveredbyDanmarksNationalbank’soversightof

theretailpaymentsystemsandDankort,asMobilePay

usescredittransfersandforinstanceDankorttoexecute

payments.

1. www.mobilepay.dk(link).

tinuetoreceiveDankortpayments.Netsiscurrentlyreviewinghowutilisationofthissolutioncanbeimproved–possiblybyautomaticallyswitchingtoofflinemodeine.g.supermarkets. NoincidentsaffectedtheoperationofBetalings-servicein2017.

The incidence of Dankort fraud is lowOverall,theincidenceofDankortfraudislow.Inabsolutefigures,Dankortfraudamountedtokr.104million8in2017,or0.23perthousandoftotalturn-over.9

8 DanmarksNationalbank’sStatBank,Payments:(link)(DNBSMIS, Type 1.1, Cat. 1, Denmark, Value, 2017 Q1-4).

9 DanmarksNationalbank’sStatBank(Payments):(link)(DNBSMIS, Type 1.1, Cat. 1, Denmark, Share of total value of transactions, 2017 Q1-4).

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TheincidenceofDankortfraudisalsolowrelativetofraudinconnectionwithDanishcardsabroad.10Visa/Dankortfraudabroadamountedto1.9perthousandin201711,cf.Chart3.

Fraudulent use of Dankort cards to withdraw cash and shop in stores FraudulentuseofstolenorlostDankortcardstowithdrawcashandshopinstoresamountedto0.15perthousandin2017,12cf.Chart4.

DanmarksNationalbankhasaskedNetstoreviewthepossibilityofstrengtheningtheoversightofillegalcashwithdrawals.Againstthatbackground,Netsdevelopedatechnicalsolutionthatiscapableofincludingallcashwithdrawalsintheoversight.Netshasenteredintoadialoguewiththeissuersaboutthispossibility,andthematterwillalsobediscussedatthemeetingoftheDanishPaymentsCouncilon9May2018.

10 SeeDanmarksNationalbank,FraudusingDanes’paymentcardsoccurabovealline-commerce,Danmarks Nationalbank Statistics (Payments, 2nd quarter of 2017),12December2017(link).

11 DanmarksNationalbank’sStatBank–(Payments)(link)(DNBSMIS, Type 1.1, Cat. 1, Foreign countries, Share of total value of transactions, 2017 Q1-4).

12 Nets’statistikformisbrugafDankort(Nets’statisticsonDankortfraud–inDanishonly)(link).

Total Dankort fraud, 2017 Chart3

0.0

0.5

1.0

1.5

2.0

InDenmark Abroad(Visa/Dankort)

Perthousand

Source: DanmarksNationalbank.

Dankort fraud online versus cash with-drawals and shopping in stores, 2017

Chart4

0

0.1

0.2

0.3

0.4

0.5

0.6

Online Cashwithdrawalsandshoppinginstores

Perthousand

Source: Nets.

Fraudulent use of Dankort cards to shop onlineFraudulentuseofDankortcardstoshoponlinewasthreetimeshigherin2017thanfraudinconnectionwithcashwithdrawalsandshoppinginstores,cf.Chart4.

FraudulentuseofDankortcardstoshoponlinede-clinedin2017andisnowmoreorlessonthesamelevelasinthe1sthalfof2015,cf.Chart5.

InNets’assessment,thedeclineistheresultofthemeasuresimplementedbyNetsinearly2017tostrengthenDankortsecurity,i.e.FraudPreventionandDankortSecuredbyNets.13

International standardsInMay2017,DanmarksNationalbankpublishedaDankortassessmentinaccordancewiththeECB’sstandardsforcardpaymentschemes.14ThemainconclusionwasthatDankort’sperformanceisstable

13 Fraud Preventionisasystemthatusespatternrecognitiontorejecttransactionssounusualthattheymustbeassumedtobemadebysomeoneotherthanthecardowner.Dankort Secured by NetsisasolutionbasedonstrongauthenticationwherebytheusermustenternotonlyDankortdetailsbutalsoacodereceivedbytextfromNetsbeforefinalisingthepurchase.Thismethod,whichisalsousedforpurchasesinvolvinginternationalcards,isusediftheamountexceedskr.450.

