Financial Sector Assessment Program: Detailed Assessment of the Securities Clearance and Settlement Systems

This paper discusses key findings of the Detailed Assessment of the Securities Clearance and Settlement Systems for Denmark. The assessment recommends that securities settlement systems should have a well-founded, clear, and transparent legal basis in the relevant jurisdiction. Confirmation of trades between market participants should occur as soon as possible after trade execution, but no later than trade date (T+0). Where confirmation of trades by indirect market participants is required, it should occur as soon as possible after trade execution, preferably on T+0, but no later than T+1.


This paper discusses key findings of the Detailed Assessment of the Securities Clearance and Settlement Systems for Denmark. The assessment recommends that securities settlement systems should have a well-founded, clear, and transparent legal basis in the relevant jurisdiction. Confirmation of trades between market participants should occur as soon as possible after trade execution, but no later than trade date (T+0). Where confirmation of trades by indirect market participants is required, it should occur as soon as possible after trade execution, preferably on T+0, but no later than T+1.

I. Introduction

A. General

1. The assessment of the observance of the Committee for Payments and Settlement Systems (CPSS) and the International Organization of Securities Commissions’ (IOSCO) Recommendations for Securities Settlement Systems dated November 2001 was carried out as part of the first Financial Sector Assessment Program (FSAP) mission to Denmark, November 7–18, 2005.1

2. Værdipapircentralen (VP) is the sole central securities depository (CSD) in Denmark and registers the ownership of securities issued in the country and clears and settles securities transactions in the regulated markets and in the over-the-counter (OTC) market.

3. Prior to the mission, Danmarks Nationalbank and Finanstilsynet, the Danish Financial Supervisory Authority (DFSA), as overseers of VP, provided a comprehensive and thorough self-assessment which was used as the basis for this assessment.

B. Scope of the Assessment

4. VP registers, clears, and settles a broad range of securities, such as treasury bills, all other negotiable money market instruments, bonds issued by the public and private sector, mortgage bonds, equities, and investment certificates issued by mutual funds.

5. Derivatives trades in Danish securities are conducted through OMX Derivatives Markets, a secondary name to Stockholm Stock Exchange Ltd (SSE), used for the derivatives trading and clearing operations. When OMX clears derivatives transactions, this means that OMX Derivatives Markets acts as the central counterparty (CCP) for all derivatives trades conducted in this market. The size of the derivatives market in Denmark has so far been relatively small (in mid-2005, around 700,000 contracts were outstanding with an average daily settlement of DKr 1.5 million). Futures and options on Danish securities have previously been listed on the FUTOP (CSE) but have recently been transferred to SSE in connection with the merger of the Nordic and Baltic stock exchanges into the OMX Group AB.2

6. For these reasons, the assessment of systemically important securities settlement systems (SSS) covers only VP as the core institute of the Danish infrastructure for clearing and settlement of securities. No other institution is active as a CSD, SSS, or CCP in Denmark, albeit that the law does allow other entities to offer registration and clearing and settlement services and, thus, does not grant a monopoly to VP.

C. Institutional and Market Structure

7. Denmark’s capital market is mainly a bond market with active trading in mortgage bonds (turnover 2004: 282.5 percent of GDP) and in government paper (turnover:157.5 percent of GDP). In 2004, the total turnover of bonds and treasury bills amounted to 486.7 percent of GDP, against a turnover in listed equities of 40.9 percent of GDP. The trading in derivatives was very modest with 1.3 percent of GDP.

