Transcript Dia 1

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
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The ESCB framework: Principles
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
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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 settlement stock exchange)

No separate collateral-lists for monetary policy purposes or
payment system operations (one framework for all business
lines)
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Single list of collateral (1)

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

Eurosystem accepts a very broad range of collateral (also
broad range of counterparties)
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Single list of collateral (2)

Marketable assets:
listed on regulated markets or certain accepted nonregulated 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)
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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.
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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)
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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 G10 countries; Guarantor
EEA
Acceptable markets
Regulated markets; non-regulated market accepted
by ECB
Currency
Euro
(No minimum size; governing law restricted to EEA)
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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
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Bank
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registration, no restrictions on mobilisation or realisation).
Risk control measures Eurosystem
Marketable assets
High credit
standards

Valuation
haircut

Variation
margins

No close links

Credit claims
Rating of A- or better or an annual probability of default of
10bps or less
Liquidity category
 Coupon type
 Residual maturity
Residual maturity
 Type of interest rate
payment
 Valuation methodology
(NCBs)

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
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Valuation principles

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
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Comparison with other frameworks
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Comparison with other frameworks (2)
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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
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Present collateral framework (NL)

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
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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
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Measures taken since 2008








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
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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
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European evolution of collateral used
by asset type
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Use of collateral for credit
operations
De Nederlandsche Bank
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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
Safekeeping of collateral
(no remote access, repatriation)
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
CSD
foreign
ICSD
(eurobonds)
CCB
DNB
CCB
CSD
domestic
CSD
foreign
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Structure of domestic safekeeping
DNB
2
3
(= credit line)
Euroclear
Netherlands
1
1
Bank A
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Structure of eligible links
1
Bank A
3 (= €)
2
1
(I)CSD
(Monte Titoli)
DNB
Eligible link
Euroclear
Netherlands
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Structure of CCBM
2
CCB
HCB
5
4
6
CSD
1a
3
Custodian/
Agent
1b
CCBM - Correspondent Central Bank Model
CCB - Correspondent Central Bank
HCB - Home Central Bank
CSD - Central Securities Depository
Bank A
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Agenda
• The Eurosystem collateral framework
• Collateral management at the
Nederlandsche Bank
• European collateral trends
• Mobilising collateral
• CCBM1 → CCBM2
De Nederlandsche Bank
Eurosysteem
Topics CCBM2
 Why
CCBM2?
 Principles
 Benefits
of CCBM2
 CCBM2,
The Modules
 Planning
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Granting credit on “foreign” collateral
Collateral management

Domestic:

DNB vault

Local CSD

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
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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
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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
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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
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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
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Topics CCBM2
 Why
CCBM2?
 Principles
 Benefits
of CCBM2
 CCBM2,
The Modules
 Planning
De Nederlandsche Bank
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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
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Important features
 No
separate legal entity, but an ICT solution
 No
compulsion, no prohibition
 Different
modules
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Topics CCBM2
 Why
CCBM2?
 Principles
 Benefits
of CCBM2
 CCBM2,
The Modules
 Planning
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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
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Harmonisation in NCB collateral
management (2)
Impact on Central Banks
Reduce considerably testing effort
Share IT costs and development
Share business knowledge & experience
Share workload
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Harmonisation in NCB collateral
management (3)
Impact on credit institutions
Harmonisation messaging & procedures
Level playing field
Increased speed of collateral mobilisation
(STP)
Real-time monitoring
Decentralised business relations remains
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Topics CCBM2
 Why
CCBM2?
 Principles
 Benefits
of CCBM2
 CCBM2,
The Modules
 Planning
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Details of CCBM2, The Modules
(I)CSDs/SSSs
Counterparties
CCBM2
Message Router
External
CMS
TARGET2
Securities
Module
Credit&
Collateral
Module
Credit
claims
Module
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Message Router
(I)CSDs/SSSs
Counterparties
CCBM2
Message Router
External
CMS
TARGET2
Securities
Module
Credit&
Collateral
Module
Credit
claims
Module
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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)
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Credit and Collateral Module
(I)CSDs/SSSs
Counterparties
CCBM2
Message Router
External
CMS
TARGET2
Securities
Module
Credit&
Collateral
Module
Credit
claims
Module
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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
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Securities Module
(I)CSDs/SSSs
Counterparties
CCBM2
Message Router
External
CMS
TARGET2
Securities
Module
Credit&
Collateral
Module
Credit
claims
Module
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Securities Module
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
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Credit claims Module
(I)CSDs/SSSs
Counterparties
CCBM2
Message Router
External
CMS
TARGET2
Securities
Module
Credit&
Collateral
Module
Credit
claims
Module
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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)
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Topics CCBM2
 Why
CCBM2?
 Principles
 Benefits
of CCBM2
 CCBM2,
The Modules
 Planning
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Tentative High Level Planning
2008-2009
Pre project phase
2010-2011
Development
2012
Test
2013
Migration
Subject to approval of Eurosystem
(september 2010)
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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
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CCBM2 and T2S
TARGET2-Securities
Sub -Cash
accounts
Securities
accounts
TARGET2
Custody
accounts
Single
Eurosystem
Interface
CCBM2
Cash
accounts
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Questions?
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