14 Cf.DanmarksNationalbank,DankortAssessment,Danmarks National-bank Report, No.4,May2017(link).

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withahighdegreeofavailabilityandalowleveloffraud.TheassessmentalsocontainedanumberofrecommendationsforNets.

DanmarksNationalbank’srecommendationsincluded,interalia,anexpansionoftheDankortriskassess-mentbyNets,moresystematicknowledgemanage-mentinrelationtoDankortandastrengtheningoftheframeworkfordecisionsandcommunicationregardingDankort.

NetshassubsequentlybeenworkingtocomplywithDanmarksNationalbank’srecommendations.Inthe1stquarterof2018,Netsachieveditsaimintermsofmostoftherecommendations:

• Netshasconductedanin-depthriskassessmentofDankort,comprisingseveraltypesofriskasopposedtopreviously,whenthefocuswasontheITplatform.Ithasalsoestablishedaprocessforannualriskassessmentupdates.

• Nets’outsourcingmanagementhasbeenstrength-ened.Nets’securityrequirementsaretransferredtoexternalsuppliersandmoresystematicallyfollowedup,e.g.byregularmeetingsandannualriskassessmentsofoutsourcedactivities.AVendorManagementBoardhasbeenestablishedtoensureinformationsharingandcoordinatedfollow-uponNets’externalsuppliers.

• Ingeneral,Netshasestablishedabetterorganisa-tionalandoperationalDankort-relatedoverview.

NetsisstillworkingonDanmarksNationalbank’srecommendationtostrengthentheframeworkforDankort-relateddecision-makingprocessesandcommunication.

DanmarksNationalbankrecentlyinitiatedanas-sessmentofBetalingsserviceinaccordancewiththeECB’sstandardsfordirectdebitsystems.

RegulationAnewDanishPaymentsActcameintoforceon1January2018.TheActimplementsthenewEUPay-mentServicesDirective,PSD2.15ThislegislationhasconsiderablychangedtheframeworkconditionsforpaymentsinDenmarkandtherestoftheEU.

Amongotherthings,PSD2hasintroducedarightforuserswithapaymentaccounttousethataccountbymeansofathirdpartyserviceproviderwithoutanagreementhavingbeenmadebetweentheuser’sbankandthethirdpartyserviceprovider.16PSD2thusallowsnewserviceproviderstoofferuserstheoptionofpayingforinstanceinvoicesfromtheirac-countswithoutdirectcontactwiththeirbanks–i.e.withouthavingtouseDankortoronlinebanking.17

PSD2ensuresthatalmostallpaymentserviceprovid-erswillbesubjecttosupervision,andthatallonlinepayments–apartfromcertainlimitedcases–mustbeapprovedbytheuserviastrong(two-factor)au-

15 TheDanishPaymentsActalsoadjustsanumberofspecialDanishrules,includingthecashobligation.

16 Themoredetailedrequirementsregardingthirdparties’accesstoinitiatingapaymentfromtheusers’paymentaccountswillnotenterintoforceuntilSeptember2019,however.

17 Theemergenceofservicesfromnewserviceprovidersallowinguserstobypassthebankswhenusingtheirbankaccountsisoftenreferredtoasopenbanking.

Dankort fraud in connection with online shopping

Chart5

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

H1 H2 H1 H2 H1 H2

2015 2016 2017

Perthousand

Source: Nets.

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thenticationrequiringtheusertoproveitsidentityintwodifferentwaystoreducetheriskoffraud.18

Thepurposeofthenewrulesistoincreasemarketcompetitionandimprovesecurityinconnectionwithpayments.

