de nederlandsche bank eurosysteem de nederlandsche bank eurosystem collateral management framework...

De Nederlandsche Bank Eurosysteem

De Nederlandsche Bank

Eurosystem Collateral Management Framework

Nynke Doornbos

3rd Macedonian Financial Sector Conference on Payments and Securities Settlement Systems

Ohrid28 June 2010


Agenda

• The Eurosystem collateral framework

• Collateral management at the Nederlandsche Bank

• Impact of turmoil on financial markets

• European collateral trends

• Mobilising collateral

• CCBM1 → CCBM2


Conditions of the collateral framework → uniform eligibility criteria: Protecting the ESCB from incurring losses in it's monetary

policy operations Volume available collateral is sufficient for effective monetary

policy and smooth operation of payment system Operations accessible to a broad set of counterparties Equal treatment of counterparties Enhancing operational efficiency and transparency In accordance with principle open market economy: free

competition -> efficient allocation of resources No special or privileged treatment of public sector securities

The ESCB framework: Principles


The ESCB framework: Basics

All liquidity providing credit operations of the ESCB based on adequate collateral (art. 18.1.ESCB statute) (= no cash collateral)

Collateral needed for monetary loans (MRO´s + LTRO´s) and intraday credit + other purposes (guarantees, margin obligations settlement stock exchange)

No separate collateral-lists for monetary policy purposes or payment system operations (one framework for all business lines)


Single list of collateral (1)

Operational on January 2007

Drawbacks 2-tiers list (1999-2006): heterogeneity and no transparency

2 asset classes: marketable assets and non-marketable assets (no quality difference)

Marketable assets: high credit standards (single A↑), located in the euro area, denomination euro

Eurosystem accepts a very broad range of collateral (also broad range of counterparties)


Single list of collateral (2)

Marketable assets: listed on regulated markets or certain accepted non-regulated markets

Non-marketable assets: credit claims and Irish non-marketable retail mortgage backed debt instruments, no market criterion

For both asset classes → Eurosystem credit assessment framework (ECAF)


Eurosystem Credit Assessment Framework

ECAF principles: consistency, accuracy and comparability

ECAF sources: ECAI – External Credit Assessment Institutions ICAS – NCBs in-house credit assessment systems IRB – counterparties internal ratings-based systems RT – third-party providers rating tools.


ECAF benchmark/threshold

´Single A` (A-Fitch and S&P, A3 Moody´s)

or

Probability of default (PD) over a one-year horizon of 0.10%

Definition default stems from EU Capital Requirements Directive (CRD)


MARKETABLE ASSETS

Type of assets ECB debt certificates; other marketable debt instruments

Credit standards Asset of high credit standard; ECAF rules

Place of issue European Economic Area

Settlement/handling procedures

Settled in euro area; centrally deposited in book-entry form with central banks or SSS fulfilling ECB’s minimum standards

Type of issuer/debtor/guarantor

Central banks; public sector; private sector; international and supranational institutions

Place of establishment of

Issuer/debtor/guarantor

Issuer: EEA or non-EEA G10 countries; Guarantor EEA

Acceptable markets Regulated markets; non-regulated market accepted by ECB

Currency Euro

(No minimum size; governing law restricted to EEA)

To sum up (1)


NON-MARKETABLE ASSETS: CREDIT CLAIMS

Type of assets Credit claims

Credit standards High credit standard for debtor/guarantor; ECAF rules

Settlement/handling procedures

Eurosystem procedures

Type of issuer/debtor/guarantor

Public sector; non-financial corporations; international and supranational institutions

Place of establishment of

Issuer/debtor/guarantor

Euro area

Currency Euro

Minimum size Until Dec 2011: NCB choice for domestic use; 500,000 for cross-border use. After 1 Jan 2012: 500,000

Governing law Law of a euro area Member State, max 2.

(Additional legal requirement: verification of existence, notification of debtor or registration, no restrictions on mobilisation or realisation).

