collateral management framework & collateral trends in europe and the netherlands 2nd conference...
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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).
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
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)
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
(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)