Denmark: Financial System Stability Assessment with reports on - IMF

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50Subjectensure that the systems it operates comply <strong>with</strong>the core principles.Main Findings and Recommended Corrective Action Planmethodology and an implementation plan.- Ensure that the oversight of KRONOS is performed on acontinuous basis.Responsibility C - The central bank shouldoversee observance <strong>with</strong> the core principles bysystems it does not operate and it should have theability to carry out this oversight.Authorities’ responseLarge-value payment system (KRONOS)- Ensure that sufficient resources and expertise areavailable.- Establish internal and external relationships <strong>with</strong>in thecontext of the oversight policy.- Analyze in more depth the pros and cons of the differentroles and their usefulness to tackle specific issues in theDanish institutional context and coordinate the use ofthese different roles.- Formalize the oversight policy <strong>with</strong> respect to systemsoperated outside Danmarks Nationalbank.- Broaden the scope of the oversight <strong>with</strong> respect to theSumclearing.- Establish a crisis management framework <strong>with</strong> respect toproblems in the infrastructure.- Ensure that the oversight can be adequately performed incase of outsourcing.- Strengthen the cooperation <strong>with</strong> other Danish authoritiesand relevant foreign authorities.- Increase the involvement of the participants in theoversight.- Strengthen the reporting of oversight in the annual<strong>Financial</strong> <strong>Stability</strong> Report.The assessments and recommendations for improvements in relation to KRONOS essentiallyreflect the findings of Danmarks Nationalbank.With regard to the recommendation to renegotiate <strong>with</strong> the system operator, the legal bindingmaximum restart time so that it can be reduced from four to two hours, please note thatnumerous tests in recent years consistently have shown that KRONOS can in practice berestarted in less than one and a half hours. Nevertheless, Danmarks Nationalbank agrees <strong>with</strong>the recommendation and has started negotiations <strong>with</strong> the system operator <strong>with</strong> the aim ofresolving the issue.
51Regarding the recommendation to further analyze the system’s efficiency, DanmarksNationalbank notes that the large number of direct participants shows that an appropriatebalance between security and efficiency seems to have been reached. The cost recovery inthe system is less than full, but seems adequate and in line <strong>with</strong> similar RTGS-systems inother small- to medium-sized European countries.Retail payment system (Sumclearing)The assessments and recommendations for improvements in relation to the Sumclearing arebroadly in line <strong>with</strong> the findings of Danmarks Nationalbank and the DFSA. However, wewould like to emphasize that the participants generally have far more eligible collateral thanneeded for their daily net payments in not only the Sumclearing, but also in the VPsettlement and CLS. 31Danmarks Nationalbank and the DFSA agree to the recommendation that the practice ofbooking retail payments in customer accounts before the settlement of the payments are finalshould be terminated. Therefore, Danmarks Nationalbank and the DFSA will startdiscussions <strong>with</strong> the banking sector <strong>with</strong> the aim of changing this practice.Danmarks Nationalbank and the DFSA take note of the recommendation to lower thefinancial risks in the system by implementing additional measures such as loss-sharingagreements or pools of collateral or by lowering the net positions settled, for instance, byrestructuring the settlement cycle and introduce new settlement blocks during the day. Theseproposals will in the near future be further analyzed. Danmarks Nationalbank will startdiscussions <strong>with</strong> the system owner <strong>with</strong> a view to identifying costs and benefits associated<strong>with</strong> the various proposals.The supervision of settlement agents and the indirect participants as well as possibleconcentration risks related to such indirect participation lies primarily <strong>with</strong> the DFSA. TheDSFA has taken note of the recommendation to gather information on possible concentrationrisk, etc., and analyze the consequences for smaller banks and the trust in the system in caseof a default of one of the larger settlement banks. As the DFSA has already considered thesequestions as part of its supervision of settlement banks, the DSFA’s understanding of the31 In a study triggered by this assessment, it was demonstrated that in 2005, all larger banks’ eligible collateralsignificantly exceeded their total net payment obligations in all systems—even when the participant <strong>with</strong> thelargest net payment obligation was <strong>with</strong>drawn from the settlement on every day during 2005 and all theremaining participant's net positions were recalculated. Among the minor banks, however, only a handful ofbanks had recalculated net positions, which on very few days surpassed the value of their eligible collateral.However, this reflects flaws in the methodology used in the study that tends to exaggerate the effects on smallbanks and does not include the fact that banks can pledge securities for intraday credit already in the settlementcycle in which the securities are received. The study “Protection of Settlement in Danish Payment <strong>System</strong>s” canbe found in <strong>Financial</strong> <strong>Stability</strong> 2006 published by Danmarks Nationalbank (Copenhagen). It is available on:http://www.nationalbanken.dk/.
Page 1: © 2006 International Monetary Fund
Page 4: 2ContentsPageGlossary .............
Page 7 and 8: 5ML/FTMLAMoEBMoUNAONPOOTCPEPROSCRSS
Page 9 and 10: 76. The payment and securities clea
Page 11 and 12: 9Figure 1. Nordic Countries: Reside
Page 13 and 14: 11Table 1. Denmark
Page 17 and 18: 1518. Stress test results need to b
Page 21 and 22: 19Table 5. Financial</stron
Page 23 and 24: 21Table 6. Market Shares of Major <
Page 25 and 26: 23is hence higher than the EU minim
Page 27 and 28: 25Table 7. Nordic Capital Markets,
Page 29 and 30: 27coverage of such rules to key per
Page 31 and 32: 29 ANNEX IOBSERVANCE OF FINANCIAL S
Page 33 and 34: 31Mortgage financing5. Danish mortg
Page 35 and 36: 3314. Licensing and Structure (CPs
Page 37 and 38: 35Authorities’ responseWith a few
Page 39 and 40: 376. The life sector is dominated b
Page 41 and 42: 39may be subject to more frequent f
Page 43 and 44: 41Reference PrincipleRisk assessmen
Page 45 and 46: 43 ANNEX IVREPORT ON THE OBSERVANCE
Page 47 and 48: 459. The infrastructure for retail
Page 49 and 50: 47Main findings19. The assessment d
Page 51: 49SubjectMain Findings and Recommen
Page 55 and 56: 53 ANNEX VREPORT ON THE OBSERVANCE
Page 57 and 58: 5510. All securities traded in the
Page 59 and 60: 57and a zero-hour rule does not exi
Page 61 and 62: 59Table 2. Recommended Actions to I
Page 63 and 64: 61 ANNEX VIIntroductionREPORT ON TH
Page 65 and 66: 63negligible. Authorities recognize
Page 67 and 68: 6521. STR reporting by Danish finan
Page 69 and 70: 67FATF 40+9RecommendationsKEY RECOM
Page 71 and 72: 69Declaration or for non-compliance
Page 73: 71 APPENDIXStress Tests—Market Ri

Denmark: Financial System Stability Assessment with reports on - IMF

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