8. Mortgage bonds are issued by mortgage banks according to tight regulations. For instance, the regulation require a matching of cash flows on the loan and funding side (the principle of balance). Thus, almost every mortgage loan in the household sector is mirrored by an outstanding bond issue that is secured by the real estate and financed by the loan. When redemption of a loan is brought forward, the corresponding amount of bonds has to be bought back and taken out of the market. In the past, borrowers were offered only a limited range of products, with long-term rate callable loans as the predominant product. Since 1990, the market has been deregulated and, in conjunction with innovation in the mortgage banking sector, this has led to a far broader menu for borrowers to choose from when financing real estate property. The turnover in the market is particularly high at certain times of the year, for instance at the beginning of January, when outstanding (short-term) mortgage loans have to be refinanced. Interest payments on a mortgage loan are channeled via the mortgage banks and VP to holders of these bonds. Due to the special legislation on Danish mortgage bonds, the outstanding mortgage bonds can be characterized as an asset backed securities, since in case of a default of a mortgage bank, the investors have priority recourse with the underlying real estate as collateral for their claims. Due to its asset backed character and, the high quality of the underlying mortgages, mortgage bonds in Denmark have a very high credit standing.

9. Both bonds and equities can be traded on the CSE.3 All the stock exchanges use the common trading system SAXESS. This trading platform is also operated by the stock exchanges of Iceland and Norway, which together with the OMX exchanges form NOREX, a strategic alliance between the capital markets in the Nordic and Baltic countries.

10. NOREX has implemented a common cross-border trading system with harmonized trading rules and membership requirements. The common infrastructure gives members in the different countries access to an electronic order book for each financial instrument listed on the different exchanges. SAXESS offers functionalities to support both order driven markets and price driven markets. For order driven markets, bids and offers are entered in the relevant book and automatically matched to trades when price, volume, and other order conditions are met. For price driven markets, interests are entered in the relevant order book and transactions are negotiated bilaterally and, if a deal is struck, reported to the system. The CSE has 44 members, mostly local and foreign banks and some specialized broker firms. The total market value of the stock exchange transactions increased by 23.8 percent from 2004 to 2005, of which equity trading increased 57.8 percent during the same period.4

11. However, most of the bond trading is done OTC in the informal telephone market. To enhance transparency in the Danish capital markets, trades in the OTC market must be reported to the CSE. Realized prices and volumes are published on an electronic bulletin board. For government bonds, the 14 primary dealers quote bids and offer prices.

12. Danish government bonds can also be traded on the MTS platform located in Belgium. MTS Denmark was launched by the primary dealers in Danish government securities in 2003. Its objective is to promote international trading in Danish government securities. There are 16 MTS participants of which 2 are clearing members of Euroclear Bank. The daily turnover is approximately DKr 2 billion (US$325 million). MTS Denmark is governed by a committee composed of the Government Debt Management at Danmarks Nationalbank, the Danish Primary Dealers, and a representative of MTS S.p.A.5

13. All securities traded in the regulated markets and in the OTC market are cleared and settled by VP, which is owned by the financial sector and Danmarks Nationalbank. Securities traded on the MTS platform denominated in euros are settled in the International Central Securities Depository’s (ICSD), Euroclear, and Clearstream, where also securities denominated in kroner can be settled. With a view to promoting the efficient settlement of cross-border trades, a very effective link has been developed between VP and Euroclear that allows, among other things, for delivery-versus-payment (DVP) and the settlement of back-to-back transactions without the loss of value dates. Also between VP and Clearstream, a link has been established that allows for the settlement on a DVP basis between participants of VP and the ICSD.

14. The securities registered in VP are all dematerialized and settled on a multilateral netting basis in several settlement cycles during the settlement day. VP does not act as central counterparty, nor does it act as a settlement bank (offering of cash services), and it does not organize a securities borrowing and lending arrangement. Trades can also be settled in VP on a real-time gross basis. All settlements are conducted on a DVP basis with the settlement of the cash leg in central bank money.

