VP - The Danish Securities Centre (Denmark)

PREAMBLE AND DISCLAIMER NOTICE

The following document comprises the answers formulated by VP - The Danish Securities Centre (hereinafter, VP) in reply to the Disclosure Framework questionnaire forwarded to VP by the joint CPSS and IOSCO Working Group on Disclosure by Securities Settlement Systems.

The Disclosure Framework has been completed by VP for the benefit of potential participants in the VP Securities Settlement System and is intended to assist such participants make an informed general assessment of the VP Securities Settlement System.

The nature of the Disclosure Framework questionnaire entails that VP cannot accept responsibility for the completeness, accuracy or actuality of the information stated therein or construed with respect thereto and that reference to other sources will be necessary. For further details and verification of the information given in the Disclosure Framework, please refer to the appropriate organisations and authorities in Denmark.

VP - The Danish Securities Centre

Helgeshoej Allé 61, P O Box 20

2630 Taastrup, Denmark

Phone: + 45 43 58 88 88

Fax: + 45 43 71 20 03

E-mail: vp@vp.dk

DISCLOSURE FRAMEWORK FOR SECURITIES SETTLEMENT SYSTEMS

VP - THE DANISH SECURITIES CENTRE

I. Basic information

A. The SSS is named VP - The Danish Securities Centre.

B. VP is located in Taastrup (19 kilometres west of Copenhagen), Denmark; Central European Time zone.

C. Functions performed by VP: services relating to the deposit and settlement of securities.

1. VP serves as both a securities depository and as a provider of securities settlement services.

a) The following types of instruments are eligible for deposit at VP: Danish listed/unlisted bonds and shares etc; and foreign listed/unlisted bonds and shares etc.

b) The following types of instruments are eligible for transfer within VP: Danish listed/unlisted bonds and shares etc; and foreign listed/unlisted bonds and shares etc.

c) All VP-eligible securities are dematerialised.

d) VP does not provide safekeeping for physical certificates.

2. VP intermediates in the transfer of funds to cash accounts in conjunction with securities transfers. VP does not provide cash accounts. In relation to the VP System, cash accounts are kept by an entity termed 'Primary Cash Provider' (corresponds approximately to 'Cash Correspondent' as defined in the Glossary). Payment settlement in relation to the VP System can take place in DKK and the currencies comprised by the Danish central bank's system for settlement in foreign currency.

3. VP is the exclusive provider of trade matching services for such securities as are settled at VP.

4. VP is the exclusive provider of trade netting services for such securities as are settled at VP. The netting performed by VP is multilateral.

5. VP does not currently offer a securities lending or borrowing programme, although it is legally entitled to do so.

6. VP provides both custodial services and services related thereto, including: notification of all ownership changes; intermediation of payments to investors (dividend interest and drawn amounts); notification of payments drawings and redemptions; notification of corporate actions and subscription rights etc; as well as tax reporting and double taxation administration.

7. VP does not act as a central counterparty or principal to transactions with its participants.

8. n.a. (no other functions in relation to deposit and settlement are performed by VP).

D. VP is organised as a private, independent and non-profit orientated entity.

1. VP is a private-sector entity.

2. VP is organised on a non-profit basis.

3. The legal basis for the establishment of VP and for securities transfers made through it is the Danish Securities Centre Act of 1 July 1980 and the Danish Securities Trading Act of 20 December 1995.

E. A description of the organisational and ownership structure of VP:

1. In principle there are no owners of VP. In practice the participants comprise the VP Board of Directors and the participants pay VP's costs.

2. VP operates its own system. VP does not outsource any of the functions of the VP System.

3. VP has a Board of Directors:

a) The VP Board has 14 (non executive) members:

- 11 representing the participants of VP (banks, brokers, issuers of securities, institutional investors, and the Danish central bank);

- 2 representing the employees of VP; and

- an independent chairman appointed by the Minister for Business and Industry.

b) Responsibilities of the VP Board:

- ensure that VP has a reasonable, prudent, and efficient organisation;

- make decisions in matters under the Danish Securities Centre Act and the Danish Securities Trading Act;

- hear and approve fees and budgets;

- examine and approve annual accounts; and

- ensure that established directives on control and security are satisfactory and adequate.

