1 D A N I S H B A N K E R S A S S O C I A T I O N M E M O Clearing and Settlement of Retail Payments in Denmark Introduction The majority of retail payments in Denmark are cleared and settled via two interbank systems the Sumclearing and the Intradayclearing systems. The clearing and settlement of retail payments was fully automated in the beginning of the 1980s, and until 2013 the Sumclearing was used to clear all payments effected at night on banking days. 27 June 2013 In 2012 it was decided to expand the existing overnight clearing cycle with three daily clearing cycles for credit transactions only. The final cash settlement takes places via the participants settlement accounts at Danmarks Nationalbank (hereinafter Nationalbanken), the central bank of Denmark. The Danish Bankers Association owns both clearing systems, with Nets as the operator and Nationalbanken as the settlement bank. As such, the Danish Bankers Association makes all strategic decisions regarding the clearing systems, as well as manages and maintains the scheme frameworks, admits new members and handles situations in which scheme participants neglect scheme obligations. Contact Claus Berthelsen Direct Nets handles the day-to-day operation and development of the systems and system directories. Nets ensures that the systems can interoperate with the associated subsystems as well as the participants data processing centres and Nationalbanken. The Danish Bankers Association and Nets work closely with the stakeholders in the scheme, i.e. the participants, the data processing centres and Nationalbanken, to achieve the overall goal of ensuring efficient and secure systems. The clearing systems are identified as systemically important payment systems, their being the only interbank clearing systems handling retail payments and transactions in Denmark. Internationally, the national central bank of any given home country monitors systemically important payment systems. Accordingly, Nationalbanken monitors the clearing systems, and thereby helps the systems function more smoothly by enhancing their efficiency and security. Nationalbanken monitors the Sumclearing and the Intradagclearing on the basis of international standards and recommendations 1. Clearing and Settlement of Retail Payment The Sumclearing and Intradayclearing systems are multilateral net settlement systems, which means that participants' net positions are stated in a 1 See Danmarks Nationalbank, Payment Systems in Denmark.
2 fixed number of processing blocks during the day. The two systems are independent and clear different types of transactions, but final settlement takes place via the same settlement accounts at Nationalbanken. Page 2 The Sumclearing The Sumclearing is the final calculation of the participants' net balances in Danish kroner for the majority of all retail payments except account-toaccount transactions. The Sumclearing calculates the net positions on the basis of the totals from the electronic clearing and the PBS clearing once a day. The Sumclearing was automated in the 1980s using the proprietary standard UDUS 2. The standard and the data exchange messages in the Sumclearing were developed by the Danish financial sector and the Danish Bankers Association and have since been maintained continuously. Transaction records used for bookkeeping of customers accounts are exchanged bilaterally between the data processing centres. The data exchange in the Sumclearing is illustrated in the figure below. Sumclearing Nationalbanken Clearing and Settlement The normal settlement cycles in Danish kroner primarily occur at night, while the first extra settlement takes place by in the morning. Nationalbanken notifies Nets of each participant s settlement account balance prior to each settlement cycle. In the Sumclearing, the settlement account balance is equal to the account holder s line in the settlement cycle. When the participants net balances do not exceed the account holders individual lines, then the Sumclearing informs Nationalbanken of the account holders net positions in that cycle, and Nationalbanken books the positions to the account holders settlement accounts. The settlement is finally concluded, 2 Universielle dataudvekslingsstandard the universal data exchange standard
3 and the Sumclearing notifies the data processing centres, which then book the retail transactions to the individual customer accounts. Page 3 The settlement cycles for the Sumclearing are shown in the table below Settlement Standing Hub sends Direct Debit Direct Debit Manual Lines Settle- Bookkeeping order forecast collateral current acc transfer ment current acc cycle First current acc When (16.30) normal forecast is Max liquidity received Latest Second normal First extra Second extra Last possible extra When forecast is received When forecast is received When forecast is received After DD collateral After DD collateral After DD collateral The aim is to settle the majority of the transactions in Danish kroner during the first normal settlement cycle. The following settlement blocks consisting of the second normal settlement and two extra settlement cycles are used for delayed or postponed transactions. Postponed transactions occur if a clearing participant does not have coverage for its net position on its settlement account. The participant in question is removed from the settlement (postponed), and new net positions are calculated for the other participants. This may mean that other participants have to postpone their transactions, as their liquidity may be insufficient to cover their new net positions. A situation may arise in which several clearing participants are postponed. The process continues until all the remaining clearing participants have coverage for their net positions. If any postponed participants remain after the first extra settlement cycle, the second extra settlement cycle runs, and postponed participants can transfer additional liquidity to their settlement account prior to the cycle. It is not possible to send new sum totals for this settlement cycle. If the Sumclearing in kroner is not complete after the second extra settlement cycle, the Danish Bankers Association and Nationalbanken may agree to run extraordinary settlement cycles, and the Danish Bankers Association notifies Nets of the times for the cycles. The Danish Bankers Association then sets new deadlines for submitting sum totals for the Sumclearing and transferring liquidity to Sumclearing accounts for the participants. The final settlement of the Sumclearing must be terminated no later than in respect of the end of the monetary-policy day at The Danish Bankers Association can extraordinarily close the clearing day without the final settlement of the Sumclearing. This only happens in situation where the Danish Bankers Association, possibly in consultation with Nationalbanken and Nets, assesses that the Sumclearing cannot be successfully concluded before the end of the monetary-policy day.