15. VP has reached a settlement agreement with Danmarks Nationalbank, which also includes collateral management services by VP for intraday credit granted by the central bank under the so-called “Automatic Collateralization Agreement.” This arrangement, which has a special legal foundation in the Securities Trading Act (STA), is used by the financial sector, among others, for the financing of cash obligations in the different settlement cycles in VP. Under this arrangement, securities in the trading accounts of clearing members can be used as collateral for intraday credit, while further on, the arrangement allows for self-collateralization (by using the securities to be received in a clearing cycle as collateral for an intraday credit from the central bank to finance the securities bought). This arrangement provides settlement members with a very flexible, efficient, and low cost management instrument for collateral, since no special procedures are necessary to pledge securities, and securities do not have to be earmarked as being pledged. Hence they can be substituted and used for trading or other purposes as long as there is excess collateral in the account to cover the outstanding intraday loans. VP, as operator of the automatic collateral accounts, has the contractual obligation to check whether there stays or, there will be, sufficient collateral in the account to secure outstanding intraday credit under this arrangement, before releasing securities from the account or before granting intraday credit on behalf of Danmarks Nationalbank for the settlement of a securities settlement cycle.

16. The transactions settled in VP have been increasing rapidly (Table 1). In 2005, 10.2 million transactions were settled in VP with a market value of DKr 30,924 billion (around US$5,012 billion), made up of DKr 27,485 billion in bonds and DKr 3,439 billion in shares.

Table 1.

Number and Value of Transactions Settled at VP, 2001–05

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Source: Danmarks Nationalbank.

17. Securities in VP are normally registered in the name of the end investor (3.0 million accounts have been opened in VP). Banks and other eligible financial institutions act as account controllers for investors (reporting trades to VP) and offer them cash settlement services (paying transactions and handling of dividends and interest payments for their clients). Large customers such as investment funds or pension funds are allowed to report directly to VP. Account controllers can opt to become clearing members and settle transactions on behalf of their clients. In 2004, VP had 131 clearing members, of which 31 were remote members, i.e., foreign financial institutions located abroad, which act as custodian for clients in their countries that wish to invest in Danish securities. Foreign investors hold especially stocks (28.4 percent of all stocks issued) and bonds (15.9 percent). Foreign custodians are allowed to open omnibus or nominee accounts for their clients and normally do not register the investment directly in the name of the end investors, as is the case for domestic investors. About 56 percent of the turnover in stocks in VP were related to foreign investors.6

18. In addition to registration of securities, VP is doing research for the development of a paperless title registration and exchange system for real estate property. Furthermore, in cooperation with the Soros Economic Development Fund, it is developing a system for issuing and handling mortgage bonds in Mexico, based on the Danish model as described above. This model is seen as conducive to the development of a bond market and unique with respect to efficiency, transparency, security, and the protection of the interests of both borrowers and investors.

D. Description of Regulatory Structure and Practices

19. The Danish Securities Council (the Council) has overall responsibility for the framework within which the securities market operates and for supervision of the market. The main focus of the Council is on market supervision and surveillance. Thus, it issues rules relating to the general conditions under which the Danish securities market operates, as well as rules that regulate clearing and settlement institutions and CSDs. The Council is composed of representatives of securities dealers, issuers and investors, including Danmarks Nationalbank.

20. The DFSA is responsible for regulating the Danish Financial sector. In this framework it is charged with the authorization and prudential supervision of market participants and market institutions. The latter category encompasses the CSE and VP. The task and responsibilities of the DFSA with respect to the securities sector are outlined in the STA.

21. The overall objectives of Danmarks Nationalbank are to maintain a safe and secure currency and to facilitate and regulate the circulation of money and the extending of credit. In the opinion of the central bank this includes monitoring the stability and efficiency of payments and securities settlement systems. In February 2006, this was acknowledged by the Danish Parliament and the oversight task of Danmarks Nationalbank with respect to payment systems was set out in the legislation via an amendment of the STA. Till that moment, the oversight role had been based on agreements with market participants and on moral suasion. The Nationalbank, as the settlement bank of VP, worked out specific requirements to ensure the safety and soundness of the infrastructure for clearing and settlement of securities. These requirements were laid down in the settlement agreement between the central bank and VP, which oblige VP to observe the CPSS/IOSCO Recommendations for Securities Settlement Systems.

22. Danmarks Nationalbank and DFSA work closely together with respect to the oversight of payments and securities settlement systems and have concluded a memorandum of understanding (MoU) on cooperation and coordination concerning oversight. The role of the central bank and the cooperation between the authorities will be laid down in the law and in the amendment to the STA effective March 1, 2006.