F. The financial resources of VP as of 31 December 1995:

1. Net capital of VP: DKK 40.6 million.

2. In accordance with the Danish Securities Trading Act, the total capital capability of a SSS as regards its custody obligations shall amount to at least DKK 1 billion by way of contributions from the participants. In relation to VP, the said contributions take the form of guarantees issued by the participants for the benefit of VP.

3. VP does not retain credit lines or letters of credit.

4. VP has the power to raise participant payments to VP.

G. As dependent on the activity concerned, all of VP's operations are subject to the authorisation, supervision and oversight of the Danish Financial Supervisory Authority.

II. Rules and procedures of VP

A. The rules and procedures governing the rights and obligations of the participants as well as the duties of VP are set out in: the VP Participation Agreement including any subagreements, supplements and appendices; as well as VP's statutes, business conditions, guidelines and rules as in force at any time.

1. As of their entering the Participation Agreement, the participants will in the context of the above material receive a copy of such rules and procedures as are applicable to the participation categories chosen by the participants.

2. As regards rules and procedures, no other documentation than that mentioned above is provided to the participants.

3. The procedure for changing rules and procedures:

a) Legal details are changed by the Danish Financial Supervisory Authority. Policy matters are changed by the Board of Directors. Operational details are changed by VP.

b) Participants are informed of changes in rules and procedures by letter and through an updating of the documentation received.

c) A user committee is heard about proposed changes to rules and procedures.

B. The rules and procedures are binding on both VP and its participants. In exceptional circumstances, VP may waive or suspend written rules and procedures subject to the approval of the Danish Financial Supervisory Authority.

III. Relationships with participants

A. Types of membership offered by VP:

1. The types of membership offered by VP differ as follows:

- an 'account controller' is authorised to maintain investor accounts and issue dematerialised securities;

- a 'major client' only has account(s) in its own name;

- an 'direct clearing member' has a cash account with the Danish central bank;

- an 'indirect clearing member' has a cash account with a direct clearing member; and

- a 'foreign CSD' has a unique link agreement as separate from the Participation Agreements entered by other members of VP.

2. All participants within a given VP membership category are subject to the same rules and procedures.

B. Those participants as are connected to VP under the 'account controller ' category can and will as the general rule establish accounts for their customers' assets that are segregated from their own asset accounts at VP.

1. This segregation will as a rule be accomplished by way of a multiplicity of accounts but can also be effected through the establishment of omnibus accounts.

2. In accordance with the Danish Securities Trading Act, the securities of participants and their customers shall as the general rule be segregated, but in exceptional circumstances non-segregation is possible subject to the approval of the Danish Financial Supervisory Authority.

3. The fact that an VP account bears the name of a third party does not confer any rights as a participant onto such a third party but only rights as a VP account holder.

C. Participant requirements for each type of membership:

- European passport to investment services (account controllers, major clients, direct clearing members, and indirect clearing members).

- Insurance company or pension fund status (institutional members/major clients).

- National CSD under public supervision (foreign CSD).

1. Participants are not required to be domiciled or resident in any particular jurisdiction.

2. In accordance with the Danish Securities Trading Act, participation as a foreign CSD requires that the entity in question be subject to public supervision. The remaining categories of participation do not require subjection to any particular supervisory regime.

3. Participants are not required to hold an equity stake in VP.

4. Other requirements: in accordance with the Danish Securities Trading Act (Part 21 - agreements with CSDs) account controllers, institutional investors and foreign CSDs must enter a participation agreement with the CSD in question (ie, VP) as a prerequisite for participation in VP's book entry business; and in accordance with said Act (Part 16 - agreements with clearing centres), the SSS in question (ie, VP) shall determine the terms of connection as a clearing participant. The detailed requirements for each type of membership are listed in VP's rules and procedures.

D. VP does not engage in oversight of its participants.

E. Participants may terminate their membership of VP subject to three months notice and providing all outstanding membership obligations have been satisfied before the expiration of the notice of termination. Additional liabilities may remain after the point of exit if the participant was a member of VP's loss-sharing arrangement (all domestic account controllers). These liabilities shall expire three months after the end of the financial year (of exit).

