DANMARKS NATIONALBANK · commercial banks. In other words, Danmarks Nationalbank acts as banker to the banks for payments in Danish kroner. Besides the banks, a number of payment

DANMARKSNATIONALBANK

DESCRIPTION OF KRONOS IN RELATION TO INTERNATIONAL PRINCIPLES

DANMARKSNATIONALBANKDESCRIPTION OF KRONOS IN RELATION TO INTERNATIONAL PRINCIPLES

4 DANMARKS NATIONALBANK BESKRIVELSE AF KRONOS EFTER INTERNATIONALE PRINCIPPER


Text may be copied from this publication cost-free provided that Danmarks Nationalbank is specifically stated as the source. Changes to or misrepresenta-tion of the content are not permitted.

Description of Kronos in relation to international principles is available on Danmarks Natio nal bank’s website: www.nationalbanken.dk under publications.

This publication is based on information available up to 22nd June 2016.

Enquiries can be directed to:

Danmarks Nationalbank,Communications,Havnegade 5,DK-1093 Copenhagen K

Telephone: +45 3363 7000 (direct) or +45 3363 6363Office hours: Monday-Friday 9.00 am-16.00 pm.E-mail: [email protected]

ISSN (Online): 978-87-92933-00-3

CONTENT

7 DESCRIPTION OF KRONOS IN RELATION TO INTERNATIONAL PRINCIPLES

7 RESUMÉ

8 SUMMARY OF MAJOR CHANGES SINCE THE LAST UPDATE

8 GENERAL BACKGROUND ON KRONOS

19 PRINCIPLE 1 LEGAL FRAMEWORK

23 PRINCIPLE 2 GOVERNANCE

26 PRINCIPLE 3 FRAMEWORK FOR THE COMPREHENSIVE MANAGEMENT OF RISKS

28 PRINCIPLE 4 CREDIT RISK

31 PRINCIPLE 5 COLLATERAL

35 PRINCIPLE 7 LIQUIDITY RISK

38 PRINCIPLE 8 SETTLEMENT FINALITY

40 PRINCIPLE 9 MONEY SETTLEMENTS

41 PRINCIPLE 13 PARTICIPANT-DEFAULT RULES AND PROCEDURES

44 PRINCIPLE 15 GENERAL BUSINESS RISK

45 PRINCIPLE 16 CUSTODY AND INVESTMENT RISKS

47 PRINCIPLE 17 OPERATIONAL RISK

51 PRINCIPLE 18 ACCESS AND PARTICIPATION REQUIREMENTS

53 PRINCIPLE 19 TIERED PARTICIPATION ARRANGEMENTS

55 PRINCIPLE 21 EFFICIENCY AND EFFECTIVENESS

57 PRINCIPLE 22 COMMUNICATION PROCEDURES AND STANDARDS

58 PRINCIPLE 23 DISCLOSURE OF RULES, KEY PROCEDURES, AND MARKET DATA

62 LIST OF PUBLICLY AVAILABLE RESOURCES

DANMARKS NATIONALBANK DESCRIPTION OF KRONOS IN RELATION TO INTERNATIONAL PRINCIPLES, 2016 7


RESUMÉ

Danmarks Nationalbank owns and operates the

only system for real-time settlement of large,

time-critical payments in Danish kroner. The

central position of Kronos in the financial infra-

structure entails high safety and efficiency require-

ments. Consequently, Danmarks Nationalbank

continuously adjusts Kronos to make sure that

international standards are observed.

The average daily value of transactions be-

tween participating credit institutions settled

via Kronos is almost kr. 100 billion. Furthermore,

Kronos is used for settlement of net positions

from connected payment and settlement systems.

Finally, Kronos plays an important role in Dan-

marks Nationalbank’s implementation of mone-

tary policy.

This report provides a detailed description of

Kronos’ observance of the international principles

for financial market infrastructures formulated by

the Committee on Payments and Market Infra-

structures in collaboration with the International

Organization of Securities Commissions (jointly

CPMI-IOSCO).

The report is structured as described in the

guidance prepared by CPMI-IOSCO. This means

that the report starts with a summary of major

changes since the last update. This is followed

by a general description of Kronos. Finally, the

individual principles are reviewed, with detailed

descriptions of how each one is observed.

8 DANMARKS NATIONALBANK DESCRIPTION OF KRONOS IN RELATION TO INTERNATIONAL PRINCIPLES, 2016

SUMMARY OF MAJOR CHANGES SINCE THE LAST UPDATE

This report is the first description of Kronos as re-

quired by the CPMI-IOSCO Principles for financial

market infrastructures: disclosure framework and

assessment methodology, December 2012.

GENERAL BACKGROUND ON KRONOS

GENERAL DESCRIPTION OF KRONOS’ FUNCTION AND THE MARKETS IT SERVESKronos is a real-time gross settlement, RTGS, sys-

tem for settlement of payments in Danish kroner.

As payments from banks and mortgage banks in

Denmark are settled via Kronos, Kronos plays a

key role in the Danish payments infrastructure.

Every day, payments averaging around kr. 530

billion, including transfers to settlement systems,

are settled, cf. Table 1. Furthermore, liquidity is

exchanged in connection with settlement of net

positions from connected payment and settle-

ment systems.

Kronos is used for individual and immedi-

ate settlement of primarily large or time-critical

payments in Danish kroner. Kronos is used mainly

for interbank payments and customer payments

between Danmarks Nationalbank’s account hold-

ers, for settlement of monetary policy transactions

in Denmark and for settlement of payments in

Danish kroner for other settlement systems in the

Danish payments infrastructure: the Sumclearing,

Intradagclearing and Straksclearing, VP and CLS.1

In 2015, Kronos settled an average of approx-

imately 4,400 interbank payments per day at an

average daily value of kr. 99 billion, cf. Table 1. The

average value of the individual payments was kr.

23 million. There is no upper or lower limit to the

size of individual payments in Kronos.

1 Furthermore, the clearing centre FUTOP holds settlement accounts at Danmarks Nationalbank. FUTOP handles clearing and settlement of trading in futures and options for Danish securities. Clearing and settlement is handled by OMX Derivatives Markets/Stockholmsbörsen AB. Danmarks Nationalbank makes accounts available for administra-tion of margin requirements in connection with these trades. Settle-ment of net positions takes place via participants’ current accounts at Danmarks Nationalbank. FUTOP is being phased out, and FUTOP settlement accounts will cease to exist after the implementation of the new RTGS system, Kronos2, in April 2017.

Kronos participants are primarily banks, mort-

gage banks and branches of foreign credit insti-

tutions. These participants must all be subject to

supervision by the Danish Financial Supervisory

Authority or subject to supervision in another

EU member state or in a country with which the

EU has concluded a cooperation agreement on

home country supervision. Other firms which are,

in the assessment of Danmarks Nationalbank, of

significance to the settlement of payments may

also participate. Examples are CLS Bank and Euro-

CCP. In March 2016, there were 94 participants in

Kronos.

The role of Kronos in the Danish payments infrastructureKronos is at the core of the infrastructure for

settlement of payments in Denmark, cf. Chart 1.

Most banks and mortgage banks in Denmark

hold accounts at Danmarks Nationalbank in the

same way private individuals hold accounts with

commercial banks. In other words, Danmarks

Nationalbank acts as banker to the banks for

payments in Danish kroner. Besides the banks,

a number of payment and settlement systems

and clearing centrals hold accounts at Danmarks

Nationalbank.

Kronos is the system that processes payments

to and from the banks’ accounts at Danmarks

Nationalbank. So payments in kroner involving

more than one bank ultimately go via Danmarks

Nationalbank for settlement, either via a payment

or settlement system – i.e. VP, CLS or the Sum-

clearing, Intradagclearing or Straksclearing – or as

an interbank payment directly between the banks’

accounts at Danmarks Nationalbank.

Settlement in VP, the Sumclearing, Intradag-

clearing and Straksclearing takes place in “cycles”

via settlement accounts for this purpose. In con-

nection with settlement cycles, separate settle-

ment accounts are used, which are locked and not

accessible to the participants until settlement has


taken place. This ensures that a participant cannot

withdraw liquidity from a settlement account

during a settlement cycle, which could delay or

interrupt the settlement cycle.

Settlement in VP, the Sumclearing and the

Intradagclearing has been planned so as to

enable participants to use the same liquidity for

the various settlements as far as possible. Several

settlement cycles take place outside the Kro-

nos opening hours, and when settlement in the

Sumclearing, Intradagclearing and VP has been

completed, the balances of the settlement ac-

counts are automatically transferred back to the

participants’ current accounts.

For the Straksclearing, which is prefinanced,

settlement accounts are not emptied. Institutions

that have been net providers of liquidity to the

Straksclearing have the balances in their settle-

ment accounts reduced and must transfer further

Payments in Kronos, daily averages Table 1

Kr. billion 2012 2013 2014 2015

Interbank payments 109.3 96.1 92.0 99.3

- Of which customer payments 11.8 10.3 11.0 12.8

Monetary policy operations 36.3 33.5 25.5 37.5

- Of which sale of certificates of deposit 35.9 33.4 24.9 37.3

- Of which monetary policy lending 0.4 0.2 0.6 0.2

Transfers to settlement systems 122.4 196.5 329.5 389.6

- Of which for the Sumclearing, Intradagclearing and Straksclear-ing

53.8 130.1 272.2 332.3

- Of which for VP settlement 47.9 44.7 40.9 40.8

- Of which for CLS 20.7 21.8 16.5 16.5

Total 268.0 326.2 446.9 526.4

Net positions settled 20.7 21.7 25.8 27.6

- Of which Sumclearing, Intradagclearing and Straksclearing 1.1 3.1 7.0 7.6

- Of which VP settlement 13.0 11.5 12.2 12.7

- Of which CLS 6.5 7.1 6.5 7.2

Note: Transfers to settlement systems comprise both traditional liquidity reservations from current accounts to settlement accounts and reservations from and use of automatic collateralisation.

Source: Danmarks Nationalbank.

liquidity to these accounts. Institutions that have

been net recipients have liquidity released in their

settlement accounts, and this liquidity is automati-

cally transferred to their current accounts.

As illustrated in Chart 1, several types of payment

are settled via Kronos:

1. Interbank payments are payments between

two financial institutions in the interbank mar-

ket, also known as the money market. These

payments are settled individually, immediate-

ly after Danmarks Nationalbank’s receipt of

the payment instructions. If both institutions

participate in Kronos, the payment can be

settled via their current accounts at Danmarks

Nationalbank. If the institutions do not partici-

pate in Kronos, the payment can be settled via

correspondent banks participating in Kronos.

Participants in Kronos may also settle pay-


ments in Kronos on behalf of their customers,

i.e. customer payments.

2. The Sumclearing, Intradagclearing and Straks-

clearing are the Danish Bankers Association’s

systems for clearing and settlement of Dan-

ish retail payments, e.g. Dankort (debit card)

transactions, Betalingsservice (direct debit)

and credit transfers. The Sumclearing and

Intradagclearing are multilateral net settle-

ment systems, in which final transfer of funds

between participants takes place via Kronos

accounts. The Straksclearing is a real-time

settlement system for payments of up to kr.

500,000, prefinanced via Kronos.

3. VP settlement is VP’s system for settlement of

securities transactions and periodic payments

(interest, repayments and dividend). For secu-

Settlement in Kronos Chart 1

DANMARKS NATIONALBANK

KRONOS

DKK LEG IN FOREIGN EXCHANGE TRANSACTIONS

MONETARY POLICY INSTRUMENTS, T-BILLS, CASH DEPOTS

PLEDGING OF COLLATERALBETWEEN DK, NO AND SE

RETAIL PAYMENTS

SUMCLEARINGINTRADAGCLEARING

STRAKSCLEARING

SECURITIES TRANSACTIONS, ETC.

VP SETTLEMENT

DN INQUIRY & TRANSFER SYSTEM

1

52

43

6

SCP

CLS

INTERBANK PAYMENTS

PARTICIPANT 2 PARTICIPANT 3PARTICIPANT 1

rities transactions, the securities leg is settled

in VP, while the cash leg is settled via the par-

ticipants’ accounts at Danmarks Nationalbank.

In addition, settlement of gross transactions

in real time, i.e. instant settlement, may take

place. In a securities transaction, securities are

exchanged in custody accounts at VP, while

payment is exchanged via the participants’

accounts in Kronos or TARGET2, the European

RTGS system for payments in euro.

4. CLS is a multilateral clearing and settlement

system for foreign exchange transactions in

18 currencies at present. The krone leg in the

participants’ foreign exchange transactions is

settled via CLS Bank’s account at Danmarks

Nationalbank. CLS is owned by a number of

large international banks.


5. Scandinavian Cash Pool, SCP, is a system for

pledging of cross-border collateral for intraday

credit in Danish and Norwegian kroner and

Swedish kronor. The main principle of SCP is

that liquidity raised from the central bank of

one country can be pledged as collateral to

the central bank of another country.

6. The DN Inquiry and Transfer System was Dan-

marks Nationalbank’s RTGS system from 1981

until it was replaced by Kronos in 2001. It is

now used for handling monetary policy instru-

ments and cash depots.

GENERAL ORGANISATION IN KRONOSAs the central bank of Denmark, Danmarks Na-

tionalbank plays a key role in the Danish financial

sector, and like many other central banks world-

wide, it operates an RTGS system. The current

Kronos system started operating on 19 November

2001. It replaced an older, more primitive sys-

tem, the DN Inquiry and Transfer System, which

was introduced in 1981 as one of the world’s first

systems of its kind. In April 2017, Kronos will be

replaced by a new RTGS system, Kronos2.

Danmarks Nationalbank is a self-governing

institution, and the composition of the top man-

agement of Danmarks Nationalbank, and hence of

Kronos, is documented in the Danmarks National-

bank Act, which is publicly accessible.

