Collateral Management Framework&

Collateral trends in Europe and the Netherlands

2nd Conference Financial Sector of Macedonia on Payments and Securities Settlement Systems

Richard DerksenOhrid, 30 June 2009

Topics

• The Eurosystem collateral framework (ESCB)

• Collateral management at de Nederlandsche Bank

• European and NL collateral trends

• Mobilising collateral

• CCBM2

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 stock exchange)

• No separate collateral-lists for monetary policy purposes or payment system operations

The ESCB framework: Basics

Conditions of the collateral framework -> uniform eligibility criteria:

• Protecting the ESCB from incurring losses in it's monetary policy operations

• Ensuring equal treatment of counterparties• Enhancing operational efficiency and

transparency

Single list of collateral

• 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

Single list of collateral

• 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.

Additionally:• Public Sector Entities-list and guarantees

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)

ECAF - Public Sector Entities (PSEs)Implicit credit assessments for euro area regional government,

local authority and public sector entity issuers, debtors or guarantors without an ECAI credit assessment

• Class 1 – PSE´s equal to the central government -> same ECAI rating

• Class 2 – PSE´s treated like credit institutions -> ECAI rating one notch lower

• Class 3 – PSE´s treated like corporates – no implicit ECAI rating

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)

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).

Eurosystem collateral framework compared to other systems

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

• 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

[Situation before EMU/1999: extensive collateral list: equities, private loans, loans in other currencies, and limits on the use of certain debtors/assettype]

Present collateral framework (NL)

• The ESCB (Euro System of Central Banks) collateral framework

•Collateral management at DNB (De Nederlandsche Bank)

•Trends in collateral: European and NL

•Mobilising collateral

Topics

Eligible collateral by asset type

European growth in deposited collateral (marketable assets, bn EUR)

European evolution of collateral used by asset type

Use of collateral for credit operations

Developments NL collateral pool (yearly averages)

development NL collateralpool (yearly averages)

0

20.000

40.000

60.000

80.000

100.000

120.000

140.000

160.000

180.000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

years

mar

ketv

alu

e (

year

ly a

vera

ges

)

total (mln)

Domestic

Crossborder

Tier-1

Tier-2

mon pol

IDC

usage

Collateral deposited in NL

Based on yearly averages

Domestic-Crossborder collateral in NL

0

20.000

40.000

60.000

80.000

100.000

120.000

140.000

160.000

180.000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

years

mar

ket

valu

e

Crossborder

Domestic

NL collateral pool – place of deposit(March 2009)

Total (Market value = before haircuts)

€ 211 bn

CCBM

ENL

EB

Domestic± € 99 bn

Eurobonds€ 58 bn

€ 30 bn

vaultCredit claims

± € 24 bn

Asset types NL collateral pool 2009 – end-of-March figures

  %

ABS/MBS 67.9%

Bonds 9.2%

Credit claims 9.1%

Medium Term Notes 6.9%

Traditional Pfandbriefe (covered bonds) 6.0%

Jumbo Pfandbriefe (covered bonds) 0,8%

T-Bills/CD/CP 0,0%

(based on collateral values)

NL change in used collateral (asset types)2005 - 2008

Influence financial markets turbulence in NL

Development Collateral 2007-2008

020.000

40.00060.000

80.000100.000

120.000140.000

160.000180.000

200.000

1-1-

2007

1-3-

2007

1-5-

2007

1-7-

2007

1-9-

2007

1-11

-200

7

1-1-

2008

1-3-

2008

1-5-

2008

1-7-

2008

1-9-

2008

1-11

-200

8

2007-2008

Co

llat

eral

val

ue

(m

ln)

Collateral value (mln)

• The ESCB (Euro System of Central Banks) collateral framework

•Collateral management at DNB (De Nederlandsche Bank)

•Trends in collateral: European and NL

•Mobilising collateral

Topics

Collateral management

• Domestic: – DNB vault– Euroclear

Netherlands (CSD)

• Cross border:– Direct links– Euroclear Bank– CCBM CSD

foreign

CSD domestic

CSD foreign

DNB

ICSD (eurobonds)

CCB

CCB

Safekeeping of collateral

EuroclearNetherlands Bank A

DNB

12

1

Structure of domestic safekeeping

3 (= €)

EuroclearNetherlands

(I)CSD(Monte Titoli)

DNB1

21

Bank A

Eligible link

3 (= €)

Structure of eligible links

CCBM = Correspondent Central Bank Model

• Dutch Eurosystem counterparty sends SWIFT MT540 to DNB (and MT542 to its own custodian)

• DNB sends MT540 to the respective CCB• Upon receipt of the securities,

the CCB sends an MT544 to DNB• DNB updates its collateral management

system and increases the credit facility for the Dutch Eurosystem counterparty

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

1

4

3

2

1

5 (= €)

2

National domestic procedures

A common procedure with minimum harmonisation for cross-border use (level of automation, communication protocols)

CPY A NCB A SSS A

SSS BNCB A NCB BCPY A

Step3: transfer instruction

Step1: Request

for credit

Step2: CCBM

message

Step3: Matching

Step 4:Confirmation

Step5: ReceiptStep6:Release credit

Step1: Requestfor credit

Step2: Matching

Step 3:Confirmation/

receipt

Step4:Release credit

Step2: transfer instruction

The current framework for the use of collateral

Today’s situation in the field of Eurosystem collateral management

• Eurosystem collateral management is technically decentralised with different national procedures

– Domestic level: different conditions exist across the euro area

(procedures, communication interfaces, level of automation)

– Cross-border level: CCBM, the specific arrangement at

Eurosystem level for cross-border use, where there are up to five

players (and related procedures) involved

– Domestic/cross-border level: Different conditions for cross-

border (CCBM) and domestic transfers (in terms of execution

time, timing and costs)

• Slow cross-border links

Collateral transferred via CCBM

1999

2007€ 557,920 mio

€ 162,659 mio

• Increased demand for cross-border use of

collateral

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

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

Today’s situation in the field of Eurosystem collateral management

Benefits of CCBM2• Consolidation

– Single technical platform for domestic and cross-border use of collateral

– Centralised IT solution while preserving decentralised business relations between NCBs and counterparties (access to credit) • Harmonisation

– Harmonised service level for all accepted collateral (marketable assets and credit claims), covering existing collateral legal techniques (pledge and repo)

– Harmonised interface with market participants • Efficiency

– Lower costs for consolidated solution which will be based on existing central bank systems (the one jointly operated by National Bank of Belgium/De Nederlandsche Bank)

– Adoption of real-time and straight-through-processing; direct interfacing with TARGET2 (cash settlement) and TARGET2-Securities (securities settlement)

Thank you.Thank you.

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