F. Where a participant connected to VP's clearing business grossly or repeatedly disregards the conditions of connection or becomes the subject of winding-up proceedings or an administration order etc, VP shall be entitled to terminate the Participation Agreement in question. Where the supervisory authorities issue an order in respect of a participant connected to VP's book-entry business as an account controller or such a participant becomes subject to winding-up proceedings or an administration order etc, VP shall be obliged and entitled respectively to terminate the Participation Agreement in question.

G. As regards VP's clearing and settlement, VP shall be subject to a fault-based liability as towards the participants where a clearing and settlement related service from VP is delayed or contains errors or defects. This liability shall be limited to remedy and re-delivery, cf contractual agreement.

As regards VP's book entry of ownership/rights to dematerialised securities, VP shall be subject to a strict liability as towards the participants in their capacity as holders of rights for losses resulting from erroneous book-entries, cf statutory legislation.

IV. Relationships with other SSSs and commercial intermediaries

A. VP maintains an automated linkage with one other SSS, based on multiple processing cycles per business day.

1. Identity of other SSSs and type of securities transferred via the linkage:

a) The other SSS is Euroclear, located in Brussels.

b) All Danish securities in VP are eligible for transfer via the linkage.

c) The transfer of securities via the Euroclear-VP linkage can be effected both free of and against payment. In the latter case, the transfer of securities shall take place simultaneously with the posting of the payment corresponding thereto.

d) Euroclear does not provide custody services to VP.

B. VP does not employ the services securities custodians and/or commercial cash correspondents.

C. Standards used by VP when approving/reviewing relationships with other SSSs: financial requirements are as stipulated in the CAD; operational requirements are those of on-line communication as based on international standards, including SWIFT securities messages.

D. VP does not advance funds or securities to or on behalf of any other intermediaries.

E. Measures in place to protect VP and its participants against the failure of other SSSs to meet obligations as towards VP: no custody exposure; no credit exposure since all decisions relating to credit and collateral lie with the Danish central bank; and alternative sources of liquidity and securities (commercial banks) are available.

V. Securities transfers, funds transfers, and linkages between transfers

A. In VP the clearing and settlement of a transaction requires the reporting of both a 'preadvice' (contains transaction details) and an 'instruct' (a final confirmation of the preadvice and designation of 'validity period' during which the trade may be recycled in the settlement process) by both parties to the transaction. As from the receipt of the last of the two preadvices, VP will carry out 'matching' (a comparison of the information contained in the preadvices). For a transaction to be included in the settlement process (ie attain 'ready for settlement' status) both preadvices concerning the transaction must have been received by VP and matching completed with a positive result before a predetermined point in time, in addition to which the instructs of both parties to the transaction must be received before the same time limit and designate validity periods that coincide in whole or in part.

1. Matching is required for all types of transactions without exception.

2. If the results of matching (of preadvices) is negative, the preadvices in question will automatically be cancelled and should the parties still want to settle their transaction, they must report new preadvices. If the settlement instructs do not specify validity periods which coincide at least in part, the said instructs will automatically be cancelled and should the parties still want to settle their transaction, they can re-instruct the preadvices in question provided the latter have not lapsed.

3. When both parties to a transaction have reported instructs with coinciding validity periods, the reporting shall be binding on the participants and cannot be unilaterally cancelled or revoked.

a) Securities transactions which prior to a participant's winding-up administration or compulsory composition (ie a participant's failure to meet obligations) have been reported to VP for settlement and which are binding on the parties will be settled in accordance with VP's Clearing Rules.

b) The above rule is a feature of the VP Clearing Rules pertaining to netting in the event of winding up etc, and it has been agreed with the participants in accordance national law, ie the Danish Securities Trading Act.

c) Transactions become binding as from the point in time when both parties to the transaction have reported instructs to VP which coincide at least in part. No pre-matching takes place prior to the matching of preadvices in VP.

B. Only a small proportion of the securities transferred within VP are registered.

1. The registrar is selected by the company in which the shares are issued.

2. Registered securities are kept in the name of the beneficial owner or in any name which such owner wishes to have registered.

3. As part of the services offered, VP will transfer owner requests for registration to the registrar.

4. VP will initiate re-registration in the event of a change of ownership or a request by the owner for an amendment of the registration.