4 One advantage of a nightly settlement in Danish kroner is that the final settlement between the banks can take place via accounts at Nationalbanken before the transactions are credited to the bank accounts of customers, who will have access to the amounts at the beginning of the workday. The nightly settlement also allows the data processing centres to use free data capacity during the night. Finally, banks cash requirement is reduced since the settlement cycle in the Sumclearing is adjusted according to the VPsettlement. Page 4 The Electronic Clearing The electronic clearing consists of both credit and debit payments. The credit payments included by those participating in the clearing are payments made by the participants own customers, such as paying-in slips. The debit payments in the electronic clearing are those made in the bank by other participants customers, for example debit instruments such as cheque payments, cash card transactions and Dankort (debit card) transactions in a bank different from the issuing bank. Each participant compiles its own retail payments, which are continuously transmitted to the participant's data processing centre. Then the data processing centre generates a list of each participant s retail payments. Every night the data processing centres bilaterally exchange total lists of retail payments for their participants. The data processing centres then prepare credit and debit balances for their respective clearing participants visà-vis all other participants in the electronic clearing. These balances, known as sum totals, are then sent to the Sumclearing, where they are used in calculating the participants' total net positions. The detailed records of the retail payments used to book the customer accounts are exchanged bilaterally between the data processing centres around the Sumclearing. The data processing centres book the customer accounts when the Sumclearing is finalised. The clearing and settlement of payments in the electronic clearing is illustrated in the figure below.
5 1 1 Page 5 Customer A Customer B 4 14 Account Customer A Bank A 13 Data processing centre Nationalbanken Account Customer B 1 Customer C 5 The Sumclearing 12 Hub 14 Account Customer C Bank B Data processing centre 2 Clearing and settlement the electronic clearing1. Customer A pays a paying-in slip to Customer C in Bank A. Customer B withdraws cash with a Dankort at Bank A. Customer C cashes a cheque from Customer A in Bank B. 2. Bank A and B regularly send information about debit and credit transactions to their data processing centres. 3. The data processing centres exchange information about retail debit and credit transactions. 4. The data processing centres calculate the respective debit and credit balances of banks A and B, called the sum total 5. The data processing centres forward the sum totals to the Sumclearing. 6. The Sumclearing calculates the net position of Bank A and Bank B on the basis of the sum totals from the electronic clearing and the PBS clearing. 7. The Sumclearing then sends the net position for all participants to the hub. 8. The hub calculates the forecasts for the Sumclearing and the Intradayclearing and forwards them to Nationalbanken. 9. Nationalbanken sends lines to the hub. 10. The hub checks for adequate cover and sends book entries to Nationalbanken. 11. Nationalbanken debits and credits the participants settlement accounts and returns an acceptance of the book entries to the hub. 12. The hub/the Sumclearing notifies the data processing centres the settlement of the Sumclearing is finalised. 13. The data processing centres book the retail transactions. 14. Bank A debits Customer A (Cheque + Paying-in slip). Bank B debits Customer B (cash withdrawal) and credits Customer C (Cheque + Paying-in slip). The PBS Clearing The PBS clearing consists of payments made by customers using a Nets product such as Betalingsservice (direct debit product) and Dankort (a debit card when used in a shop or online in Denmark or the Visa/Dankort abroad), as well as most payments by international debit cards (Visa Electron and Maestro) issued by Danish Banks. Nets calculates each participant s debit and credit balances in the PBS clearing and forwards the figures to the Sumclearing. Nets regularly forwards book entries to the data processing centres on Dankort payments made by customers in the respective banks. Book entries regarding other Nets products are forwarded to the data processing centres according to agreed deadlines. The clearing and settlement of payments in the PBS clearing is illustrated in figure below.