Clearingandsettlement ofretailpayments

TheSumclearing,IntradagclearingandStraksclear-ingarethefinancialsector’ssystemsforclearingandsettlementofDanishretailpayments.Thesys-temsareownedbyFinanceDenmark,managedbye-nettet,whichisthefinancialsector’sprojectandmanagementcompany,andprovidedbyNets.

TheSumclearingisusedforsettlementofallcardpayments,BetalingsserviceandNets’otherpaymentproducts.SettlementintheSumclearingiscarriedoutonceadayonbankingdays.TheIntradagclearingisusedforsettlementofcredittransferssuchasonlinebankingtransfers,payrolltransactionsandpublic- sectorpayments.Settlementiscarriedoutatfivefixedtimesadayonbankingdays.TheSumclearingandIntradagclearingarebothnetsettlementsystems.

TheStraksclearingisareal-timesettlementsystemwherecredittransfersofuptokr.500,000aremadewithinsecondsona24/7basis.Thisispossiblebecausethebankshaveprefundedthetransfers.TheStraksclearingisprimarilyusedforonlinebankingtransfersandpaymentsviaMobilePay.

UseThereare52directparticipantsintheretailpaymentsystemsand31indirectparticipants,whosettleviadirectparticipants.Thetotaltransactionvolumeintheretailpaymentsystemsaveragedkr.38.4billionperbankingdayin2017,representinganincreaseby5.5percenton2016,cf.Table2.

ThenumberoftransactionsintheStraksclearinghascontinuedtorise,cf.Chart6.Theincreaseismainly

18 Themoredetailedrequirementsregardingstrongcustomerauthen-ticationandtherelatedexceptionswillnotenterintoforceuntilSeptember2019,however.

Payments in the Sumclearing, Intradagclearing and Straksclearing

Table2

Kr.billion,averages perbankingday 2013 2014 2015 2016 2017

Sumclearing 29.1 17.9 16.7 17.2 17.8

Intradagclearing 13.8 17.0 17.8 18.4 19.7

Straksclearing - 0.5 0.6 0.8 0.9

Total 42.9 35.4 35.0 36.4 38.4

Source: Nets.

Payments in the Intradagclearing and Straksclearing, 2015-17

Chart6

0

200

400

600

800

1,000

0

5

10

15

20

25

Straks Intradag Straks Intradag

Thousands,averageperbanking day

Kr.billion,averageperbankingday

Number (right-hand axis)

2015

2016

2017

2015

2016

2017

2015

2016

2017

Value

Source: Nets.

attributabletoMobilePaypaymentsbeingsettledintheStraksclearing.Statisticsshowthatmorethan3.7millionDanesuseMobilePay.19

Althoughtherehasbeenanincreaseinthenumberofinstantpayments,theStraksclearingonlyaccountsforasmallshareoftotalretailpaymentsintermsofvalue,cf.Table2.

19 www.mobilepay.dk(link).

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Operational reliabilityRetailpaymentsystemoperationswereingeneralsatisfactoryin2017.Amajorincidentoccurredon26Aprilwhenanundergroundmaincablewascutintwo.Thecabledamageaffectedthecentralnetworkofthesectorandmeantthat,formorethaneighthours,notransactionscouldbesubmitt-edforclearing,andthatthenormalsettlementactivitiesbetweenNetsandDanmarksNational-bankwerenotcarriedoutasplanned.Thereasonforthemorethaneighthourdelayinrestoringnetworktrafficwasanunclearnetworkgovernancestructure.Inviewoftheincident,itwasdecidedtoimplementanewnetwork,cf.belowonsystemupdates.

LiquidityParticipantsreserveliquidityinaccountsatDan-marksNationalbankforsettlementoftheirnetpositions.Ifaparticipantdoesnotreservesufficientliquidity,itssettlementispostponed,andnewnetpositionsarecalculatedfortheotherparticipantswhorisknotreceivingtheexpectedliquidityforsettlement.Therewerenoincidentsofparticipantshavingtheirsettlementpostponedin2017.Onereasonisthatallparticipantsuseatleastoneoftheautomatedliquiditymanagementtools.