5. Re-registration is effected immediately. VP informs the registrar as a by-product of the settlement process. In most cases the registrar updates on a same day or next day basis.

6. Securities can be transferred within VP before registration in a buyer's name is complete. VP's database is the official proof of legal title so the rules and procedures of VP do not provide for an unwind or reversal of such a transfer in the event of bankruptcy or other events which result in the buyer's name not being entered on the register.

C. A description of how securities transfers are processed in VP:

1. Securities transfers in VP are processed as debits and credits to the securities accounts of the participants or their customers/clients.

2. Transfers can be effected immediately (real time) or (more commonly) as part of a batch settlement. There are several batch cycles per day.

3. Real time transfers can be effected from 08.00 to 15.00 hours CET. Batch settlements are processed with legal effect times of 18.00, 23.30, 06.00 and 10.30 hours CET.

4. Settlement is effected on all Danish weekdays except Saturdays, Constitution Day (5 June), and Christmas Eve (24 December). No differentiation is made between the various types of securities.

D. Funds transfers in conjunction with the VP System are made as debits and credits to balances held at the Danish central bank.

1. VP does not maintain any form of cash accounts for its participants. The settlement accounts in question are maintained by the Danish central bank.

2. The participant bears a cash deposit risk on the Danish central bank in so far as the participant holds funds at this entity for the purpose of settling securities transactions.

3. VP does not provide any credit extensions or advances of funds to its participants and does therefore not expose itself to any credit risk.

4. n.a. (see answer to question V.D.3.)

E. A description of the DVP system used in VP:

1. Securities transfers are processed in VP, cash transfers are processed in the Danish central bank. The two systems are linked in accordance with an agreement between VP and the Danish central bank with communications being effected via the data centre of the latter.

a) As regards RTGS, securities transfers are linked to funds transfers on a trade-by-trade basis. As regards batch settlement, securities transfers are linked to funds transfers on a net basis.

b) Large transactions must be split (by the participants): as regards VP's net settlement, transactions concerning bonds denominated in DKK may not exceed nom. DKK 500 million.

2. Securities transfers and funds transfers become final and irrevocable at the same point in time.

a) As regards RTGS, securities transfers become final at the time of transfer. As regards batch settlement, securities transfers become final at the conclusion of the settlement cycle.

b) Funds transfers become final and irrevocable at the same time as the corresponding securities transfers. VP has real time access to the credit lines of the participants in the Danish central bank.

Within the parameters of VP's batch settlement and RTGS systems, the timing of funds transfer finality allows for the same-day re-transfer of funds received in exchange for securities.

c) The final delivery of securities does not precede the final transfer of funds. Participants cannot dispose of such securities prior to funds finality.

d) The final delivery of funds does not precede the final delivery of securities. Participants cannot dispose of such funds prior to securities finality.

e) The timing of finality is the same for all such instruments as are eligible for transfer within VP and for all currencies in which payment is to be made.

3. Participants have access to clearing information both prior to settlement as well as after finality.

F. VP does not "guarantee" funds or securities transfers.

1.- 3. n.a. (see answer to question V.F.)

VI. Default procedures

A. In accordance with the rules and procedures of VP, the following events or circumstances would or could constitute the default of a participant or warrant the use of exceptional procedures: a declaration of insolvency, a file for bankruptcy, or the issue of an administration order would constitute default under the rules of VP; a failure to meet obligations as towards other clearing members or the authorities could lead to the suspension of participant; and the VP Board of Directors and the Danish Financial Supervisory Authority are entitled to suspend a participant should the latter grossly or repeatedly violate duties or obligations.

1. A participant's insolvency, bankruptcy or administration as pursuant to the applicable laws of that participant's jurisdiction will constitute an event of default.

2. A participant's reapeated failure to make payments or deliveries of securities within the time specified could potentially lead to a suspension of payments by that participant and thus default.

3. Should a participant grossly or repeatedly violate its duties or obligations, the VP Board of Directors and the Danish Financial Supervisory Authority are entitled to suspend that participant.