6 Page 6 Account Customer A 1 Account Shop 14 Bank A 13 Data processing centre 1 4 Shop 3 12 Customer B Customer A Nationalbanken PBS-clearing Sumclearing Hub Account Customer B 4 12 Account Business 14 Bank B 13 Data processing centre 2 Clearing and settlement PBS clearing 1. Customer A uses Betalingsservice to pay a bill to a business, which is a customer in Bank B. Customer B pays by Dankort in a shop, which is a customer in Bank A. 2. Betalingsservice forwards the transaction information about customer B s Betalingsservice payment to data processing centres 1 and The PBS clearing receives the information about Customer A s Dankort payment from the online terminal in the shop, and about customer B s payment from Betalingsservice. 4. The PBS clearing continuously forwards detailed payment records on Dankort payments to the data processing centres. 5. The PBS clearing calculates the banks debit and credit balances and forwards the figures to the Sumclearing. 6. The Sumclearing combines the balances from the electronic clearing and the PBS clearing and calculates the net positions of bank A and B. 7. The Sumclearing then sends the net position for all participants to the hub. 8. The hub calculates the forecasts for the Sumclearing and the Intradayclearing and forwards them to Nationalbanken. 9. Nationalbanken sends lines to the hub. 10. The Hub checks for adequate cover and sends book entries to Nationalbanken. 11. Nationalbanken debits and credits the banks settlement accounts and returns an acceptance of the book entries to the hub. 12. The hub/the Sumclearing notifies the data processing centres the settlement of the Sumclearing is finalised. 13. The data processing centres book the retail transactions. 14. Bank A debits Customer A (Dankort payment) and credits the business (Betalingsservice payment). Bank B debits Customer B (Betalingsservice payment) and credits the shop (Dankort payment).
7 Intradayclearing The Intradayclearing calculates the participants net positions for accountto-account transactions four times a day. The net positions are calculated on the basis of the transactions submitted to the ongoing clearing by the data processing centres. The data processing centres may submit transactions for several clearings at a time, though only for the current clearing day, and for the following clearing day after the deadline for submitting transactions for the last scheduled clearing on the current clearing day. Page 7 Unlike the Sumclearing, the Intradayclearing is built on a central unit called the hub. The hub receives all transactions and after clearing and settlement distributes them to the data processing centres, for which reason there are no bilateral exchanges between the data processing centres. The use of a central unit means there are fewer interfaces and system integrations than with the Sumclearing and thus a more distinct distribution of responsibility between the participants. The exchange of data in the Intradayclearing system is illustrated in the figure below. Nationalbanken The Intradayclearing system was introduced in 2013 and builds on international standards ISO The shift from UDUS to ISO20022 was made to facilitate adaptations to future demands such as a migration to the euro. The introduction of clearings during the daytime has enabled customers to make account-to-account transactions within the same day. Hence, the participants can offer their customers two kinds of account-to-account transfers: a standard transfer settled overnight or a same-day transfer settled within the same day at given times of the day. Clearing and Settlement The Intradayclearing has, in fact, five clearings and settlements, three in the daytime and two at night. One of the night cycles, however, is only for the technical purposes of clearing and settling delayed transactions from the data processing centres.
8 The clearing and settlement schedule is illustrated below. Settlement Intraday 0130 Standing order current acc Max liquidity Hub sends forecast Direct Debit collateral When forecast is received Latest When forecast is received When forecast is received When forecast is received When forecast is received Direct Debit current acc After DD collateral After DD collateral After DD collateral Manual transfer Lines (16.30) Settlement Bookkeeping current acc Page The participants net positions are basically calculated in the same ways as with the Sumclearing. The hub uses the retail transactions to calculate the net positions of the individual participants, then checks for adequate cover with respect to the participants lines from Nationalbanken. The check for adequate cover occurs simultaneously for all participants. If a participant lacks the necessary funding to participate in the clearing, the transactions to and from the participant are removed from the ongoing clearing, and the hub recalculates the net positions of the other participants and re-checks for adequate cover. This process is repeated until all participants in the ongoing Intradayclearing have adequate cover. All transactions to and from a rejected participant are carried forward to the following Intradayclearing, unless the participant is rejected in the last Intradayclearing of the given clearing day, in which case all the transactions are returned to the data processing centres and must be resubmitted for settlement the following clearing day. Thus, the Intradayclearing, unlike the Sumclearing, does not operate with postponed participants, meaning that additional funds cannot be transferred to cover a net position in an ongoing settlement of an Intradayclearing cycle. However, the hub publishes a forecast of the participants net positions prior to the settlement of a cycle in the Intradayclearing. The participants have access to their final forecast approximately half-an-hour before the settlement, for which reason the forecast can be used to reserve liquidity for settlement of the Intradayclearing during the daytime, when Kronos is open. Settlement at Nationalbanken Nationalbanken acts as settlement bank for the Sumclearing and the Intradayclearing, hence the final cash settlement of the net positions between the participants is booked via their respective settlement accounts at Nationalbanken. Prior to each settlement the participants reserve liquidity for their settlement accounts. Liquidity for the clearing and settlements during the daytime can be reserved on the basis of the net position forecasts published by the Hub half-an-hour before the settlement. The participants are expected to reserve sufficient liquidity for the settlement, which is the forecasted net