E. Information and Methodology used for Assessment

23. The assessment was based on the following:

  • self-assessment carried out by the Danish authorities, using the CPSS/IOSCO assessment methodology for Recommendations for Securities Settlement Systems;

  • self-assessment conducted by VP and the completed questionnaire of the European Central Securities Depository Association (ECSDA) (not yet published); and

  • discussions with Danmarks Nationalbank, the DFSA, VP, and with market participants.

24. The assessment was further enhanced by reference to:

  • relevant laws, rules, and regulations; MoUs; and VP’s annual reports;

  • Payment Systems in Denmark, a book published by Danmarks Nationalbank, which provides an excellent description of Danish clearing and settlement infrastructure;7

  • several articles written by staff members of Danmarks Nationalbank on: (i) the legal basis for clearing and settlement of securities and the provision of collateral; (ii) financial institutions’ accounts at and pledging of collateral to Danmarks Nationalbank; (iii) assessment of settlement risk in VP; (iv) contagion risk in the Danish interbank market; and (v) the Danish mortgage market; and

  • a questionnaire on securities markets completed by Danmarks Nationalbank.

25. All parties were fully cooperative and the discussions were informative and very cordial. The Danish authorities were well prepared for the FSAP, with all relevant documentation being provided well in advance.

II. Assessment of Observance

A. Executive Summary of the Recommendation by Recommendation Assessment

Legal risk (recommendation 1)

26. There is a consistent set of laws, regulations, and contracts that form the legal foundation for custody and clearing and settlement of securities. All relevant laws and regulations are publicly available. Finality is well regulated, also in the case of a bankruptcy, and a zero-hour rule does not exist. Customer assets are protected by law against the bankruptcy of an account controller or custodian. Other key issues, such as dematerialization, netting, securities lending arrangements, and the establishment of collateral interest, are also well regulated. All laws, regulations, and contractual arrangements are fully enforceable.

27. VP is fully aware of possible conflicts of laws in cases of linkages and remote participation and has clearly indicated that Danish law will apply to each aspect of the settlement process. If relevant, conflicts of law are identified through legal opinions.

Pre-settlement risk (recommendations 2-5)

28. Matching and confirmation are essential elements to trigger settlement in VP. All transactions are matched prior to settlement, mostly on trading day. Transactions in the regulated and OTC market are settled on a rolling settlement procedure on T+3 or on a shorter settlement cycle in VP. Incentives are in place to ensure timely settlement and settlement failures are closely monitored.

29. No central counterparty is established in Denmark for the settlement of securities transactions. In the opinion of market participants, such an entity does not add value and might impair the existing efficient settlement arrangements. However, the cost benefit studies were never published and it is difficult to know whether the existing liquidity and replacement cost risks were adequately balanced against the costs of setting up such an entity and whether alternative measures were studied to reduce the existing risks in the markets. Nor is it clear whether the changing risk profiles were taken into account as a result of the implementation of order driven platforms and internationalization of the trading in Danish securities on the stock exchanges of other Scandinavian and Baltic countries in the framework of NOREX and the cross-border trading of Danish government bonds in the European market (MTS-Denmark).

30. Securities lending is well established in Denmark as a method to promote timely settlement and is fully supported by the legal, accounting, and tax framework. A well developed market for securities lending exists, with banks and the Danish government offering securities lending services and Danmarks Nationalbank acting as lender-of-last-resort if, for whatever reason, participants are not able to borrow the securities in the market.

Settlement risk (recommendations 6-10)

31. As one of the first countries to do so, Denmark introduced in 1983 the electronic registration of securities. It has since then been very active in promoting dematerialization of all outstanding securities. At the moment, all shares and bonds traded in regulated markets and in the OTC market are dematerialized, as well as a large amount of unlisted unit trusts.

