2nd Conference Financial Sector of Macedonia on Payments and Securities Settlement Systems

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

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).

Eurosystem collateral framework compared
to other systems



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

Eligible collateral by asset type

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



European evolution of collateral used

by asset type

Use of collateral for credit operations

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
marketvalue (yearly averages)
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
market value
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

vault

Credit 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
)

NL change in used collateral (asset types)

2005
-

2008

Influence financial markets turbulence in NL

Development Collateral 2007-2008
0
20.000
40.000
60.000
80.000
100.000
120.000
140.000
160.000
180.000
200.000
1-1-2007
1-3-2007
1-5-2007
1-7-2007
1-9-2007
1-11-2007
1-1-2008
1-3-2008
1-5-2008
1-7-2008
1-9-2008
1-11-2008
2007-2008
Collateral value (mln)
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)

ICSD


(eurobonds)

CCB


CCB


Safekeeping of collateral

Euroclear

Netherlands

Bank A

DNB

1

2

1

Structure of domestic safekeeping

3 (=
€
)

Euroclear

Netherlands


(I)CSD

(Monte Titoli)

DNB

1

2

1

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 B

NCB A

NCB B

CPY 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

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)








Thank you.



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€
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