9 position plus extra coverage. The extra coverage is needed as a buffer to avoid rejection in case another participant is rejected, and the participant concerned is net beneficiary from the rejected participant. Page 9 Liquidity for night Sumclearing and Intradayclearing settlements is already reserved between and Consequently, the clearings are calculated and the forecast is published hours before the final retail transactions are submitted for clearing and settlement by the data processing centres, the reason being the link to Kronos opening hours. The participants do not have access to their settlement accounts during the settlement. When a settlement is final, any deposit on the settlement accounts is generally transferred to the participant s current account at Nationalbanken. The clearing and settlement cycles are scheduled according to the time that Nationalbanken can offer intraday credit to the participants. Nationalbanken can offer intraday credit within the monetary-policy day, which runs from to the following banking day. Pledging of Collateral for Intraday Credit Account holders can pledge collateral for intraday credit in various ways. Either the account holder can in the traditional manner pledge securities that meet certain criteria, or, alternatively, the participant can enter into an automatic collateralisation agreement with Nationalbanken. The securities pledged by the account holder must be registered in a safekeeping account with VP Securities Services (VP), after which the account is pledged to Nationalbanken. Under the automatic collateral arrangement the account holders pledge collateral in the form of securities in one or more appointed safekeeping accounts at VP, typically a trading account. In order to use the automatic collateral, the participant must conclude an automatic collateralisation agreement with Nationalbanken and open an automatic collateralisation account. Credit extended under the automatic collateralisation arrangement is debited to the account. Any unused amounts reserved under the automatic collateralisation arrangement after the settlement are first used to reduce the credit under the arrangement, before the excess amount in the settlement account is transferred to the account holder s current account. Reserving Liquidity for the Clearings Nationalbanken provides a variety of liquidity management options to account holders. The participants options depend on whether a given participant uses the automatic collateralisation arrangement or the current account for funding as well as whether the liquidity is used for a settlement that takes place while Kronos is open during the day, since all transfers from the current account depend on access to Kronos.
10 Page 10 The participants can use the various liquidity management tools independently or combine two or more. For example, a participant can choose to combine Mest Muligt (max liquidity) from the current account and Direct Debit under the automatic collateralisation arrangement to reserve liquidity for a night settlement. Note that extraordinary settlement cycles in the Sumclearing are not considered a scheduled day settlement in relation to liquidity management, for which reasons participants must pay special attention when an extra settlement cycle is required, and in most cases must handle the settlement manually. Liquidity from the Current Account Participants can transfer liquidity from their current account to the settlement account in various ways. Manual transfer from the current account to the settlement account is done via Kronos between and for the overnight settlement cycles and no later than ten minutes before a daytime settlement. The participants can also choose to have a standing order from the current account to the settlement account. The standing orders are executed in the afternoon prior to the overnight settlement cycles and 40 minutes before a daytime settlement. In addition, the participants can use Direct Debit from the current account for the daytime settlements. The option is mandatory, but the participants may choose to give other liquidity management tools higher priority, such as a standing order from the current account or a direct debit from the automatic collateralisation account. Lastly, the participants can use the Mest Muligt option for overnight settlements. If a participant uses Mest Muligt, the total disposable amount in the current account is transferred to the settlement account at Liquidity under the Automatic Collateralisation Arrangement Direct Debit from the automatic collateralisation account can be used for all settlements. The direct debit is based on the participants liquidity needs for the forthcoming settlement cycle and is calculated as the net position plus extra coverage less liquidity transferred from the current account. However, Direct Debit from the automatic collateralisation account takes priority over any other liquidity management tool for the overnight settlement cycles. Below is an example of liquidity for the 0900 Intradayclearing settlement cycle. Activity Time Amount Total Forecast from hub ,000 Extra coverage ,000 Liquidity needs 100,000 Manuel transfer 0 Standing order ,000
11 Direct Debit collateral ,000 Direct Debit current account Line ,000 Book entry ,000 Page 11 Interdependence of the Overnight Settlement of the Sumclearing and the Intradayclearing The settlement of the Sumclearing and the night settlement of the Intradayclearing occur simultaneously. Since the clearings are settled on the same settlement account, the Sumclearing and Intradayclearing use the same line from Nationalbanken to check for adequate cover. Therefore, in order to avoid an overdraft of the settlement account, which is not allowed, the participants net positions in the clearings are added up and subsequently jointly checked for adequate cover. If a participant lacks the necessary liquidity to settle both clearings, then the settlement of the Sumclearing has precedence over the Intradayclearing, and the participant is rejected in the Intradayclearing. However, if the participant only lacks the necessary funding to settle the Sumclearing, then the participant is not, per se, rejected in both clearings, but the hub will then check for adequate cover to settle the Intradayclearing. The Payment Schemes and the Scheme Participants The Danish payment schemes are developed by the Danish Bankers Association