De Nederlandsche Bank Eurosystem Collateral Management Framework Nynke

De Nederlandsche Bank Eurosystem Collateral Management Framework Nynke Doornbos 3 rd Macedonian Financial Sector Conference on Payments and Securities Settlement Systems Ohrid 28 June 2010 De Nederlandsche Bank Eurosysteem

Agenda • The Eurosystem collateral framework • Collateral management at the Nederlandsche Bank • Impact of turmoil on financial markets • European collateral trends • Mobilising collateral • CCBM 1 → CCBM 2 De Nederlandsche Bank Eurosysteem

The ESCB framework: Principles Conditions of the collateral framework → uniform eligibility criteria: l Protecting the ESCB from incurring losses in it's monetary policy operations l Volume available collateral is sufficient for effective monetary policy and smooth operation of payment system l Operations accessible to a broad set of counterparties l Equal treatment of counterparties l Enhancing operational efficiency and transparency l In accordance with principle open market economy: free competition -> efficient allocation of resources l No special or privileged treatment of public sector securities De Nederlandsche Bank Eurosysteem

The ESCB framework: Basics l All liquidity providing credit operations of the ESCB based on adequate collateral (art. 18. 1. ESCB statute) (= no cash collateral) l Collateral needed for monetary loans (MRO´s + LTRO´s) and intraday credit + other purposes (guarantees, margin obligations settlement stock exchange) l No separate collateral-lists for monetary policy purposes or payment system operations (one framework for all business lines) De Nederlandsche Bank Eurosysteem

Single list of collateral (1) l Operational on January 2007 l Drawbacks 2 -tiers list (1999 -2006): heterogeneity and no transparency l 2 asset classes: l marketable assets and l non-marketable assets (no quality difference) l Marketable assets: high credit standards (single A↑), located in the euro area, denomination euro l Eurosystem accepts a very broad range of collateral (also broad range of counterparties) De Nederlandsche Bank Eurosysteem

Single list of collateral (2) l Marketable assets: listed on regulated markets or certain accepted nonregulated markets l Non-marketable assets: credit claims and Irish non-marketable retail mortgage backed debt instruments, no market criterion l For both asset classes → Eurosystem credit assessment framework (ECAF) De Nederlandsche Bank Eurosysteem

Eurosystem Credit Assessment Framework ECAF principles: consistency, accuracy and comparability ECAF sources: l ECAI – External Credit Assessment Institutions l ICAS – NCBs in-house credit assessment systems l IRB – counterparties internal ratings-based systems l RT – third-party providers rating tools. De Nederlandsche Bank Eurosysteem

ECAF benchmark/threshold l ´Single A` (A-Fitch and S&P, A 3 Moody´s) or l Probability of default (PD) over a one-year horizon of 0. 10% Definition default stems from EU Capital Requirements Directive (CRD) De Nederlandsche Bank Eurosysteem

To sum up (1) 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 G 10 countries; Guarantor EEA Acceptable markets Regulated markets; non-regulated market accepted by ECB Currency Euro (No minimum size; governing law restricted to EEA) De Nederlandsche Bank Eurosysteem

To sum up (2) 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 De Nederlandsche Bank Eurosysteem registration, no restrictions on mobilisation or realisation).

Risk control measures Eurosystem Marketable assets High credit standards l Valuation haircut l Variation margins l No close links l Credit claims Rating of A- or better or an annual probability of default of 10 bps or less Liquidity category l Coupon type l Residual maturity l Type of interest rate payment l Valuation methodology (NCBs) l Marking to market assets and requiring additional collateral if market prices move substantially No close links between counterparty submitting collateral and issuer/guarantor of collateral De Nederlandsche Bank Eurosysteem

Valuation principles l Valuation on a daily basis l Marketable assets l l Define the most representative price source (market price) l Rules for non-availability of prices -> theoretical price (based on discounted cash flows) l Two hubs provide theoretical prices, Banque de France for ABS, Deutsche Bundesbank for other complex debt instruments Non-marketable assets l Theoretical price or outstanding amount De Nederlandsche Bank Eurosysteem

Comparison with other frameworks De Nederlandsche Bank Eurosysteem

Comparison with other frameworks (2) De Nederlandsche Bank Eurosysteem

Agenda • The Eurosystem collateral framework • Collateral management at the Nederlandsche Bank • Impact of turmoil on financial markets • European collateral trends • Mobilising collateral • CCBM 1 → CCBM 2 De Nederlandsche Bank Eurosysteem

Present collateral framework (NL) l Legal technique: pledge l 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 l Legal setting credit claims: public pledge, physical delivery loan documentation, ex ante notification of debtor De Nederlandsche Bank Eurosysteem

