1. Collateral Management Framework & Collateral trends in Europe and the Netherlands 2nd Conference Financial Sector of Macedonia on Payments and Securities Settlement Systems Richard Derksen Ohrid, 30 June 2009

2. Topics The Eurosystem collateral framework (ESCB) Collateral management at de Nederlandsche Bank European and NL collateral trends Mobilising collateral CCBM2

3. 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

4. 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

5. 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

6. 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)

7. 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

8. 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)

9. 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

10. 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)

11. 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).

12. Eurosystem collateral framework compared to other systems

14. 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

15. 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

16. 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)

17. 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

18. Eligible collateral by asset type

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

20. European evolution of collateral used by asset type

21. Use of collateral for credit operations

22. Developments NL collateral pool (yearly averages)

23. Collateral deposited in NL Based on yearly averages

24. 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 vault Credit claims ± € 24 bn

25. Asset types NL collateral pool 2009 – end-of-March figures % ABS/MBS67.9% Bonds9.2% Credit claims9.1% Medium Term Notes6.9% Traditional Pfandbriefe (covered bonds)6.0% Jumbo Pfandbriefe (covered bonds)0,8% T-Bills/CD/CP0,0% ( based on collateral values )

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

27. Influence financial markets turbulence in NL

28. 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

29. Collateral management Domestic: –DNB vault –Euroclear Netherlands (CSD) Cross border: –Direct links –Euroclear Bank –CCBM ICSD (eurobonds) CCB Safekeeping of collateral

30. Euroclear Netherlands Bank A DNB 1 2 1 Structure of domestic safekeeping 3 (= €)

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

32. 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

33. 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

34. National domestic procedures A common procedure with minimum harmonisation for cross-border use (level of automation, communication protocols) CPY ANCB A SSS A SSS BNCB ANCB BCPY A Step3: transfer instruction Step1: Request for credit Step2: CCBM message Step3: Matching Step 4: Confirmatio n Step5: Receipt Step6: Release credit Step1: Request for credit Step2: Matching Step 3: Confirmation/receipt Step4: Release credit Step2: transfer instruction The current framework for the use of collateral

35. 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

36. 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

37. 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)

38. Thank you. Qu € stions?