and its members. The Danish Bankers Association owns the schemes and is the link between the stakeholders in the payment infrastructure. Therefore, the Danish Bankers Association has entered into agreements with Nets on the development and daily operation of the clearings, as well as with Nationalbanken on the settlement of these clearings, on the one hand, and with the participants, on the other. To participate in the payment infrastructure, the participants also have individual agreements with Nets, Nationalbanken and perhaps a data processing centre. Nets Access to the Danish Bankers Association s payment schemes requires participation in Nets infrastructure, which includes various payment systems directories, which are a technical requirement for access to the clearings and subsystems. A Data Processing Centre The participants can choose to have their own data processing centres inhouse or use one of the jointly held centres Bankdata, BEC or SDC. If a participant decides to keep data processing in-house, the data processing centre requires separate approval and must participate in tests with the existing data processing centres in the Danish infrastructure to ensure the stability, efficiency, and security of the clearings and subsystems. Nationalbanken
12 Direct participation in the clearing and settlement in Danish kroner requires a current and a settlement account with Nationalbanken. In addition, Nationalbanken monitors the clearings and in this connection has quarterly meetings with the Danish Bankers Association, during which various clearing- and settlement-related topics, such as the participants liquidity management discipline, are discussed. Participation in the Payment Schemes Financial institutes with banking activities in Denmark and that meet the terms of admission participate in the payment schemes; see below. The participants can choose to participate directly in the clearings or indirectly via a direct participant by way of a bilateral agreement. The participant must have the same status in both clearings, for which reason indirect participants in the Sumclearing must also be indirect participants via the same direct participant in the Intradayclearing. Page 12 Participants participating directly in the clearings are called direct participants and have signed the The Clearing and Settlement Agreement ; see below. Participants participating via direct participants are called indirect participants; they have a bilateral agreement with a direct participant to settle their payments via the direct participant s settlement account at Nationalbanken. Hence, the direct participant guarantees the cash settlement of the indirect participant s payments. An indirect participant must meet the terms of compliance and comply with the Framework Agreement. The terms of compliance reflect the general terms of admission to the payment schemes. Both direct and indirect participants must have a data processing centre or facility. The major participants have their own data processing centres inhouse, whereas most other participants use one of the jointly held centres. The data processing centres carry out a number of tasks in relation to clearing and settlement; see above. Terms of Admission to the Payment Schemes To become a direct participant, the participant must meet a number of requirements: 1. Participate in the electronic clearing, the PBS clearing or both, and the Intradayclearing; 2. Give Nationalbanken written permission to settle the net positions from the electronic clearing, the PBS clearing, or both, and the Intradayclearing on the settlement account; 3. Belong to one of the following categories: a. A Danish bank, savings bank or cooperative bank subject to supervision by the Danish Financial Supervisory Authority, b. A Danish branch of a foreign bank, savings bank or cooperative bank subject to supervision in another EU member state or a country with a cooperation agreement with the EU on homeland supervision,
13 c. A Danish branch of a foreign bank, savings bank or cooperative bank subject to supervision by the Danish Financial Supervisory Authority, d. A foreign bank, savings bank or cooperative bank subject to supervision in another EU member state or a country having a cooperation agreement with the EU on homeland supervision and which conducts cross-border activities in Denmark; 4. Meet the technical and administrative requirements laid down by the Danish Bankers Association at any time; 5. Hold a current account and a settlement account at Nationalbanken, be connected to Kronos and meet the conditions set out by Nationalbanken for account holders. Page 13 Admission of New Participants The Danish Bankers Association continuously admits new participants to the clearings if they meet the terms of admission. However, the number of applicants is limited. A potential participant that meets the terms will usually gain access to the clearings shortly after the approval, often within a month. Before receiving approval, applicants have usually spent at least two months working on meeting the terms of admission. The amount of time required to obtain access to the payment schemes depends on the applicant s experience as a financial institution, how the applicant plans to be connected to the infrastructure and what kind of products the applicant wants to offer customers. An applicant that wants to use its own data processing centre to connect to the infrastructure is most likely to spend more time preparing to participate in the payment schemes than an applicant that signs up with a data processing centre already connected to the infrastructure, since a new data processing centre requires separate approval, including sector tests with existing data processing centres. In fact, numerous related issues affect the amount of time an applicant needs to gain access to the infrastructure. Exit Procedures Participants can exit the payment schemes agreement with three- months notice. However, the actual exit from the payment infrastructure may occur earlier than three months. Consolidation of the financial sector is probably the most common reason for participants exit from the payment schemes. In most cases the participant concerned remains an indirect participant through a continuing participant and later completely ceases to be a participant after a period of time. Beyond a voluntary exit, the Danish Bankers Association also has the right to terminate agreements with immediate effect, if a participant neglects the terms and conditions.