To sum up (2)


Marketable assets Credit claims

High credit standards

Rating of A- or better or an annual probability of default of 10bps or less

Valuation haircut

Liquidity category Coupon type Residual maturity

Residual maturity Type of interest rate payment Valuation methodology (NCBs)

Variation margins

Marking to market assets and requiring additional collateral if market prices move substantially

No close links No close links between counterparty submitting collateral and issuer/guarantor of collateral

Risk control measures Eurosystem


Valuation on a daily basis

Marketable assets Define the most representative price source (market price)

Rules for non-availability of prices -> theoretical price (based on discounted cash flows)

Two hubs provide theoretical prices, Banque de France for ABS, Deutsche Bundesbank for other complex debt instruments

Non-marketable assets Theoretical price or outstanding amount

Valuation principles


Comparison with other frameworks


Comparison with other frameworks (2)


Agenda






• CCBM1 → CCBM2


Legal technique: pledge

Pool of collateral- total market value minus haircut (+interest) = credit line

- integrated use of the collateral pool on request of credit institutions like supporting services, e.g. CCP margin and guarantees for special purposes

Legal setting credit claims: public pledge, physical delivery loan documentation, ex ante notification of debtor

Present collateral framework (NL)


Agenda






• CCBM1 → CCBM2


Monetary operations added with longer maturities and fixed rates and with full allotment

Liquidity provisions in other currencies (US dollars , Swiss francs through Fx swaps), additional swap arrangements (US, CHF, JPY, GBP, SEK)

Temporary relaxation of eligibility criteria – ending ult. 2010 Emergency collateral prepared in the toolbox (non-EUR collateral) Higher haircuts and higher rating requirements for ABS, additional

requirements (surveillance reports, ‘financial close links’) Limits for the use of uncovered bank bonds Covered bond program (CBPP) SMP program

Measures taken since 2008


Agenda






• CCBM1 → CCBM2


Eligible collateral by asset type


European evolution of collateral used by asset type


Use of collateral for credit operations


Agenda






• CCBM1 → CCBM2


Collateral management Domestic:

DNB vault Euroclear

Netherlands (Local CSD)

Cross border: Direct link between

CSD’s Euroclear Bank Foreign CSD via

CCBM network of central banks

CCB

CCB

Safekeeping of collateral(no remote access, repatriation)

DNB

CSD domestic

CSD foreign

CSD foreignICSD

(eurobonds)


EuroclearNetherlands Bank A

DNB

12

1

Structure of domestic safekeeping

3 (= credit line)


EuroclearNetherlands

(I)CSD(Monte Titoli)

DNB1

21

Bank A

Eligible link

3 (= €)

Structure of eligible links


Structure of CCBM

CCBM - Correspondent Central Bank Model

CCB - Correspondent Central Bank

HCB - Home Central Bank

CSD - Central Securities Depository

CCB

CSD

Custodian/Agent Bank A

HCB

1b

5

4

3

1a6

2


Agenda





• CCBM1 → CCBM2


Why CCBM2?

Principles

Benefits of CCBM2

CCBM2, The Modules

Planning

Topics CCBM2


Collateral management Domestic:

DNB vault Local CSD

Cross border:• Direct link between

CSD’s• Euroclear Bank• Foreign CSD via

CCBM network of central banks

CCB

CCB

Granting credit on “foreign” collateral

DNB

CSD domestic

CSD foreign

CSD foreignICSD

(eurobonds)


CCBM: developments

Increased demand till 2008 for cross-border use of collateral (2006 > 50%; 2008 > 60%)

CCBM is used in 80% of cross-border transactions


Drawbacks of CCBM

Eurosystem collateral management is technically decentralised with different national procedures

Domestic level: different conditions across the euro area Cross-border level: CCBM Domestic/cross-border level: Different conditions for cross-border

(CCBM) and domestic transfers Not all eligible collateral is easy to deliver cross-border Slow cross-border links Complex model: Too many different messages per country (CSD)

Costs: Lack of standardization Sometimes need for predepositing


Eurosystem answer : CCBM2

Given the drawbacks in terms of harmonisation and efficiency, in July 2008 the Governing Council of the ECB decided to launch the CCBM2 project

A better organisation of the Eurosystem collateral mobilisation

Delivery of collateral, both cross border and domestic

CCBM2 will offer a harmonised and efficient solution facilitating the interaction of counterparties acting as collateral providers with the Eurosystem


Press release March 8, 2007 andDecision of 17 July 2008

Governing Council decided to:

review the current Eurosystem collateral management handling procedures

develop a single IT platform for domestic and cross border collateral

based on existing system such as the one of NBB/DNB


Why CCBM2?

