Danmarks Nationalbank PaymentSystemsinDenmark Danmarks Nationalbank Payment Systems in Denmark Danmarks Nationalbank Havnegade 5 DK-1093 Copenhagen K Telephone +45 33 63 63 63 Fax +45 33 63 71 25 www.nationalbanken.dk E-mail: [email protected] omslag_UK.indd 1 17-05-2005, 08:38:21 PAYMENT SYSTEMS IN DENMARK Text may be copied from this publication provided that Danmarks Nationalbank is specifically stated as the source. Changes to or misrepresentation of the content are not permitted. Payment Systems in Denmark is available at Danmarks Nationalbank's website: www.nationalbanken.dk under Publications. To order Payment Systems in Denmark, please contact: Danmarks Nationalbank, Information Desk, Havnegade 5, DK-1093 Copenhagen K Telephone: +45 33 63 70 00 (direct) or +45 33 63 63 63 Office hours: Monday-Friday 9.00 a.m.-4.00 p.m. E-mail: [email protected] www.nationalbanken.dk This publication is based on information available up to June 2005. Explanation of symbols: - Magnitude nil 0 Less than one half of unit employed • Category not applicable … Data not available Details may not add due to rounding. Scanprint A/S ISBN 87-87251-50-7 ISBN 87-87251-51-5 (Online) 3 Contents FORWORD ................................................................................................... 7 1. THE ROLE OF CENTRAL BANKS IN PAYMENT SYSTEMS 1.1 Serious events within the payments infrastructure ...................... 9 1.2 Central banks as system operators ................................................ 13 1.3 The role of central banks as settlement banks ............................. 14 1.4 The roles of central banks and private banks ............................... 15 1.5 The central banks' oversight function ........................................... 16 2. PAYMENT SYSTEMS IN A HISTORICAL PERSPECTIVE 2.1 From barter economy to monetary economy ............................... 20 2.2 Banks and credit-based payment in the middle ages .................. 23 2.3 Payment systems with clearing and central banks ....................... 27 2.4 Payments in Denmark 1700-1850 .................................................. 31 2.5 Bank-based payment systems in 19th century Denmark ............. 35 3. PAYMENT AND SCURITIES SETTLEMENT 3.1 Settlement outside the payments infrastructure ......................... 43 3.2 Real-Time gross settlement systems .............................................. 44 3.3 Net settlement systems.................................................................... 48 3.4 Hybrid systems .................................................................................50 3.5 Securities settlement systems ......................................................... 52 4. RISK IN PAYMENT AND SECURITIES SETTLEMENT 4.1 Risks of settlement outside the payments infrastructure ............ 64 4.2 Risk in payment systems ................................................................. 64 4.3 Risk in securities settlement ........................................................... 69 5. DANMARKS NATIONALBANK'S ROLE IN THE DANISH PAYMENTS INFRASTRUCTURE 5.1 Banknote and coins ........................................................................ 74 5.2 Danmarks Nationalbank's role as settlement bank ...................... 74 5.3 Danmarks Nationalbank provides krone liquidity ........................ 76 5.4 Danmarks Nationalbank offers intraday credit in euro ............... 78 5.5 Pledging of collateral to Danmarks Nationalbank ....................... 79 5.6 Settlement procedure at Danmarks Nationalbank ...................... 86 4 6. PAYMENT AND SETTLEMENT SYSTEMS IN DENMARK 6.1 Kronos ............................................................................................96 6.2 The Sumclearing ............................................................................104 6.3 VP settlement ................................................................................. 111 6.4 FUTOP settlement .........................................................................119 7. RETAIL PAYMENTS IN DENMARK 7.1 Means of payment and payment instruments ............................ 125 7.2 Infrastructure for payment cards ................................................. 132 7.3 The Dankort ...................................................................................135 7.4 New payment instruments ............................................................ 139 7.5 Use of payment cards in EU member states................................. 144 8. INTERNATIONAL PAYMENT AND SETTLEMET SYSTEMS 8.1 Target .............................................................................................149 8.2 Target2 ...........................................................................................151 8.3 EURO1 ............................................................................................153 8.4 STEP1 ..............................................................................................157 8.5 STEP2 ..............................................................................................159 8.6 The vision of SEPA – The Single Euro Payment Area .................. 161 8.7 CLS ..................................................................................................164 9. THE LEGAL FRAMEWORK FOR THE PAYMENTS INFRASTRUCTURE 9.1 Contractual and legal basis of the systems ................................. 173 9.2 The settlement finality directive .................................................. 176 9.3 The financial collateral directive .................................................. 179 9.4 The Hauge convention on the PRIMA principle ......................... 180 9.5 Protection of the payments infrastructure in Danish law........... 181 9.6 Other legislation on payment systems ........................................ 184 9.7 EU legislation on electronic retail payments .............................. 185 10. OVERSIGHT 10.1 Central banks as overseers ........................................................... 190 10.2 Oversight by Danmarks Nationalbank ........................................ 195 10.3 International standards for payment systems ............................. 195 10.4 International requirements for securities settlement systems ... 198 10.5 Assessment of Danish payment and settlement systems ........... 202 10.6 Oversight of the risk of major operational disruptions ............. 206 Annex 10.A: BIS' Core Principles for systemically important payment systems ................................................................ 212 Annex 10.B: BIS/IOSCO recommendations for securities settlement systems.............................................................. 214 5 Annex 10.C: Memorandum of understanding between Danmarks Nationalbank and the Danish financial supervisory authority concerning payment systems and clearingcentres ...................................................................... 217 Appendix A: Definition of gridlock and gridlock resolution in Kronos ................................................................................. 221 Appendix B: Liquidity management by the RTGS system participants ......................................................................... 227 Appendix C: Effect of queue facilities for Kronos participants ............ 235 Appendix D: Simulation of systemic risk in the sumclearing ................ 245 GLOSSARY ................................................................................................. 253 INDEX ........................................................................................................ 261 7 Foreword One of the objectives of Danmarks Nationalbank is to contribute to the efficiency and stability of payment and settlement systems. These sys- tems are necessary for the efficiency of the Danish financial sector. Danmarks Nationalbank has several roles in relation to payment sys- tems. It operates a payment system for settlement of large-value time- critical payments between financial institutions and it is furthermore the settlement bank for payment systems and the cash leg of securities transactions in Denmark. In addition, Danmarks Nationalbank conducts the oversight of payment and securities settlement systems in Denmark. These tasks are performed by most central banks worldwide. Danmarks Nationalbank considers it important that the Danish pay- ments infrastructure is described in full detail and that this description is available to the general public. That is why Danmarks Nationalbank has issued this publication on payment systems. The publication focuses on the technical infrastructure of payment sys- tems, while the use of banknotes and coins for payments is only touched lightly upon. The systems described are primarily payment systems for settlement of large-value payments between financial institutions, as well as securities and foreign-exchange settlement systems. Finally, retail payment systems used in connection with e.g. settlement of Dankort payments are described. Whenever possible, it has been sought to write the chapters as stand- alone chapters. Chapter 1 presents the roles of central banks in payment systems. Chapter 2 reviews the historical background to payment sys- tems, including the background to the involvement of central banks. This Chapter is aimed primarily at readers with an interest in history. Chapters 3 and 4 describe the general principles and risks in various types of payment and securities settlement systems. Chapters 5-7 review the Danish payments infrastructure