32. All transactions in VP are settled on a DVP basis in central bank money between clearing members. However, smaller participants in VP make use of a so-called primary cash provider, and are thus exposed to deposit risk. The various netting cycles during the long opening day, as well as the facility for a trade-for-trade RTGS facility, result in almost all trades being settled with intraday finality, and they can be used again for other settlement obligations on the same business day.

33. No rigorous risk control measures are in place to ensure timely settlement in the event of bankruptcy of the participant, with the largest obligation to settle in the deferred netting schemes. However, stress test studies of Danmarks Nationalbank indicate that in the present situation, participants can raise sufficient liquidity under the automatic collateralization arrangement to reduce the liquidity pressure that may occur in such an event. However, the effects of multiple failures were not analyzed.

Operational risk (recommendation 11)

34. VP has developed an appropriate information technology (IT) security policy and has proactively assessed possible threats to the system and the organization. The risk and the adequacy of the risk control measures are reviewed annually. Adequate contingency plans and back-up facilities are available and tested periodically. Operational reliability is high and sufficient capacity is available to handle stress volumes.

Custody risk (recommendation 12)

35. In Denmark, investors are protected against claims of an account controller, custodian, or VP. Normally, securities are directly registered in VP in the name of the end- investor. In case of the use of omnibus or trustee accounts, segregation of the custodian’s own investments and the securities of its clients is required. Liabilities of account controllers and custodians are clearly defined and monitored and ample compensation schemes are in place in case of theft, misuse, or errors.

Other issues (recommendations 13-19)

36. The governance structure of VP is clearly specified, transparent, ensures the fulfillment of public interest requirements, and promotes the objectives of owners and users. The access criteria do not limit access other than on grounds of legal risk to finality. The operations of the CSD are cost effective and VP provides its participants with sufficient information to identify the risks and costs associated with using the system. VP has developed efficient and safe DVP links with Euroclear and Clearstream and free-of-payment (FOP) links with Iceland and Sweden. No provisional deliveries take place over these links.

37. VP is supervised and regulated by the DFSA under the STA. Danmarks Nationalbank is also involved in the oversight based on its responsibility for safe and efficient payment arrangements as defined in the central bank act. The cooperation and coordination between the two authorities are effectively organized and laid out in a MoU.

Steps to be taken to achieve full observance

38. To achieve full observance, the effects of the failure of the largest participant and the effects of multiple failures should be analyzed in more depth. In addition, the costs involved in guaranteeing the settlements or preventing losses in the event of significant failures should be determined, for instance by collateralization of the market risks and the establishment of a CCP. Within this context, the changing risk profiles due to cross-border trading and the use of order driven trading platforms should be taken into account, since these make it difficult to manage counterparty risk.

Table 2.

Summary Observance of CPSS-IOSCO Recommendations for Securities Settlement Systems—Væerdipapircentralen

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B. Detailed Assessment

Table 3.

Observance of CPSS-IOSCO Recommendations for Securities Settlement Systems—Væerdipapircentralen

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Table 4.

Recommended Actions to Improve Observance of CPSS-IOSCO Recommendations for Securities Settlement Systems—Væerdipapircentralen

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Authorities’ response

Danmarks Nationalbank and the DFSA found that the IMF has made a very thorough and comprehensive assessment of the Danish securities settlement system (VP-afviklingen) and essentially agreed with the IMF’s recommendations. Although the need for a pool of collateral and a loss-sharing agreement historically have not been deemed necessary in Denmark, Danmarks Nationalbank will review the benefits and costs in introducing additional measures to reduce the settlement risks in Danish securities trading. In this context benefits and costs of a central counterparty will also be evaluated. Furthermore, we will address the potential effects of an increase in foreign participation in the system. However, we would like to emphasize that the participants generally have far more eligible collateral than needed for their daily net payments not only in VP settlement, but also in the Sumclearing and CLS.14

Supervision of concentration risks that may stem from indirect participation with regard to payments in the VP-system is already part of the supervision of the “indirect participants” and the payment providers by the DFSA. However, based on the recommendations of the IMF, steps will be taken to further formalize supervision in this area.