Agenda • The Eurosystem collateral framework • Collateral management at the Nederlandsche Bank • Impact of turmoil on financial markets • European collateral trends • Mobilising collateral • CCBM 1 → CCBM 2 De Nederlandsche Bank Eurosysteem

Measures taken since 2008 l l l l 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 De Nederlandsche Bank Eurosysteem

Agenda • The Eurosystem collateral framework • Collateral management at the Nederlandsche Bank • Impact of turmoil on financial markets • European collateral trends • Mobilising collateral • CCBM 1 → CCBM 2 De Nederlandsche Bank Eurosysteem

Eligible collateral by asset type De Nederlandsche Bank Eurosysteem

European evolution of collateral used by asset type De Nederlandsche Bank Eurosysteem

Use of collateral for credit operations De Nederlandsche Bank Eurosysteem

Agenda • The Eurosystem collateral framework • Collateral management at the Nederlandsche Bank • Impact of turmoil on financial markets • European collateral trends • Mobilising collateral • CCBM 1 → CCBM 2 De Nederlandsche Bank Eurosysteem

Safekeeping of collateral (no remote access, repatriation) Collateral management l Domestic: l DNB vault l Euroclear Netherlands (Local CSD) l Cross border: l Direct link between CSD’s l Euroclear Bank l Foreign CSD via CCBM network of central banks CSD foreign ICSD (eurobonds) CCB DNB CCB CSD domestic CSD foreign De Nederlandsche Bank Eurosysteem

Structure of domestic safekeeping DNB 2 3 (= credit line) Euroclear Netherlands 1 1 Bank A De Nederlandsche Bank Eurosysteem

Structure of eligible links 1 Bank A 3 (= €) 2 1 (I)CSD (Monte Titoli) DNB Eligible link Euroclear Netherlands De Nederlandsche Bank Eurosysteem

Structure of CCBM 2 CCB HCB 5 4 6 CSD 1 a 3 Custodian/ Agent 1 b CCBM - Correspondent Central Bank Model CCB - Correspondent Central Bank HCB - Home Central Bank CSD - Central Securities Depository Bank A De Nederlandsche Bank Eurosysteem

Agenda • The Eurosystem collateral framework • Collateral management at the Nederlandsche Bank • European collateral trends • Mobilising collateral • CCBM 1 → CCBM 2 De Nederlandsche Bank Eurosysteem

Topics CCBM 2 Ø Why CCBM 2? Ø Principles Ø Benefits of CCBM 2 Ø CCBM 2, The Modules Ø Planning De Nederlandsche Bank Eurosysteem

Granting credit on “foreign” collateral Collateral management Ø Domestic: l DNB vault l Local CSD Ø Cross border: • Direct link between CSD’s • Euroclear Bank • Foreign CSD via CCBM network of central banks CSD foreign ICSD (eurobonds) CCB DNB CCB CSD domestic CSD foreign De Nederlandsche Bank Eurosysteem

CCBM: developments Ø Increased demand till 2008 for cross-border use of collateral (2006 > 50%; 2008 > 60%) Ø CCBM is used in 80% of cross-border transactions De Nederlandsche Bank Eurosysteem

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 De Nederlandsche Bank Eurosysteem

Eurosystem answer : CCBM 2 § Given the drawbacks in terms of harmonisation and efficiency, in July 2008 the Governing Council of the ECB decided to launch the CCBM 2 project § A better organisation of the Eurosystem collateral mobilisation § Delivery of collateral, both cross border and domestic § CCBM 2 will offer a harmonised and efficient solution facilitating the interaction of counterparties acting as collateral providers with the Eurosystem De Nederlandsche Bank Eurosysteem

Press release March 8, 2007 and Decision of 17 July 2008 Governing Council decided to: Øreview the current Eurosystem collateral management handling procedures Ødevelop a single IT platform for domestic and cross border collateral Øbased on existing system such as the one of NBB/DNB De Nederlandsche Bank Eurosysteem

Topics CCBM 2 Ø Why CCBM 2? Ø Principles Ø Benefits of CCBM 2 Ø CCBM 2, The Modules Ø Planning De Nederlandsche Bank Eurosysteem

CCBM 2 principles 1. 2. 3. 4. 5. 6. Central Bank IT platform for collateral management Domestic & cross border, pooling & earmarking, pledge & repo For all eligible collateral Real-time straight-through-processing Fully compatible with T 2 and new systems to be developed in future Eligible SSS and eligible links between SSS De Nederlandsche Bank Eurosysteem