At Danmarks Nationalbank, responsibility for

Kronos operations is broken down at the strate-

gic, tactical and operational levels in accordance

with Danmarks Nationalbank’s internal guidelines

for management of system ownership. This model

ensures that strategic decisions are lifted to the

highest management level, while tactical and op-

erational issues can be handled at lower levels. In

other words, top management charts the course

for Kronos, while day-to-day management can be

handled at a lower level.

LEGAL FRAMEWORKKronos is owned by Danmarks Nationalbank. Ac-

tual operation of the system has been outsourced

to Bankernes EDB Central, BEC. This means that

BEC is the system operator and responsible for

ensuring day-to-day operation of hardware and

software developed for Kronos. Responsibilities,

obligations and rights between Danmarks Nation-

albank and BEC are contractually regulated.

Section 1 of the Danmarks Nationalbank Act

1936 states that Danmarks Nationalbank shall

“maintain a safe and secure currency system in

this country, and [...] facilitate and regulate the

traffic in money and the extension of credit”. This

section is the background to Danmarks National-

bank’s operation of the payment system Kronos,

and hence the system has, in all respects, been

designed with a view to ensuring and facilitating

exchange of large, time-critical payments between

participants.

The contractual basis for Kronos comprises

the documentation for settlement of payments

in kroner, which is part of the “Documentation

for monetary-policy instruments and settlement

of payments in DKK, EUR, SEK and ISK”, hereinaf-

ter the “terms and conditions for accounts”. The

terms and conditions for accounts regulate all

matters between the account holders and Dan-

marks Nationalbank in connection with settle-

ment of payments in Danish kroner at Danmarks

Nationalbank. By signing a “Request for a Current

Account in Danish Kroner at Danmarks National-

bank”, the account holder accepts the terms and

conditions for accounts.

Kronos is owned by Danmarks Nationalbank,

which is an independent, self-governing insti-

tution. Danmarks Nationalbank’s oversight of

systemically important payment and settlement

systems, which is also based on section 1 of the

Danmarks Nationalbank Act, ensures that Kronos

meets international standards.2

SYSTEM DESIGN AND OPERATIONS

Participants and access criteriaTo participate in Kronos, the participant must be a

credit institution or investment firm that is subject

to supervision by the Danish Financial Supervisory

Authority or subject to supervision in another EU

member state or in a country with which the EU

has concluded a cooperation agreement on home

country supervision. Furthermore, Danish branch-

es of foreign credit institutions and investment

firms that are subject to supervision may become

participants. Finally, others can become partici-

2 See Danmarks Nationalbank’s oversight publication.


pants if they are, in the assessment of Danmarks

Nationalbank, of major significance to the settle-

ment process. This includes e.g. other payment

and settlement systems.

Account structureAll account holders must hold a compulsory

current account in Danish kroner. In addition, an

account holder may have attached accounts for

settlement of monetary policy operations and

various settlement accounts related to payment

and securities settlement systems’ settlement of

payments at Danmarks Nationalbank. Current

account holders may request to have one or more

of the following sub-accounts attached:

• Settlement account for retail payments

• VP settlement accounts, including settlement

accounts for trading transactions and periodic

settlement, as well as a Payment-vs-Payment

settlement account

• Automatic collateralisation account

• CLS settlement account

• SCP loan account and pledged collateral ac-

count.

The account structure at Danmarks National-

bank is regulated by the terms and conditions

for accounts. The current account is remunerated

at the “current account rate”, which is one of the

monetary policy interest rates. Interest is calculat-

ed on the basis of the balance in the account at

the close of the monetary policy day, i.e. at 3:30

pm. Settlement accounts are non-interest bear-

ing, and no interest is payable on intraday credit

either. When the monetary policy day ends, all

intraday current account overdrafts must have

been covered, and settlement accounts must have

been emptied. However, an exception applies to

liquidity for prefinancing of the Straksclearing,

which remains in the settlement account from one

monetary policy day to the next and is included in

the current account balance.

Structure of KronosKronos comprises two modules that can be select-

ed by participants as required: the basic module

and the Poseidon module.

All participants have access to the basic module,

which enables them to execute payments manu-

ally via the Kronos terminal. The Kronos terminal

is almost like an online bank for participants. Via

this terminal, payments can be made, and account

movements and status can be monitored.

The Poseidon module is an add-on module for

participants wishing to remit payments in the

SWIFT3 format. Participants using SWIFT typical-

ly have their own automated systems designed

to allow them to settle payments by means of

Straight-Through Processing, STP, i.e. without

manual interference, using SWIFT. The Poseidon

module automatically translates payment mes-

sages between the Kronos terminal and SWIFT

so that participants with and without SWIFT can

remit payments to each other even though they

are not using the same network language. Partic-

ipants who have opted for the Poseidon module

pay a separate fee for this module and for trans-

lation of payment messages to/from the SWIFT

format.

Participants with SWIFT remit nearly all pay-

ments via SWIFT, while smaller participants

without SWIFT remit all their payments manually

via the Kronos terminal. So Kronos caters to both

large and small participants by not requiring that

participants must have SWIFT to remit and receive

payments in Kronos. Participants with SWIFT may

also choose to remit payments via the Kronos

terminal.

Kronos functionsThe Kronos terminal allows participants to enter

payments, view entries in their own accounts,

monitor and manage queued payments, follow

clearing and settlement processes in connected

payment and settlement systems, receive news

from Danmarks Nationalbank and download his-

torical account entry data.

Participants have a choice of four payment types:

• Payments to other account holders (can also

be sent via a SWIFT message MT202)

• Transfers between own accounts

• Payments to and from customers (can also be

sent via a SWIFT message MT103)

3 SWIFT, the Society for Worldwide Interbank Financial Telecommunica-tion, is a global secure network for financial communication.


• Transfer of funds to settlement accounts for

cash depots in connection with receipt of cash

from a depot.

Account holders with SWIFT may choose to

execute payments to other account holders with

SWIFT via SWIFT messages. Account holders who

have opted for the Poseidon module may remit

SWIFT payments to all Kronos participants.

Furthermore, participants may create standing

orders, i.e. regular transfers from a current ac-

count to the attached settlement accounts used

to transfer liquidity to e.g. the Sumclearing and

Intradagclearing or VP settlement.

Kronos offers two queuing facilities that sup-

port the participants’ liquidity management: a

liquidity queue and a value date queue. In the

value date queue, participants with SWIFT can

enter payments for settlement on a future value

date up to 14 banking days before the value

date. Via the Kronos terminal, participants can

view and cancel payments in their own value

date queues.

The liquidity queue is used if participants have

insufficient liquidity for payments submitted for

settlement. The payments are then placed in the

relevant participant’s liquidity queue until ade-

quate funds are available in the current account.

Kronos seeks to settle payments in the order in

which they are received, i.e. the FIFO4 principle.

If there is insufficient cover for the first payment,

the subsequent payments in the queue will not

be settled either. However, participants may

select a bypass function, so that it is neverthe-

less sought to settle the subsequent payments. If

there are unsettled payments in a liquidity queue

when Kronos closes, these payments are reject-

ed.

Kronos has an optimisation procedure, the

gridlock resolution mechanism, for ongoing check

of liquidity queues for gridlocks, i.e. situations

where several participants’ payments are mutually

awaiting each other’s settlement. Gridlocks are

resolved by settling a group of payments simulta-

neously, provided that no participants’ accounts

are overdrawn in this process.5

4 First In, First Out.

5 See Danmarks Nationalbank (2005), Chapter 3, for further informa-tion about gridlocks.

Checks and rejection of paymentsBefore a payment is executed, a check is per-

formed to ensure that the payment instruction

contains all the information necessary to execute

a payment, and that the remitter has cover for the

payment.

A payment is rejected if the payment instruc-

tions contain errors regarding the time or value

date, the recipient or currency is unknown, or the

payment has been remitted outside the Kronos

opening hours.

If a payment cannot be settled because of

insufficient liquidity, the payment is placed in a

liquidity queue. If there are payments in a liquidity

queue when Kronos closes, these payments are

rejected.

Opening hoursKronos is open for krone payments on all Danish

banking days between 7:00 am and 3:30 pm. In

addition, the system is open between 4:00 and

4:30 pm for transfers from current accounts to

settlement accounts for night-time settlement of

retail payments and securities in the Sumclearing,

Intradagclearing and Straksclearing and in VP

settlement.

Sumclearing payments are settled at 1:30 am,

while Intradagclearing payments are settled at

6:00 am, 9:00 am, 12 noon and 2:00 pm. The

Straksclearing runs at 0:50 am, 5:20 am, 8:20 am,

11:20 am, 1:20 pm and 2:30 pm. VP runs six secu-

rities settlement cycles and four other settlement

cycles, some in the daytime, some at night. In val-

ue terms, the largest share of VP settlement takes

place outside the Kronos opening hours.

At 7:00 am, participants begin to execute the

day’s interbank payments in Kronos. Payments

can be effected throughout the day, i.e. until

Kronos closes at 3:30 pm, but most payments are

settled before noon.

In 2018, the opening hours will be extended to

5:00 pm in connection with the migration of VP’s

settlement in kroner to TARGET2-Securities, T2S.

The settlement process will also be amended

when T2S is implemented.


PricesThe price payable for participation in Kronos is

made up of two components:

1. A monthly subscription fee to cover regular,

fixed operating expenses as well as any costs

for further development of Kronos.

2. A variable monthly consumption charge to

cover the individual account holder’s actual

use of the system.

There is no connection fee for new participants.

However, there may be costs for technical access

to Danmarks Nationalbank’s operational service

provider. The monthly fee is based on the indi-

vidual participant’s choice of modules in Kronos

and a distribution key reflecting the size of the

participant’s working capital. This means that

large banks, which typically settle many payments

in Kronos, pay a considerably higher monthly

Transaction prices in Kronos Table 2

Price per transaction, kr.

Payments

Domestic payment:1

0-1,000 payments per month 1.00

1,001-2,500 payments per month 0.50

2,501-5,000 payments per month 0.25

5,001- 0.10

Own transfers, including standing orders1) 1.00

Poseidon/SWIFT payment from terminal account holder2) 4.27

Poseidon/SWIFT payment to terminal account holder 3.00

Kronos terminal

User fee per user per month 35.00

Terminal update, per update 0.015

SWIFT messages

SWIFT MT 900, MT 910, MT 941, MT 942, MT 950, MT 298sub251, MT 298sub999 0.97

Note: The prices stated have been calculated on the basis of the exchange rate of the euro at end-January 2016. Prices for Poseidon pay-ments and SWIFT messages may fluctuate with the euro as Danmarks Nationalbank’s SWIFT costs are payable in euro. Invoicing is based on the exchange rate at the time of invoicing.

Source: Danmarks Nationalbank.1. Rejected domestic payments are free of charge.2. The Poseidon transaction price is payable by account holders with SWIFT who have activated the Poseidon module, irrespective of whether

payments are remitted to or received from terminal account holders. For payments remitted, the transaction price stated should be added to the price for a domestic payment.

subscription fee than smaller participants. The

variable consumption charge depends on the

number and types of transactions performed by

each participant.

The price per payment is shown the price list in

Table 2. The Kronos pricing structure means that

the price per payment falls when the number of

payments made by a participant rises. This gives

participants with a high number of payments an

incentive to execute them individually in Kronos

rather than netting payments before settlement.

In addition, Danmarks Nationalbank may

charge participants for overdrafts. The fee is

0.02 per cent of the overdraft amount, but not

less than kr. 1,000 and not more than kr. 25,000,

however. In the event of repeated overdrafts by

the same participant, Danmarks Nationalbank is

entitled to bar access to overdrafts without notice

or terminate the customer relationship with the

participant in question.


Intraday credit and pledging of collateralAs a consequence of the continuous individual

settlement of all payments in an RTGS system such

as Kronos, the participants have a large intraday

liquidity requirement. To ensure that participants

have sufficient liquidity for smooth settlement of

payments, Danmarks Nationalbank gives partici-

pants access to credit within the day, i.e. intraday

credit. This credit comprises overdrafts on their

current accounts at Danmarks Nationalbank and

is extended against a wide range of securities as

collateral.

Account holders may pledge collateral for

intraday credit in the form of traditional pledging

of collateral, certificates of deposit or via various

arrangements: automatic collateralisation (floating

collateral)6 and Scandinavian Cash Pool, SCP.

The collateral value of the assets is calculated

on the basis of their market value less a valuation

haircut. The haircuts applied are based on the

degree of liquidity of the assets and their remain-

ing time to maturity. If euro-denominated securi-

ties are pledged as collateral for credit in Danish

kroner, a currency haircut is also deducted.

The collateral basis is limited to securities

for which the underlying legislation ensures a

high credit quality. Eligible securities for credit

in Danish kroner are published in the ‘tier list’ at

Danmarks Nationalbank’s website, www.national-

banken.dk, which is updated on a daily basis on

all Danish trading days.

6 Automatic collateralisation is an arrangement for pledging of collat-eral for intraday credit in Danish kroner. Under the automatic collat-eralisation arrangement, participants pledge securities deposited in one or several designated securities accounts at VP, typically their trading accounts, as collateral. As opposed to traditional pledging of collateral, this offers the advantage that specific assets in a securities account are not bound. Instead, a share of the value of the account holder’s securities, less a haircut, corresponding to the credit amount, is pledged to Danmarks Nationalbank. The securities in the collateral custody account are at the disposal of the account holder as long as the value of the account exceeds the total loans raised under the automatic collateralisation arrangement.


DISCLOSURE FOR EACH APPLICABLE PRINCIPLE

This section describes how Kronos observes the CPMI-IOSCO Principles for financial market infrastructures. The description is broken down by individual principles and comprises those of relevance to Kronos, i.e. principles 1, 2, 3, 4, 5, 7, 8, 9, 13, 15, 16, 17, 18, 19, 21, 22 and 23. Under each principle there is also a description of the key considerations of relevance to Kronos.



