De Nederlandsche Bank Eurosysteem De Nederlandsche Bank Eurosystem Collateral Management Framework Nynke Doornbos 3rd 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 CCBM1 → CCBM2

De Nederlandsche Bank Eurosysteem 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

De Nederlandsche Bank Eurosysteem The ESCB framework: Basics All liquidity providing credit operations of the ESCB based on adequate collateral ( art 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)

De Nederlandsche Bank Eurosysteem Single list of collateral (1) Operational on January 2007 Drawbacks 2-tiers list ( ): 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)

De Nederlandsche Bank Eurosysteem 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)

De Nederlandsche Bank Eurosysteem 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.

De Nederlandsche Bank Eurosysteem 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)

De Nederlandsche Bank Eurosysteem MARKETABLE ASSETS Type of assetsECB debt certificates; other marketable debt instruments Credit standardsAsset of high credit standard; ECAF rules Place of issueEuropean 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 marketsRegulated markets; non-regulated market accepted by ECB CurrencyEuro (No minimum size; governing law restricted to EEA) To sum up (1)

De Nederlandsche Bank Eurosysteem NON-MARKETABLE ASSETS: CREDIT CLAIMS Type of assetsCredit claims Credit standardsHigh 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 CurrencyEuro Minimum sizeUntil Dec 2011: NCB choice for domestic use; 500,000 for cross-border use. After 1 Jan 2012: 500,000 Governing lawLaw 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)

De Nederlandsche Bank Eurosysteem Marketable assetsCredit 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 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

De Nederlandsche Bank Eurosysteem 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

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 CCBM1 → CCBM2

De Nederlandsche Bank Eurosysteem 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)

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 CCBM1 → CCBM2

De Nederlandsche Bank Eurosysteem 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 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

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 CCBM1 → CCBM2

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 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 Safekeeping of collateral (no remote access, repatriation) DNB CSD domestic CSD foreign CSD foreign ICSD (eurobonds)

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

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

De Nederlandsche Bank Eurosysteem 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 a 6 2

De Nederlandsche Bank Eurosysteem 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

De Nederlandsche Bank Eurosysteem 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 Granting credit on “foreign” collateral DNB CSD domestic CSD foreign CSD foreign ICSD (eurobonds)

De Nederlandsche Bank Eurosysteem 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

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 : 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

De Nederlandsche Bank Eurosysteem Press release March 8, 2007 and Decision 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

De Nederlandsche Bank Eurosysteem  Why CCBM2?  Principles  Benefits of CCBM2  CCBM2, The Modules  Planning Topics CCBM2

De Nederlandsche Bank Eurosysteem 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

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

De Nederlandsche Bank Eurosysteem  Why CCBM2?  Principles  Benefits of CCBM2  CCBM2, The Modules  Planning Topics CCBM2

De Nederlandsche Bank Eurosysteem 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

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

De Nederlandsche Bank Eurosysteem Impact on credit institutions  Harmonisation messaging & procedures  Level playing field  Increased speed of collateral mobilisation (STP)  Real-time monitoring  Decentralised business relations remains Harmonisation in NCB collateral management (3)

De Nederlandsche Bank Eurosysteem  Why CCBM2?  Principles  Benefits of CCBM2  CCBM2, The Modules  Planning Topics CCBM2

De Nederlandsche Bank Eurosysteem Details of CCBM2, The Modules CCBM2 Message Router TARGET2 Credit claims Module Credit& Collateral Module Securities Module External CMS Counterparties (I)CSDs/SSSs

De Nederlandsche Bank Eurosysteem Message Router CCBM2 Message Router TARGET2 Credit claims Module Credit& Collateral Module Securities Module External CMS Counterparties (I)CSDs/SSSs

De Nederlandsche Bank Eurosysteem 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)

De Nederlandsche Bank Eurosysteem Credit and Collateral Module CCBM2 Message Router TARGET2 Credit claims Module Credit& Collateral Module Securities Module External CMS Counterparties (I)CSDs/SSSs

De Nederlandsche Bank Eurosysteem 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 Credit and Collateral Module

De Nederlandsche Bank Eurosysteem Securities Module CCBM2 Message Router TARGET2 Credit claims Module Credit& Collateral Module Securities Module External CMS Counterparties (I)CSDs/SSSs

De Nederlandsche Bank Eurosysteem 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

De Nederlandsche Bank Eurosysteem Credit claims Module CCBM2 Message Router TARGET2 Credit claims Module Credit& Collateral Module Securities Module External CMS Counterparties (I)CSDs/SSSs

De Nederlandsche Bank Eurosysteem 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)

De Nederlandsche Bank Eurosysteem  Why CCBM2?  Principles  Benefits of CCBM2  CCBM2, The Modules  Planning Topics CCBM2

De Nederlandsche Bank Eurosysteem Pre project phaseDevelopment Test Tentative High Level Planning Migration Subject to approval of Eurosystem (september 2010)

De Nederlandsche Bank Eurosysteem 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

De Nederlandsche Bank Eurosysteem Sub -Cash accounts Cash accounts Securities accounts Single Eurosystem Interface TARGET2-Securities TARGET2 CCBM2 Custody accounts CCBM2 and T2S

De Nederlandsche Bank Eurosysteem Questions?