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The Monetary- and Foreign-Exchange-Policy Instruments
Danmarks Nationalbank's activities are reflected in the composition of assets and liabilities on its balance sheet, cf. Table 1.1.
Danmarks Nationalbank's primary tasks are to issue banknotes and coins and to conduct monetary and foreign-exchange policy. A derived effect is that Danmarks Nationalbank has claims in kroner and in foreign exchange. Consequently, Danmarks Nationalbank cannot avoid incurring a number of financial risks that affect its financial result, primarily the risk of losses due to fluctuations in interest and exchange rates in the Danish and international financial markets. It is important for a central bank to ensure absolute confidence in its solvency so that revenue considerations do not curtail its ability to conduct monetary and foreign-exchange policy. Its net capital must therefore be significant in relation to its balance sheet and activities, and consolidation should take place on an ongoing basis.
Danmarks Nationalbank's profit after allocations to reserves is payable to the central government. In 2002 the profit paid to the central government amounted to kr. 3.6 billion. At end-2002 Danmarks Nationalbank's net capital was approximately kr. 50 billion.
In addition to krone-denominated transactions with the monetary-policy counterparties, Danmarks Nationalbank's balance sheet is primarily affected by transactions related to Danmarks Nationalbank's role as banker to the central government and to the purchase and sale of foreign exchange in the market. The following sections elaborate on the individual items of Danmarks Nationalbank's balance sheet and their relation to the monetary and foreign-exchange policy.
The net position vis-à-vis Danmarks Nationalbank is the term used for Danmarks Nationalbank's net balance with banks and mortgage-credit institutes the monetary-policy counterparties in relation to the monetary-policy instruments. The net position is calculated as the counterparties' current-account deposits as well as placements in certificates of deposit, less monetary-policy loans from Danmarks Nationalbank. Bonds in Danmarks Nationalbank's portfolio are not included in the net position even though they are issued by e.g. a mortgage-credit institute which is a monetary-policy counterparty. Nor are the counterparties' holdings of banknotes and coins included in the net position. This reflects that neither Danmarks Nationalbank's portfolio of mortgage-credit bonds nor variations in the circulation of banknotes and coins are any longer of significance to the monetary policy, cf. Sections 1.5.4 and 1.5.5.
All other items of a central bank's balance sheet i.e. all items except the net position are usually referred to as "autonomous items". In numeric terms, the autonomous items on a central bank's balance sheet exactly correspond to the monetary-policy counterparties' net position vis-à-vis the central bank. Changes in the autonomous items are therefore reflected in equivalent changes in the net position. In Danmarks Nationalbank's case this relationship is best illustrated by a few examples.
When Danmarks Nationalbank needs to support the exchange rate of the krone,it purchases kroner from e.g. a bank against payment in foreign exchange. This transaction reduces the foreign-exchange reserve and the net position, cf. Table 1.2.
Another example is a central-government payroll disbursement. This reduces the balance of the central government's account and is offset by an increase in the net position, cf. Table 1.3.
Not all Danmarks Nationalbank's transactions have an impact on the net position. For instance, foreign-exchange transactions with the centralgovernmentdonotaffectthe net position. When the central government raises foreign loans, Danmarks Nationalbank exchanges the central government's loan proceeds in foreign exchange for kroner. Hereby only the central government's deposit with Danmarks Nationalbank and the foreign-exchange reserve will increase, cf. Table 1.4.
In the longer term the net position is especially influenced by Danmarks Nationalbank's net purchases of foreign exchange. The central government's net payments in kroner result in large fluctuations within the individual year, but are of minor significance in the longer term, cf. Section 1.5.2. Fluctuations in the net position due to other autonomous items are usually small. The relationship between the net position and Danmarks Nationalbank's purchase of foreign exchange is illustrated in Chart 1.10.
Danmarks Nationalbank is the main banker to the Danish central government, and the central government holds a current account at Danmarks Nationalbank. Deposits to the central government's account accrue interest at the discount rate. The account holds the central government's liquid funds and is used to settle large central-government payments. Other public authorities (municipalities and counties) do not hold accounts at Danmarks Nationalbank their ingoing and outgoing payments are handled via commercial banks.
The central government's outgoing retail payments are outsourced to the banking sector, so that Danmarks Nationalbank pays out an aggregated sum to a bank, which handles the further distribution of the funds. Ingoing payments to the central government e.g. VAT are typically also handled by banks, which then transfer the funds to Danmarks Nationalbank.
Under an agreement with the Ministry of Finance, Danmarks Nationalbank undertakes all functions related to raising and managing the central-government debt. Even though the central government holds an account at Danmarks Nationalbank, it does not borrow from Danmarks Nationalbank. Central-government borrowing is structured so as to ensure adequate funds on the central government's account to absorb the significant daily fluctuations in ingoing and outgoing central-government payments. If there is a risk that the central government's account will be overdrawn, the central government raises a loan on market terms, and the proceeds are credited to the central government's account. The Treaty Establishing the European Community prohibits credit facilities with the central bank in favour of the central government in order to avoid monetary financing of government deficits. The Treaty also prohibits the purchase of government securities directly from the central government by the central bank.
In Denmark a framework for raising central-government loans has furthermore been established in the form of a "norm", cf. Box 1.10. In overall terms the agreement states that the central government's krone-denominated borrowing normally covers the central government's gross domestic financing requirement, i.e. the central government's current deficit and redemptions on the domestic debt, for a given fiscal year. The norm ensures that the central government's payments have virtually no impact on the liquidity situation of the monetary-policy counterparties over the entire year.
Chart 1.11 shows the development in the central government's deposits with Danmarks Nationalbank at year-end. The large increase in 1993 reflects substantial short-term foreign loans to safeguard the foreign-exchange reserve in connection with the currency unrest in 1993.
Within each year there are temporary fluctuations in the liquidity effect from the central government due to time lags between the central government's gross domestic financing requirement and its krone-denominated borrowing.
On Danmarks Nationalbank's balance sheet fluctuations in central-government payments are reflected in the central government's balance and in the net position. Chart 1.12 shows the payments to and from the central government's account, excluding movements related to the central government's foreign debt. It is seen that the liquidity effect fluctuates considerably, e.g. in 2002 from liquidity absorption of around kr. 15 billion in February to liquidity expansion of around kr. 20 billion in March.
Changes in the central government's foreign debt have no impact on the net position, but on Danmarks Nationalbank's foreign-exchange reserve. Changes in the central government's foreign debt are the dominant reason for fluctuations in the central government's balance with Danmarks Nationalbank over a number of years.
The foreign-exchange reserve is an asset on Danmarks Nationalbank's balance sheet. The foreign-exchange reserve consists of secure and liquid assets that are mainly deposits with foreign banks and foreign securities that can quickly be sold or pledged as collateral should the need arise. In addition, Danmarks Nationalbank's gold stock is also included in the foreign-exchange reserve, cf. Box 1.11.
The primary purpose of the foreign-exchange reserve is to allow Danmarks Nationalbank to intervene rapidly in the foreign-exchange market at its own initiative if required. By intervening, i.e. purchasing or selling foreign exchange against kroner, Danmarks Nationalbank can influence the krone rate at least in the short term. When foreign exchange is sold, the krone is strengthened, while purchase of foreign exchange will weaken the krone. The foreign-exchange reserve serves as a buffer against undesirable fluctuations in the krone rate. In addition, the size of the foreign-exchange reserve has a signal value which may prevent any speculation from arising.
The foreign-exchange reserve does not constitute an upper limit for Danmarks Nationalbank's intervention capacity:
Changes in the foreign-exchange reserve stem primarily from two sources, i.e. the raising of government loans and Danmarks Nationalbank's purchases of foreign exchange, as well as adjustments to the foreign-exchange reserve to reflect changes in stock-exchange prices and exchange rates. Chart 1.13 shows the development in the foreign-exchange reserve and the central government's foreign debt since 1987.
Previously, e.g. in the 1960s, Danmarks Nationalbank's purchase and sale of krone-denominated bonds in the market was considered to be an important monetary-policy instrument for influencing bond yields and economic activity.
In view of today's free movement of capital such operations are not considered effective in influencing long-term yields, cf. Chapter 3. Consequently the portfolio of domestic bonds is not used as a monetary-policy instrument. Monetary policy is arranged to manage the short-term money-market interest rates with a view to maintaining a stable krone vis-à-vis the euro. Danmarks Nationalbank's bond portfolio is thus a portfolio of investment securities.
Banknotes and coins in circulation are important liabilities on Danmarks Nationalbank's balance sheet, but in terms of monetary policy variations in circulating banknotes and coins are of no significance, cf. also Chapter 4.
The circulation of banknotes and coins as means of payment is affected primarily by the scale of private consumption, but banknotes are also used for savings purposes to some extent. Danmarks Nationalbank adjusts the volume of banknotes and coins in circulation to the citizens' demand. The development in the circulation is normally rather stable from year to year, but there are seasonal fluctuations within each year, cf. Chart 1.14.
Over time the circulation of banknotes and coins has increased in step with private consumption despite the more widespread use of electronic payment methods, e.g. via the Dankort (debit card). At end-2002, banknotes and coins in circulation amounted to approximately kr. 48 billion, equivalent to around kr. 9,000 per citizen.
Banknotes and coins are put into circulation via the banks, which obtain them from Danmarks Nationalbank, so that citizens' cash requirements can be met. An increase in circulation is offset by a decrease in the net position, cf. Table 1.5.
The circulation of banknotes and coins can be seen as a non-interest-bearing deposit with Danmarks Nationalbank, whereas the monetary-policy counterparties' net position bears interest. After deduction of costs of production and distribution, banknotes and coins are therefore a significant source of income for Danmarks Nationalbank. This income is known as seigniorage.
Danmarks Nationalbank operates in the foreign-exchange market for the following reasons:
Danmarks Nationalbank intervenes in the foreign-exchange market to stabilise the krone in the short term, cf. Section 1.2. If, for instance, there is en tendency for the krone to weaken in the foreign-exchange market, Danmarks Nationalbank may sell foreign exchange and purchase kroner in order to counteract this tendency. When Danmarks Nationalbank sells foreign exchange and purchases kroner, the krone will tend to strengthen due to Danmarks Nationalbank's impact on the demand for kroner. By intervening Danmarks Nationalbank furthermore signals its willingness to defend the krone rate, which may also impact on the supply and demand of kroner in the market.
Within the framework of ERM II a distinction is made between two types of intervention.
Intramarginal intervention takes place when the krone rate vis-à-vis the euro is within the fluctuation band of +/- 2.25 per cent around the central rate. In the period from the launch of ERM II in 1999 and to date (early June 2003) only Danmarks Nationalbank has conducted intramarginal intervention. The ERM II agreement does, however, allow Danmarks Nationalbank and the ECB to conduct coordinated intramarginal intervention.
Intervention at the margin takes place if the krone rate vis-à-vis the euro reaches the upper or lower limit of the fluctuation band around the central rate. In this case both Danmarks Nationalbank and the ECB have an obligation to intervene. The ECB and Danmarks Nationalbank may, however, suspend intervention if this is in conflict with the primary monetary-policy objective. Since the krone has remained close to its central rate throughout the lifetime of ERM II to date (early June 2003), intervention at the margin has not yet been necessary.
A well-functioning system has been established with prior approval of intervention within the framework of ERM II. The prior acceptance of the ECB is required when Danmarks Nationalbank wishes to conduct intramarginal foreign-exchange transactions in euro for amounts exceeding the agreed limits. Likewise, the ECB must obtain the prior acceptance of Danmarks Nationalbank if it wishes to undertake foreign-exchange transactions in kroner above an agreed amount.
As stated in Section 1.2, Danmarks Nationalbank operates with both intervention and interest-rate changes in its management of the krone rate. Whether to intervene and/or change the monetary-policy interest rates are independent decisions, since intervention and interest-rate changes may be applied independently of each other. If there is e.g. a tendency for the krone to weaken, Danmarks Nationalbank normally opts for one or several of the following:
Changes in the monetary-policy interest rates and invention may thus to some extent substitute each other in relation to management of the krone rate. Isolated intervention primarily takes place in order to absorb minor or temporary fluctuations in the krone rate. In connection with a prolonged inflow or outflow of foreign exchange with no actual pressure on the krone the intervention is normally supplemented with minor fine-tuning interest-rate changes, e.g. in the range of 0.05 per cent. In the event of a sustained large outflow of foreign exchange and pressure on the krone Danmarks Nationalbank will normally not only intervene, but also raise interest rates more significantly, e.g. by 0.25 or 0.5 per cent. Speculative attacks on the krone may lead to considerably higher interest-rate increases.
Danmarks Nationalbank's purchase and sale of foreign exchange will be reflected in the monetary-policy counterparties' net position vis-à-vis Danmarks Nationalbank, cf. Section 1.5. If Danmarks Nationalbank sells foreign exchange, the net position will decrease, while purchase of foreign exchange will increase the net position. In a fixed-exchange-rate regime the net position will therefore have a residual character. This can also be seen from the fact that Danmarks Nationalbank has no objective for the size of or sign preceding the monetary-policy counterparties' net position vis-à-vis Danmarks Nationalbank.
Due to the relationship between foreign-exchange intervention and the net position, intervention also influences Danmarks Nationalbank's use of its instruments.
For instance, if a foreign-exchange sale is settled at a time when Danmarks Nationalbank is not conducting regular market operations, the sale is reflected in lower current-account deposits when the payments are settled (normally 2 banking days after the trade day). In the event of major intervention an aggregate liquidity deficit may arise, and Danmarks Nationalbank will have to provide liquidity via extraordinary market operations to ensure that the aggregate current-account deposits do not fall below zero. This may be achieved by e.g. opening for buy-back of certificates of deposit.
On the other hand, purchase of foreign exchange may entail that the total current-account deposits approach the limit of around kr. 20 billion. In that case Danmarks Nationalbank will sell certificates of deposit so that the current-account limit is not exceeded, cf. Section 1.3.1.
In the weekly market operations the counterparties are free to distribute their net position on current-account deposits, certificates of deposit and monetary-policy loans within the framework of the current-account-limit system. In the longer term the actual size of the current-account deposit will therefore be independent of the intervention scope and correspond to the current-account deposit desired by the counterparties within the range of kr. 0-20 billion.
Abildgren, Kim (2002), Experience with the Eurosystem's Weekly Open Market Operations, Danmarks Nationalbank, Monetary Review, 4th Quarter.
Angelius, Thomas and Astrid Henneberg Pedersen (2002), Danmarks Nationalbank's New Payment System, Kronos, Danmarks Nationalbank, Monetary Review, 1st Quarter.
Bie, Ulrik and Astrid Henneberg Pedersen (1999), The Role of Gold in the Monetary System, Danmarks Nationalbank, Monetary Review, 3rd Quarter.
Christoffersen, Tina and Marie Jakobsen (2003), New Interest-Rate Statistics, Danmarks Nationalbank, Monetary Review, 2nd Quarter
Danmarks Nationalbank (1998), Denmark's Participation in ERM II, Danmarks Nationalbank, Monetary Review, 4th Quarter.
Danmarks Nationalbank (2001), Financial Institutions' Accounts at and Pledging of Collateral to Danmarks Nationalbank, Danmarks Nationalbank, Monetary Review, 4th Quarter.
Danmarks Nationalbank (2003a), Documentation for monetary-policy instruments and settlement of payments in DKK, EUR and SEK, 2 June.
Danmarks Nationalbank (2003b), Use of Monetary-Policy Instruments, Monetary Review, 1st Quarter.
Official Journal of the European Communities (1998), Agreement of 1 September 1998 between the European Central Bank and the national central banks of the Member States outside the euro area laying down the operating procedures for an exchange rate mechanism in stage three of Economic and Monetary Union (98/C 345/05), 13.11.98.
ECB (2001), The Monetary Policy of the ECB.
ECB (2002), The single monetary policy in the euro area. General documentation on Eurosystem monetary policy instruments and procedures, April.
ECB (2003), Measures to improve the efficiency of the operational framework for monetary policy, Press Release, 23 January.
Hansen, Ib and Christian Ølgaard (2000), Danmarks Nationalbank's Risk Management, Danmarks Nationalbank, Monetary Review, 2nd Quarter.
Jayaswal, Peter (2003), Danmarks Nationalbank's Portfolio of Domestic Securities, Danmarks Nationalbank, Monetary Review, 2nd Quarter.
Jensen, Peter Kjær (1999), The Foreign-Exchange Reserve, Danmarks Nationalbank, Monetary Review, 1st Quarter.
Køhler, Majken and Jesper Ulriksen Thuesen (1997), Institutional Conditions for Denmark outside EMU (in Danish), Danmarks Nationalbank, Kvartalsoversigt, May.
Pedersen, Erik Haller and Tom Wagener (1996), Circulation of Notes and Coins in Denmark, Danmarks Nationalbank, Monetary Review, November.
Pedersen, Erik Haller and Tom Wagener (2000), Compilation of Seigniorage, Danmarks Nationalbank, Monetary Review, 4th Quarter.
Wagener, Tom (1998), Denmark's Cash Supply System, Danmarks Nationalbank, Monetary Review, 3rd Quarter.
The Danish krone payment system is based on the banks, which handle the vast majority of all financial transactions in Denmark. A wide range of payments e.g. payrolls, payments for goods and services by cheque or Dankort (debit card), purchases of securities, etc. involve transfers between bank accounts.
The payments between participants in the payment system are to a large extent settled via accounts with Danmarks Nationalbank. Some payments are settled directly via the current accounts, while other types of payments are first collated and compiled (cleared) in a separate system outside Danmarks Nationalbank before they are settled via accounts with Danmarks Nationalbank.
Danmarks Nationalbank is the settlement bank for a number of systems, which are briefly outlined below. Table 1.A.1 provides an overview of the volume of transactions in the systems in 2002.
Participation in Kronos is compulsory for current-account holders at Danmarks Nationalbank. Kronos functions as the current-account holders' "home banking system" whereby they have direct access to their accounts at Danmarks Nationalbank via their own computer screens. A bank can thus manually transact online payment transfers from its own current account to other banks' current accounts with Danmarks Nationalbank.
Kronos is open for payments in Danish kroner between 7.00 a.m. and 4.30 p.m., except between 3.30 p.m. and 4.00 p.m. when the counterparties' accounts with Danmarks Nationalbank are settled at the start of a new monetary-policy day. However, in the period from 4.00 p.m. to 4.30 p.m. liquidity may only be transferred to settlement accounts for overnight settlement of payments related to securities registered with VP Securities Services or in connection with the Sumclearing.
For a detailed description of Kronos, see Angelius and Pedersen (2002).
Prior to settlement via Danmarks Nationalbank the banks transfer sufficient funds from their current accounts to their settlement accounts with Danmarks Nationalbank. Danmarks Nationalbank then reports the amounts to PBS, which handles the clearing (netting). PBS checks that net deficits in the clearing are within the reported amounts and submits the net statement to Danmarks Nationalbank. The latter enters the net items to the settlement accounts. The banks themselves book the underlying retail transactions after settlement of the net positions via Danmarks Nationalbank.
The VP System
Settlement takes place several times a day at fixed times when the participants' positions in respectively securities and money are calculated. Danmarks Nationalbank handles settlement of the monetary positions. In principle securities transactions are settled via withdrawal from the buyer's current account with Danmarks Nationalbank and registration of the purchase on the buyer's securities account at VP. Buyers who do not hold accounts with Danmarks Nationalbank settle via another account holder connected to VP. Monetary positions are settled simultaneously with the securities. This ensures that both money and securities are present. This is known as Delivery versus Payment or DvP.
Many international investors have deposited their Danish securities with Euroclear. Euroclear is connected to VP via a direct link that enables the transfer of the Danish securities between Euroclear and VP without loss of trading days (value days). The close coordination between VP's settlement cycle and Euroclear's makes it possible to transfer the same securities to and from Euroclear and VP several times during the same day.
CLS is a private banking company established and owned by the world's largest commercial foreign-exchange dealers. In CLS currency trades are settled according to the "payment versus payment" principle, whereby both parties to a currency trade must first pay their part of the trade into CLS before the payments are exchanged. In this way neither party incurs a settlement risk by paying its part of the trade without being certain of receiving payment from the counterparty.
At the beginning of 2003 currency trades could be settled in US, Australian and Canadian dollars, euro, Japanese yen, pounds sterling and Swiss francs. Danish and Norwegian kroner, Swedish kronor and Singapore dollars are expected to join CLS in the 2nd half of 2003. Ingoing and outgoing payments related to the currency trades settled in CLS are effected via the national payment systems of the participating currencies and booked to accounts with the central banks of the respective currencies. When the Danish krone joins CLS, the krone part of currency trades involving Danish kroner will be settled by means of Kronos via accounts with Danmarks Nationalbank.
Danmarks Nationalbank regularly publishes a wide range of information of interest in the context of monetary and foreign-exchange policy, cf. the lists in Tables 1.B.a and b.
At 4.00 p.m. on banking days Danmarks Nationalbank publishes information on the net position at 3.30 p.m. on the same day and on the use of instruments. The content corresponds to Box B.1.
To assist the monetary-policy counterparties in their liquidity planning, Danmarks Nationalbank regularly issues forecasts of central-government payments. At the same time dates are published for Danmarks Nationalbank's planned purchase and sale of certificates of deposit. Danmarks Nationalbank's forecasts of central-government payments include a monthly and a day-to-day distribution, cf. Box B.2.
On banking days Danmarks Nationalbank publishes information on the central government's sale of domestic government securities. This information is published at 8.00 a.m. on the following day. Treasury notes and government bonds are usually sold with three days' value, while Treasury bills are normally sold with two days' value.
On the 1st banking day of each month an updated overview is published of the central government's domestic borrowing requirement, including details of the volume of the central government's foreign-exchange swaps from kroner to euro in the current fiscal year.
On the 2nd banking day of each month Danmarks Nationalbank issues a press release with information on the central government's actual financing requirement in the preceding month, as well as Danmarks Nationalbank's total net foreign-exchange purchases during the preceding month.
Box B.3 gives an example of how the various information is linked in relation to an analysis of the liquidity development.
Access to and use of accounts at Danmarks Nationalbank are determined in Danmarks Nationalbank's terms and conditions for accounts (Documentation for monetary-policy instruments and settlement of payments in DKK, EUR and SEK), cf.DanmarksNationalbank(2001and2003a). The terms and conditions constitute the concrete implementation of the overall framework for use of Danmarks Nationalbank's credit facilities and pledging of collateral at Danmarks Nationalbank. The terms and conditions are regularly updated and adjusted and can be viewed at Danmarks Nationalbank's website, www.nationalbanken.dk, under "Monetary policy", "Instruments", or under "Rules", "Monetary and foreign-exchange policy".
In addition to the above information Danmarks Nationalbank regularly publishes articles on various aspects of the monetary- and foreign-exchange-policy instruments or monetary and foreign-exchange policy in general in its Monetary Review, which is published quarterly (in February, May, September and November), and in Danmarks Nationalbank's Report and Accounts, published in March each year.
Furthermore, the Board of Governors of Danmarks Nationalbank regularly presents opinions on monetary- and foreign-exchange-policy issues in speeches, lectures, articles, interviews in news media, and at meetings in various fora, etc. Many of these can be found at Danmarks Nationalbank's website, www.nationalbanken.dk, and in its Monetary Review or Report and Accounts.
