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
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Agenda
• The Eurosystem collateral framework
• Collateral management at the Nederlandsche Bank
• Impact of turmoil on financial markets
• European collateral trends
• Mobilising collateral
• CCBM1 → CCBM2
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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
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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)
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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)
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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)
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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.
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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)
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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)
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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)
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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
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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
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Comparison with other frameworks
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Comparison with other frameworks (2)
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Agenda
• The Eurosystem collateral framework
• Collateral management at the Nederlandsche Bank
• Impact of turmoil on financial markets
• European collateral trends
• Mobilising collateral
• CCBM1 → CCBM2
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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)
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Agenda
• The Eurosystem collateral framework
• Collateral management at the Nederlandsche Bank
• Impact of turmoil on financial markets
• European collateral trends
• Mobilising collateral
• CCBM1 → CCBM2
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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
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Agenda
• The Eurosystem collateral framework
• Collateral management at the Nederlandsche Bank
• Impact of turmoil on financial markets
• European collateral trends
• Mobilising collateral
• CCBM1 → CCBM2
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Eligible collateral by asset type
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European evolution of collateral used by asset type
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Use of collateral for credit operations
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Agenda
• The Eurosystem collateral framework
• Collateral management at the Nederlandsche Bank
• Impact of turmoil on financial markets
• European collateral trends
• Mobilising collateral
• CCBM1 → CCBM2
De Nederlandsche Bank Eurosysteem
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)
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EuroclearNetherlands Bank A
DNB
12
1
Structure of domestic safekeeping
3 (= credit line)
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EuroclearNetherlands
(I)CSD(Monte Titoli)
DNB1
21
Bank A
Eligible link
3 (= €)
Structure of eligible links
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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
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Agenda
• The Eurosystem collateral framework
• Collateral management at the Nederlandsche Bank
• European collateral trends
• Mobilising collateral
• CCBM1 → CCBM2
De Nederlandsche Bank Eurosysteem
Why CCBM2?
Principles
Benefits of CCBM2
CCBM2, The Modules
Planning
Topics CCBM2
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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)
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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
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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
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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
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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
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Why CCBM2?
Principles
Benefits of CCBM2
CCBM2, The Modules
Planning
Topics CCBM2
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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
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Important features
No separate legal entity, but an ICT solution
No compulsion, no prohibition
Different modules
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Why CCBM2?
Principles
Benefits of CCBM2
CCBM2, The Modules
Planning
Topics CCBM2
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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
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Impact on Central BanksReduce considerably testing effortShare IT costs and development Share business knowledge & experienceShare workload
Harmonisation in NCB collateral management (2)
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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)
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Why CCBM2?
Principles
Benefits of CCBM2
CCBM2, The Modules
Planning
Topics CCBM2
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Details of CCBM2, The Modules
CCBM2Message Router
TARGET2
Credit claimsModule
Credit&CollateralModule
SecuritiesModule
External CMS
Counterparties (I)CSDs/SSSs
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Message Router
CCBM2Message Router
TARGET2
Credit claimsModule
Credit&CollateralModule
SecuritiesModule
External CMS
Counterparties (I)CSDs/SSSs
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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)
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Credit and Collateral Module
CCBM2Message Router
TARGET2
Credit claimsModule
Credit&CollateralModule
SecuritiesModule
External CMS
Counterparties (I)CSDs/SSSs
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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
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Securities Module
CCBM2Message Router
TARGET2
Credit claimsModule
Credit&CollateralModule
SecuritiesModule
External CMS
Counterparties (I)CSDs/SSSs
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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
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Credit claims Module
CCBM2Message Router
TARGET2
Credit claimsModule
Credit&CollateralModule
SecuritiesModule
External CMS
Counterparties (I)CSDs/SSSs
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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)
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Why CCBM2?
Principles
Benefits of CCBM2
CCBM2, The Modules
Planning
Topics CCBM2
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2010-20112008-2009 20132012
Pre project phase Development Test
Tentative High Level Planning
Migration
Subject to approval of Eurosystem(september 2010)
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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
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Sub -Cash accounts
Cash accounts
Securities accounts
Single Eurosystem
Interface
TARGET2-Securities
TARGET2 CCBM2
Custody accounts
CCBM2 and T2S
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Questions?