Central bank responsibilities

The recommendations to further strengthen the oversight of the Danish payment and settlement systems are consistent with the self-assessment done by Danmarks Nationalbank. It should be noted though that important steps towards full observance of the international standards on central bank oversight have already been taken. The legal basis, for instance, has been strengthened by an amendment to the Securities Trading Act, which has become effective from March 1, 2006. Following this amendment, the “Memorandum of Understanding between Danmarks Nationalbank and the Danish Financial Supervisory Authority concerning Payment Systems and Clearing Centres” will be revised with a view to further enhancing the cooperation between the two authorities. In addition, Danmarks Nationalbank will take the necessary steps to broaden the oversight of the retail payment system (Sumclearingen) with a view to cover all major components of the system, including different payment instruments and sub-clearings. High priority will be assigned to formalize the oversight task through written procedures and guidelines. Thus, full observance is expected to be achieved in 2006.


The assessment was performed by Jan Woltjer, Monetary and Financial Systems Department (MFD), International Monetary Fund (IMF).


For information on the OMX Group, see:


In Denmark, there is also a small marketplace for nonlisted stocks called Dansk Authoriseret Markedsplads A/S. For more information, see


In 2004, trading in bonds at CSE amounted to DKr 7,059 billion and in 2005 DKr 8,534 billion, while the trading in equities during the same period amounted to, respectively, DKr 593 billion and DKr 936 billion. Note, however that the blue-chip index (OMXC20) increased 37¼ percent during 2005.


For details on MTS, see:


The take-over of one of the largest companies, TDC (a telephone company), and the envisaged delisting in 2006, may have contributed to these figures.


The book is available on the website of Danmarks Nationalbank:


Only government bonds and mortgage bonds are eligible, but these securities are the most common tradable securities in Denmark. Next to the automatic collateralization scheme, participants can transfer eligible securities in VP to a so called pooling pledge account. This account is used to collateralize overdrafts on the current account the participant have with Danmarks Nationalbank and monetary policy transaction. Participants use their current account to transfer cash to the VP settlement account in KRONOS. The sum of the cash in the VP settlement account in KRONOS and the liquidity that can be raised under the automatic collateralization scheme forms the cash cover and the liquidity buffer


The STA allows other institutions that fulfill certain conditions stated in the law, to enter the market and provide registration and clearing and settlement services as a CSD and hence to compete with VP. At the moment no other institutions has requested approval of the DFSA to operate a CSD in Denmark.


As indicated under rec. 3, under the automatic collateralization agreement participants can use all eligible securities in their trading account, as well as eligible securities to be delivered in the clearing (selfcollateralization). VP, as administrator on behalf of Danmarks Nationalbank calculates automatically the potential amount that can be raised, taking into account the applicable haircuts set by Danmarks Nationalbank. Loans granted under the agreement have to be redeemed before 1.30 p.m. the same day.


See page 97–105 “Assessment of Settlement Risk in VP Securities Services,” in the Financial Stability Report 2005 (Copenhagen: Danmarks Nationalbank). Available on


For details, see the website of VP:


See Monetary Review, 2nd quarter, 2001, page 89–90 (Copenhagen: Danmarks Nationalbank), which is available on: n


In a study triggered by this assessment, it was demonstrated that in 2005, all larger banks’ eligible collateral significantly exceeded their total net payment obligations in all systems—even when the participant with the largest net payment obligation was withdrawn from the settlement on every day during 2005 and all the remaining participant’s net positions were recalculated. Among the minor banks, however, only a handful of banks had recalculated net positions, which on very few days surpassed the value of their eligible collateral. However, this reflects flaws in the methodology used in the study that tends to exaggerate the effects on small banks and does not include the fact that banks can pledge securities for intraday credit already in the settlement cycle in which the securities are received. The study “Protection of Settlement in Danish Payment Systems” can be found in Financial Stability 2006 published by Danmarks Nationalbank (Copenhagen). It is available on: