Monetary Policy in Denmark

Adjustable-rate loan
In Denmark this term often refers to a mortgage-credit loan for which the rate of interest is adjusted to the current market terms with a pre-specified frequency, e.g. annually.

Arbitrage
The simultaneous purchase and sale of a financial asset to exploit minor price differences in order to obtain a risk-free gain. The simultaneous purchase and sale of one currency against another is called currency arbitrage.

Banking days
Business days of the financial sector (and Danmarks Nationalbank).

Basis point
1 basis point is 0.01 percentage point. Applied especially to interest-rate changes and interest-rate spreads.

BIS (Bank for International Settlements)

BIS is an international organisation whose objective is to promote monetary and financial stability. BIS is also often referred to as "central banker to the central banks".

Central rate
In ERM II a bilateral central rate vis-à-vis the euro is fixed for the currency of each participating country. See under ERM II.

Certificates of deposit
Zero-coupon papers issued by Danmarks Nationalbank as part of its monetary policy. Certificates of deposit may be traded among the monetary-policy counterparties, but cannot be negotiated outside their circle. Trading in certificates of deposit is a way of exchanging liquidity without credit risk for settlement on the same day.

CIBOR (Copenhagen InterBank Offered Rate)
Reference interest rate on the Danish money market for a number of financial contracts. CIBOR is the interest rate at which a bank is willing to lend uncollateralised krone liquidity to another prime bank on the Danish money market. Danmarks Nationalbank calculates CIBOR on the basis of interest rates reported daily by currently 8 individual banks. CIBOR corresponds to EURIBOR on the European money market.

Clearing
Compilation of purchases and sales of financial contracts as the basis for calculation of the parties' gross or net positions.

Examples are cheque clearing, clearing of Dankort transactions and transfers via BetalingsService (direct debit), etc. in connection with netting in the Sumclearing. All payments to and from an individual participant are netted as one payment, which is then settled via the participants' accounts at Danmarks Nationalbank. See also Settlement.

CLS (Continuous Linked Settlement)
International system for settlement of currency trades. 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 to CLS before the payments are exchanged. In this way neither party incurs a settlement risk from paying its part of the trade without being sure 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.

Commercial Paper (CP)
Zero-coupon paper with maturity of up to one year. The Danish central government has CP programmes in foreign currency that give access to raise foreign loans at short notice, e.g. to strengthen the Foreign-exchange reserve.

Conversion
Conversion of loans. Most fixed-rate mortgage-credit loans in Denmark are subject to a conversion right whereby the loans can e.g. be converted to loans at lower interest rates, should this be an advantage when interest rates are falling.

Correspondent bank
A bank which executes payments, etc. for another bank or a mortgage-credit institute.

Settlement of foreign-exchange transactions normally takes place via a bank in the home country of the currency in question. For instance, GBP is settled via a bank in the UK. This need not be a British bank, but can also be a UK branch of a foreign bank. Foreign-exchange dealers normally have a network of correspondent banks holding foreign-exchange accounts in different countries. In practice the parties independently send payment instructions to their respective correspondent banks to transfer the sold amount to the counterparty's account with its correspondent bank.

In the money market the banks and mortgage-credit institutes with no relations with Danmarks Nationalbank (typically small banks) e.g. use accounts with correspondent banks in their liquidity management.

Currency arbitrage
See Arbitrage.

Currency swap
See Foreign-exchange swap.

Current account
Only monetary-policy counterparties may hold current accounts at Danmarks Nationalbank which are remunerated at the current-account rate. The current accounts of other account holders are non-interest-bearing.

Current-account limit
Ceiling for the current-account deposits of the monetary-policy counter-parties at Danmarks Nationalbank at the close of the day. This limits the total volume of overnight krone liquidity that the counterparties overall may raise at their own initiative. The total current-account limit is broken down as individual current-account limits for the counterparties. If the total limit is exceeded at the close of the day, deposits exceeding the individual limits will be converted into certificates of deposit. The current-account limits are designed to prevent the accumulation of excess liquidity that may be used for speculation in future interest-rate or exchange-rate changes.

Current-account rate
The rate of interest on the current accounts of the monetary-policy counterparties at Danmarks Nationalbank. In the period from April 1992 to date (early June 2003) the current-account rate has been equal to the discount rate.

Delivery versus payment
Settlement principle in connection with securities trading whereby money and securities are exchanged simultaneously. See also Settlement.

Deposits
Uncollateralised loans that are traded in the Danish money market with standardised maturities of between 1 day and 12 months.

Derivatives
Financial instruments of which the market value depends on the market value of other (underlying) assets. See also Options, Futures and Interest-rate derivatives.

Difference settlement
Settlement of net gains and losses in connection with financial derivatives.

Discount rate
Danmarks Nationalbank's discount rate is a signal rate indicating the overall level of the monetary-policy interest rates. None of the monetary-policy instruments directly accrue interest at the discount rate, but from April 1992 to date (early June 2003) the current-account rate has been equal to the discount rate.

DN Inquiry and Transfer System
IT system used by the monetary-policy counterparties in connection with pledging of collateral for monetary-policy loans from Danmarks Nationalbank.

DN News
Danmarks Nationalbank's system for issuing information to connected news agencies. Monetary-policy counterparties can view information from DN News via the DN Inquiry and Transfer System.

ECB
Abbreviation for the European Central Bank. The ECB is the common central bank for the euro area.

Effective krone rate
The effective krone rate is calculated as a weighted average of the development in the bilateral krone rates vis-à-vis Denmark's most important trading partners. The weights are calculated on the basis of trade in manufactured goods in 1995. An increase in the index reflects a strengthening of the krone vis-à-vis the weighted average of the currencies included in the index.

EONIA (Euro OverNight Index Average)
Rate of interest on euro-denominated lending commencing on the day that the contract is entered into, and expiring on the following banking day. This makes EONIA an overnight interest rate.

ERM II (Exchange-Rate Mechanism II)
European fixed-exchange-rate system. In ERM II a bilateral central rate vis-à-vis the euro is fixed for the currency of each participating country. For each currency the standard fluctuation band for the bilateral exchange rate vis-à-vis the euro is +/- 15 per cent around the central rate. Under the ERM II agreement it is, however, possible to negotiate a narrower band. Denmark participates in ERM II at a central rate of kr. 746.038 per 100 euro. Due to its high degree of economic convergence with the euro area, Denmark has been able to enter into an agreement for a narrow fluctuation band of +/- 2.25 per cent. Within ERM II the central rates may be adjusted. Decisions relating to central rates and the standard fluctuation band require agreement among the ministers from the euro-area member states, the ECB, and the ministers and central-bank governors of the non-euro-area member states participating in ERM II.

EURIBOR (EuRo InterBank Offered Rate)
The rate of interest at which a bank is willing to lend uncollateralised euro liquidity to another prime bank in the euro-interbank market. EURIBOR is determined for maturities of 1 week to 12 months and is the reference interest rate for a number of financial contracts, e.g. interest-rate swaps. Corresponds to CIBOR in the Danish money market.

Euro
The single currency of the euro area.

Euro area
Aggregate term for the EU member states that have introduced the single currency, the euro. The following member states introduced the euro from 1 January 1999: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain. Greece joined the single currency with effect from 1 January 2001.

Euroclear
Settlement and custody institution for securities. See Settlement.

Eurosystem
Comprises the European Central Bank (ECB) and the national central banks in the euro area.

Foreign-exchange brokers
Intermediaries that do not themselves take positions, but solely establish contact between agents supplying and demanding foreign-exchange-market products. On an anonymous basis, the brokers continuously state the best bid and offer prices in the individual products for standardised maturities on the basis of rates provided by the individual banks.

Foreign-exchange dealers
Pursuant to the Danish Order on Foreign Exchange foreign-exchange dealers are financial institutions that on a commercial basis act as intermediaries for payments between residents and non-residents via accounts with or on behalf of foreign banks.

Foreign-exchange dealers are e.g. banks that purchase and sell foreign exchange for their customers, to hedge their own positions, or in connection with currency arbitrage.

Foreign-exchange market
The Danish foreign-exchange market is the market for purchase and sale of foreign exchange against Danish kroner. All transactions involving transfer of a position in Danish kroner against foreign exchange from one participant to another are part of the Danish foreign-exchange market. The market is not geographically delineated. Purchase and sale of foreign exchange against Danish kroner solely between non-residents thus also forms part of the Danish foreign-exchange market. The foreign-exchange market is central to the monetary and foreign-exchange policy since the krone rate is formed in this market. Danmarks Nationalbank undertakes intervention (purchase and sale of foreign exchange against Danish kroner) in order to stabilise the krone's exchange rate against the euro.

Foreign-exchange option
Transaction giving one of the parties the right, but not the obligation, at a fixed time in the future to purchase or sell an amount in one currency against an amount in another currency at an agreed exchange rate.

Foreign-exchange options are used to e.g. hedge exchange rates. An export company which will receive dollars in six months' time can buy an option giving the right, but not the obligation, to sell dollars at a specific exchange rate in six months' time. The company is thus guaranteed a minimum exchange rate for its revenue denominated in dollars. The company pays a premium for the option that is dependent on several factors, primarily maturity, exchange-rate volatility and the required minimum exchange rate. Se also Options.

Foreign-exchange reserve
Danmarks Nationalbank's holdings of net foreign assets. The foreign-exchange reserve consists of secure and liquid assets that are mainly deposits with foreign banks and foreign securities that are easy to sell or use as collateral for loans should the need arise. In addition, Danmarks Nationalbank's stock of gold is included in the foreign-exchange reserve. The purpose of the foreign-exchange reserve is primarily to enable Danmarks Nationalbank to intervene in the foreign-exchange market rapidly and at its own initiative with a view to stabilising the krone vis-à-vis the euro if necessary. See also Intervention.

Foreign-exchange spot transaction
Foreign-exchange transaction (purchase or sale of foreign exchange against Danish kroner) for settlement no later than two banking days after the trade date. Foreign-exchange spot transactions are used for outright exchange of kroner and foreign exchange. See also Spot transaction.

Foreign-exchange swap
A contract between two parties to swap payments in different currencies during a certain period. In the money and foreign-exchange markets a distinction is made between FX swaps and currency swaps.

FX swaps are loans in one currency against collateral denominated in another currency. An FX swap can be seen as a simultaneous spot transaction and forward contract in foreign exchange. On settlement of the spot transaction one currency is exchanged for another currency, and vice versa when the forward contract is settled. The rate of interest on the loan is reflected in the spot and forward rates applied. FX swaps with one leg in kroner can be seen as a money-market product in the form of a krone-denominated loan against collateral in foreign exchange. In the Danish money market FX swaps are traded with standardised maturities from 1 day up to 12 months.

Currency swaps are foreign-exchange swaps that entail ongoing exchange of interest payments and a swap of principals in different currencies at the beginning and end of the contract term. A currency swap can thus be seen as the exchange of loans in different currencies.

Forward contract
A forward contract is a contract between two parties giving the holder of the contract the right and the obligation to buy or sell an underlying asset at a specified time in the future (the expiry date of the forward contract) at a pre-specified forward price. See also Forward foreign-exchange contract.

Forward foreign-exchange contract
Foreign-exchange transaction for settlement later than two banking days after conclusion of the contract. Forward contracts may be used by companies to hedge the exchange-rate risk associated with their transactions. If an export company knows that it will receive dollars in six months' time, it can sell this future dollar revenue forward in order to fix the value of the revenue in kroner in advance. The company can thus immunise itself against exchange-rate fluctuations. Likewise, non-residents holding krone-denominated bonds can hedge their positions by selling the future krone-denominated payments from the bonds on forward terms.

FRA (Forward Rate Agreement)
Agreement to pay interest on a fictive principal at an agreed rate for an agreed future period. In Denmark standardised FRAs run for 3 or 6 months. At the beginning of the future period, difference settlement takes place of an amount equivalent to the difference between the agreed reference interest rate (e.g. CIBOR) and the agreed FRA rate on the fictive principal. No payments are exchanged on the conclusion of the actual contract.

FRAs are used to e.g. hedge against interest-rate risks. If a bank wishes to be certain of achieving financing at the current FRA rate in a future period, the bank can purchase an FRA now and raise a loan at the market rate (CIBOR) for the future period. If CIBOR for the future period exceeds the agreed FRA rate, the bank will – via the FRA – receive an amount to compensate for the difference.

Futures
A future is a forward contract that is standardised with regard to the underlying instrument, maturity date, contract size and other contract terms. Due to this standardisation, futures (unlike other forward contracts) are suitable for trading on exchanges.

FX swap
See Foreign-exchange swap.

Gross domestic financing requirement (central government's)
Compiled as the gross financing requirement less redemptions on the government’s foreign debt. Corresponds to the central government's current net disbursements (deficit) plus redemptions on the domestic government debt and the net bond purchases of the Social Pension Fund.

Gross financing requirement (central government's)
The gross financing requirement is compiled as the current expenditure of less receipts to the central government, with the addition of redemptions on the domestic and foreign debt, and the net bond purchases of the Social Pension Fund (SPF). See also Gross domestic financing requirement.

Haircut
The deduction made from a paper's market value on determining its collateral value. Used in connection with Danmarks Nationalbank's monetary-policy lending to minimise the risk that the value of the counterparty's loan exceeds the value of the pledged securities.

Hedge fund
Investment company with an investment strategy that often entails a considerable element of speculation and a high rate of borrowing in relation to its equity capital.

IMF (the International Monetary Fund)
International organisation established to promote international monetary cooperation and exchange stability, foster international trade, ensure high levels of employment and real income, contribute to free and unimpeded payments between member countries, and grant loans to member countries experiencing balance-of-payments difficulties.

Interest-rate derivatives
Interest-rate derivatives are financial contracts used by banks, business enterprises and investors to hedge interest-rate risks and to take positions. The most important interest-rate derivatives in the Danish money market are FRAs and short-term interest-rate swaps.

Interest-rate swap
Agreement between two parties for the future exchange of interest payments for an agreed period on the basis of a fictive principal. Fixed-rate payments (the swap rate for the maturity in question) are often exchanged for floating-rate payments. A bank with e.g. floating-rate deposits can use interest-rate swaps to exchange the floating-rate payments for fixed-rate payments. For the deposit and interest-rate swap taken as one, this corresponds to the bank converting its interest-rate exposure from floating-rate deposits to fixed-rate deposits. See also T/N IRS.

Intervention (in the foreign-exchange market)
Term used for Danmarks Nationalbank's purchase and sale of foreign exchange for and from the foreign-exchange reserve in order to stabilise the krone vis-à-vis the euro. When Danmarks Nationalbank sells foreign exchange (and purchases kroner) in the foreign-exchange market, the krone will have a tendency to strengthen. When Danmarks Nationalbank buys foreign exchange (and sells kroner), the krone will have a tendency to weaken.

Within the framework of ERM II a distinction is made between two types of intervention.

Intervention that takes place when the exchange rate for the krone vis-à-vis the euro is within the fluctuation band of +/- 2.25 per cent around the central rate is denoted intramarginal intervention. Intramarginal intervention can be conducted by Danmarks Nationalbank or as coordinated intervention agreed between Danmarks Nationalbank and the ECB.

Intervention at the margin is the term used for intervention that takes place if the exchange rate for the krone vis-à-vis the euro reaches the upper or lower margin 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 it is in conflict with the primary monetary-policy objective.

Intraday credit
Loans offered for a period of less than one banking day within the same monetary-policy day.

Kronos
Danmarks Nationalbank's payment system via which significant daily liquidity transfers take place among banks and mortgage-credit institutes.

Lending rate
The rate of interest for monetary-policy loans in Danmarks Nationalbank's regular market operations in which the monetary-policy counterparties may borrow usually with a maturity of 14 days against securities as collateral. The lending rate is equal to the rate of interest for certificates of deposit.

Liquidity
In Denmark the key liquidity concept in monetary policy is the current-account deposits of the monetary-policy counterparties, since these funds can be used immediately as a means of payment at the initiative of the account holders. Current-account deposits are therefore often referred to as "liquidity", "current-account liquidity" or "krone liquidity". The key liquidity concept in payment systems is the sum of current-account balances and current-account overdrafts within the day (intraday credit).

Margin
General excess collateral in connection with a loan. Used in Danmarks Nationalbank's monetary-policy lending where a margin of 2 per cent is required. This means that collateral for a value of at least kr. 102 must be provided for a loan of kr. 100. The collateral value is calculated as the market value of the securities less a haircut.

Marginal lending facility
A facility in the Eurosystem which the monetary-policy counterparties may use at their own initiative to obtain overnight credit against collateral at a pre-specified interest rate. Also called a Lombard facility.

Marginal rate
The lowest interest rate at which liquidity is granted in the weekly main refinancing operations in the euro area. See Market operations.

Market conventions
Conventions for trading in financial contracts and interest calculation. In the Danish money and foreign-exchange markets the settlement date (value date) is normally two banking days after the trade date (t+2) on which the contract is concluded. The yield to maturity in per cent p.a. is calculated according to the money-market convention on the basis of the day-count convention "actual/360", with simple accrual of interest (no compound interest). In the Danish bond market the settlement date for a transaction is normally three business days after the trade date (t+3).

Market maker
A number of banks have concluded mutual agreements on market making in the various segments of the money market and the foreign-exchange market. Market makers continuously set binding two-way prices vis-à-vis each other for fixed amounts in a number of specific products. Market making contributes to limiting the spread between bid and offer prices.

Market operations (Danmarks Nationalbank's)
Weekly market operations whereby the monetary-policy counterparties can borrow liquidity against securities as collateral (monetary-policy loans) or make placements by purchasing certificates of deposit. These transactions usually have a maturity of 14 days. Furthermore, Danmarks Nationalbank may need to provide liquidity to the market outside the regular market operations. These extraordinary market operations normally take place as the purchase and sale of certificates of deposit.

Market operations (the Eurosystem's)
Provision of liquidity to the banking system by the Eurosystem takes place primarily via weekly main refinancing operations conducted as tenders at which bids are collected via the national central banks in the euro area.

Liquidity is provided as lending against securities as collateral, and the loans normally have a maturity of two weeks. The Eurosystem also provides liquidity via longer-term refinancing operations conducted as monthly tenders for loans with a maturity of three months. In addition, the Eurosystem may conduct fine-tuning operations to smooth out interest-rate fluctuations, particularly those caused by unexpected liquidity fluctuations. Finally, the Eurosystem may conduct structural operations to adjust its net position vis-à-vis the financial sector over a prolonged period.

In January 2003 the ECB announced that the maturity of lending in the weekly main refinancing operations will be reduced from 14 days to 1 week in the 1st quarter of 2004.

MFI (Monetary Financial Institution)
Used as an aggregate term for banks and mortgage-credit institutes and money-market funds, etc. in e.g. Danmarks Nationalbank's financial statistics.

Minimum bid rate
The lowest rate at which the monetary-policy counterparties can submit bids in the Eurosystem's weekly main refinancing operations. The minimum bid rate is the ECB's key monetary-policy interest rate.

Monetary and foreign-exchange policy
As the Danish central bank Danmarks Nationalbank is responsible for monetary policy in Denmark. Danmarks Nationalbank conducts monetary policy by determining the monetary-policy interest rates, i.e. the discount rate, the current-account rate and the lending rate (equal to the rate of interest for certificates of deposit). Danmarks Nationalbank's interest rates guide the short-term interest rates in the Danish money market, as well as the deposit and lending rates that the banks offer customers.

Denmark conducts a fixed-exchange-rate policy vis-à-vis the euro. This means that the objective of monetary and foreign-exchange policy is to keep the Danish krone stable against the euro. Other factors besides the exchange rate, such as cyclical development in Denmark, are not included in the monetary-policy considerations.

Monetary financing
Financing of government budget deficits via direct or indirect credit extension by the central bank. In order to avoid monetary financing, the EU Treaty prohibits credit facilities with the central bank in favour of the central government. The Treaty also prohibits the central bank's purchase of government securities directly from the central government. In Denmark the framework for central-government borrowing also includes the norm for central-government borrowing.

Monetary-policy counterparties
Danmarks Nationalbank's monetary-policy counterparties are banks and mortgage-credit institutes that operate under respectively the Commercial Banks and Savings Banks Act and the Mortgage Credit Act and meet certain technical criteria. Danmarks Nationalbank may also give Danish branches of foreign credit institutions conducting equivalent business access to the monetary-policy instruments. Danmarks Nationalbank selects its monetary-policy counterparties on the basis of monetary-policy considerations.

Monetary-policy day
The monetary-policy day runs from 4.00 p.m. to 3.30 p.m. on the following banking day.

Monetary-policy instruments
This term covers the facilities used by a central bank to manage and service accounts with the monetary-policy counterparties. Danmarks Nationalbank's monetary-policy counterparties are banks and mortgage-credit institutes. They have access to place liquidity with Danmarks Nationalbank as overnight deposits (current-account deposits), and to participate in Danmarks Nationalbank's market operations.

Monetary-policy interest rates
These are the discount rate and the rates of interest for Danmarks Nationalbank's balances with the monetary-policy counterparties, i.e. the current-account rate and the lending rate (which is equal to the rate of interest for certificates of deposit). The lending rate is the rate of interest for monetary-policy loans. Current-account deposits accrue interest at the current-account rate, which from April 1992 to date (early June 2003) has been equal to the discount rate. The current-account rate is lower than the lending rate.

Monetary-policy lending
Lending in Danmarks Nationalbank's regular market operations whereby the monetary-policy counterparties can normally raise 14-day loans against securities as collateral.

Monetary-policy loans
See Monetary-policy lending.

Money market
The Danish money market is the interbank market for loan agreements and interest-rate derivatives in kroner with a maturity of up to one year. The money market is used for the exchange of liquidity between market participants and for management of short-term interest-rate positions. A well-functioning money market is important to ensure a clear transmission of Danmarks Nationalbank's monetary-policy interest rates to the short-term market interest rates. See also Deposits, Repos and Foreign-exchange swaps.

Money-market broker
Money-market brokersare intermediaries who do not themselves take positions, but solely establish contact between agents supplying and demanding money-market products. On an anonymous basis, the brokers continuously state the best bid and offer prices in the individual products for standardised maturities on the basis of rates provided by the individual banks.

Money-market fund
Investment association investing in bank deposits and money-market related securities.

Money supply (M3)
The money supply consists of bank deposits made by private individuals and business enterprises, and their holdings of banknotes and coins and certain short-term bonds.

Net position
The monetary-policy counterparties' monetary-policy balance with Danmarks Nationalbank. Calculated as the counterparties' current-account balances with addition of placements in certificates of deposit less monetary-policy loans from Danmarks Nationalbank.

Norm for central-government borrowing
Agreement between the government and Danmarks Nationalbank on the scope and distribution of central-government borrowing in kroner and in foreign currency. The main feature of the agreement is that the central government's gross domestic financing requirement, i.e. the central government's current deficit and redemptions on the domestic debt in a given financial year, is in principle financed by krone-denominated borrowing. The norm for foreign borrowing entails that the redemptions on the foreign debt in a given financial year are in principle refinanced by borrowing in foreign currency. The purpose of the central government's foreign borrowing is to ensure an adequate foreign-exchange reserve.

Options
Contract between two parties giving the buyer of the option a right, but not an obligation, to buy or sell an underlying asset for an agreed price (contract price, exercise price or strike price) before or on a specific future expiry date. The buyer of the option pays the seller a premium on conclusion of the contract in return for this right.

An option giving the buyer the right to buy the underlying asset is a call option. An option giving the buyer the right to sell the underlying asset is a put option.

If the buyer may exercise the option at any time up to the expiry date, it is called an "American option". If the buyer may only exercise the option on the expiry date, it is called a "European option". See also Foreign-exchange option.

OTC (Over-The-Counter)
Trading in financial products outside the exchanges.

Overnight interest rate
Rate of interest for a loan with a maturity of one banking day. The overnight (O/N) interest rate applies to a loan commencing on the trade date and expiring on the following banking day. The tomorrow/next (T/N) interest rate applies to a loan commencing on the 1st banking day after the trade date and expiring on the 2nd banking day after the trade date. The spot/next (S/N) interest rate applies to a loan commencing on the 2nd banking day after the trade date and expiring on the 3rd banking day after the trade date. See also T/N interest rate and EONIA.

Par
Equal to the nominal value of a security.

Payment versus payment
Settlement principle by which both parties to e.g. a currency trade first pay their part of the trade before the payments are exchanged. See also Settlement and CLS.

Pips
Pips refers to the spread between the bid and offer prices for foreign currency. For example, a spread of 5 pips on the krone's rate against the euro entails a spread of kr. 0.05 per 100 euro between the bid and offer rates.

Rate of interest for certificates of deposit
Certificates of deposit are zero-coupon papers issued by Danmarks Nationalbank. The interest rate corresponds to the difference between the redemption price (par) and the bid price. Se also Lending rate.

Real-Time Gross Settlement (RTGS)
Settlement principle in a payment system whereby the payments are settled individually, immediately and finally to the participants' accounts. See also Settlement.

Repos (repurchase agreements)
Repos are collateralised loans that are traded on the Danish moneymarket with standardised maturities from 1 day up to 6 months. The pledged collateral comprises securities, typically bonds. Repos are also known as sell and buy-back transactions since on the conclusion of the agreement the seller of the bonds (the liquidity recipient) at the same time enters into an obligation to repurchase the securities at a later date for a price fixed when the agreement is entered into. The repo rate is reflected in the difference between the agreed spot and forward prices.

Repurchase agreements
See Repos.

Reserve requirement
A requirement for monetary-policy counterparties to hold minimum reserves on accounts with the central bank.

Under the minimum reserve system of the Eurosystem credit institutions in the euro area are obliged to deposit an amount corresponding to 2 per cent of selected liabilities with the national central banks. The reserve requirement must be met on average over a reserve maintenance period of one month. The required reserves are remunerated at the average marginal rate applying to the main refinancing operations in the reserve maintenance period.

The Eurosystem's minimum reserve system serves two purposes. Firstly, it helps to stabilise the overnight interest rate since the counterparties have an incentive to lend liquidity in the market when the overnight interest rate is higher than the rate of interest on the required reserves. On the other hand, the counterparties have an incentive to maintain ample reserves in the periods when the overnight interest rate is lower than the rate of interest on the required reserves. Secondly, the minimum reserve system helps to ensure that the counterparties have a structural liquidity deficit vis-à-vis the Eurosystem, which is assumed to enhance the transmission from the monetary-policy interest rates to the market interest rates.

Residents and non-residents
Pursuant to the Danish Order on Foreign Exchange residents are natural persons or legal entities resident in Denmark. Non-residents are natural persons or legal entities not resident in Denmark.

Settlement
Exchange of services to fulfil the parties' obligations under a financial contract.

For example, trading of securities registered at VP Securities Services is settled by compiling the participants' positions in securities and money respectively several times a day. Danmarks Nationalbank is responsible for the settlement of the money side of the trades. In principle, a securities trade is settled by drawing on the buyer's current account at Danmarks Nationalbank and registering the purchase to the buyer's securities account at VP Securities Services. The money side is settled simultaneously with the securities side. This ensures the availability of both money and securities.

Settlement account
An account held by a direct participant in the payment system at Danmarks Nationalbank with a view to settlement of payments.

Settlement date
The day of settlement of a financial transaction. Settlement may take place on the trade date (same-day settlement) or one or several days after the trade date. The settlement date is also called the value date. See also Market conventions.

Social Pension Fund (SPF)
The Danish Social Pension Fund (SPF) was established in 1970 by the Social Pension Fund Act, whereby a special national retirement pension contribution was introduced. The proceeds were allocated to SPF and invested in bonds. With effect from 1982 the Act was amended, and the payments to SPF ceased. SPF was continued as an asset of the central government. SPF is part of the remit of the Ministry of Social Affairs and the Ministry of Finance. The management of SPF's capital is handled by a committee with representatives from the Ministry of Finance, the Ministry of Social Affairs and Danmarks Nationalbank. The day-to-day management of the assets of SPF is handled by Government Debt Management at Danmarks Nationalbank.

Spot transaction
In the money and foreign-exchange markets a spot transaction is a contract between two parties on purchase or sale of a financial asset for settlement no later than 2 banking days after the trade date. See also Foreign-exchange spot transaction.

Stability and Growth Pact
EU pact according to which all EU member states are to ensure a budgetary position close to balance or in surplus in the medium term.

Sumclearing
Danish payment system for settlement of e.g. retail payments between banks, including cheques, Dankort (debit card) transactions and transfers via BetalingsService (direct debit).

Swap rate
The swap rate is the fixed interest rate in an interest-rate swap.

SWIFT
International financial network used for exchanging payment messages.

T/N IRS (Tomorrow/Next Interest Rate Swap)
T/N IRS is a short-term interest-rate swap applying the T/N rate as the reference interest rate. When a T/N interest-rate swap is concluded the parties in principle agree to exchange the payment of interest at a fixed rate (the swap rate for the maturity in question) for the payment of interest at a floating overnight rate (the T/N rate). The interest payments are calculated on the basis of a fictive principal. The agreement can be concluded for standardised maturities of between 1 and 12 months. On expiry of the swap, the parties' gains and losses are settled (difference settlement) via the exchange of a net amount. The term "CITA swap" is often used synonymously with "T/N IRS" (CITA is an abbreviation of Copenhagen Interest T/n Average).

T/N rate (Tomorrow/Next interest rate)
Reference interest rate in the Danish money market in a number of financial contracts. The T/N rate is a rate of interest for an overnight loan running from the 1st banking day after the trade date to the 2nd banking day after the trade date. The T/N rate is determined on the basis of data reported to Danmarks Nationalbank by currently 13 major players in the Danish money market. See also T/N IRS.

Tender
A monetary-policy procedure whereby the central bank provides (absorbs) liquidity to (from) the market on the basis of competitive bids submitted by the monetary-policy counterparties.

In the period from 28 June 2000 until now (early June 2003) the Eurosystem's main refinancing operations have been conducted as variable-rate tenders. At the tenders the counterparties submit bids for both interest rates and amounts. Bids with the highest interest rates are accommodated first, and the interest rate that is bid applies. The ECB successively accepts bids for lower interest rates until the desired amount has been allotted. The lowest interest rate at which liquidity is allotted is known as the marginal rate, and liquidity may be allotted on a pro-rata basis at this interest rate. The individual counterparty hereby receives liquidity in relation to its bid at the marginal rate as a proportion of the counterparties' total amount bid at the marginal rate. Prior to the variable-rate tenders the Governing Council of the ECB announces a minimum bid rate which is the lowest interest rate at which bids from the counterparties will be accepted. The minimum bid rate is the ECB's key monetary-policy interest rate.

Trade date
The date on which a contract for a financial transaction (e.g. a krone-denominated loan or a currency trade) is concluded between two counterparties. Also called trading day.

Trading day
See Trade date.

Value date
See Settlement date.

VP Securities Services (VP)
Institution in the Danish securities market. VP’s most important tasks are to undertake the computerised issue of securities, to book-enter ownership and rights in relation to electronic securities, and to undertake the clearing and settlement of securities transactions.

VP System
VP Securities Services' system for settlement of trades and other payments (e.g. interest and redemption payments) in connection with securities registered by VP Securities Services.

Zero-coupon paper
Loan without coupon interest, for which redemption payment falls due on expiry. The certificates of deposit issued by Danmarks Nationalbank are zero-coupon papers.


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Glossary
	Adjustable-rate loan In Denmark this term often refers to a mortgage-credit loan for which the rate of interest is adjusted to the current market terms with a pre-specified frequency, e.g. annually. Arbitrage The simultaneous purchase and sale of a financial asset to exploit minor price differences in order to obtain a risk-free gain. The simultaneous purchase and sale of one currency against another is called currency arbitrage. Banking days Business days of the financial sector (and Danmarks Nationalbank). Basis point 1 basis point is 0.01 percentage point. Applied especially to interest-rate changes and interest-rate spreads. BIS (Bank for International Settlements) BIS is an international organisation whose objective is to promote monetary and financial stability. BIS is also often referred to as "central banker to the central banks". Central rate In ERM II a bilateral central rate vis-à-vis the euro is fixed for the currency of each participating country. See under ERM II. Certificates of deposit Zero-coupon papers issued by Danmarks Nationalbank as part of its monetary policy. Certificates of deposit may be traded among the monetary-policy counterparties, but cannot be negotiated outside their circle. Trading in certificates of deposit is a way of exchanging liquidity without credit risk for settlement on the same day. CIBOR (Copenhagen InterBank Offered Rate) Reference interest rate on the Danish money market for a number of financial contracts. CIBOR is the interest rate at which a bank is willing to lend uncollateralised krone liquidity to another prime bank on the Danish money market. Danmarks Nationalbank calculates CIBOR on the basis of interest rates reported daily by currently 8 individual banks. CIBOR corresponds to EURIBOR on the European money market. Clearing Compilation of purchases and sales of financial contracts as the basis for calculation of the parties' gross or net positions. Examples are cheque clearing, clearing of Dankort transactions and transfers via BetalingsService (direct debit), etc. in connection with netting in the Sumclearing. All payments to and from an individual participant are netted as one payment, which is then settled via the participants' accounts at Danmarks Nationalbank. See also Settlement. CLS (Continuous Linked Settlement) International system for settlement of currency trades. 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 to CLS before the payments are exchanged. In this way neither party incurs a settlement risk from paying its part of the trade without being sure 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. Commercial Paper (CP) Zero-coupon paper with maturity of up to one year. The Danish central government has CP programmes in foreign currency that give access to raise foreign loans at short notice, e.g. to strengthen the Foreign-exchange reserve. Conversion Conversion of loans. Most fixed-rate mortgage-credit loans in Denmark are subject to a conversion right whereby the loans can e.g. be converted to loans at lower interest rates, should this be an advantage when interest rates are falling. Correspondent bank A bank which executes payments, etc. for another bank or a mortgage-credit institute. Settlement of foreign-exchange transactions normally takes place via a bank in the home country of the currency in question. For instance, GBP is settled via a bank in the UK. This need not be a British bank, but can also be a UK branch of a foreign bank. Foreign-exchange dealers normally have a network of correspondent banks holding foreign-exchange accounts in different countries. In practice the parties independently send payment instructions to their respective correspondent banks to transfer the sold amount to the counterparty's account with its correspondent bank. In the money market the banks and mortgage-credit institutes with no relations with Danmarks Nationalbank (typically small banks) e.g. use accounts with correspondent banks in their liquidity management. Currency arbitrage See Arbitrage. Currency swap See Foreign-exchange swap. Current account Only monetary-policy counterparties may hold current accounts at Danmarks Nationalbank which are remunerated at the current-account rate. The current accounts of other account holders are non-interest-bearing. Current-account limit Ceiling for the current-account deposits of the monetary-policy counter-parties at Danmarks Nationalbank at the close of the day. This limits the total volume of overnight krone liquidity that the counterparties overall may raise at their own initiative. The total current-account limit is broken down as individual current-account limits for the counterparties. If the total limit is exceeded at the close of the day, deposits exceeding the individual limits will be converted into certificates of deposit. The current-account limits are designed to prevent the accumulation of excess liquidity that may be used for speculation in future interest-rate or exchange-rate changes. Current-account rate The rate of interest on the current accounts of the monetary-policy counterparties at Danmarks Nationalbank. In the period from April 1992 to date (early June 2003) the current-account rate has been equal to the discount rate. Delivery versus payment Settlement principle in connection with securities trading whereby money and securities are exchanged simultaneously. See also Settlement. Deposits Uncollateralised loans that are traded in the Danish money market with standardised maturities of between 1 day and 12 months. Derivatives Financial instruments of which the market value depends on the market value of other (underlying) assets. See also Options, Futures and Interest-rate derivatives. Difference settlement Settlement of net gains and losses in connection with financial derivatives. Discount rate Danmarks Nationalbank's discount rate is a signal rate indicating the overall level of the monetary-policy interest rates. None of the monetary-policy instruments directly accrue interest at the discount rate, but from April 1992 to date (early June 2003) the current-account rate has been equal to the discount rate. DN Inquiry and Transfer System IT system used by the monetary-policy counterparties in connection with pledging of collateral for monetary-policy loans from Danmarks Nationalbank. DN News Danmarks Nationalbank's system for issuing information to connected news agencies. Monetary-policy counterparties can view information from DN News via the DN Inquiry and Transfer System. ECB Abbreviation for the European Central Bank. The ECB is the common central bank for the euro area. Effective krone rate The effective krone rate is calculated as a weighted average of the development in the bilateral krone rates vis-à-vis Denmark's most important trading partners. The weights are calculated on the basis of trade in manufactured goods in 1995. An increase in the index reflects a strengthening of the krone vis-à-vis the weighted average of the currencies included in the index. EONIA (Euro OverNight Index Average) Rate of interest on euro-denominated lending commencing on the day that the contract is entered into, and expiring on the following banking day. This makes EONIA an overnight interest rate. ERM II (Exchange-Rate Mechanism II) European fixed-exchange-rate system. In ERM II a bilateral central rate vis-à-vis the euro is fixed for the currency of each participating country. For each currency the standard fluctuation band for the bilateral exchange rate vis-à-vis the euro is +/- 15 per cent around the central rate. Under the ERM II agreement it is, however, possible to negotiate a narrower band. Denmark participates in ERM II at a central rate of kr. 746.038 per 100 euro. Due to its high degree of economic convergence with the euro area, Denmark has been able to enter into an agreement for a narrow fluctuation band of +/- 2.25 per cent. Within ERM II the central rates may be adjusted. Decisions relating to central rates and the standard fluctuation band require agreement among the ministers from the euro-area member states, the ECB, and the ministers and central-bank governors of the non-euro-area member states participating in ERM II. EURIBOR (EuRo InterBank Offered Rate) The rate of interest at which a bank is willing to lend uncollateralised euro liquidity to another prime bank in the euro-interbank market. EURIBOR is determined for maturities of 1 week to 12 months and is the reference interest rate for a number of financial contracts, e.g. interest-rate swaps. Corresponds to CIBOR in the Danish money market. Euro The single currency of the euro area. Euro area Aggregate term for the EU member states that have introduced the single currency, the euro. The following member states introduced the euro from 1 January 1999: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain. Greece joined the single currency with effect from 1 January 2001. Euroclear Settlement and custody institution for securities. See Settlement. Eurosystem Comprises the European Central Bank (ECB) and the national central banks in the euro area. Foreign-exchange brokers Intermediaries that do not themselves take positions, but solely establish contact between agents supplying and demanding foreign-exchange-market products. On an anonymous basis, the brokers continuously state the best bid and offer prices in the individual products for standardised maturities on the basis of rates provided by the individual banks. Foreign-exchange dealers Pursuant to the Danish Order on Foreign Exchange foreign-exchange dealers are financial institutions that on a commercial basis act as intermediaries for payments between residents and non-residents via accounts with or on behalf of foreign banks. Foreign-exchange dealers are e.g. banks that purchase and sell foreign exchange for their customers, to hedge their own positions, or in connection with currency arbitrage. Foreign-exchange market The Danish foreign-exchange market is the market for purchase and sale of foreign exchange against Danish kroner. All transactions involving transfer of a position in Danish kroner against foreign exchange from one participant to another are part of the Danish foreign-exchange market. The market is not geographically delineated. Purchase and sale of foreign exchange against Danish kroner solely between non-residents thus also forms part of the Danish foreign-exchange market. The foreign-exchange market is central to the monetary and foreign-exchange policy since the krone rate is formed in this market. Danmarks Nationalbank undertakes intervention (purchase and sale of foreign exchange against Danish kroner) in order to stabilise the krone's exchange rate against the euro. Foreign-exchange option Transaction giving one of the parties the right, but not the obligation, at a fixed time in the future to purchase or sell an amount in one currency against an amount in another currency at an agreed exchange rate. Foreign-exchange options are used to e.g. hedge exchange rates. An export company which will receive dollars in six months' time can buy an option giving the right, but not the obligation, to sell dollars at a specific exchange rate in six months' time. The company is thus guaranteed a minimum exchange rate for its revenue denominated in dollars. The company pays a premium for the option that is dependent on several factors, primarily maturity, exchange-rate volatility and the required minimum exchange rate. Se also Options. Foreign-exchange reserve Danmarks Nationalbank's holdings of net foreign assets. The foreign-exchange reserve consists of secure and liquid assets that are mainly deposits with foreign banks and foreign securities that are easy to sell or use as collateral for loans should the need arise. In addition, Danmarks Nationalbank's stock of gold is included in the foreign-exchange reserve. The purpose of the foreign-exchange reserve is primarily to enable Danmarks Nationalbank to intervene in the foreign-exchange market rapidly and at its own initiative with a view to stabilising the krone vis-à-vis the euro if necessary. See also Intervention. Foreign-exchange spot transaction Foreign-exchange transaction (purchase or sale of foreign exchange against Danish kroner) for settlement no later than two banking days after the trade date. Foreign-exchange spot transactions are used for outright exchange of kroner and foreign exchange. See also Spot transaction. Foreign-exchange swap A contract between two parties to swap payments in different currencies during a certain period. In the money and foreign-exchange markets a distinction is made between FX swaps and currency swaps. FX swaps are loans in one currency against collateral denominated in another currency. An FX swap can be seen as a simultaneous spot transaction and forward contract in foreign exchange. On settlement of the spot transaction one currency is exchanged for another currency, and vice versa when the forward contract is settled. The rate of interest on the loan is reflected in the spot and forward rates applied. FX swaps with one leg in kroner can be seen as a money-market product in the form of a krone-denominated loan against collateral in foreign exchange. In the Danish money market FX swaps are traded with standardised maturities from 1 day up to 12 months. Currency swaps are foreign-exchange swaps that entail ongoing exchange of interest payments and a swap of principals in different currencies at the beginning and end of the contract term. A currency swap can thus be seen as the exchange of loans in different currencies. Forward contract A forward contract is a contract between two parties giving the holder of the contract the right and the obligation to buy or sell an underlying asset at a specified time in the future (the expiry date of the forward contract) at a pre-specified forward price. See also Forward foreign-exchange contract. Forward foreign-exchange contract Foreign-exchange transaction for settlement later than two banking days after conclusion of the contract. Forward contracts may be used by companies to hedge the exchange-rate risk associated with their transactions. If an export company knows that it will receive dollars in six months' time, it can sell this future dollar revenue forward in order to fix the value of the revenue in kroner in advance. The company can thus immunise itself against exchange-rate fluctuations. Likewise, non-residents holding krone-denominated bonds can hedge their positions by selling the future krone-denominated payments from the bonds on forward terms. FRA (Forward Rate Agreement) Agreement to pay interest on a fictive principal at an agreed rate for an agreed future period. In Denmark standardised FRAs run for 3 or 6 months. At the beginning of the future period, difference settlement takes place of an amount equivalent to the difference between the agreed reference interest rate (e.g. CIBOR) and the agreed FRA rate on the fictive principal. No payments are exchanged on the conclusion of the actual contract. FRAs are used to e.g. hedge against interest-rate risks. If a bank wishes to be certain of achieving financing at the current FRA rate in a future period, the bank can purchase an FRA now and raise a loan at the market rate (CIBOR) for the future period. If CIBOR for the future period exceeds the agreed FRA rate, the bank will – via the FRA – receive an amount to compensate for the difference. Futures A future is a forward contract that is standardised with regard to the underlying instrument, maturity date, contract size and other contract terms. Due to this standardisation, futures (unlike other forward contracts) are suitable for trading on exchanges. FX swap See Foreign-exchange swap. Gross domestic financing requirement (central government's) Compiled as the gross financing requirement less redemptions on the government’s foreign debt. Corresponds to the central government's current net disbursements (deficit) plus redemptions on the domestic government debt and the net bond purchases of the Social Pension Fund. Gross financing requirement (central government's) The gross financing requirement is compiled as the current expenditure of less receipts to the central government, with the addition of redemptions on the domestic and foreign debt, and the net bond purchases of the Social Pension Fund (SPF). See also Gross domestic financing requirement. Haircut The deduction made from a paper's market value on determining its collateral value. Used in connection with Danmarks Nationalbank's monetary-policy lending to minimise the risk that the value of the counterparty's loan exceeds the value of the pledged securities. Hedge fund Investment company with an investment strategy that often entails a considerable element of speculation and a high rate of borrowing in relation to its equity capital. IMF (the International Monetary Fund) International organisation established to promote international monetary cooperation and exchange stability, foster international trade, ensure high levels of employment and real income, contribute to free and unimpeded payments between member countries, and grant loans to member countries experiencing balance-of-payments difficulties. Interest-rate derivatives Interest-rate derivatives are financial contracts used by banks, business enterprises and investors to hedge interest-rate risks and to take positions. The most important interest-rate derivatives in the Danish money market are FRAs and short-term interest-rate swaps. Interest-rate swap Agreement between two parties for the future exchange of interest payments for an agreed period on the basis of a fictive principal. Fixed-rate payments (the swap rate for the maturity in question) are often exchanged for floating-rate payments. A bank with e.g. floating-rate deposits can use interest-rate swaps to exchange the floating-rate payments for fixed-rate payments. For the deposit and interest-rate swap taken as one, this corresponds to the bank converting its interest-rate exposure from floating-rate deposits to fixed-rate deposits. See also T/N IRS. Intervention (in the foreign-exchange market) Term used for Danmarks Nationalbank's purchase and sale of foreign exchange for and from the foreign-exchange reserve in order to stabilise the krone vis-à-vis the euro. When Danmarks Nationalbank sells foreign exchange (and purchases kroner) in the foreign-exchange market, the krone will have a tendency to strengthen. When Danmarks Nationalbank buys foreign exchange (and sells kroner), the krone will have a tendency to weaken. Within the framework of ERM II a distinction is made between two types of intervention. Intervention that takes place when the exchange rate for the krone vis-à-vis the euro is within the fluctuation band of +/- 2.25 per cent around the central rate is denoted intramarginal intervention. Intramarginal intervention can be conducted by Danmarks Nationalbank or as coordinated intervention agreed between Danmarks Nationalbank and the ECB. Intervention at the margin is the term used for intervention that takes place if the exchange rate for the krone vis-à-vis the euro reaches the upper or lower margin 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 it is in conflict with the primary monetary-policy objective. Intraday credit Loans offered for a period of less than one banking day within the same monetary-policy day. Kronos Danmarks Nationalbank's payment system via which significant daily liquidity transfers take place among banks and mortgage-credit institutes. Lending rate The rate of interest for monetary-policy loans in Danmarks Nationalbank's regular market operations in which the monetary-policy counterparties may borrow usually with a maturity of 14 days against securities as collateral. The lending rate is equal to the rate of interest for certificates of deposit. Liquidity In Denmark the key liquidity concept in monetary policy is the current-account deposits of the monetary-policy counterparties, since these funds can be used immediately as a means of payment at the initiative of the account holders. Current-account deposits are therefore often referred to as "liquidity", "current-account liquidity" or "krone liquidity". The key liquidity concept in payment systems is the sum of current-account balances and current-account overdrafts within the day (intraday credit). Margin General excess collateral in connection with a loan. Used in Danmarks Nationalbank's monetary-policy lending where a margin of 2 per cent is required. This means that collateral for a value of at least kr. 102 must be provided for a loan of kr. 100. The collateral value is calculated as the market value of the securities less a haircut. Marginal lending facility A facility in the Eurosystem which the monetary-policy counterparties may use at their own initiative to obtain overnight credit against collateral at a pre-specified interest rate. Also called a Lombard facility. Marginal rate The lowest interest rate at which liquidity is granted in the weekly main refinancing operations in the euro area. See Market operations. Market conventions Conventions for trading in financial contracts and interest calculation. In the Danish money and foreign-exchange markets the settlement date (value date) is normally two banking days after the trade date (t+2) on which the contract is concluded. The yield to maturity in per cent p.a. is calculated according to the money-market convention on the basis of the day-count convention "actual/360", with simple accrual of interest (no compound interest). In the Danish bond market the settlement date for a transaction is normally three business days after the trade date (t+3). Market maker A number of banks have concluded mutual agreements on market making in the various segments of the money market and the foreign-exchange market. Market makers continuously set binding two-way prices vis-à-vis each other for fixed amounts in a number of specific products. Market making contributes to limiting the spread between bid and offer prices. Market operations (Danmarks Nationalbank's) Weekly market operations whereby the monetary-policy counterparties can borrow liquidity against securities as collateral (monetary-policy loans) or make placements by purchasing certificates of deposit. These transactions usually have a maturity of 14 days. Furthermore, Danmarks Nationalbank may need to provide liquidity to the market outside the regular market operations. These extraordinary market operations normally take place as the purchase and sale of certificates of deposit. Market operations (the Eurosystem's) Provision of liquidity to the banking system by the Eurosystem takes place primarily via weekly main refinancing operations conducted as tenders at which bids are collected via the national central banks in the euro area. Liquidity is provided as lending against securities as collateral, and the loans normally have a maturity of two weeks. The Eurosystem also provides liquidity via longer-term refinancing operations conducted as monthly tenders for loans with a maturity of three months. In addition, the Eurosystem may conduct fine-tuning operations to smooth out interest-rate fluctuations, particularly those caused by unexpected liquidity fluctuations. Finally, the Eurosystem may conduct structural operations to adjust its net position vis-à-vis the financial sector over a prolonged period. In January 2003 the ECB announced that the maturity of lending in the weekly main refinancing operations will be reduced from 14 days to 1 week in the 1st quarter of 2004. MFI (Monetary Financial Institution) Used as an aggregate term for banks and mortgage-credit institutes and money-market funds, etc. in e.g. Danmarks Nationalbank's financial statistics. Minimum bid rate The lowest rate at which the monetary-policy counterparties can submit bids in the Eurosystem's weekly main refinancing operations. The minimum bid rate is the ECB's key monetary-policy interest rate. Monetary and foreign-exchange policy As the Danish central bank Danmarks Nationalbank is responsible for monetary policy in Denmark. Danmarks Nationalbank conducts monetary policy by determining the monetary-policy interest rates, i.e. the discount rate, the current-account rate and the lending rate (equal to the rate of interest for certificates of deposit). Danmarks Nationalbank's interest rates guide the short-term interest rates in the Danish money market, as well as the deposit and lending rates that the banks offer customers. Denmark conducts a fixed-exchange-rate policy vis-à-vis the euro. This means that the objective of monetary and foreign-exchange policy is to keep the Danish krone stable against the euro. Other factors besides the exchange rate, such as cyclical development in Denmark, are not included in the monetary-policy considerations. Monetary financing Financing of government budget deficits via direct or indirect credit extension by the central bank. In order to avoid monetary financing, the EU Treaty prohibits credit facilities with the central bank in favour of the central government. The Treaty also prohibits the central bank's purchase of government securities directly from the central government. In Denmark the framework for central-government borrowing also includes the norm for central-government borrowing. Monetary-policy counterparties Danmarks Nationalbank's monetary-policy counterparties are banks and mortgage-credit institutes that operate under respectively the Commercial Banks and Savings Banks Act and the Mortgage Credit Act and meet certain technical criteria. Danmarks Nationalbank may also give Danish branches of foreign credit institutions conducting equivalent business access to the monetary-policy instruments. Danmarks Nationalbank selects its monetary-policy counterparties on the basis of monetary-policy considerations. Monetary-policy day The monetary-policy day runs from 4.00 p.m. to 3.30 p.m. on the following banking day. Monetary-policy instruments This term covers the facilities used by a central bank to manage and service accounts with the monetary-policy counterparties. Danmarks Nationalbank's monetary-policy counterparties are banks and mortgage-credit institutes. They have access to place liquidity with Danmarks Nationalbank as overnight deposits (current-account deposits), and to participate in Danmarks Nationalbank's market operations. Monetary-policy interest rates These are the discount rate and the rates of interest for Danmarks Nationalbank's balances with the monetary-policy counterparties, i.e. the current-account rate and the lending rate (which is equal to the rate of interest for certificates of deposit). The lending rate is the rate of interest for monetary-policy loans. Current-account deposits accrue interest at the current-account rate, which from April 1992 to date (early June 2003) has been equal to the discount rate. The current-account rate is lower than the lending rate. Monetary-policy lending Lending in Danmarks Nationalbank's regular market operations whereby the monetary-policy counterparties can normally raise 14-day loans against securities as collateral. Monetary-policy loans See Monetary-policy lending. Money market The Danish money market is the interbank market for loan agreements and interest-rate derivatives in kroner with a maturity of up to one year. The money market is used for the exchange of liquidity between market participants and for management of short-term interest-rate positions. A well-functioning money market is important to ensure a clear transmission of Danmarks Nationalbank's monetary-policy interest rates to the short-term market interest rates. See also Deposits, Repos and Foreign-exchange swaps. Money-market broker Money-market brokersare intermediaries who do not themselves take positions, but solely establish contact between agents supplying and demanding money-market products. On an anonymous basis, the brokers continuously state the best bid and offer prices in the individual products for standardised maturities on the basis of rates provided by the individual banks. Money-market fund Investment association investing in bank deposits and money-market related securities. Money supply (M3) The money supply consists of bank deposits made by private individuals and business enterprises, and their holdings of banknotes and coins and certain short-term bonds. Net position The monetary-policy counterparties' monetary-policy balance with Danmarks Nationalbank. Calculated as the counterparties' current-account balances with addition of placements in certificates of deposit less monetary-policy loans from Danmarks Nationalbank. Norm for central-government borrowing Agreement between the government and Danmarks Nationalbank on the scope and distribution of central-government borrowing in kroner and in foreign currency. The main feature of the agreement is that the central government's gross domestic financing requirement, i.e. the central government's current deficit and redemptions on the domestic debt in a given financial year, is in principle financed by krone-denominated borrowing. The norm for foreign borrowing entails that the redemptions on the foreign debt in a given financial year are in principle refinanced by borrowing in foreign currency. The purpose of the central government's foreign borrowing is to ensure an adequate foreign-exchange reserve. Options Contract between two parties giving the buyer of the option a right, but not an obligation, to buy or sell an underlying asset for an agreed price (contract price, exercise price or strike price) before or on a specific future expiry date. The buyer of the option pays the seller a premium on conclusion of the contract in return for this right. An option giving the buyer the right to buy the underlying asset is a call option. An option giving the buyer the right to sell the underlying asset is a put option. If the buyer may exercise the option at any time up to the expiry date, it is called an "American option". If the buyer may only exercise the option on the expiry date, it is called a "European option". See also Foreign-exchange option. OTC (Over-The-Counter) Trading in financial products outside the exchanges. Overnight interest rate Rate of interest for a loan with a maturity of one banking day. The overnight (O/N) interest rate applies to a loan commencing on the trade date and expiring on the following banking day. The tomorrow/next (T/N) interest rate applies to a loan commencing on the 1st banking day after the trade date and expiring on the 2nd banking day after the trade date. The spot/next (S/N) interest rate applies to a loan commencing on the 2nd banking day after the trade date and expiring on the 3rd banking day after the trade date. See also T/N interest rate and EONIA. Par Equal to the nominal value of a security. Payment versus payment Settlement principle by which both parties to e.g. a currency trade first pay their part of the trade before the payments are exchanged. See also Settlement and CLS. Pips Pips refers to the spread between the bid and offer prices for foreign currency. For example, a spread of 5 pips on the krone's rate against the euro entails a spread of kr. 0.05 per 100 euro between the bid and offer rates. Rate of interest for certificates of deposit Certificates of deposit are zero-coupon papers issued by Danmarks Nationalbank. The interest rate corresponds to the difference between the redemption price (par) and the bid price. Se also Lending rate. Real-Time Gross Settlement (RTGS) Settlement principle in a payment system whereby the payments are settled individually, immediately and finally to the participants' accounts. See also Settlement. Repos (repurchase agreements) Repos are collateralised loans that are traded on the Danish moneymarket with standardised maturities from 1 day up to 6 months. The pledged collateral comprises securities, typically bonds. Repos are also known as sell and buy-back transactions since on the conclusion of the agreement the seller of the bonds (the liquidity recipient) at the same time enters into an obligation to repurchase the securities at a later date for a price fixed when the agreement is entered into. The repo rate is reflected in the difference between the agreed spot and forward prices. Repurchase agreements See Repos. Reserve requirement A requirement for monetary-policy counterparties to hold minimum reserves on accounts with the central bank. Under the minimum reserve system of the Eurosystem credit institutions in the euro area are obliged to deposit an amount corresponding to 2 per cent of selected liabilities with the national central banks. The reserve requirement must be met on average over a reserve maintenance period of one month. The required reserves are remunerated at the average marginal rate applying to the main refinancing operations in the reserve maintenance period. The Eurosystem's minimum reserve system serves two purposes. Firstly, it helps to stabilise the overnight interest rate since the counterparties have an incentive to lend liquidity in the market when the overnight interest rate is higher than the rate of interest on the required reserves. On the other hand, the counterparties have an incentive to maintain ample reserves in the periods when the overnight interest rate is lower than the rate of interest on the required reserves. Secondly, the minimum reserve system helps to ensure that the counterparties have a structural liquidity deficit vis-à-vis the Eurosystem, which is assumed to enhance the transmission from the monetary-policy interest rates to the market interest rates. Residents and non-residents Pursuant to the Danish Order on Foreign Exchange residents are natural persons or legal entities resident in Denmark. Non-residents are natural persons or legal entities not resident in Denmark. Settlement Exchange of services to fulfil the parties' obligations under a financial contract. For example, trading of securities registered at VP Securities Services is settled by compiling the participants' positions in securities and money respectively several times a day. Danmarks Nationalbank is responsible for the settlement of the money side of the trades. In principle, a securities trade is settled by drawing on the buyer's current account at Danmarks Nationalbank and registering the purchase to the buyer's securities account at VP Securities Services. The money side is settled simultaneously with the securities side. This ensures the availability of both money and securities. Settlement account An account held by a direct participant in the payment system at Danmarks Nationalbank with a view to settlement of payments. Settlement date The day of settlement of a financial transaction. Settlement may take place on the trade date (same-day settlement) or one or several days after the trade date. The settlement date is also called the value date. See also Market conventions. Social Pension Fund (SPF) The Danish Social Pension Fund (SPF) was established in 1970 by the Social Pension Fund Act, whereby a special national retirement pension contribution was introduced. The proceeds were allocated to SPF and invested in bonds. With effect from 1982 the Act was amended, and the payments to SPF ceased. SPF was continued as an asset of the central government. SPF is part of the remit of the Ministry of Social Affairs and the Ministry of Finance. The management of SPF's capital is handled by a committee with representatives from the Ministry of Finance, the Ministry of Social Affairs and Danmarks Nationalbank. The day-to-day management of the assets of SPF is handled by Government Debt Management at Danmarks Nationalbank. Spot transaction In the money and foreign-exchange markets a spot transaction is a contract between two parties on purchase or sale of a financial asset for settlement no later than 2 banking days after the trade date. See also Foreign-exchange spot transaction. Stability and Growth Pact EU pact according to which all EU member states are to ensure a budgetary position close to balance or in surplus in the medium term. Sumclearing Danish payment system for settlement of e.g. retail payments between banks, including cheques, Dankort (debit card) transactions and transfers via BetalingsService (direct debit). Swap rate The swap rate is the fixed interest rate in an interest-rate swap. SWIFT International financial network used for exchanging payment messages. T/N IRS (Tomorrow/Next Interest Rate Swap) T/N IRS is a short-term interest-rate swap applying the T/N rate as the reference interest rate. When a T/N interest-rate swap is concluded the parties in principle agree to exchange the payment of interest at a fixed rate (the swap rate for the maturity in question) for the payment of interest at a floating overnight rate (the T/N rate). The interest payments are calculated on the basis of a fictive principal. The agreement can be concluded for standardised maturities of between 1 and 12 months. On expiry of the swap, the parties' gains and losses are settled (difference settlement) via the exchange of a net amount. The term "CITA swap" is often used synonymously with "T/N IRS" (CITA is an abbreviation of Copenhagen Interest T/n Average). T/N rate (Tomorrow/Next interest rate) Reference interest rate in the Danish money market in a number of financial contracts. The T/N rate is a rate of interest for an overnight loan running from the 1st banking day after the trade date to the 2nd banking day after the trade date. The T/N rate is determined on the basis of data reported to Danmarks Nationalbank by currently 13 major players in the Danish money market. See also T/N IRS. Tender A monetary-policy procedure whereby the central bank provides (absorbs) liquidity to (from) the market on the basis of competitive bids submitted by the monetary-policy counterparties. In the period from 28 June 2000 until now (early June 2003) the Eurosystem's main refinancing operations have been conducted as variable-rate tenders. At the tenders the counterparties submit bids for both interest rates and amounts. Bids with the highest interest rates are accommodated first, and the interest rate that is bid applies. The ECB successively accepts bids for lower interest rates until the desired amount has been allotted. The lowest interest rate at which liquidity is allotted is known as the marginal rate, and liquidity may be allotted on a pro-rata basis at this interest rate. The individual counterparty hereby receives liquidity in relation to its bid at the marginal rate as a proportion of the counterparties' total amount bid at the marginal rate. Prior to the variable-rate tenders the Governing Council of the ECB announces a minimum bid rate which is the lowest interest rate at which bids from the counterparties will be accepted. The minimum bid rate is the ECB's key monetary-policy interest rate. Trade date The date on which a contract for a financial transaction (e.g. a krone-denominated loan or a currency trade) is concluded between two counterparties. Also called trading day. Trading day See Trade date. Value date See Settlement date. VP Securities Services (VP) Institution in the Danish securities market. VP’s most important tasks are to undertake the computerised issue of securities, to book-enter ownership and rights in relation to electronic securities, and to undertake the clearing and settlement of securities transactions. VP System VP Securities Services' system for settlement of trades and other payments (e.g. interest and redemption payments) in connection with securities registered by VP Securities Services. Zero-coupon paper Loan without coupon interest, for which redemption payment falls due on expiry. The certificates of deposit issued by Danmarks Nationalbank are zero-coupon papers.

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