14 Page 14 If a participant is subject to bankruptcy or reconstruction, the Danish Bankers Association will mark the participant as bankrupt or under reconstruction in the clearing directories; see below for further information. Participation Fees The participation fee consists of an admission fee and a yearly membership fee, regardless of whether participation in the scheme was attained with or without membership of the Danish Bankers Association. There are additional operational costs for participation in the Intradayclearing as well as Nets infrastructure. Nets sets the fee for participating in its infrastructure, including the Sumclearing. The admission fee and yearly membership fee in 2013 are given below: - The admission fee for access to the Danish Bankers Association s payment schemes is 3.6 million DKK - The membership fee at admission is DKK 103,500 The fees are adjusted yearly on 1 January. The admission fee for access to the Danish Bankers Association s payment schemes is calculated on the premise that new participants must pay a reasonable share of the cost incurred. As previously mentioned, the various parts of the legal framework are closely interconnected, and it is not possible to identify the cost associated with each agreement. Therefore, a discount for participating in some of the agreements or schemes cannot be obtained. A bank wholly owned by one or more participants in the schemes does not have to pay to participate in the schemes. The Danish Bankers Association may require documentation of such ownership. The yearly fee for membership of the Danish Bankers Association is calculated on the basis of the capital requirements of the individual members as stated in the latest annual financial report. If a bank does not wish to become a member of the Danish Bankers Association, but wants to participate in the scheme, the yearly fee is reduced to 20 per cent of the membership fee. The Danish Bankers Association charges the following operational cost for participation in the Intradayclearing (in 2013 figures): - A yearly fee of DKK 600,000 allocated to all participants The fee is allocated according to the Danish Bankers Association s scale. - A transaction fee per clearing transaction of DKK 0.04
15 Payment Scheme Agreements There are two central agreements regulating the payment schemes: Framework Agreement on Participation in the Core Infrastructure (the Framework Agreement) and Agreement on Participating in the Sumclearing, Intraday Clearing, and RealLow Clearing and Settlement (The Clearing and Settlement Agreement). The Framework Agreement includes all mandatory agreements for participating in the payment schemes. The Clearing and Settlement Agreement is only mandatory for direct participants. In addition, there are a few optional agreements that regulate different areas of the payment infrastructure cooperation. Page 15 The agreements are, as a rule, non-transferable. The Framework Agreement (in Danish - Aftale om deltagelse i Kerneinfrastrukturen) The Framework Agreement is mandatory for participants that wish to participate in the Danish payment infrastructure and schemes. In addition to the general terms and conditions for the participants, the agreement also covers a number of specific sub-agreements. Compliance with the Framework Agreement gives a bank access to the clearing systems as well as to the following sub-agreements Agreement on Interbank Charges in the Payment Systems, Agreement on Accounts with Cheque and/or Dankort, Agreement on Crossborder Payments and Agreement on Payment Transfer. The agreements are enclosed as annexes to the Framework Agreement. The contracting parties to the Framework Agreement are the Danish Bankers Association and the individual banks participating in the schemes. The agreement lays down the rights and obligations of the contractual parties, such as the responsibilities of the scheme participants with access to the core infrastructure. The core infrastructure is defined in the agreement as common mandatory industry solutions, as they are defined at any point in time by the board of the Danish Bankers Association. By signing the Framework Agreement, the bank also commits to respecting the terms and conditions in the manuals. Agreement on Interbank Charges in the Payment Systems (Aftale vedrørende interbankgebyrer i betalingsformidlingen) regulates the maximum transfer prices between scheme participants with respect to cards, cheques, and undeliverable credit transfers. The Danish Bankers Association may regulate the interbank charges depending on the development in the Danish net price index. Any regulation of the charges is published by the Danish Bankers Association at the end of the year and enters into force according to agreement. Agreement on Accounts with Cheque and/or Dankort (Aftale om konti med check og/eller Dankort) sets out common rules regarding accounts with
16 cheque and/or Dankort, cashing and return of cheques, as well as the opening of accounts, endorsement control, and rejection of cheques. Page 16 Agreement on Cross-border Payments (Aftale om udlandsbetalinger) regulates how intermediary banks transfer cross-border payments to the payee s bank in Denmark as well as procedures for clearing and settlement of foreign cheques. Agreement on Payment Transfer (Generel overførselsoverenskomst) lays down the basic terms for credit transfers except for paying-in slips. The agreement regulates interbank credit transfers between accounts as well as bulk payments within the same bank. The agreement sets out rules for crediting the transfer, including time of availability, deadlines, revocation and cancellation as well as interest rate compensation. The Clearing and Settlement Agreement (in Danish - Aftale om deltagelse i sumclearingen, intradagclearingen og straksclearingen og afviklingen heraf) The agreement lays down the rules and obligations of direct participants in the clearings and their settlement, and is mandatory for all banks wanting to become a direct participant in the schemes. The Framework Agreement is a precondition for signing the Clearing and Settlement Agreement. In addition, direct participants also need to open a current account and a settlement account at Nationalbanken bank and have access to Kronos, the RTGS system for Danish kroner as well as give the central bank permission to register the settlement on the settlement account. The Participants Settlement Discipline As a monitor, Nationalbanken and, as an owner, the Danish Bankers Association want the payment schemes to be efficient and secure at all times. For this reason, there is a continuous focus on effecting the majority of settlements without delays due to technical errors and without participants that are postponed or rejected due to lack of liquidity. Delayed settlement of the clearings is an inconvenience for all participants as well as their customers, especially when the Sumclearing is delayed, because this delays the bookkeeping of the retail transactions for the individual customer accounts. The number of delayed settlements affects the IMF s 3 evaluation of the systemic risks of the clearings, and hence their recommendations for the systemic design and requirements for liquidity management. Therefore, the Danish Bankers Association strives to keep the number of delayed settle- 3 IMF International Monetary Fund
17 ments to a minimum by encouraging the participants to have a high standard of liquidity management and at all times to actively manage their liquidity, particularly at the end of a quarter, when a number of major payments are made, including mortgage payments and rents. Page 17 In general the participants have a high settlement discipline, and Nationalbanken has assessed that the participants in the Sumclearing systematically reserve a significant liquidity surplus for the settlement account compared to their actual needs 4. Sanctions To maintain good settlement discipline, the Danish Bankers Association imposes sanctions against participants that are postponed or rejected in the clearings due to lack of liquidity. The sanctions increase if a participant is repeatedly postponed or rejected, in which case the Danish Bankers Association requires a written statement from the participant explaining the reasons for the failed liquidity management. For the first postponement in the Sumclearing a participant is fined DKK 10,000. In fact, the fine increases each time the participant is postponed within the 12-month period following the first incident. A rejected participant in the Intradayclearing is fined DKK 5,000 the first time, and the fine increases with each reoccurrence in the following three months. The Danish Bankers Association may in certain situations decide not to sanction an incident, if the lack of funding is indisputably due to external circumstances. Emergency Liquidity Management The participants are obliged to have staff ready to respond to situations where the clearing and settlement is postponed. In case of emergency, i.e. postponed participants in the Sumclearing or general technical issues, the Danish Bankers Association will need to get hold of the relevant or, in some situations, all participants. Especially when it comes to the settlement of the Sumclearing, the participants are required to have liquidity staff at the bank from on clearing days. The staff must be able to reserve liquidity if the participant is postponed in the settlement due to lack of funding. The participant is also obliged to ensure that the Sumclearing is finalised. The Danish Bankers Association will contact postponed participants to ensure they reserve funding for the extra settlement cycle. 4 Nationalbanken (2013) Assessment of the Sumclearing Chart 3, Excess Liquidity in the Sumclearing
18 Participants in Distress There is a strict protocol regarding how to handle a participant in distress. It is a crucial factor whether the participant is declared bankrupt or taken under reconstruction before or after the cut-off time of a clearing and settlement cycle. If it happens after the cut-off time, then the payments submitted to the clearing and settlement cycle are protected by the finality directive implemented by the Securities Trading Act and will be executed if the participant has adequate cover on the settlement account. However, if the participant is declared bankrupt or taken under reconstruction prior to the cut-off time, then all transactions to and from the participant are removed from the clearing. Page 18 However, a participant in distress will more likely choose to be dismantled under the Act on Financial Stability by the Private Contingency Association. When the Private Contingency Association dismantles a participant, business continues unchanged, and the participant thus avoids both bankruptcy and being taken under reconstruction. Alternatively, the Private Contingency Association may help the participant in distress to be sold. Risks Clearing and settlement of retail payments involves different kinds of risks, including credit