Danmarks Nationalbank's quarterly statistics for the trading volume in cash market products in the Danish money market and the BIS-coordinated survey of the Danish foreign-exchange and derivatives markets can be found in the statistical publications at Danmarks Nationalbank's website, www.nationalbanken.dk, under "Statistics".
Finally, Danmarks Nationalbank publishes a Working Paper series, which at intervals includes analyses of monetary issues of a more research-oriented nature. Danmarks Nationalbank's Working Papers are available at www.nationalbanken.dk under "Publications", "Publication overview".
Danmarks Nationalbank requires collateral for all types of lending. This not only applies to monetary-policy loans, but also to e.g. intra-day loans.
As collateral for krone-denominated loans Danmarks Nationalbank accepts most of the following securities denominated in Danish kroner, listed on the Copenhagen Stock Exchange and registered with VP Securities Services:
In addition, Danmarks Nationalbank may determine which other assets can be pledged as collateral for krone-denominated credit facilities, subject to a specific assessment. Certificates of deposit may also be pledged as collateral, but only for current-account overdrafts within the same day (intra-day credit).
The assets that can be pledged as collateral for monetary-policy loans amount to around kr. 2,000 billion, of which the monetary-policy counterparties hold approximately 1/5, cf. Table 1.C.1.
The pledging of collateral to Danmarks Nationalbank is structured so that a joint pool of pledged securities deposited with VP Securities Services may be pledged as collateral for both monetary-policy loans and intra-day loans. In practice the counterparties pledge the securities by transferring assets via the IT system DN Inquiry and Transfer System to a custody account with VP Securities Services that has been pledged to Danmarks Nationalbank. The counterparties may replace the collateral during the term of the loan by first placing securities in and then taking securities out of the pledged custody account.
Due to day-to-day fluctuations in the market value of the pledged securities, the value of the pledged custody account constantly changes. To minimise the risk that the value of the counterparty's monetary-policy loan exceeds the value of the pledged securities, the collateral value of the pledged securities is calculated by making certain securities-specific deductions ("haircuts") from their market value, depending on the securities' residual maturity and liquidity. For instance, only 98 per cent of the market value of a fixed-rate Danish government bond with a remaining term to maturity of 3-7 years may be pledged, cf. Table 1.C.2. In addition there is a general requirement for excess coverage, or margin, of 2 per cent, so that a loan of kr. 100 requires a minimum collateral value of kr. 102. If the collateral value of the pledged securities decreases during the term of the loan, further collateral must be pledged. To facilitate the day-to-day management of the collateral deposit, supplementary collateral is only required when the collateral value of the pledged securities falls below 101 per cent of the outstanding 14-day loans and loans for cash deposits. When the supplementary collateral has been called for, the collateral value must again exceed the outstanding loans plus the 2-per-cent margin.
Pledging of collateral for loans from Danmarks Nationalbank is described in more detail in Danmarks Nationalbank (2001 and 2003a).
 The profit for 2002 was allocated according to the following principles: positive value adjustments are allocated to the Value Adjustment Reserve. Negative value adjustments are covered from the Value Adjustment Reserve, if possible. After allocation to/from the Value Adjustment Reserve, 20 per cent of the resulting profit is allocated to the General Reserves for consolidation purposes. The remaining 80 per cent of the profit is payable to the central government. Danmarks Nationalbank's accounts and risk management are described in more detail in Hansen and Ølgaard (2000) and in Danmarks Nationalbank, Report and Accounts.
 The central government's domestic and foreign borrowing is described in Danmarks Nationalbank's annual publication "Danish Government Borrowing and Debt".
 For a more detailed description of the foreign-exchange reserve, see Jensen (1999).
 For a more detailed description of the portfolio of domestic bonds, see Jayaswal (2003).
 The cash supply and the significance of banknotes and coins in circulation to Danmarks Nationalbank's revenue is considered in Pedersen and Wagener (1996 and 2000) and Wagener (1998).
 At end-2002 Danmarks Nationalbank's foreign-exchange reserve, in addition to euro, included positions in US dollars, pounds sterling and Swedish kronor, of which virtually all had been converted to euro via forward contracts.
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