KC 1: Legal basisThe legal basis should provide a high degree of cer-

tainty for each material aspect of an FMI’s activities

in all relevant jurisdictions.

The legal basis for Kronos comprises:

• The Danmarks Nationalbank Act 1936

• Relevant Danish legislation7

• The contractual basis for Kronos.

The Danmarks Nationalbank Act 1936Section 1 of the Danmarks Nationalbank Act 1936

states that Danmarks Nationalbank shall “maintain

a safe and secure currency system in this country,

and [...] facilitate and regulate the traffic in money

and the extension of credit”. This section is the le-

gal basis for Danmarks Nationalbank’s operation

of the Kronos payment system.

General legislationDanish legislation of relevance to Kronos includes

law of contracts and property (freedom of con-

tract) and the provisions of the Securities Trading

Act, STA, which implements the Settlement Final-

ity Directive, cf. below. These provisions address

7 All legislation etc. passed by the Folketing (Danish Parliament) is publicly available in Danish at retsinformation.dk. In addition, English translations of key financial sector legislation are available at the website of the Danish Financial Supervisory Authority at www.finan-stilsynet.dk.

PRINCIPLE 1 LEGAL FRAMEWORK

An FMI should have a well-founded, clear, transparent, and enforceable legal basis for each material aspect of its activities in

all relevant jurisdictions.

the issue of finality of payment and access to

realisation of collateral. Relevant provisions are

described below:

The principle of freedom of contract

The general principle of freedom of contract in

Danish law means that agreements between two

or more parties are to a very large extent pro-

tected. Danmarks Nationalbank is regarded as a

‘special administrative body’, and preparation of

the terms and conditions for accounts, including

the rules for Kronos, as a general administrative

act within Danmarks Nationalbank’s remit as the

central bank of Denmark. This means that the

terms and conditions for accounts are not sub-

ject to negotiation (unlike traditional contracts).

But when preparing the terms and conditions for

accounts, Danmarks Nationalbank must observe

a number of administrative rules and basic prin-

ciples.

Provisions of the legislation on electronic payments

Payments by electronic transfer of funds are

recognised as legally valid, and electronic entries

are accepted by Danish courts of law as sufficient

documentation.

Finality provisions

Kronos has been registered as a designated pay-

ment system in accordance with the provisions of


the Settlement Finality Directive8, which have been

implemented in the Danish Securities Trading Act.

The Directive generally focuses on two issues:

the finality of settlement in payment and settle-

ment systems, and the option to satisfy claims by

realising collateral, irrespective of a participant’s

possible insolvency.

In accordance with section 57c of the STA,

which implements Articles 3 and 5 of the Directive,

Kronos includes provisions on

• when a transfer order is deemed to have been

entered into the system, and

• the time when a transfer order entered into

the system can no longer be revoked by a par-

ticipant or a third party.

According to the terms and conditions for ac-

counts, a Kronos transaction has been execut-

ed when it has been registered in the current

account. A transaction between two or more

account holders at Danmarks Nationalbank has

been executed when it has been registered on all

relevant accounts at Danmarks Nationalbank.

Hence, all payments via Kronos are final and

irrevocable, even in the event of a participant’s

default or resolution/restructuring, when the

amount has been debited from/credited to the

account.

Netting provisions

Multilateral netting is recognised in Danish law,

also if a participant in a payment system defaults

or is subject to resolution/restructuring, cf. STA

section 57.

Since Kronos is an RTGS system, in which all

payments are settled individually and immedi-

ately after the payment instruction, the netting

provisions are basically not relevant. The gridlock

resolution mechanism in Kronos does include an

element of netting. However, the gridlock resolu-

tion mechanism, which must be activated manual-

ly, has never been used.

In addition, recognition of netting is impor-

tant in relation to a smooth general settlement

process in Kronos as several multilateral netting

systems settle via Kronos, cf. Chart 1.

8 Directive 98/26/EC of the European Parliament and of the Council of 19 May 1998 on settlement finality in payment and securities settle-ment systems.

Legislative provisions on the access

to interest from collateral

Under Danish law, the extent of the pledge is, as

a main rule, determined by the agreement be-

tween the pledgor and the pledgee. According to

the “Deed of Pledge for Credit Facilities in Danish

Kroner at Danmarks Nationalbank”, the pledge

to Danmarks Nationalbank includes redeemed

amounts and interest on pledged securities fall-

ing due before the time of realisation. Redeemed

amounts and interest are credited to yield accounts

pledged to Danmarks Nationalbank as collateral

for any debt owing to Danmarks Nationalbank by

the institution at that time or in the future.

Provisions on enforcement of collateral

Collateral in the form of securities or cash may be

realised at once if a prior agreement to this effect

has been concluded, cf. STA section 57b(2). Such

an agreement has been concluded between Dan-

marks Nationalbank and the individual account

holder in the above Deed of Pledge. The Deed

states that should Danmarks Nationalbank wish

to enforce its collateral rights to the securities

registered to the account, Danmarks Nationalbank

shall be entitled without prior legal action or prior

warning to realise such securities in the manner

determined by Danmarks Nationalbank. Further-

more, Danmarks Nationalbank shall be entitled to

take over ownership of the securities so pledged.

Pledging of collateral for credit in Kronos can-

not be rendered null and void pursuant to sec-

tions 70(1) or 72(2) of the Danish Insolvency Act.9

This follows from STA section 57b(1), which imple-

ments Article 9 of the Settlement Finality Directive,

whereby collateral pledged to a system desig-

nated under section 57a, a clearing centre, inter-

operable systems, participants in such systems

or a central bank cannot be declared null and

void (unless the collateral has not been pledged

without undue delay or it does not appear to be

ordinary).10

9 It is a precondition, however, that the collateral is pledged without undue delay after the lack of collateral occurred, and the collateral must be pledged according to ordinary procedures. Kronos observes these conditions.

10 It should be noted that the issue of collateral pledged for old debt will, de facto, not be relevant for Kronos, as a participant’s maximum intraday credit is calculated on the basis of collateral pledged before the credit is extended.


KC 2: Clear rules consistent with relevant regulationAn FMI should have rules, procedures, and con-

tracts that are clear, understandable, and consis-

tent with relevant laws and regulations.

The contractual basis for Kronos comprises the

documentation for settlement of payments in

kroner, i.e. the terms and conditions for accounts,

found in the “Documentation for monetary-policy

instruments and settlement of payments in DKK,

EUR, SEK and ISK”. The terms and conditions

for accounts regulate all matters between the

account holders and Danmarks Nationalbank in

connection with settlement of payments in Danish

kroner at Danmarks Nationalbank. By signing a

“Request for a Current Account in Danish Kroner

at Danmarks Nationalbank”, the account holder

accepts the terms and conditions for accounts.

Participation in Kronos

All participants must accept the terms and condi-

tions for accounts, thereby accepting that Kronos

is regulated by Danish law, which has implemented

the provisions of the Settlement Finality Directive.

Foreign participants11 are subject to the terms

and conditions for accounts in the same way as

Danish participants. Foreign participants domi-

ciled outside the EU must document their home

country’s legal recognition of the finality and

irrevocability of payments transacted via Kro-

nos, even in the event of insolvency proceedings

against the participant. Foreign participants

domiciled in the EU are subject to the Settlement

Finality Directive.

Exclusion of participants

Participation in Kronos requires a current account

in Danish kroner. According to the “Terms and

Conditions for a Current Account in Danish Kroner

at Danmarks Nationalbank”, Danmarks National-

bank is at any time entitled to terminate the cur-

rent account and/or exclude the account holder

from the monetary policy instruments without

notice, regardless of whether a breach has taken

place, and to require the immediate repayment

11 The “Terms and Conditions for a Current Account in Danish Kroner at Danmarks Nationalbank” state which foreign institutions can have access to current accounts at Danmarks Nationalbank, which means that they have the option to join Kronos.

of any outstanding amount. If the outstanding

amount is not repaid, Danmarks Nationalbank is

entitled to enforce the collateral pledged by the

account holder without notice.

Handling of failing account holders according to

the BRRD

The new EU framework on recovery and reso-

lution of credit institutions, the BRRD, has intro-

duced common rules for management of failing

banks and mortgage banks in the EU. The BRRD

has been implemented into Danish law, partly via

amendments to the Financial Business Act and

the Financial Stability Act, partly via a new act on

restructuring and resolution of certain financial

enterprises, which entered into force on 1 June

2015. The BRRD rules replace and supplement

the special Danish resolution model introduced

by Bank Rescue Package 3. Firstly, the framework

includes a number of recovery tools to prevent

emerging difficulties in an institution from es-

calating into a crisis. Secondly, it lays down a

framework for management of an institution if the

recovery measures prove to be insufficient so that

the institution is no longer viable. In such case,

the institution is regarded as likely to fail or failing

and must be resolved or restructured, unless a

private sector solution is found. If, subject to a

number of conditions being met, an institution is

transferred to resolution/restructuring, the Finan-

cial Stability Company as the resolution authority

assumes control of the institution with a view to

ensuring continuation of the institution’s critical

functions. Resolution/restructuring entails contin-

uation of the institution, so that it also continues

as a participant in Kronos. An institution subject

to control must still meet the requirements for

participation in Kronos. The option for the Finan-

cial Stability Company to suspend the payment

and delivery obligations of the failing institution

does not apply to the institution’s obligations

vis-à-vis Danmarks Nationalbank and the pay-

ment systems12. From the time when the Financial

Stability Company decides to assume control of

an institution, Danmarks Nationalbank must abide

by the decisions made by the Financial Stability

12 Cf. the Act on Restructuring and Resolution of Certain Financial Enter-prises, section 32(4)(ii).


Company. The institution’s existing signature rules

and powers of attorney remain in force vis-à-vis

Danmarks Nationalbank until changed by the

Financial Stability Company.

Default

In future, failing banks and mortgage banks will

– in the vast majority of cases – be subject to

resolution/restructuring rather than insolvency

proceedings. However, it cannot be ruled out that

a specific situation may occur in which a Kronos

participant is subject to insolvency proceedings.

In that case, Danmarks Nationalbank will observe

the provisions of the Danish Insolvency Act.

The rules on intervention in or cessation of a

financial enterprise are found in Title VII of the

Financial Business Act, FBA, and the rules on

cessation in Part 15. Resolution of a financial en-

terprise is effected via liquidation or winding-up

or merger, cf. FBA section 227. If a bank becomes

insolvent, the Danish Financial Supervisory Au-

thority may submit a petition for liquidation, cf.

FBA section 234(1).

KC 3: Articulation of legal basis to relevant partiesAn FMI should be able to articulate the legal basis

for its activities to relevant authorities, participants,

and, where relevant, participants’ customers, in a

clear and understandable way.

Kronos has clear rules, procedures and contracts

that are freely accessible at Danmarks Nation-

albank’s website. The terms and conditions for

accounts provide detailed descriptions of all

relevant conditions applying in connection with

participation in Kronos, cf. KC 2 above. At least 14

days’ notice is given of any amendments to the

terms and conditions for accounts.

Furthermore, user group meetings are held,

at which Kronos participants can raise questions

regarding e.g. the terms and conditions for ac-

counts.

KC 4: Enforceable rules, procedures and contracts in all relevant jurisdictionsAn FMI should have rules, procedures, and con-

tracts that are enforceable in all relevant jurisdic-

tions. There should be a high degree of certainty

that actions taken by the FMI under such rules and

procedures will not be voided, reversed, or subject

to stays.

Kronos operates in Denmark only and is governed

by Danish law.

Kronos’ rules, procedures and contracts are

based on relevant Danish legislation, cf. KC 1 and

KC 2. This means that foreign participants agree

to being governed by Danish legislation when

participating in Kronos.


An FMI should have governance arrangements that are clear and transparent, promote the safety and efficiency of the FMI,

and support the stability of the broader financial system, other relevant public interest considerations, and the objectives of

relevant stakeholders.

KC 1: General objectivesAn FMI should have objectives that place a high

priority on the safety and efficiency of the FMI and

explicitly support financial stability and other rele-

vant public interest considerations.

Kronos’ objective reflects Danmarks National-

bank’s objective, which is enshrined in section 1

of the Danmarks Nationalbank Act, stating that

Danmarks Nationalbank shall “maintain a safe and

secure currency system in this country, and [...]

facilitate and regulate the traffic in money and the

extension of credit”. Hence, importance is at-

tached to both safety and efficiency in the opera-

tion of Kronos.

PRINCIPLE 2 GOVERNANCE

Furthermore, in the annual Report and Accounts,

the areas of financial stability and secure pay-

ments are part of the Report of the Board of

Governors for the past year.13

It is sought to achieve efficiency and safety in

all aspects of Kronos operations. Major elements

include the design of the re-invoicing function and

Danmarks Nationalbank’s own coverage of parts

of the costs, the offer of collateralised intraday

credit and focus on operational stability. All this

contributes to giving the financial sector broad

access to settlement of payments in real time via

Kronos.

13 Report and Accounts 2015 (link).

KC 2: Governance arrangementsAn FMI should have documented governance

arrangements that provide clear and direct lines

of responsibility and accountability. These arrange-

ments should be disclosed to owners, relevant

authorities, participants, and, at a more general

level, the public.

The composition of the top management of

Danmarks Nationalbank, and hence of Kronos, is

documented in the Danmarks Nationalbank Act,

which is publicly accessible. The Act lays down

the powers of the Board of Directors, Committee

of Directors and Board of Governors, respective-

ly.


Internally at Danmarks Nationalbank, Banking and

Markets is the Kronos system owner.

Responsibility for Kronos operations is broken

down at the strategic, tactical and operational lev-

KC 5: Roles and responsibilities of managementThe roles and responsibilities of management

should be clearly specified. An FMI’s management

should have the appropriate experience, a mix of

skills, and the integrity necessary to discharge their

responsibilities for the operation and risk manage-

ment of the FMI.

Management of Kronos is clearly defined, cf. KC 2

above. Banking and Markets, which is the system

owner, holds monthly meetings with a represent-

ative of the Board of Governors, at which any

issues related to Kronos are discussed. Issues of

a principal or strategic nature are discussed with

the whole Board of Governors.

In practice, operation of Kronos has been

outsourced to Bankernes EDB Central, BEC. To

ensure that the service provider meets Danmarks

Nationalbank’s requirements, committees have

been set up at the operational level and at high

management level. These committees follow up

BEC’s operation of Kronos on a regular basis.

KC 6: Risk-management governanceThe board should establish a clear, documented

risk-management framework that includes the FMI’s

risk-tolerance policy, assigns responsibilities and

accountability for risk decisions, and addresses

decision making in crises and emergencies. Gov-

ernance arrangements should ensure that the

risk-management and internal control functions

have sufficient authority, independence, resources,

and access to the board.

Due to the composition of the Committee of

Directors, which reflects Danmarks Nationalbank’s

role as the central bank of Denmark, and not di-

rectly its role as Kronos system owner, the Board

of Governors, in its capacity as the top manage-

ment level at Danmarks Nationalbank, lays down

the framework for risk management.

Danmarks Nationalbank’s Framework for Oper-

ational Risk Management, 2nd edition, describes

the framework for operational risk management

in Kronos. It has been approved by the Board of

Governors and all material amendments of the

framework, policies and requirements must be

approved by the Board of Governors.

The framework summarises the policies and

overall operational requirements applying to Dan-

marks Nationalbank. It is supported by underlying

detailed guidelines. The framework and guidelines

are based on international standards and recom-

mendations, as well as inputs from international

cooperation.

The framework for operational risk manage-

ment lays down rules for preparing and maintain-

ing risk assessments and business procedures, in-

cluding how to handle residual risks. Furthermore,

the framework addresses contingency measures,

and consequently contingency plans have been

prepared, both for Danmarks Nationalbank in

general and more specifically for Kronos.

Danmarks Nationalbank has set up a Risk and

Safety Committee chaired by a representative of

the Board of Governors. The Committee has four

working groups that report to the Committee.

els in accordance with Danmarks Nationalbank’s

internal guidelines for management of system

ownership.


KC 7: Reflection of legitimate interestsThe board should ensure that the FMI’s design,

rules, overall strategy, and major decisions reflect

appropriately the legitimate interests of its direct

and indirect participants and other relevant stake-

holders. Major decisions should be clearly disclosed

to relevant stakeholders and, where there is a

broad market impact, the public.

Participants and stakeholders are informed and to

a large extent involved in major decisions con-

cerning amendments to Kronos.

Kronos participants are also to a large extent

involved in the development of Kronos2. A ref-

erence group has been set up with participants

from VP, e-nettet, Nets, data centres, banks,

mortgage banks and Danmarks Nationalbank.

Under this group, four working groups have been

established to discuss issues relating to liquidi-

ty, testing, technology and go-live, respectively.

Finally, a sector group has been established with

participation at high management level. The

purpose of this group is to ensure that the sector,

also at high management level, is informed and

has background information on the replacement

of the customer-oriented systems.

Close bilateral collaboration exists between

Danmarks Nationalbank and the connected set-

tlement systems, i.e. VP and e-nettet/Nets, respec-

tively, in relation to development and testing.

Previously, annual RTGS user group meetings

were held, at which Kronos participants were

invited to Danmarks Nationalbank. At these

meetings, developments over the last year and

strategic contemplations were presented. This

also gave participants an opportunity to raise any

questions or topics that they would like to know

more about in relation to Kronos.

Due to the close collaboration on the devel-

opment of Kronos2, no annual RTGS user group

meetings have been held in recent years. Once

Kronos2 has gone live, the regular user group

meetings will be resumed.


KC 1: Robust risk-managementAn FMI should have risk-management policies,

procedures, and systems that enable it to identify,

measure, monitor, and manage the range of risks

that arise in or are borne by the FMI. Risk-man-

agement frameworks should be subject to periodic

review.

Danmarks Nationalbank has a general risk man-

agement model which ensures that all relevant

risks and threats are documented and assessed.

Furthermore, the measures taken to mitigate

risks and threats are documented. Finally, it is

assessed whether the residual risk is acceptable

or whether further measures are required. The

system for maintaining risk assessments ensures

that they are revisited at least once a year. Major

residual risks are discussed with the Board of

Governors.

Kronos has a clear policy for management of

operational risk, see Danmarks Nationalbank’s

Framework for Operational Risk Management,

2nd edition, which has been approved by the

Board of Governors (described in more detail

under Principle 17). Management of credit risk is

also subject to formalised risk management, cf.

Principle 4.

Legal risk is managed primarily by Danmarks

Nationalbank’s legal department, which updates

the terms and conditions for accounts. Specific

An FMI should have a sound risk-management framework for comprehensively managing legal, credit, liquidity, operational,

and other risks.

legal risks are addressed on an ad-hoc basis, e.g.

by amendment of the terms and conditions for

accounts.

Liquidity risk is not subject to formalised

management. However, Danmarks Nationalbank

is not exposed to liquidity risk, and participants

have good tools for managing their own liquidity

risks by using the intraday credit facility and the

Kronos terminal, where liquidity for outgoing and

incoming payments can be monitored in real time.

Furthermore, Danmarks Nationalbank regularly

performs stress tests of the participants’ liquidity

risk, cf. Principle 7.

Other sources of risk, such as business risk, cf.

Principle 15, default or resolution of a participant,

cf. Principle 13, indirect participation, cf. Principle

19, and interdependencies, KC 3 below, are han-

dled in an appropriate manner, given the scope of

the risk.

Danmarks Nationalbank maintains an overall

cross-category overview of all risks to which Dan-

marks Nationalbank, via Kronos, and the partici-

pants are exposed.

Danmarks Nationalbank also maintains a con-

tingency plan for Kronos, cf. Principle 17. This plan

ensures that the impact on Kronos operations is

minimised in crisis situations such as fire, flooding,

terrorism, pandemics and natural disasters. The

plan is tested annually.

PRINCIPLE 3 FRAMEWORK FOR THE COMPREHENSIVE MANAGEMENT OF RISKS


KC 2: Incentives for participants to manage and contain risksAn FMI should provide incentives to participants

and, where relevant, their customers to manage

and contain the risks they pose to the FMI.

Participants may expose Danmarks Nationalbank

to credit risk when using the intraday credit facility.

Hence, participants must pledge collateral when

using this facility, and suitable haircuts are ap-

plied.14 See Principles 4 and 5 for further details.

The terms and conditions for accounts state

that participants must pay a fee if they do not cov-

er their intraday credit by the end of the monetary

policy day. This gives participants an incentive to

cover their intraday credit in a timely manner.

14 Participants may also raise monetary policy loans, thereby giving Danmarks Nationalbank an interday credit risk, which is also hedged by means of collateral.

KC 3: Regularly review of material risks stemming from and posed to other entitiesAn FMI should regularly review the material risks it

bears from and poses to other entities (such as oth-

er FMIs, settlement banks, liquidity providers, and

service providers) as a result of interdependencies

and develop appropriate risk-management tools to

address these risks.

Risk arising from interdependencies with other

entities has been formalised vis-à-vis BEC, which

operates Kronos on behalf of Danmarks Nation-

albank. A joint risk assessment is maintained

and discussed at monthly meetings between

Danmarks Nationalbank and BEC. Interdepend-

encies with the connected settlement systems

are handled via contingency procedures. Further-

more, Danmarks Nationalbank, VP Securities and

the Danish Bankers Association are establishing a

joint forum for identifying and managing mutual

risks. The first meeting is expected to be held in

the autumn of 2016.


An FMI should effectively measure, monitor, and manage its credit exposures to participants and those arising from its pay-

ment, clearing, and settlement processes. An FMI should maintain sufficient financial resources to cover its credit exposure to

each participant fully with a high degree of confidence.

Participants incur no credit risk when using Kronos

as Kronos is an RTGS system, which means that

all payments are settled immediately and are final

and irrevocable when credited to the recipient’s ac-

count at Danmarks Nationalbank. Since settlement

takes place in central bank money via accounts at

Danmarks Nationalbank, participants do not incur

any credit risk on the settlement bank either.

Danmarks Nationalbank incurs a credit risk on

the participants as Danmarks Nationalbank offers

Kronos participants access to credit. The credit

risk is limited substantially in that the credit is

collateralised. This means that two events must

occur if Danmarks Nationalbank is to lose money:

a participant is unable to repay the amount bor-

rowed, and the value of the collateral pledged by

the participant has fallen below the value of the

credit granted – e.g. if the market price of the as-

sets pledged dives unusually sharply. If insolvency

proceedings are initiated against a participant,

Danmarks Nationalbank will file a claim against

the estate corresponding to the uncollateralised

part, if any, of the credit and may incur a loss in

the same way as other creditors.

PRINCIPLE 4 CREDIT RISK

KC 1: Establishing a framework for the management of credit riskAn FMI should establish a robust framework to

manage its credit exposures to its participants and

the credit risks arising from its payment, clearing,

and settlement processes. Credit exposure may

arise from current exposures, potential future expo-

sures, or both.

Danmarks Nationalbank has established a frame-

work for management of credit risk that includes

both current and potential future credit expo-

sures. Danmarks Nationalbank extends credit

to its account holders as monetary policy loans,

loans for cash depots and intraday credit in

kroner. For all types of credit, Danmarks National-

bank requires high-quality assets as collateral. The

collateral value of the assets is marked-to-market

on a daily basis, and haircuts are deducted on the

basis of the assets’ market, liquidity and credit

risks. The rules are set out in Danmarks Nation-

albank’s terms and conditions for accounts in


“Terms and Conditions for Pledging of Collateral

for Credit Facilities in Danish Kroner”. Danmarks

Nationalbank’s framework for credit operations

can be found there: how credit is obtained, infor-

mation about the collateral basis and collateral

value, how checks for adequate cover are per-

formed and how pledged collateral is removed

and top-up collateral pledged.

KC 2: Identifying, measuring and monitoring credit riskAn FMI should identify sources of credit risk, rou-

tinely measure and monitor credit exposures, and

use appropriate risk-management tools to control

these risks.

Credit risks are identified and monitored via risk

assessments, which are reviewed annually, and it is

regularly assessed whether there is a need to re-

view the collateral basis or parts of it. At least every

second year, analyses are performed of whether

haircuts sufficiently hedge the risk of losses on col-

lateral and whether synthetic prices (i.e. calculated

prices for securities not traded) reflect the actual

value of the securities. On the basis of the analyses,

the haircuts are adjusted as required.

Credit risk is measured and monitored on a

daily basis using valuation of collateral (mark-to-

market) and checks for adequate cover.

The market value of the securities eligible as

collateral is updated on a daily basis to reflect the

closing prices from OMX Nasdaq CPH. For valua-

tion purposes, closing prices from the same day

are applied if the securities have been traded that

day. For securities that have not been traded that

day, a calculated synthetic price from the preced-

ing day is applied. As the tier list applies from 6

pm, the trading prices applied are 0-1 day old,

while the synthetic prices applied are 1-2 days

old.

Collateral is pledged by a Kronos participant

transferring a VP-registered asset to a VP account

pledged by the participant to Danmarks Nation-

albank. In the period from 7:00 am to 6:00 pm,

the participant may apply via Kronos to with-

draw VP-registered assets from the VP account.

The VP-registered assets are transferred to a VP

account assigned by the account holder, provid-

ed that there is still adequate cover for the credit

granted to the participant. Pledged assets can

be substituted by transferring new VP-registered

assets to the participant’s VP account and then

withdrawing previously transferred VP-registered

assets from the VP account.

Checks for adequate cover are continuously

performed in Kronos so as to ensure that there is

always sufficient collateral for a given credit and

that no unintentional credit risk arises. Checks for

adequate cover are performed automatically by

simulating execution of a transaction, and if there

is cover, the transaction is executed. Furthermore,

at the end of the monetary policy day, i.e. at 3.30

pm, daily checks are performed to see whether

any participants have negative balances in their

current accounts. Checks are also performed for

overdrafts on SCP and automatic collateralisation

accounts (at 2 pm and 3 pm, respectively).

KC 3: Use of collateral and other financial resourcesA payment system or SSS should cover its current

and, where they exist, potential future exposures to

each participant fully with a high degree of confi-

dence using collateral and other equivalent finan-

cial resources (see Principle 5 on collateral). In the

case of a DNS payment system or DNS SSS in which

there is no settlement guarantee but where its

participants face credit exposures arising from its

payment, clearing, and settlement processes, such

an FMI should maintain, at a minimum, sufficient


resources to cover the exposures of the two par-

ticipants and their affiliates that would create the

largest aggregate credit exposure in the system.

Danmarks Nationalbank uses collateral to hedge

the credit risk associated with granting credit to

Kronos participants, cf. above. Hence, Danmarks

Nationalbank has not set aside financial resources

specifically to cover potential losses in Kronos.

Danmarks Nationalbank is entitled to immedi-

ate realisation of the securities pledged as collat-

eral.

KC 7: Explicit rules and procedures for covering credit lossesAn FMI should establish explicit rules and proce-

dures that address fully any credit losses it may

face as a result of any individual or combined

default among its participants with respect to any

of their obligations to the FMI. These rules and

procedures should address how potentially uncov-

ered credit losses would be allocated, including the

repayment of any funds an FMI may borrow from

liquidity providers. These rules and procedures

should also indicate the FMI’s process to replenish

any financial resources that the FMI may employ

during a stress event, so that the FMI can continue

to operate in a safe and sound manner.