International standardsDanmarksNationalbankisfinalisinganassessmentoftheretailpaymentsystems’observanceoftheCPMI-IOSCOprinciples.Theassessmentwillbepub-lishedinmid-2018.

DanmarksNationalbankpreviouslyrecommendedthatFinanceDenmarkperformananalysisoftheretailpaymentsystems’observanceoftheCPMI- IOSCOcyberguidance.FinanceDenmarkwillinitiatethisanalysiswhentheaboveassessmenthasbeencompleted.

System updatesThefinancialsectorisestablishingawholenewnetworkforclearingandsettlementofretailpay-mentstoreplacetheoldnetwork.Thenetworkiscallede-connect,andTDChasbeenchosenassupplier.Theprojectishandledbye-nettettoen-suresuppliermanagementonbehalfofthesector.

e-nettetisalsoinchargeofoverallgovernancefortheparticipantsinthenewnetwork.Thenetworkisexpectedtobeimplementedinthecourseof2018.

TheopeninghoursofKronoswillbeextendedwhentheDanishkronejoinsT2S,whichwillenablelatersettlementintheretailpaymentsystems.Inthatconnection,itwaspreviouslydecidedtomovethelastsettlementsintheIntradagclearingandStraks-clearingtotakeplacelaterintheday.Thismeansthatalargershareoftransactionswillbesettledwithinthesameday.

AgroupoflargerSwedish,Danish,NorwegianandFinnishbanksarecurrentlyexploringthepossibil-itiestoestablishapan-Nordicpaymentinfrastruc-tureforalltheNordicbanks.Thevisionistocreatethefirstareaintheworld,wheredomesticandcross-borderpaymentsinmultiplecurrencies(SEK,DKK,NOKandEUR)canbemadefastandeasy.

Securitiessettlement

VPsettlementistheDanishsecuritiessettlementsystem.VPSecuritiesA/S,VP,alsoundertakesregis-trationofownershipofsecuritiesandhandlingofperiodicpayments,issues,redemptions,etc.

UseTheVPsettlementsystemhas145participants,ofwhich60arenon-residentmarketparticipants.Securitiestransactionstotallinganaverageofkr.162.7billionperbankingdayweresettledin2017,cf.Table3,afallof7.5percentrelativeto2016.Thedeclinewasstrongestforbonds,whilethevalueofinvestmentfundsharessettledcontinueditsupwardtrendfromthepreviousyears.

Operational reliabilityVPsystemuptime20was100percentin2017.Inafewcases,delaysinTarget2-Securities,thetrans-Europeansecuritiessettlementsystem,delayednight-timesettlementinVP’ssystems,butdidnotaffecttheavailabilityofVP.

20 TheuptimeisthetechnicaluptimesuppliedbyVP’sITserviceprovider.

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VPandDanmarksNationalbankregularlymonitorincidentsinVPtobeabletoassessoperationalrisks.Overall,theoperationalreliabilityoftheVPsettlementsystemisassessedtohavebeensatisfac-toryin2017.VPhasfollowedupanyincidentsinatimelymanner,andtheirconsequenceshavebeenlimited.

Settlement ratioAccordingtobestpractice,securitiestransactionsmustbesettledtwodaysafterthetransactiondate.Thesettlementratioindicatesthepercentage,invalueterms,ofthetransactionssettledinatimelymanner.In2017,theoverallsettlementratioinVPwas99.0percent,whichwasalittlehigherthaninthepreviousyear,cf.Chart7.Sanctions,includingfinesofuptokr.100,000,willbeimposedonVPsettlementparticipantsiftheirsettlementratiosremaintoolowforaprolongedperiodoftime.In2017,twofineswereissuedtoparticipantswithtoolowsettlementratio.

LiquidityVPparticipantsreserveliquidityinaccountsatDan-marksNationalbankforVP’snetsettlementcycles.IfVP’schecksforadequatecovershowthatabuyerdoesnothavesufficientliquidity,thereportedpurchaseswill,asamainrule,bepostponeduntilthesubsequentsettlementcycle.Participantswhohaveoverdrawntheirliquiditylinesmaybefined.

Settlement ratios in VP Chart7

92

94

96

98

100

Percent,monthlyaverages

Total

Equities and investment fund shares

Bonds

2013 2014 2015 2016 2017

Note: Inthechart,thesettlementratiosarestatedonthebasisofsettlementvalues.Forequitiesandinvestmentfundshares,thesettlementratiohasbeencalculatedasaweightedaverageofthetwotypesofsecurities,whilethetotalisaweightedaverageforalltypesofsecurities.

Source: VPSecuritiesA/S.

Equities, investment fund shares and bonds settled in VP Table3

Total Bonds EquitiesInvestment fund shares

Year,daily averages

Number oftrades,thousands

Value,kr.billion

Number oftrades,thousands

Value,kr.billion

Number oftrades,thousands

Value,kr.billion

Number oftrades,thousands

Value,kr.billion

2013 51.5 172.0 3.3 146.1 25.7 21.3 22.5 4.6

2014 61.1 178.2 3.1 144.4 32.3 28.2 25.6 5.6

2015 67.1 206.2 3.4 158.5 33.4 41.4 30.2 6.3

2016 63.6 175.9 2.8 131.8 30.9 37.6 29.9 6.6

2017 66.9 162.7 2.7 118.4 32.4 36.6 31.8 7.7

Note: Valueshavebeencalculatedonthebasisofthesecuritieslegofatrade,i.e.themarketvalueofthesecuritiestransferredfromthesellertothebuyer.

Source: VPSecuritiesA/S.

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Thesizeofthefinedependsonhowmanytimestheparticipanthasoverdrawnitsliquiditylinewithinthelastsixmonths.

In2017,therewereatotalof71overdraftsinVP,and29fineswereissued,cf.Chart8.Thiswasalowernumberofoverdraftsthanin2016andthenumberoffineswasreducedbyhalf.Thedevelopmentinthenumberofoverdraftsisbeingmonitoredtoassesstheefficiencyofthesanctioningsystem.

New regulations and legislationTheCentralSecuritiesDepositoriesRegulation,CSDR,wasimplementedinDanishlawwitheffectfrom2015.ThepurposeoftheCSDRistoensureconsistentregulationofcentralsecuritiesdeposito-riesintheEUwithaviewtoincreasinginternationalcompetition.Infuture,firmsmustapplyforalicencetoactascentralsecuritiesdepositories.

VPappliedforalicenceundertheCSDRinMay2017.DanmarksNationalbankandtheECBpar-ticipatedintheassessmentofVP’sapplicationasrelevantauthorities,i.e.authoritieswithrightofconsultation.TheECBisarelevantauthorityforVP,becausemorethan1percentofVP’stotalsettle-mentisineuro.

VPwasgivenitsCSDRlicencewitheffectfrom3January2018asoneofthefirstcentralsecuritiesde-positoriesintheEU.Infuture,VPmustreporttotheDanishFinancialSupervisoryAuthority,DanmarksNationalbankandtheECBaccordingtotheCSDR.Attheturnoftheyear2017/18,theexistingDanishSecuritiesTradingActwasrepealedandreplacedbytheCapitalMarketsAct.OneofthereasonsforthischangewastoensuregreatercoherencewiththeCSDRasVPistofunctioninaccordancewiththenewlegalbasis.

International standardsTherulesoftheCSDRarealignedwiththeCPMI- IOSCOprinciples,whichformthebasisforDanmarksNationalbank’soversightofthefinancialinfrastruc-ture.