Principles

Benefits of CCBM2

CCBM2, The Modules

Planning

Topics CCBM2


CCBM2 principles

1. Central Bank IT platform for collateral management

2. Domestic & cross border, pooling & earmarking, pledge & repo

3. For all eligible collateral

4. Real-time straight-through-processing

5. Fully compatible with T2 and new systems to be developed in future

6. Eligible SSS and eligible links between SSS


Important features

No separate legal entity, but an ICT solution

No compulsion, no prohibition

Different modules


Why CCBM2?

Principles

Benefits of CCBM2

CCBM2, The Modules

Planning

Topics CCBM2


Harmonisation in NCB collateral management (1) Cross-NCB harmonised procedures, messages and

standards:

• for settlement instructions, corporate actions (coupons, redemptions), statements of holdings

• between NCBs and credit institutions• between NCBs and SSSs/(I)CSDs

• common SWIFT-address

• same SWIFT-message formats using international market standards


Impact on Central BanksReduce considerably testing effortShare IT costs and development Share business knowledge & experienceShare workload

Harmonisation in NCB collateral management (2)


Impact on credit institutionsHarmonisation messaging & proceduresLevel playing fieldIncreased speed of collateral mobilisation (STP)Real-time monitoringDecentralised business relations remains

Harmonisation in NCB collateral management (3)


Why CCBM2?

Principles

Benefits of CCBM2

CCBM2, The Modules

Planning

Topics CCBM2


Details of CCBM2, The Modules

CCBM2Message Router

TARGET2

Credit claimsModule

Credit&CollateralModule

SecuritiesModule

External CMS

Counterparties (I)CSDs/SSSs


Message Router

CCBM2Message Router

TARGET2

Credit claimsModule


SecuritiesModule

External CMS



Message Router

Mandatory core module of CCBM2 Communication with external parties and market

infrastructures Main functionalities:

Receiving/sending messages Validation of messages Conversion of messages Query on the status af any operation in process

(real-time)


Credit and Collateral Module

CCBM2Message Router

TARGET2

Credit claimsModule


SecuritiesModule

External CMS



Management of counterparties’ collateral positions as regardsexecution of monetary policy or central bank intraday credit operationsAssigns each counterparty a single global position:

Collateral position= value of assets mobilised

Credit position= outstanding credit operations

Credit and Collateral Module


Securities Module

CCBM2Message Router

TARGET2

Credit claimsModule


SecuritiesModule

External CMS



Main functionalities: Processing of messages (matching, settling, rejecting) Validation checks (eligibility, close links) Static data Handling of corporate actions (coupon payment,

redemption) Supporting Pledge & Repo Counterparty receives daily statement of holdings

Securities Module


Credit claims Module

CCBM2Message Router

TARGET2

Credit claimsModule


SecuritiesModule

External CMS



Credit claims Module

Main functionalities: Receiving (de)mobilization requests NCBs (recording) Sending (de)mobilization requests to Router (recording) Validation checks (eligibility, close links) Static data Successfully validated credit claims automatically mobilised

(bulk procedures) Supporting different national legal requirements (e.g.

eligibility checks, registration, ex-ante debtor notification, banking secrecy)


Why CCBM2?

Principles

Benefits of CCBM2

CCBM2, The Modules

Planning

Topics CCBM2


2010-20112008-2009 20132012

Pre project phase Development Test

Tentative High Level Planning

Migration

Subject to approval of Eurosystem(september 2010)


CCBM2 and T2S

T2S:• market infrastructure project • settlement system • eligible securities of participating CSDs

CCBM2:• project for central bank internal systems• custody (25 CSDs), settlement of MPOs • also credit claims and emergency collateral


Sub -Cash accounts

Cash accounts

Securities accounts

Single Eurosystem

Interface

TARGET2-Securities

TARGET2 CCBM2

Custody accounts

CCBM2 and T2S


Questions?

de nederlandsche bank eurosysteem de nederlandsche bank eurosystem collateral management framework...

Documents

credit operations

credit claims

intraday credit

broad range of collateral

principlesthe escb framework

high credit standards

monetary policy purposes

escb statute