Obviously, Danmarks Nationalbank incurs credit

risk on the participants as stated above, but Kro-

nos does not have any explicit rules for losses as a

result of credit risk as Kronos is a central-bank-op-

erated system; in other words, Danmarks Nation-

albank has no need to hold liquidity and no need

for liquidity support for business continuity of

Kronos if a participant defaults.


KC 1: Collateral with low riskAn FMI should generally limit the assets it (routine-

ly) accepts as collateral to those with low credit,

liquidity, and market risks.

Kronos participants can use the following ar-

rangements to pledge collateral for intraday

credit in Danish kroner:

• Traditional pledging of collateral: Pledging of

securities as collateral takes place by trans-

fer of securities to a custody account at VP

Securities pledged to Danmarks Nationalbank.

Based on the value of the pledged securities,

the account holder is allocated a drawing right

for credit facilities in Danish kroner equivalent

to the collateral value thereof.

• Certificates of deposit: The account holder’s

certificates of deposit are automatically includ-

ed in the drawing right for intraday credit in

Danish kroner.

• Automatic collateralisation: Account holders

may pledge securities deposited in one or

several custody accounts at VP Securities,

typically trading accounts, as collateral for

intraday credit in Danish kroner. Only secu-

rities complying with the lending rules are

included.

PRINCIPLE 5 COLLATERAL

• Scandinavian Cash Pool, SCP: Liquidity in one

Scandinavian central bank may be pledged

as collateral for intraday credit from another

Scandinavian central bank.

Danmarks Nationalbank grants access to cred-

it facilities in Danish kroner to account holders

at Danmarks Nationalbank against a number of

high-quality, low-risk assets. These are:

• Securities issued by the Kingdom of Denmark

• Bonds guaranteed by the Kingdom of Den-

mark

• Bonds issued by KommuneKredit

• Bonds issued by Føroya Landstýri (the Faroese

government) and

• Mortgage bonds (ROs), covered bonds (SDOs)

and covered mortgage bonds (SDROs) issued

by institutions subject to the Danish Financial

Business Act.15

The assets must be registered in VP, traded at OMX

Nasdaq CPH and denominated in Danish kroner

or euro. With a few exceptions, it applies that the

above assets must not have been issued or guar-

anteed by the account holder or by an entity with

which the account holder has close links as defined

in Article 4(1)(38) of Regulation (EU) no. 575/2013.

15 Cf. Danmarks Nationalbank’s website (link).

An FMI that requires collateral to manage its or its participants’ credit exposure should accept collateral with low credit,

liquidity, and market risks. An FMI should also set and enforce appropriately conservative haircuts and concentration limits.


In addition, the balances of yield accounts in Dan-

ish kroner at Danmarks Nationalbank are included

in the collateral basis.

At the request of the account holders and sub-

ject to specific assessment, Danmarks National-

bank may also include other assets in the collater-

al basis for credit facilities in Danish kroner.

KC 2: Valuation practices and haircutsAn FMI should establish prudent valuation practices

and develop haircuts that are regularly tested and

take into account stressed market conditions.

Valuation of assets included in the collateral basis

is performed on a daily basis to reflect the closing

prices from OMX Nasdaq CPH. For valuation pur-

poses, closing prices (at 5:21 pm) are applied if

the bonds have been traded that day. Alternative-

ly, a synthetic price from the preceding day, i.e. a

theoretical, calculated price, is applied. As the tier

list applies from 6 pm, the trading prices applied

are 0-1 day old, while the synthetic prices applied

are 1-2 days old.

The collateral value of the assets is calculated

as the market value including accrued interest

less a haircut, cf. the terms and conditions for

accounts. The current collateral value of the assets

is published on the tier list via Danmarks Nation-

albank’s website16, where the haircuts applying at

any time can also be found. The collateral value is

stated in Danish kroner, and the collateral value of

16 Cf. Danmarks Nationalbank’s website (link).

VP-registered assets in euro is calculated on the

basis of the official exchange rate from Danmarks

Nationalbank on the preceding day of listing.

A securities-specific valuation haircut is de-

ducted when calculating the collateral value of all

eligible securities. For fixed-rate and variable-rate

bonds, the haircut is larger the longer the remain-

ing time to maturity is, as interest rate sensitivity

increases as a function of the remaining time to

maturity. Furthermore, eligible assets are divided

into four liquidity categories, and the haircuts are

also larger for the least liquid assets. The most liq-

uid assets, i.e. government securities, are placed

in liquidity category 1. For these, smaller haircuts

apply, as it is expected that the realisation period

is shorter so that they cannot fall as much in value

as securities with longer realisation periods.

When a theoretical price is applied, an extra

haircut of 5 per cent is deducted for all types of

securities except for securities issued by the King-

dom of Denmark, and a currency haircut of 3 per

cent is deducted when securities denominated in

euro are pledged as collateral for credit in kroner.


KC 3: Procyclical adjustmentsIn order to reduce the need for procyclical adjust-

ments, an FMI should establish stable and con-

servative haircuts that are calibrated to include

periods of stressed market conditions, to the extent

practicable and prudent.

Haircuts are generally conservative in order to

avoid unnecessary procyclical effects. Haircuts

are assessed on the basis of long-term develop-

ments over periods including both recessions

and booms. However, in special cases it may be

necessary to adjust the collateral basis. For exam-

ple, a number of expansions of the collateral basis

were introduced during the financial crisis in 2008.

These have now been phased out.

KC 4: Concentration limitsAn FMI should avoid concentrated holdings of

certain assets where this would significantly impair

the ability to liquidate such assets quickly without

significant adverse price effects.

If participants pledge too high concentrations

of certain assets as collateral, there is a risk that

the assets in question cannot be realised without

a significant impact on the market price. A high

concentration means that a single participant

pledges a high share of the total issued volume

of a given asset as collateral. The concentration

may be calculated for each issuer or for each

asset type included in the collateral pledged by a

participant.

At present no limits have been set on the indi-

vidual participants’ concentrations of certain as-

sets, but regular monthly analyses are performed

of the mix of the assets pledged. Taking these

analyses as the point of departure, concentration

risks are assessed on a continuous basis.

KC 5: Cross-border collateralAn FMI that accepts cross-border collateral should

mitigate the risks associated with its use and ensure

that the collateral can be used in a timely manner.

Danmarks Nationalbank participates in the Nordic

cooperation on the Scandinavian Cash Pool, SCP.

With SCP, a participant can obtain intraday credit

from a Nordic central bank by pledging collateral

to another Nordic central bank.

The credit is always collateralised and is grant-

ed intraday only, and a currency haircut of 5 per

cent is applied, cf. the terms and conditions for

accounts (“Terms and Conditions for SCP Loan

Accounts in Danish Kroner at Danmarks National-

bank”).


KC 6: Flexible collateral management systemAn FMI should use a collateral management system

that is well-designed and operationally flexible.

The current IT system for handling of collateral is

not very flexible, which means that manual pro-

cesses may be required when new rules are intro-

duced for pledging of collateral or the collateral

basis is changed. A new collateralisation system,

offering more features than the existing one, will

be introduced in 2017 and expanded in 2018.


KC 1: Robust framework for managing liquidity riskAn FMI should have a robust framework to manage

its liquidity risks from its participants, settlement

banks, nostro agents, custodian banks, liquidity

providers, and other entities.

Kronos does not incur liquidity risk on partici-

pants, but the participants incur liquidity risk on

each other. Participants’ liquidity risk is limited

via free access to collateralised intraday credit.

In general, participants have access to ample

liquidity for settlement. This ensures that pay-

ments are generally settled smoothly in Kronos

and are rarely delayed, which in turn minimises

liquidity risk.

Kronos has a facility for placing payments in

a liquidity queue if the remitter has insufficient

liquidity for settlement. The payment remains in

PRINCIPLE 7 LIQUIDITY RISK

the queue until the remitter has sufficient liquidity

to execute the payment. Payments in the liquidity

queue are settled in the order in which they are

received, i.e. the FIFO principle. Every time the

maximum credit for an account changes, Kronos

automatically checks whether queued payments

can be released. Participants may change the

order of the queued payments and use the “with

bypass” feature, whereby Kronos continuously

seeks to settle queued payments for which there

is sufficient liquidity.

Moreover, participants may place payments in

a value date queue up to 14 banking days ahead,

and there is a built-in gridlock resolution mech-

anism17. If the gridlock resolution mechanism is

used, the liquidity queues of the participants in

question will be locked while the mechanism runs

so that the liquidity queues cannot be altered dur-

ing the process.

17 A gridlock is a situation where several participants’ payments are mutually awaiting each other’s settlement in a liquidity queue. A grid-lock resolution mechanism is an optimisation procedure that enables continuous checks for gridlocks in liquidity queues. Gridlocks are resolved by settling a group of payments simultaneously, provided that no participants’ accounts are overdrawn in this process.

An FMI should effectively measure, monitor, and manage its liquidity risk. An FMI should maintain sufficient liquid resources

in all relevant currencies to effect sameday and, where appropriate, intraday and multiday settlement of payment obligations

with a high degree of confidence under a wide range of potential stress scenarios that should include, but not be limited to,

the default of the participant and its affiliates that would generate the largest aggregate liquidity obligation for the FMI in

extreme but plausible market conditions.


KC 2: Identifying, measuring and monitoring liquidity riskAn FMI should have effective operational and

analytical tools to identify, measure, and monitor

its settlement and funding flows on an ongoing and

timely basis, including its use of intraday liquidity.

Participants can monitor their Kronos transactions

in real time. The individual participant can see

payments executed, payments rejected, payments

in liquidity and value date queues and lists of own

standing orders and settlement cycles executed.

Participants are responsible for managing their

own liquidity. They use their own tools, which are

not part of Kronos, for liquidity management.

KC 3: Sufficient liquid resourcesA payment system or SSS, including one employing

a DNS mechanism, should maintain sufficient liquid

resources in all relevant currencies to effect same-

day settlement, and where appropriate intraday or

multiday settlement, of payment obligations with

a high degree of confidence under a wide range of

potential stress scenarios that should include, but

not be limited to, the default of the participant and

its affiliates that would generate the largest aggre-

gate payment obligation in extreme but plausible

market conditions.

Since Kronos does not incur liquidity risk on par-

ticipants, there is no need for liquidity reserves to

hedge this risk.

However, if sufficient liquid resources are seen

as sufficient liquidity among participants to exe-

cute the payments as requested, participants have

until now had ample liquidity so that settlement

of payments has generally been smooth in Kro-

nos. Kronos participants have access to collater-

alised liquidity that exceeds their normal liquidity

requirement many times.

If the system had insufficient liquidity, Dan-

marks Nationalbank would be able to provide

additional liquidity in various ways, e.g. by ex-

panding the collateral basis and hence access to

intraday credit or loans.

A stress test programme has been developed

for Kronos and is carried out regularly. By default,

the consequences of removing the largest and

most critical participants from the settlement are

tested. The stress test programme can also be

used for analysing other scenarios. The stress test

programme ensures regular stress testing and a

plan to follow up the results.

Earlier on, stress tests of Kronos participants’

liquidity have been undertaken on an ad-hoc

basis. Most recently, the effect of an operational

failure at a data centre so that the Kronos par-

ticipants settling via that data centre could not

remit payments was analysed in 2013-14. Among

other things, the analysis showed that the conse-

quences of a failure are limited because Kronos

participants generally have ample liquidity. In 145

of 250 3-hour failures analysed, the outcome was

that participants not affected by the failure had

to postpone payments due to insufficient liquid-

ity because they were waiting for liquidity from

participants affected by the failure. But the conse-

quences of the simulated failures were limited in

that the liquidity shortfall did not spread to fur-

ther links in the chain. In other words, there were

no cases where payments were delayed because

participants were short of liquidity as a result of

delayed payments from participants not affect-

ed by the failure. Moreover, the analysis showed

that settlement of a relatively small number of

payments via the emergency procedure solved

the other participants’ liquidity problems during

a failure, thereby mitigating the consequences of

the failure.18

18 Cf. Danmarks Nationalbank (2014b), Special Topic: Consequences of system failures at data centres. See link.


KC 8: Using central bank accounts, payment services, or securities servicesAn FMI with access to central bank accounts,

payment services, or securities services should use

these services, where practical, to enhance its man-

agement of liquidity risk.

Kronos payments are settled via accounts at Dan-

marks Nationalbank (i.e. in central bank money),

and Kronos uses account structures and collater-

alisation functions at Danmarks Nationalbank.

For settlement in SEK and ISK, Danmarks Na-tionalbank uses accounts at Sveriges Riksbank and Sedlabanki Islands, so that central bank facilities are used whenever possible.

KC 10: Rules and procedures for managing liquidity shortfallsAn FMI should establish explicit rules and proce-

dures that enable the FMI to effect same-day and,

where appropriate, intraday and multiday settle-

ment of payment obligations on time following any

individual or combined default among its partici-

pants. These rules and procedures should address

unforeseen and potentially uncovered liquidity

shortfalls and should aim to avoid unwinding,

revoking, or delaying the same-day settlement of

payment obligations. These rules and procedures

should also indicate the FMI’s process to replen-

ish any liquidity resources it may employ during a

stress event, so that it can continue to operate in a

safe and sound manner.

Kronos has no rules and procedures for addressing

situations with unforeseen liquidity shortfalls as

any liquidity shortfalls will affect Kronos partici-

pants, not Kronos itself. It is not possible to unwind

or revoke transactions due to liquidity shortfalls.

Payments executed in Kronos are final, so no

payments can be reversed once they have been

executed. Settlement in Kronos as such is not de-

layed by liquidity shortfalls, but it may take longer

time for individual participants to settle payments

if they are affected by liquidity shortfalls.

The built-in gridlock resolution mechanism can

be used to address liquidity shortfalls resulting

from gridlocks among participants. There are

rules and procedures for how to use this mecha-

nism but not for when to use it.


An FMI should provide clear and certain final settlement, at a minimum by the end of the value date. Where necessary or

preferable, an FMI should provide final settlement intraday or in real time.

KC 1: Rules and procedures for final settlementAn FMI’s rules and procedures should clearly define

the point at which settlement is final.

Kronos has rules and procedures in place for

ensuring settlement finality. Payments in Kronos

are settled individually in real time. A payment is

final and irrevocable when the remitter’s account

has been debited and the recipient’s credited.

After this time, the payment cannot be revoked.

The time when a payment is final is defined in the

PRINCIPLE 8 SETTLEMENT FINALITY

terms and conditions for accounts19. Finality is

recognised in Danish law in that Kronos has been

registered as a designated payment system under

the provisions of the Settlement Finality Directive

(Directive 98/26/EC of the European Parliament

and of the Council of 19 May 1998 on settlement

finality in payment and securities settlement sys-

tems), which has been implemented in the Danish

Securities Trading Act.

19 Danmarks Nationalbank (2015a).

KC 2: Settlement no later than the end of the value dateAn FMI should complete final settlement no later

than the end of the value date, and preferably in-

traday or in real time, to reduce settlement risk. An

LVPS or SSS should consider adopting RTGS or mul-

tiple-batch processing during the settlement day.

Kronos is an RTGS system, which means that set-

tlement takes place in real time. In other words, all

transactions are settled within the chosen value

date.

Payments in Kronos are generally settled early

in the day. One of the reasons is that most

participants have signed an agreement with the

Danish Bankers Association whereby payments

in connection with settlement of deposits, FX

and derivatives transactions must be remitted

as early as possible on the value date and pref-

erably before 1:00 pm. Payments via current

accounts at Danmarks Nationalbank on behalf

of customers or banks are settled at 2:00 pm at

the latest.


Figures from 2015 show that, in value terms,

approximately 50 per cent of a day’s payments in

Kronos have been settled by 10 am, approximate-

ly 80 per by noon and 98 per cent by 2 pm.

KC 3: Revoking paymentsAn FMI should clearly define the point after which

unsettled payments, transfer instructions, or other

obligations may not be revoked by a participant.

The terms and conditions for accounts state that

a payment can be revoked until it is final. Unset-

tled transactions in a participant’s own value date

queue (transactions entered into the system for

settlement on a future value date) and unsettled

transactions in a participant’s own liquidity queue

(when participants have remitted payments for

settlement, but have insufficient liquidity) can

be revoked and cancelled during the settlement

day. If there are unsettled payments in a liquidity

queue when Kronos closes at the end of the mon-

etary policy day, i.e. at 3:30 pm, these payments

are rejected.

However, Kronos may discretionarily change its

opening hours if this is deemed to be necessary –

e.g. if an extraordinary incident means that there

are queued payments at closing time that should

be settled.

If a participant remits a faulty transaction (e.g.

the wrong recipient or an incorrect amount), any

reversal of the transaction in question must be

agreed bilaterally between the remitter and the

recipient.

If Danmarks Nationalbank causes an error in a

transaction, Danmarks Nationalbank corrects the

error as far as possible and is entitled to reverse

the transaction in this case.


An FMI should conduct its money settlements in central bank money where practical and available. If central bank money is

not used, an FMI should minimise and strictly control the credit and liquidity risk arising from the use of commercial bank

money.

KC 1: Central bank moneyAn FMI should conduct its money settlements in cen-

tral bank money, where practical and available, to

avoid credit and liquidity risks.

Payments in Kronos are settled via the partici-

pants’ accounts at Danmarks Nationalbank. The

deposits in the participants’ accounts are claims

on Danmarks Nationalbank, and consequently

settlement takes place in central bank money.

PRINCIPLE 9 MONEY SETTLEMENTS

Central bank money in the relevant currency is

the most expedient settlement asset for systemi-

cally important payment systems because central

bank money is virtually risk-free and can easily

be exchanged for other liquid assets in the same

currency.


An FMI should have effective and clearly defined rules and procedures to manage a participant default. These rules and

procedures should be designed to ensure that the FMI can take timely action to contain losses and liquidity pressures and

continue to meet its obligations.

KC 1: Rules and proceduresAn FMI should have default rules and procedures

that enable the FMI to continue to meet its obliga-

tions in the event of a participant default and that

address the replenishment of resources following a

default.

Resolution and default

Danmarks Nationalbank has two procedures for

handling failing institutions:

1. A procedure for resolution/restructuring

2. A procedure for liquidation.

In future, failing banks and mortgage banks will

– in the vast majority of cases – be subject to

resolution/restructuring rather than insolvency

proceedings. Resolution/restructuring entails

continuation of the institution, so that it also

continues as a participant in Kronos. An institution

subject to control by the Financial Stability Com-

pany, “Finansiel Stabilitet A/S”, must still meet the

requirements for participation in Kronos. Only the

name and CVR no. of the continuing institution

may have to be changed in the system. Danmarks

Nationalbank will do this in accordance with inter-

nal guidelines.

Furthermore, Danmarks Nationalbank has

guidelines defining how Kronos involves and

informs participants, authorities and other rele-

PRINCIPLE 13 PARTICIPANT-DEFAULT RULES AND PROCEDURES

vant stakeholders in the handling of a participant

subject to resolution. The other Kronos partici-

pants can continue their settlement of payments

without being affected by the resolution or liqui-

dation.

It cannot be ruled out that a specific situation

may occur in which a Kronos participant is sub-

ject to insolvency proceedings. In that case, the

institution’s exposures with Danmarks National-

bank are closed down and Danmarks National-

bank’s claims are secured. Danmarks National-

bank immediately blocks all accounts, including

the current account and settlement accounts, for

outgoing payments. However, any outstanding

settlement in settlement accounts is executed

before they are blocked if Danmarks Nationalbank

has sent irrevocable lines to the system using the

settlement accounts in question.

At the end of the monetary policy day on which

the insolvency order was issued, typically at 3:30

pm, the current account will be closed and pay-

ments to the institution can no longer be deposit-

ed in the account and will be rejected. Before the

account is closed, all incoming payments will be

accepted and credited to the institution’s current

account.

Immediately after the insolvency order – or as

soon as Kronos opens – Kronos will send out news

about the situation to all participants, informing


them of the rules for outgoing and incoming pay-

ments. Furthermore, it will be stated that the de-

faulted participant’s current account will be closed

at the end of the monetary policy day, after which

incoming payments will be rejected.

Operational failures

If a participant is hit by an operational failure,

e.g. an IT failure, so that the participant cannot

execute and receive payments, guidelines have

also been prepared for handling this situation in

the form of detailed internal guidelines as well as

published descriptions of emergency procedures

in the terms and conditions for accounts.

Danmarks Nationalbank can also transfer mon-

ey to a participant’s settlement account for VP, the

Sumclearing, Intradagclearing and Straksclearing

on behalf of the participant so that the partici-

pant in question can meet its obligations in these

settlement cycles.

KC 2: Timely settlement and discretionary proceduresAn FMI should be well prepared to implement its de-

fault rules and procedures, including any appropri-

ate discretionary procedures provided for in its rules.


Kronos has sufficient operational capacity and

trained staff to perform the required procedures

in time in the event of a participant’s default/res-

olution or failure. Kronos is always staffed during

its opening hours. The staff is trained to handle

a participant’s resolution, default or failure and

is involved in any handling of such situation on a

current basis. There are procedures and instruc-

tions to describe how to handle these situations,

and emergency procedures and resolution/

default are regularly tested, which also helps to

ensure that the staff is trained to perform these

procedures in practice.


There are internal plans for the distribution of roles

and responsibilities in relation to handling failing

banks and participants experiencing failures.

Kronos’ internal plans for handling participants’

resolution, default or failure include guidelines

for coordination with relevant parties and timely

communication. One possible channel of commu-

nication is the Kronos news service.

KC 3: Public disclosure of key aspects of default rules and proceduresAn FMI should publicly disclose key aspects of its

default rules and procedures.


Danmarks Nationalbank’s right to realise assets

that a participant has pledged as collateral for

credit from Danmarks Nationalbank is described

in the terms and conditions for accounts. They

state that Danmarks Nationalbank is entitled to

take over ownership of a participant’s pledged

securities and seek to enforce such securities

without prior legal action and without notice.


Rules and procedures in relation to operational

failures have been published in Danmarks Na-

tionalbank’s terms and conditions for accounts,

general provisions, section 5 on emergency

procedures. If there is no connection to Kronos,

a participant may, by prior telephone agreement

with Danmarks Nationalbank, perform trans-

actions on request using special forms that are

faxed. The forms are included in the terms and

conditions for accounts.


KC 4: Test and review of rules and procedures with participants and othersAn FMI should involve its participants and other

stakeholders in the testing and review of the FMI’s

default procedures, including any close-out proce-

dures. Such testing and review should be conducted

at least annually or following material changes to

the rules and procedures to ensure that they are

practical and effective.


A programme has been initiated for testing the

handling of participants subject to resolution or

insolvency proceedings. The first test is scheduled

for October 2016.


In respect of operational failures, regular tests of

emergency procedures, in which all Kronos partic-

ipants are involved, are held several times a year.

Furthermore, tests with participation of interde-

pendent FMIs (VP, Danish Bankers Association,

CLS) are held, and Kronos’ operational service

provider, BEC, performs relevant tests. The test

results are shared and evaluated at the relevant

management level.

Handling of participants subject to resolution

and participants experiencing operational failures

has frequently been tested in practice.


Kronos is a central-bank-owned RTGS system and

hence there is no need to hold liquid net assets

specifically to cover business risks or support a re-

covery plan, and nor does Kronos have any need

to maintain a plan for procuring further capital.

KC 1: Robust management of general business riskAn FMI should have robust management and

control systems to identify, monitor, and manage

general business risks, including losses from poor

execution of business strategy, negative cash flows,

or unexpected and excessively large operating

expenses.

Kronos has taken precautions against a number of

financial losses. Operational sources of business

An FMI should identify, monitor, and manage its general business risk and hold sufficient liquid net assets funded by equity

to cover potential general business losses so that it can continue operations and services as a going concern if those losses

materialise. Further, liquid net assets should at all times be sufficient to ensure a recovery or orderly wind-down of critical

operations and services.

PRINCIPLE 15 GENERAL BUSINESS RISK

risk are identified and assessed regularly in con-

nection with risk assessments.

From a legal perspective, Danmarks National-

bank has safeguarded itself against business loss-

es resulting from claims for damages in relation

to Kronos operations. Operational risks that may

result in losses are handled in collaboration with

Kronos’ operational service provider, cf. Principle

17.

Developments within payment systems are

monitored in collaboration with various interna-

tional market players, and IT developments are

also monitored.

Kronos has minimised the risk of not covering

its expenses by adjusting participant fees annually

so that revenue reflects actual expenses.


An FMI should safeguard its own and its participants’ assets and minimise the risk of loss on and delay in access to these

assets. An FMI’s investments should be in instruments with minimal credit, market, and liquidity risks.

PRINCIPLE 16 CUSTODY AND INVESTMENT RISKS

KC 1: CustodianAn FMI should hold its own and its participants’

assets at supervised and regulated entities that

have robust accounting practices, safekeeping

procedures, and internal controls that fully protect

these assets.

Kronos uses VP as its custodian bank. VP-regis-

tered assets can be pledged to Danmarks Na-

tionalbank as collateral for participants’ intraday

credit.

VP is subject to supervision by the Danish

Financial Supervisory Authority and oversight

by Danmarks Nationalbank. This ensures that

accounting methods are stable, that assets are

stored in a secure way and that internal controls

are in place, cf. the most recent assessment of VP,

Danmarks Nationalbank (2016a).

VP has a secure legal basis for its activities, in-

cluding segregation of VP’s own assets and partic-

ipant’s securities, as well as segregation of partic-

ipants’ securities by using separate accounts, and

safeguarding of participants’ securities in custody

accounts against claims from VP’s creditors. VP

and participants are insured against errors in the

registration of securities in custody accounts, and

VP also has adequate capital resources to ensure

that its custodian bank activities can continue

during a prolonged period of losses.


KC 2: Prompt access to assets in custodyAn FMI should have prompt access to its assets and

the assets provided by participants, when required.

Danmarks Nationalbank has prompt access to its

assets in safekeeping. An agreement on immedi-

ate realisation has been concluded between Dan-

marks Nationalbank and the individual account

holders, who must sign the “Deed of Pledge for

Credit Facilities in Danish Kroner at Danmarks

Nationalbank” in the terms and conditions for

accounts. If an account holder wishes to partic-

ipate in SCP, the account holder must also sign

the “Deed of Pledge for Credit Facilities in Danish

Kroner in SCP”, which is also included in the terms

and conditions for accounts.

Danmarks Nationalbank’s right to realise col-

lateral immediately also applies in the event of a

participant’s resolution or default.

KC 3: Exposure to custodian banksAn FMI should evaluate and understand its expo-

sures to its custodian banks, taking into account

the full scope of its relationships with each.

Risks related to the use of custodian bank services

at VP are regularly considered in risk assessments.


KC 1: Establishing a risk-management frameworkAn FMI should establish a robust operational

risk-management framework with appropriate sys-

tems, policies, procedures, and controls to identify,

monitor, and manage operational risks.

Danmarks Nationalbank has a clear framework for

managing operational risk, as described in Frame-

work for Operational Risk Management, 2nd

edition. The framework has been approved by the

Board of Governors and defines roles and respon-

sibilities for operational risk management as well

as practical aspects of business procedures and

risk assessments.

For every risk identified, the probability and the

impact before and after any mitigation measures

An FMI should identify the plausible sources of operational risk, both internal and external, and mitigate their impact

through the use of appropriate systems, policies, procedures, and controls. Systems should be designed to ensure a high

degree of security and operational reliability and should have adequate, scalable capacity. Business continuity management

should aim for timely recovery of operations and fulfilment of the FMI’s obligations, including in the event of a wide-scale or

major disruption.

PRINCIPLE 17 OPERATIONAL RISK

are assessed. Such measures may be preventive,

precautionary or clarifying, thereby affecting

either the probability that a risk or threat will ma-

terialise or its potential implications.

Danmarks Nationalbank’s framework for oper-

ational risk management has been imposed on

the operational service provider, BEC, and as the

security guidelines become ISO compliant, cf. KC

5, they will also be imposed on BEC. Danmarks

Nationalbank and BEC jointly maintain a risk as-

sessment addressing all significant risks related to

the outsourcing of Kronos operations to BEC. The

risk assessment has been prepared in accordance

with Danmarks Nationalbank’s framework for risk

management and is discussed at monthly meet-

ings between Danmarks Nationalbank and BEC.


KC 2: Decisions on roles and responsibilities for ad-dressing operational risk by the board of directorsAn FMI’s board of directors should clearly define

the roles and responsibilities for addressing opera-

tional risk and should endorse the FMI’s operation-

al risk-management framework. Systems, opera-

tional policies, procedures, and controls should be

reviewed, audited, and tested periodically and after

significant changes.

The framework for operational risk management,

which has been approved by the Board of Gover-

nors, lays down the distribution of roles and re-

sponsibilities for management of operational risk.

Ultimate responsibility for the system is vested in

the head of the Danmarks Nationalbank depart-

ment that owns the system.

The operational service provider, BEC, is re-

sponsible for large parts of the operational risk

management of Kronos and is subject to Dan-

marks Nationalbank’s framework for operational

risk management. The risks resulting from BEC’s

operation of Kronos are addressed in a joint risk

assessment that is discussed at monthly meetings

between Danmarks Nationalbank and BEC, cf.

above.

KC 3: Operational reliabilityAn FMI should have clearly defined operational reli-

ability objectives and should have policies in place

that are designed to achieve those objectives.

Danmarks Nationalbank and BEC have concluded

a Service Level Agreement, SLA, specifying tar-

gets for the operation and availability of Kronos.

The overall requirement for Kronos is 99.8 per

cent system availability. The agreed targets are

discussed at monthly meetings between Dan-

marks Nationalbank and BEC and follow-up on

any non-compliance with the SLA is agreed. The

top managements of Danmarks Nationalbank and

BEC meet on a quarterly basis to discuss opera-

tional stability and other issues.

Change management is also discussed at the

monthly meetings between Danmarks National-

bank and BEC. A change management process

is in place to ensure that all agreed changes are

tested and documented before being implement-

ed. In connection with major system changes,

such as the implementation of Kronos2, Danmarks

Nationalbank’s project model, PRINCE2, will be

used to ensure a clear distribution of roles and

responsibilities.

BEC must remedy, respond to and provide

notification of operational incidents within agreed

time limits, depending on the severity of the

incident, i.e. the extent to which business-critical

operations are affected. Critical incidents must

be addressed “without undue delay”. At the joint

meetings, it is assessed whether the incidents

have been followed up in a satisfactory manner.

KC 4: Scalable capacityAn FMI should ensure that it has scalable capacity

adequate to handle increasing stress volumes and

to achieve its service-level objectives.

The agreement with BEC stipulates that the sys-

tem must be able to handle traffic corresponding

to a full day’s transactions in just one hour.

Historically, there have been incidents where the

capacity of Kronos has been exceeded. This has

been caused by incorrect prioritisation of traf-

fic from other BEC customers. When Danmarks

Nationalbank launches Kronos2 in April 2017, the

new system will run on an isolated operating plat-

form so that it is no longer dependent on BEC’s

other customers.


KC 5: Security policiesAn FMI should have comprehensive physical and

information security policies that address all poten-

tial vulnerabilities and threats.

Danmarks Nationalbank’s security policy is

prepared and maintained by Danmarks Nation-

albank’s central security function, headed by the

Chief Risk Officer, CRO.

Under the framework for operational risk man-

agement, security guidelines have been estab-

lished. During 2016 they will be converted into a

format that complies with ISO 27002:2013. These

guidelines detail the requirements for various

aspects of Danmarks Nationalbank’s operational

risk management. They include, inter alia, physical

security, supplier relationships and access control

measures. The security guidelines lay down clear

and implementable security requirements for Dan-

marks Nationalbank’s business activities, including

Kronos, so that these activities can be carried out

efficiently and reliably.

Once the security guidelines have been con-

verted to the ISO standard, they will be imposed

on BEC to ensure that BEC meets the security re-

quirements laid down by Danmarks Nationalbank.

KC 6: Business continuityAn FMI should have a business continuity plan

that addresses events posing a significant risk of

disrupting operations, including events that could

cause a wide-scale or major disruption. The plan

should incorporate the use of a secondary site and

should be designed to ensure that critical infor-

mation technology (IT) systems can resume opera-

tions within two hours following disruptive events.

The plan should be designed to enable the FMI to

complete settlement by the end of the day of the

disruption, even in case of extreme circumstances.

The FMI should regularly test these arrangements.

A contingency plan exists for Kronos, covering

all significant elements needed to manage crisis

situations in the operation of Kronos. The contin-

gency plan includes appointment of crisis staff

and support functions, distribution of resources,

internal and external communication strategies

– including a contact list – and procedures and

instructions related to crisis management. The

contingency plan is tested annually, most recent-

ly in the spring of 2016. When testing has been

completed, experience is gathered and the plan

adjusted.

Danmarks Nationalbank has set up contingency

facilities, from which key functions in relation to

Kronos operations can be undertaken. The contin-

gency facilities are regularly tested to ensure that

they function as expected.

BEC, which operates Kronos on behalf of

Danmarks Nationalbank, tests its organisational,

technical and physical contingency measures on a

quarterly basis. In this connection, the switch from

the primary to the secondary data centre is also

tested.

According to an agreement with BEC, it must

be possible to resume Kronos operations within 4

hours. In connection with the implementation of

Kronos2 and the new, isolated operating plat-

form, this will be reduced to 2 hours.


KC 7: InterdependenciesAn FMI should identify, monitor, and manage the

risks that key participants, other FMIs, and service

and utility providers might pose to its operations.

In addition, an FMI should identify, monitor, and

manage the risks its operations might pose to other

FMIs.

Management of risks arising from interdependen-

cies with other entities has been formalised vis-

à-vis BEC, which operates Kronos for Danmarks

Nationalbank. A contract has been concluded and

a joint risk assessment is maintained and dis-

cussed at monthly meetings between Danmarks

Nationalbank and BEC. In practice, risks arising

from interdependencies between Kronos and

the connected settlement systems are handled

via emergency procedures. Furthermore, Dan-

marks Nationalbank, VP Securities and the Danish

Bankers Association are establishing a joint forum

for identifying and managing risks arising from

interdependencies. The first meeting is expected

to be held in the autumn of 2016.


An FMI should have objective, risk-based, and publicly disclosed criteria for participation, which permit fair and open access.

KC 1: Fair and open access to servicesAn FMI should allow for fair and open access to its

services, including by direct and, where relevant,

indirect participants and other FMIs, based on rea-

sonable riskrelated participation requirements.

The access criteria for Kronos allow participants

access without significant restrictions. Kronos is

open to all credit institutions and their branch-

es that are subject to supervision by the Danish

Financial Supervisory Authority, subject to super-

vision in another EU member state or in a country

with which the EU has concluded a cooperation

agreement on home country supervision.

Other participants which in the evaluation of

Danmarks Nationalbank are of significance to the

settlement of payments at Danmarks National-

bank may also be admitted.20

The modular design of Kronos and the pric-

ing structure, cf. the description of Kronos in the

20 Cf. Danmarks Nationalbank (2015a) “Terms and Conditions for a Cur-rent Account in Danish Kroner at Danmarks Nationalbank”, clauses 1 and 2.

PRINCIPLE 18 ACCESS AND PARTICIPATION REQUIREMENTS

“System design and operations” section, ensures

flexibility and contributes to fair and open access

for all potential participants, irrespective of size.

Consequently, a large share of banks and other

financial institutions in the Danish market have

chosen to participate directly in Kronos.

If a participant wishes to subscribe to the Po-

seidon module, it is a requirement that the partic-

ipant has been registered with a live BIC at SWIFT

and has access to the SWIFT network.

Danmarks Nationalbank is entitled to terminate

a participant’s current account and settlement ac-

counts without notice and/or exclude the account

holder from the monetary policy instruments and

to require the immediate repayment of any out-

standing amount, regardless of whether a breach

has taken place.


KC 2: Risk considerationsAn FMI’s participation requirements should be

justified in terms of the safety and efficiency of the

FMI and the markets it serves, be tailored to and

commensurate with the FMI’s specific risks, and be

publicly disclosed. Subject to maintaining accept-

able risk control standards, an FMI should endeav-

our to set requirements that have the least-restric-

tive impact on access that circumstances permit.

As stated above, Kronos requires that participants

are subject to supervision, which is Danmarks

Nationalbank’s assurance when letting institutions

participate in Kronos. Moreover, access is not re-

stricted unnecessarily. Intraday credit in Kronos is

collateralised, which minimises Danmarks Nation-

albank’s credit risk on participants, cf. Principle 4,

without making it necessary to restrict the group

of participants.

Kronos has well-documented internal proce-

dures for creating new participants, which helps

to counter the risk of making errors in this con-

nection. Furthermore, Danmarks Nationalbank’s

terms and conditions for accounts, price lists, user

manual, etc. are publicly accessible in Danish and

English, including via Danmarks Nationalbank’s

website, which helps to provide information

to participants and prevent them from causing

unnecessary errors when settling payments in

Kronos.

KC 3: Compliance with participation requirements and exit rulesAn FMI should monitor compliance with its partici-

pation requirements on an ongoing basis and have

clearly defined and publicly disclosed procedures

for facilitating the suspension and orderly exit of a

participant that breaches, or no longer meets, the

participation requirements.

Kronos receives information from the Danish

Financial Supervisory Authority if a participant is

resolved or defaults and/or the Authority’s ap-

proval is revoked and the participant is no longer

subject to supervision. In this way, the partici-

pants’ continued observance of the participation

requirements is followed up.

If necessary, participants’ current accounts

and access to Kronos are closed with immediate

effect.

Kronos participants can close their accounts and

leave Kronos at any time. The criteria for leaving

Kronos are described in the terms and conditions

for accounts.21 Danmarks Nationalbank has dis-

cretionary powers to exclude a participant and/

or exclude the account holder from the monetary

policy instruments settled via Kronos without no-

tice. These powers are also described in the terms

and conditions for accounts.

Internal procedures are in place to regulate a

participant’s exit, either voluntarily, as a result of

a breach of contract, due to default or in con-

nection with resolution via the Financial Stability

Company.

21 Cf. Danmarks Nationalbank (2015a) “Terms and Conditions for a Current Account in Danish Kroner at Danmarks Nationalbank”, clause 3.


An FMI should identify, monitor, and manage the material risks to the FMI arising from tiered participation arrangements.

KC 1: Gathering of information about indirect participationAn FMI should ensure that its rules, procedures, and

agreements allow it to gather basic information

about indirect participation in order to identify,

monitor, and manage any material risks to the FMI

arising from such tiered participation arrangements.

Financial institutions that do not hold accounts at

Danmarks Nationalbank and do not participate

in Kronos must use correspondent banks to gain

access to the Danish payments infrastructure. Kro-

nos regards the legal relationship between direct

participants and other parties that may enter into

an agreement with a direct participant to settle

via this participant, i.e. indirect participants, as

being of no consequence to Danmarks National-

bank. Any transactions settled by a direct partici-

pant on behalf of an indirect participant are, from

a Kronos perspective, equivalent to the direct

PRINCIPLE 19 TIERED PARTICIPATION ARRANGEMENTS

participant’s own transactions. Kronos has clear

rules for settlement of payments in all phases of

the settlement process, cf. Principle 8, and these

rules also apply to payments settled by a direct

participant on behalf of an indirect participant.

Kronos gathers information about indirect par-

ticipants’ settlement of transactions in Kronos that

can be used to identify

• the share of the direct participant’s transac-

tions that are settled on behalf of indirect

participants

• direct participants settling on behalf of a con-

siderable number of indirect participants

• indirect participants settling a considerable

number of transactions or transactions of con-

siderable value

• indirect participants whose numbers of trans-

actions or transaction values are large relative

to the direct participants through which they

settle.

KC 2: Identification of dependencies between direct and indirect participantsAn FMI should identify material dependencies

between direct and indirect participants that might

affect the FMI.

Dependencies between direct and indirect partic-

ipants that could potentially affect settlement of

payments in Kronos are identified on the basis of

the above information gathered, cf. KC 1.


KC 3: Managing risks arising from tiered participationAn FMI should identify indirect participants respon-

sible for a significant proportion of transactions

processed by the FMI and indirect participants

whose transaction volumes or values are large

relative to the capacity of the direct participants

through which they access the FMI in order to man-

age the risks arising from these transactions.

Risks relating to indirect participants’ transactions

are managed by including such risks in risk as-

sessments. Kronos has identified indirect partic-

ipants whose transaction volumes or values are

large relative to the overall transaction volume/

value in Kronos or relative to the direct partici-

pants through which these indirect participants

settle.

KC 4: Regular risk review and mitigating actionsAn FMI should regularly review risks arising from

tiered participation arrangements and should take

mitigating action when appropriate.

Risks relating to indirect participants’ transactions

in Kronos are reviewed annually in connection

with the updating of the relevant risk assess-

ments. Any need to introduce measures to limit

risks is investigated and the measures are imple-

mented if this is deemed to be necessary.


An FMI should be efficient and effective in meeting the requirements of its participants and the markets it serves.

KC 1: Meeting the needs of its participants and the markets it servesAn FMI should be designed to meet the needs of its

participants and the markets it serves, in particu-

lar, with regard to choice of a clearing and settle-

ment arrangement; operating structure; scope of

products cleared, settled, or recorded; and use of

technology and procedures.

There is a high degree of participant involvement

in the development of Kronos. Annual user group

PRINCIPLE 21 EFFICIENCY AND EFFECTIVENESS

meetings are held, and users are continuously

involved in connection with major changes such

as the modernisation of the retail payments infra-

structure.

In connection with the development of Kro-

nos2, working groups have been set up at vari-

ous levels – from technical groups to a high-level

management group – to ensure that the new

RTGS system meets participants’ requirements

and needs.

KC 2: Clearly defined goals and objectives that are measurable and achievableAn FMI should have clearly defined goals and ob-

jectives that are measurable and achievable, such

as in the areas of minimum service levels, risk-man-

agement expectations, and business priorities.

Kronos has clearly defined service level objectives

that have been laid down in a Service Level Agree-

ment with BEC, cf. Principle 17. These include

requirements for uptime, timely settlement, trou-

bleshooting and change management. Kronos

operations are followed up on a monthly basis by

the Operations and Changes Committee, in which

both Danmarks Nationalbank and BEC participate.

Once every quarter, Kronos operations are dis-

cussed by the Steering Committee with high-level

management participation.

Risk management in connection with Kronos

has been approved by the Board of Governors of

Danmarks Nationalbank and ensures a distribution

of roles and responsibilities in relation to man-

agement of all relevant risks to which Kronos is

exposed, cf. Principle 3. A Risk Management forum

has been set up between Danmarks Nationalbank

and BEC. This forum maintains a joint assessment

of the operational risks that Kronos is exposed to

through outsourcing of operations to BEC.


KC 3: Regular review of efficiency and effectivenessAn FMI should have established mechanisms for the

regular review of its efficiency and effectiveness.

Kronos attaches importance to maintaining a

non-discriminatory pricing structure which does

not restrict the use of the system and is transpar-

ent. Pricing is reviewed on an annual basis.

The re-invoicing model will be revisited in con-

nection with the implementation of Kronos2, tak-

ing into account participants’ wishes in relation to

the distribution of costs. To ensure that the most

competitive supplier of a new RTGS system was

found, tenders were invited for the development

of Kronos2. Furthermore, an isolated operating

platform will be established at BEC, which will

improve the possibility of exposing BEC to com-

petition as the operation service provider.


KC 1: Internationally accepted communication procedures and standardsAn FMI should use, or at a minimum accommodate,

internationally accepted communication procedures

and standards.

By using SWIFT, Kronos observes internationally

accepted communication procedures and stand-

ards. The messaging format follows the ISO 15022

standard, and procedures for use of messages

have been laid down in the SWIFT handbook. In

addition, Kronos offers participants a graphical

user interface, the “Kronos terminal”, which allows

PRINCIPLE 22 COMMUNICATION PROCEDURES AND STANDARDS

them to enter payments manually and to monitor

their liquidity, etc.

Kronos also allows smooth exchange of mes-

sages and payments between participants that

use SWIFT and participants that use the graphical

user interface. Hence, use of the terminal does not

affect observance of the ISO standard.

Kronos2 will observe the same standards and

procedures as Kronos, but will also be compatible

with the newer ISO 20022 standard. However, in

consultation with the market, it has been decided

not to switch to the new standard immediately.

An FMI should use, or at a minimum accommodate, relevant internationally accepted communication procedures and stan-

dards in order to facilitate efficient payment, clearing, settlement, and recording.


KC 1: Clear and comprehensive rulesAn FMI should adopt clear and comprehensive rules

and procedures that are fully disclosed to partic-

ipants. Relevant rules and key procedures should

also be publicly disclosed.

Kronos’ rules and procedures are described in the

terms and conditions for accounts, i.e. “Documen-

tation for the monetary-policy instruments and

payment settlement in DKK, EUR, SEK and ISK”22.

Settlement of payments in Danish kroner, Swedish

kronor and Icelandic kronur takes place in Kronos,

while settlement of payments in euro takes place

via TARGET2. Settlement of payments in Swedish

kronor and Icelandic kronur only takes place via

VP settlement accounts in connection with VP

settlement in Kronos.

The terms and conditions for accounts include

descriptions of:

• The terminology used

• Right of signature and power of attorney and

power of attorney to another participant

• Transactions

• Emergency procedures

• Obligation to participate in tests

22 Cf. Danmarks Nationalbank (2015a).

• Corrections of incorrect transactions

• Fees and prices

• Pledging of collateral

• Danmarks Nationalbank’s liability and rights in

relation to losses, close-out netting and devia-

tions from normal practice

• Governing law and legal venue and language

• Statements of account, notifications and re-

quests

• Amendments to terms and conditions

• Opening days

• Four chapters on settlement in Danish kroner,

Swedish kronor, Icelandic kronur and euro,

respectively. Each chapter contains the rules

for the various account types available for

the currency in question, as well as terms and

conditions for obtaining credit and pledging

collateral.

• One chapter with fax formats for settlement

using the emergency procedure.

In addition, the terms and conditions for accounts

are supplemented with a number of documents

on prices, collateral, the tier list for eligible assets

and the user manual “Getting started with Kro-

nos”23, which describes use of the Kronos terminal,

23 Danmarks Nationalbank (2014a).

PRINCIPLE 23 DISCLOSURE OF RULES, KEY PROCEDURES, AND MARKET DATA

An FMI should have clear and comprehensive rules and procedures and should provide sufficient information to enable par-

ticipants to have an accurate understanding of the risks, fees, and other material costs they incur by participating in the FMI.

All relevant rules and key procedures should be publicly disclosed.


including execution of payments, use of liquidity

facilities, standing orders and continuous moni-

toring of account status.

Information about Kronos is also provided at

Danmarks Nationalbank’s website, www.national-

banken.dk, and Danmarks Nationalbank has pub-

lished the book “Payment Systems in Denmark”24,

which describes the payments infrastructure in

Denmark, how the various payment and settle-

ment systems function and the associated risks.

The terms and conditions for accounts are

accessible in Danish and English via Danmarks

Nationalbank’s website. The same applies to rel-

evant supplementary material, including the user

manual “Getting started with Kronos”, the book

“Payment Systems in Denmark” the Kronos price

list25 and the tier list26 for eligible collateral. How-

ever, the tier list is not available in English.

An employee has been assigned the task of en-

suring that the terms and conditions for accounts

are always updated.

24 Danmarks Nationalbank (2005).

25 www.nationalbanken.dk, see “Banking and payments”, “Interbank payments”, “Kronos”, “Pricing structure of Kronos 2016” (link) and “Payment for Kronos and Custody Accounts in 2016” (link).

26 www.nationalbanken.dk, see “Banking and payments”, “Collateral”, “Eligible assets”, “List for credit facilities in Danish Kroner”” (link).

In extraordinary situations, i.e. situations where

Kronos operations are not normal, emergency

procedures may be used. The emergency pro-

cedures for Kronos are described in the terms

and conditions for accounts27. The terms and

conditions for accounts also include emergen-

cy forms to be used by participants in order to

ensure uniform and safe handling of emergency

procedures. Time schedules are laid down on the

basis of the specific situations, and participants

are notified via messages in Kronos, if possible,

or by telephone or similar. If Danmarks National-

bank has knowledge of forthcoming extraordinary

situations, it may choose to send out letters to

participants informing them of the situation. The

emergency procedures are tested biannually to

ensure that participants know how to handle such

situations.

27 Cf. Danmarks Nationalbank (2015a), General Terms and Conditions for Monetary-Policy Instruments and Settlement of Payments in Danish Kroner, Swedish Kronor and Icelandic Kroner at Danmarks Nationalbank, clause 5.

KC 2: Descriptions of system design and operationsAn FMI should disclose clear descriptions of the

system’s design and operations, as well as the FMI’s

and participants’ rights and obligations, so that

participants can assess the risks they would incur

by participating in the FMI.

Kronos’ structure and settlement cycle are de-

scribed in the terms and conditions for accounts,

at www.nationalbanken.dk and in the book “Pay-

ment Systems in Denmark”. The terms and condi-

tions for accounts describe the specific settlement

times, while an overall description of the Kronos

structure and settlement process can be found in

“Payment Systems in Denmark”.

Participants’ rights and obligations are also de-

scribed in the terms and conditions for accounts,

while the financial risks that participants may

incur in Kronos are described in detail in “Payment

Systems in Denmark”.28

The terms and conditions for accounts do not

describe credit risk, as Kronos always checks

for adequate cover in the participants’ accounts

before executing payments so that situations

with credit risk cannot arise. When a payment has

28 Danmarks Nationalbank (2005), see e.g. section 4.2.


been settled, it is final, even if a participant is sub-

ject to insolvency proceedings. Since settlement

takes place via accounts at Danmarks National-

bank, participants do not incur any credit risk on

the settlement bank either.

As regards liquidity risk, the terms and condi-

tions for accounts describe how Kronos handles

transactions in liquidity queues, and the user man-

ual “Getting started with Kronos” and the built-in

quick guide in Kronos also describe how partici-

pants can use the value date and liquidity queue

functions in Kronos. Reference is also made to

Danmarks Nationalbank’s website, www.nation-

albanken.dk, and the book “Payment Systems in

Denmark”.

KC 3: Training of participantsAn FMI should provide all necessary and appro-

priate documentation and training to facilitate

participants’ understanding of the FMI’s rules and

procedures and the risks they face from participat-

ing in the FMI.

External participants are not currently offered any

training in the use of Kronos. As stated above,

a comprehensive user manual, “Getting started

with Kronos”, is available. If new participants need

guidance on the use of the system beyond that

provided in the user manual, they can contact

the TARGET helpdesk at Danmarks Nationalbank,

which acts as the Kronos helpdesk. The TARGET

helpdesk is staffed throughout the Kronos open-

ing hours by experienced employees who have

in-depth knowledge of Kronos and can provide

support and assistance to participants experienc-

ing problems.

Participants are encouraged to learn how

Kronos functions as they must sign a statement

saying that they understand and accept the terms

and conditions for accounts when requesting a

current account. In addition, emergency proce-

dures are tested with participants several times a

year so that participants are regularly trained in

these procedures.

KC 4: Costs of participationAn FMI should publicly disclose its fees at the level

of individual services it offers as well as its policies

on any available discounts. The FMI should provide

clear descriptions of priced services for comparabil-

ity purposes.

Danmarks Nationalbank’s terms and conditions

for accounts contain a section on fees and pric-

es. Participants generally pay a fixed monthly

fee, a fee per transaction that varies with the

participant’s total number of transactions per

month and other fees for miscellaneous services.

Danmarks Nationalbank invoices participants for

these fees. In addition, a fixed monthly fee is pay-

able for each custody account for credit in kroner.

This is invoiced by VP. Price lists are published at

www.nationalbanken.dk, cf. “Pricing structure of

Kronos” and “Payment for Kronos and Custody

Accounts”.

Kronos participants are notified, typically via

the Danish Bankers Association, of expected de-

velopment costs well ahead of the invoicing date,

i.e. as soon as possible after Danmarks National-

bank has become aware of them. Notification of

the annual adjustment of the monthly fee is sent

out with the invoice for January.


KC 5: Response to CPMI-IOSCO Disclosure frame-work and public disclosure of dataAn FMI should complete regularly and disclose

publicly responses to the CPSS-IOSCO Disclosure

framework for financial market infrastructures. An

FMI also should, at a minimum, disclose basic data

on transaction volumes and values.

This report is the first description of Kronos ac-

cording to the CPMI-IOSCO Principles, i.e. the first

disclosure. Similar information about Kronos has

previously been published in assessment reports;

see e.g. Assessment of Kronos according to Core

Principles for Systemically Important Payment

Systems, April 2012.29 The report is expected to be

updated biannually.

29 Cf. Danmarks Nationalbank (2012).

Basic data about transaction volumes and values

is published in Danmarks Nationalbank’s over-

sight publication “Oversight of the Financial In-

frastructure in Denmark” at www.nationalbanken.

dk.30 Data is compiled and published on an annual

basis.

The following information is published:

• number of transactions

• total value of transactions

• value of interbank payments

• value of customer payments

• value of monetary policy operations

• value of transfers to settlement systems

• value of other transactions.

30 Cf. Danmarks Nationalbank (2015b).


LIST OF PUBLICLY AVAILABLE RESOURCES

Danmarks Nationalbank (2005). Payment Systems

in Denmark, 1st edition, 1 September 2005.

Danmarks Nationalbank (2014a). Getting started

with Kronos, version 1.8, 14 November 2014.

Danmarks Nationalbank (2014b). Oversight of

the Financial Infrastructure in Denmark, 2014.

Danmarks Nationalbank (2015a). Terms and con-

ditions for accounts, Danmarks Nationalbank,

22 June 2015.

Danmarks Nationalbank (2015b). Oversight of

the Financial Infrastructure in Denmark, 2015.

Danmarks Nationalbank (2016a). Assessment of

VP Securities, Danmarks Nationalbank and the

Danish Financial Supervisory Authority, 2016.

Kronos pricing structure, 30 January 2016.

Payment for Kronos and Custody Accounts in

2016, 26 January 2016.

Letter to current account holders at Danmarks

Nationalbank, 30 January 2015.

Danmarks Nationalbank (2012). Assessment of

Kronos according to Core Principles for Systemi-

cally Important Payment Systems, March 2012.

Documents

DANMARKS NATIONALBANK · commercial banks. In other words, Danmarks Nationalbank acts as banker to the banks for payments in Danish kroner. Besides the banks, a number of payment