VPcomplieswiththevastmajorityoftherequire-mentsintheCPMI-IOSCOprinciples.Thatwasthe

conclusionintheassessmentpublishedbyDanmarksNationalbankandtheDanishFinancialSupervisoryAuthorityin2016.21

Intheassessment,fourrecommendationsweregiventoVP–includingtoensuretheindependenceoftheBoard.InconnectionwithitsreviewofVP’sCSDRapplication,theDanishFinancialSupervisoryAuthority’sassessedthattheindependenceofVP’sBoardwassufficientlyensured.

VPcollaborateswithFinanceDenmarkandDan-marksNationalbankonmanagementoftherisksre-latedtointerdependencies.Oncethiscollaborationhasbeenformalised,VPwillbeassessedtocomplywiththeCPMI-IOSCOprincipleformanagingrisksrelatedtointerdependencies.

VPhasalsopresenteditsplantoobservetheCPMI-IOSCOprincipleforthehandlingofapar-ticipant’soperationalfailure,resolutionordefault.Basedonthedocumentationavailable,DanmarksNationalbankassessesthatVPisobservingtheprinciple.

21 Cf.DanmarksNationalbankandtheDanishFinancialSupervisoryAuthority,AssessmentofVPSecurities,February2016(link).

Overdrafts and sanctions in VP settlement

Chart8

0

10

20

30

40

50

Overdrafts Sanctions

Number,quarterlybasis

2012 2013 2014 2015 2016

Anm.: Aparticipantisfinedonlyiftheoverdraftisthepartici-pant’sownfault.Inotherwords,nofineisimposediftheoverdraftisduetonon-paymentbyanotherparticipantwhohasreservedinsufficientliquidityforsettlement.

Source: VPSecuritiesA/S.

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Finally,DanmarksNationalbankmadearecommen-dationregardingmanagementofbusinessrisks.Accordingtotherecommendation,VPmustensurecloserlinksbetweenitsriskmanagement,recoveryplanandresolutionplan.ThisrecommendationwasalsoissuedinconnectionwiththereviewoftheCSDRapplication.

DanmarksNationalbankregularlyassessesthemeas-uresimplementedbyVPinordertocomplywiththerequirementsoftheCPMI-IOSCOprinciples.

Cyber resilienceIntheautumnof2017,VPparticipatedintheECB’squestionnairesurveyconcerningVP’scybersecurityresponseplans.ItsresponsesshowthatVPstrength-eneditscyberattackresponseplansin2016and2017.

In2018,VPwillconductaredteamtestasasimu-latedcyberattackonsystemsinproduction,butwithoutdamagingthosesystemsortheoperationofVP.InitialtestresultsconfirmthatVPhasastrongcyberdefence.

System updatesInanefforttostrengthenitsNordicposition,VPconcludedanagreementwithSverigesRiksbankforsettlementofsecuritiestransactions,etc.inSwed-ishkronorinVP.ThesolutionwasimplementedinMarch2017.VPwillalsoestablishalinktoEuroclearSweden,thecentralSwedishsecuritiesdepository,inthecourseof2018toallowsecuritiestransactionsinSwedishkronorviaVP.

Target2-SecuritiesT2Sisatrans-Europeansecuritiessettlementsys-temownedbytheECB.ThepurposeofT2Sisforcross-bordersecuritiestransactionstobehandledassafely,inexpensivelyandefficientlyasdomestictransactions.

Atotalof20centralsecuritiesdepositoriesfrom18countriesnowsettleviaT2S,includingVP.Settlementineuro,accountingforjustover1percentoftotalsettlement,mainlytakesplaceonT2S.22Sofar,theeuroistheonlyT2Ssettlementcurrency,butfrom

22 ItwillstillbepossibletosettleineuroinVP’sownsystemsincycle50at2:15pm.

October2018,settlementinDanishkronerviathesystemispossible.

13DanishbanksaredirectparticipantsinT2SandthuscurrentlyholdT2SsettlementaccountsatDanmarksNationalbank.Threeofthosebankshaveestablishedaccountsineurowithcentralbanksintheeuroareainordertohavedirectaccesstoeuro.Theotherbankshaveconcludedagreementswithcorrespondentbanks.

CCP clearingInDenmark,equitiesandrepotransactionsare settledviaacentralcounterparty,CCP,cf.Box4.

ThethreeCCPs,EuroCCP,LCHClearnetandSixX-clear,clearequitiestransactions,whileNasdaqClearingclearsrepotransactions.AfterCCPclearing,transactionsaresettledinVP.

OngoingsupervisiontoensurethatCCPscomplywiththeregulatoryrequirementsisconductedbythenationalsupervisoryauthoritiesincollaborationwithsupervisorycolleges,comprisingsupervisoryauthoritiesandcentralbanksfromthemostim-portantcountriesinwhichtheCCPisoperating.DanmarksNationalbankmonitorsdevelopments,viaitsparticipationine.g.theEuroCCPsupervisorycollege.

What is a CCP? Box4

ACCPintermediatesbetweenthepartiestoatransac-

tion,assumingtheriskforboththebuyerandtheseller

fromthetransactiondateuntilthetransactionhasbeen

finallysettled.Soifeitherofthepartiestothetransaction

defaultswithinthisperiod,theCCPstillhasanobligation

totheotherparty.However,thisalsomeansthatrisksare

concentratedintheCCP,andthereforetheCCPissubject

toanumberofregulatoryrequirements1 to ensure the

completionofthetransaction.

1. Cf.Regulation(EU)No648/2012oftheEuropeanParliament

andoftheCouncilof4July2012onOTCderivatives,central

counterpartiesandtraderepositories(link).

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Settlementofforeignexchangetransactions

Aforeignexchangetransactionconsistsoftwoop-positepaymentsintwodifferentcurrencies.23Trad-itionally,foreignexchangetransactionsaresettledastwoindependentpayments,oftenexecutedviacorrespondentbanksinthecurrenciesinquestion.Ifthetwopaymentsarenotsettledsimultaneously,thepartiesincursettlementrisk.Theinternationalforeignexchangesettlementsystem,CLS,mitigatessettlementriskbysimultaneoussettlementofthetwopayments(payment-versus-payment,PvP).

CLSisownedbylarge,internationalbanksandsettlestransactionsin18participatingcurrencies,includingDanishkroner.

DanmarksNationalbankparticipatesinthecoopera-tiveoversightofCLS,cf.Box5.

UseMorethan80percentofallforeignexchangetrans-actionsinDanishkroneraresettledviaCLS.24BothfinancialinstitutionsandfirmsparticipateintheCLSsettlementofDanishkroner.IfacompanydoesnotsettledirectlyinCLSitself,FXtradescanbesettledviaoneofthefoursettlementmemberswithdirectaccesstotheCLSsettlementinDanishkrone.

In2017,thevalueofCLStransactionsremainedstable,cf.Chart9.TheaveragedailyvalueofCLStransactionswaskr.225billionin2017.Thevalueoftradesisparticularlylargearoundquarterchangeandondaysaroundforeignholidays.CLSsettle-mentsetanewrecordinDanishkroneronthefirstbankingdayof2ndquarter2017,3April,reachingkr.612billion.

Operational reliability and liquidityPay-instoCLStakeplaceviathenationalRTGSsys-tems;inthecaseofDanishkronerviaKronos.