B. Procedures followed by VP in the event of a participant default or VP's determination that exceptional procedures are to be employed: the defaulting participant will be disconnected - it will not be able to enter into new obligations and it will not be able to access its funds in the cash accounts at the Danish central bank. However, the said funds in the Danish central bank will be available to meet the defaulting participant's obligations under VP's netting rules. No unwinds of transfers will be necessary or possible.

1. VP informs all participants immediately after an event of default has occurred.

2. In the event of participant default etc, VP will continue to meet its obligations as towards the participants: VP will continue its operations as normal and settlement will continue under VP's normal DVP conditions.

VP is not at risk in the event of a participant's default since VP is not party to the transactions. VP's risk would be the operational risk: a loss-causing system malfunction that cannot be corrected because it coincides with a participant's default.

There are no loss-sharing arrangements etc, as between the participants: the individual participants are exposed to a price/market risk if their counterparty is the defaulting participant and as such is unable to settle due to insufficient funds or securities.

3. n.a. (see answer to question VI.B.2)

4. The VP settlement system does not comprise provisional transfers of securities or funds.

5. Neither bankruptcy nor insolvency can be declared retrospectively in VP's jurisdiction, ie Denmark.

6. Transfers of securities or funds that in answer to question V.E.2. are defined as final, will under no circumstances be unwound in VP.

C. In VP's history, a number of participants have been declared insolvent or in default, etc.

1. There are no loss-sharing procedures as regards the VP settlement system.

2. The mentioned occurrences of insolvency/default did not lead to any losses for VP. The market/price risk of the defaulting participants was carried by the participants.

VII. Securities overdrafts, securities lending, and back-to-back transactions

A. Debit positions (overdrafts) in securities accounts at VP can never arise.

1.- 4. n.a. (see answer to question VII.A.)

B. VP does not provide for the lending of securities.

1.- 4. n.a. (see answer to question VII.B.)

C. In VP, back-to-back transactions are settled as follows:

1. Delivery instructions by participants receiving and redelivering securities on the same day under back-to-back transactions, are only settled for same day value if the participant in question has securities on deposit that have been received no later than the final securities transfer, ie a receipt no later than the same settlement cycle or the redelivery.

2. With the exception of the transaction size maximum specified in answer to question V.E.1.b), there are no limits in place as regards the above-mentioned arrangement for the settlement of back-to-back transactions.

3. Payment instructions by participants in VP under back-to-back transactions are only settled for same day value if the participant has funds on deposit with the Danish central bank that have been received no later than simultaneously with a final funds transfer, ie no later than in the same settlement cycle.

Several settlement cycles per day entails several opportunities to settle back-to- back with same day value.

An on-delivery of securities to a counterparty outside the VP System is not possible without an extension of credit.

VIII. Risk control measures

A. A description of the roles and responsibilities of those sectors of VP as are responsible for risk management and control:

1. VP has a process for the internal review of risk management policies and procedures. A description of this process is contained in the VP rules and procedures pertaining to safeguard measures.

2. VP has a risk management policy that addresses the review and approval of new products and services to be offered by VP. The risk management approval of a new product or service is given at the Board of Director level of VP's organisation.

3. VP has no specific risk management function.

4. The VP Board of Directors review risk management policies and procedures. VP's Board has the support of an internal audit. The Board does not have a risk management committee.

B. VP's activities are subject to both an external and internal audit.

1. The external audit is effected by Deloitte Touche Tohmatsu International, while the internal audit is performed by the VP Internal Information Systems Audit as appointed by VP's Board of Directors.

2. VP's compliance with both internal controls as well as external rules and procedures is audited by the external audit. The internal audit encompasses supervision of whether: VP's systems accord with the law and VP's statutes; security, safeguard measures and audit requirements are satisfied during the development, upkeep and operation of the systems; VP's business conditions are adequate from a security and safeguard point of view; VP's guidelines accurately reflect the functioning of the VP System; and security and safeguard procedures are followed in conjunction with daily operations.

3. VP is audited continuously by both the external and internal audit.

4. The audit reports of the external audit are available to the Danish Financial Supervisory Authority and to a participants audit committee.