Important features Ø No separate legal entity, but an ICT solution Ø No compulsion, no prohibition Ø Different modules De Nederlandsche Bank Eurosysteem

Topics CCBM 2 Ø Why CCBM 2? Ø Principles Ø Benefits of CCBM 2 Ø CCBM 2, The Modules Ø Planning De Nederlandsche Bank Eurosysteem

Harmonisation in NCB collateral management (1) Ø 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 De Nederlandsche Bank Eurosysteem

Harmonisation in NCB collateral management (2) Impact on Central Banks ØReduce considerably testing effort ØShare IT costs and development ØShare business knowledge & experience ØShare workload De Nederlandsche Bank Eurosysteem

Harmonisation in NCB collateral management (3) Impact on credit institutions ØHarmonisation messaging & procedures ØLevel playing field ØIncreased speed of collateral mobilisation (STP) ØReal-time monitoring ØDecentralised business relations remains De Nederlandsche Bank Eurosysteem

Topics CCBM 2 Ø Why CCBM 2? Ø Principles Ø Benefits of CCBM 2 Ø CCBM 2, The Modules Ø Planning De Nederlandsche Bank Eurosysteem

Details of CCBM 2, The Modules (I)CSDs/SSSs Counterparties CCBM 2 Message Router External CMS TARGET 2 Securities Module Credit& Collateral Module Credit claims Module De Nederlandsche Bank Eurosysteem

Message Router (I)CSDs/SSSs Counterparties CCBM 2 Message Router External CMS TARGET 2 Securities Module Credit& Collateral Module Credit claims Module De Nederlandsche Bank Eurosysteem

Message Router Ø Ø Ø Mandatory core module of CCBM 2 Communication with external parties and market infrastructures Main functionalities: l Receiving/sending messages l Validation of messages l Conversion of messages l Query on the status af any operation in process (real-time) De Nederlandsche Bank Eurosysteem

Credit and Collateral Module (I)CSDs/SSSs Counterparties CCBM 2 Message Router External CMS TARGET 2 Securities Module Credit& Collateral Module Credit claims Module De Nederlandsche Bank Eurosysteem

Credit and Collateral Module Management of counterparties’ collateral positions as regards execution of monetary policy or central bank intraday credit operations Assigns each counterparty a single global position: Collateral position = value of assets mobilised Credit position = outstanding credit operations De Nederlandsche Bank Eurosysteem

Securities Module (I)CSDs/SSSs Counterparties CCBM 2 Message Router External CMS TARGET 2 Securities Module Credit& Collateral Module Credit claims Module De Nederlandsche Bank Eurosysteem

Securities Module Main functionalities: Ø Processing of messages (matching, settling, rejecting) Ø Validation checks (eligibility, close links) Static data Ø Handling of corporate actions (coupon payment, redemption) Ø Supporting Pledge & Repo Ø Counterparty receives daily statement of holdings De Nederlandsche Bank Eurosysteem

Credit claims Module (I)CSDs/SSSs Counterparties CCBM 2 Message Router External CMS TARGET 2 Securities Module Credit& Collateral Module Credit claims Module De Nederlandsche Bank Eurosysteem

Credit claims Module Main functionalities: Ø Receiving (de)mobilization requests NCBs (recording) Ø Sending (de)mobilization requests to Router (recording) Ø Validation checks (eligibility, close links) Static data Ø Successfully validated credit claims automatically mobilised (bulk procedures) Ø Supporting different national legal requirements (e. g. eligibility checks, registration, ex-ante debtor notification, banking secrecy) De Nederlandsche Bank Eurosysteem

Topics CCBM 2 Ø Why CCBM 2? Ø Principles Ø Benefits of CCBM 2 Ø CCBM 2, The Modules Ø Planning De Nederlandsche Bank Eurosysteem

Tentative High Level Planning 2008 -2009 Pre project phase 2010 -2011 Development 2012 Test 2013 Migration Subject to approval of Eurosystem (september 2010) De Nederlandsche Bank Eurosysteem

CCBM 2 and T 2 S Ø T 2 S: • market infrastructure project • settlement system • eligible securities of participating CSDs Ø CCBM 2: • project for central bank internal systems • custody (25 CSDs), settlement of MPOs • also credit claims and emergency collateral De Nederlandsche Bank Eurosysteem

CCBM 2 and T 2 S TARGET 2 -Securities Sub -Cash accounts Securities accounts TARGET 2 Custody accounts Single Eurosystem Interface CCBM 2 Cash accounts De Nederlandsche Bank Eurosysteem

Questions? De Nederlandsche Bank Eurosysteem