HencetheoperationalreliabilityofCLSdependsonthestabilityoftheRTGSsystems.In2017oneKronos

23 Forexample,tradingkroneragainsteuroentailsapaymentinkronerbyonepartytotheotherandanoppositepaymentineuro.

24 BIS,Triennial Central Bank Survey, Foreign exchange turnover in April 2016(link)andCLSBank.

Trade instructions in CLS Chart9

0

1,000

2,000

3,000

4,000

5,000

0

100

200

300

400

500

Kr.billion,averagesperbanking day

Number,averagesperbankingday

Value oftrade instructions

Number oftrade instructions(right-hand axis)

2013 2014 2015 2016 2017 2018

Note: Dailyaveragescalculatedonamonthlybasis.On23January2017,CLSchangedthethresholdamountforwhichatradeissplitintoseveralinstructions.Thishasledtoahighernumberofinstructionsperday.

Source: CLSBank.

Oversight of CLS Box5

OversightofCLSisbasedontheCPMI-IOSCOprinciples

forfinancialmarketinfrastructures(PFMI).Everysecond

yearCLSpublishesanupdateddisclosureofthesystem’s

observanceofthePFMI.1OversightofCLSiscarriedout

byajointCLSOversightCommittee,whichisaforumfor

cooperationbetweenthecentralbanksoftheparticipat-

ingcurrencies2,wherebytheycancarryouttheirnational

oversightresponsibilities.DanmarksNationalbankpar-

ticipatesinthiswork,whichisorganisedbytheFederal

Reserve,Fed.TheFedisalsothesupervisoryauthority

forCLS. DanmarksNationalbank’soversightisfocusedon

mattersofimportancetothesettlementoftransactionsin

Danishkroner.

1. CLS,PrinciplesforFinancialMarketInfrastructuresDisclosure,

2016(link).

2. FederalReserveSystem,ProtocolfortheCooperativeOversight

ArrangementofCLS(link).

DANMARKS NATIONALBANK

HAVNEGADE 5

DK-1093 COPENHAGEN K

WWW.NATIONALBANKEN.DK

This edition closed for contributions on 16 April 2018

ABOUT REPORT Reports are periodical reports and accounts describing the activities and tasks of Danmarks Nationalbank.

Reports include e.g. Danmarks Nationalbank’s annual report and the semi-annual report on monetary and financial trends.

R E P O RT — DA N M A R K S N AT I O N A L BA N KOV E R S I G H T O F T H E F I N A N C I A L I N F R A S T RU C T U R E

incidentaffectedCLSsettlement.On30March2017settlementinKronoswasaffectedbynetworkissuesresultinginCLSnotreceivingpayments.ManualprocedureswerelaunchedtoensureCLSsettlementwithinkeybusinessdeadlines.

TheDanishparticipantsreservesufficientliquidityforCLSsettlement.

System updatesCLScontinuestoworktowardsthelaunchof CLSNet25,astandardised,automatedbilateralpaymentnettingserviceintendedforFXtransac-tionssettledoutsidetheCLSsettlementservice.ParticipantswillbeabletosubmitFXinstructionsfortradesinmorethan125currencies.Theservicewillbelaunchedonadistributedledgertechnology(DLT)basedplatform.CLSNetcanbeaccessedeitherdirectlyviaDLTorindirectlyviaSWIFTchannels.

FurthermoreCLSplanstolaunchaseparatesettle-mentserviceforclearedFXproducts.ThefirstCCPstojointhenewserviceareexpectedtobeEurexClearingandLCHClearnet.

25 CLS,CLSNet(link).

AnothernewinitiativeunderwayisCLSNow26whichwillallowparticipantstomitigatesettlementriskassociatedwithsamedayFXtransactions,includingtheoutlegsofCLSin-outswaptransactions27. CLSNowwillprovidesimultaneoussettlementofbothlegs(PvP)onagrossbasis.TheservicewillbeopenforallCLSeligiblecurrenciesinthefuture28.

26 CLS,CLSNow(link).

27 InCLSin/outswapsreducelargepositionstominimiseliquidityriskinsettlement.

28 Atgo-live,onlyCAD,CHF,EUR,GBP,andUSDwillbeincluded.