risk, liquidity risk, and operational risk. Credit Risk The credit risk in payment systems is the risk of financial loss due to a counterparty s inability to meet its obligations either at the time of settlement or at a later time. Credit risk may arise in the time frame spanning from when the payment system accepts the payment until the payment is finally settled in cash. The credit risk is to some extent eliminated because the time from payment acceptance to cash settlement is very short. The fact that the settlement of the Sumclearing and hence the majority of retail payments as well as one of the Intradayclearing settlement cycles occur overnight when a bankruptcy is unlikely to take place also mitigates risk. In addition, the customers accounts are credited after the cash settlement in Nationalbanken, for which reason the cash settlement with central bank money occurs before customers have access to the money. In general, some credit risk is associated with the various payment instruments, which arises from the time the payment is initiated until cash settlement of the payment, i.e., because of lack of funding on the customer s account. However, this kind of credit risk is not considered a systemic risk associated with the clearing and settlement system. Direct participants do not have any credit risk with respect to the settlement bank, since the final cash settlement is in central bank money. However, direct participants may have credit risk with respect to their indirect partici-
19 pants, as direct and indirect participants create unsettled accounts in connection with the clearing and settlement. Page 19 Liquidity Risk The liquidity risk in payment systems arises when a payment is not settled at the expected time, for example, due to postponed participants or technical errors that delay cash settlement. The financial loss arises from the fact that the participant needs the funds from the cash settlement for other purposes such as a VP-clearing. This is why the participant needs to secure the liquidity for the VP-clearing through other means. As a result, delays in the cash settlement can be associated with additional costs if they prevent a participant from settling other obligations. The main liquidity risk in the Sumclearing is the risk that a postponed participant will cause other participants to be postponed and thus the payments not to be settled in due time. This risk is also present in the Intradayclearing overnight cycle. The liquidity risk mainly arises since the participants have to estimate their liquidity needs based on expected net positions hours before the last payment has taken place and not on the basis of an actual calculation of the net positions. However, the participants have an incentive to reserve more liquidity than needed because of the flexible access to overnight liquidity provided by Nationalbanken, which is furthermore supported by effective and partly automated facilities to reservation of liquidity. Both measures contribute to the overall reduction of the liquidity risk. There are also several procedures for the Sumclearing that reduce the liquidity risk in the system. For example, the participants can move additional liquidity to their settlement accounts in the morning prior to the second extra settlement as a means of aiding postponed participants. The liquidity risk in the daytime cycles of the Intradayclearing is additionally reduced because the participants can choose to reserve liquidity based on the forecast of their net positions from the hub. The liquidity risk is further reduced by the possibility of setting a limit for individual transactions, the purpose being to reduce the risk imposed by errors made by other participants. In the PBS clearing the limit on a Dankort transaction is DKK 1 million. In the electronic clearing the participants can choose to set an individual limit for single debit transaction, although this may not exceed DKK 100 million. The participants are obliged to set a limit for single credit transactions that reflects the level of credit transactions in the bank. Transactions exceeding the limits are transferred via Kronos. Direct participants must approve any limits set by an indirect participant. Indirect participants impose a liquidity risk for the direct participant if the indirect participant s net position in the settlement is higher than expected. This will mean that the direct participant s net position is higher than the
20 withdrawal on the direct participant s settlement account. In general, however, an indirect participant s liquidity needs are fairly small compared to those of the direct participant. Page 20 Operational Risks Operational risks in payment systems are the risks associated with operational errors. These include human errors such as safety procedure breaches, systemic errors or breakdowns as well as external circumstances like natural catastrophes, terrorism, etc. Operational risks in the clearings can arise due to operational or capacity issues at Nets, a meltdown in communication lines to and from the participants and Nets or on-site threats against Nets, including fires or acts of terror. As an important system operator, Nets performs an annual safety revision of all the core systems. The safety protocol includes approved procedures for all systems, including the clearings and their related subsystems. In addition, Nets has a back-up facility that can be started up and put into use within 4 hours.
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