C. VP will have the capacity to value (ie, mark-to-market) securities from Q2 1997.

1. These valuations will be used in VP's collateralisation services.

2. Securities will be re-evaluated on a daily basis.

3. The source of the security valuations will be market prices as adjusted by a haircut (determined by the creditor).

D. VP does not have a lien on the securities held in or transferred through it.

1.- 2. n.a. (see answer to question VIII.D.)

E. Circumstances in which collateral is used to limit or mitigate risk:

1. VP does not operate a collateral management system. Such a system will be operational Q2 1997.

2. VP does not share a collateral system with any other SSS or payment system.

3. Collateral at VP can be posted and returned on the same day.

4. The types of transactions at VP which will potentially involve the use of collateral (as defined in the VP System for the administration of rights of security) will be those where both parties thereto are participants in VP's clearing and settlement system.

5. The creditor decides which (VP eligible) securities can be used as collateral and the haircut required.

6. The collateral valuation methodologies as are employed by the VP collateral management system are reviewed by the VP User Committee.

7. Policies and procedures as regards collateral are described in VP's settlement rules.

F. The VP Settlement system does not use limits on exposure as a method of monitoring or controlling risk.

1.- 6. n.a. ( see answer to question VIII.F.)

G. A description of other controls to mitigate or reduce risks at VP:

1. VP has the capacity to monitor participants' accounts during processing. Within the parameters of VP's settlement system, VP's participants also have the capacity to monitor their accounts continuously during processing.

2. For the time being, VP does not have a special risk control regime as regards participants known to be experiencing financial difficulties.

3. VP has a loss-sharing arrangement (minimum DKK 1 billion) for errors in VP's depository system (loss of ownership and loss of rights to securities in the book- entry system). VP do not have a loss-sharing arrangement for the settlement system. In case of the default of a clearing member a VP participant will be exposed to a price risk for all unsettled trades as towards the defaulting participant.

IX. Operational risks

A. The operational reliability of the systems used by VP:

1. The percentage uptime of the systems used by VP:

a) As regards the whole system, overall percentage uptime is greater than 99.5%.

b) As regards minor delays in settlement: Three days per year.

c) As regards minor delays in cross border transmissions: Five days per year.

2. Major operational problems experienced by VP during the last two years:

a) One incident in the last two years caused a delay of 22 hours.

b) Bacteria in the water cooling system caused a cooling failure and subsequently a CPU-failure.

B. A description of contingency/disaster recovery planning at VP:

1. VP has a formal contingency plan for business continuity in place.

2. The plan is not available to the participants.

3. The plan is rehearsed every 6-9 months. This testing includes the switching of communication lines to the participants.

4. Major elements of the business continuity plan:

- Access to a back-up site.

- Establishment of an emergency organisational structure.

- Access to a complete hardware installation.

- Continuous download of data to back-up site and restoration of all software systems and programs.

- Substitution of VP's entire communication system.

5. The planned time for VP's resumption of operations if the primary systems become unusable is 16 hours.

C. Key features of the internal controls covering operations and security at VP: establishment of operational control and securities measures:

The entire VP organisation is focused on operational integrity and security. A list of internal controls would be very long. VP's internal audit evaluates the internal controls: that the controls are working, adequate and in compliance with the directives of VP's Board of Directors. Policy decisions regarding internal control and security are made by VP's Board of Directors. Detailed decisions are made by the General Management.

1. VP has detailed controls and procedures in place to ensure that VP acts only on authentic settlement instructions from valid participants.

2. The internal operational and security controls of VP are included in both the external and internal audit of VP.

3. The internal operational and security controls of VP are covered by regulatory requirements as applicable to VP, specifically an executive order pertaining to informations system audit.

D. VP does not impose any minimum operational standards on third parties (eg communication providers) as separate from settlement participants.

1. No specific standard exist for third parties or participants, but a new participant must undergo a formal test before being granted access to the VP System. This test covers technical and operational as well as business matters. The test as well as acceptance criteria are specified by VP.

2. The general rule of Danish law is one of liability based on fault (culpa). In the event of losses incurred due to operational problems caused by third parties or participants, VP would need to bring legal action against the a third party or a participant. As regards the consequences of operational problems in relation to the other participants, see answer to question III.G.

1996-12-10/1997-03-05

(SSSDISC.WP6) JB

J.nr. DI 053-09-9/J.nr. DI 05346