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Securities and the use of collateral in the context of intraday and monetary credit Content Introduction 1 The use of collateral 1.1 Delivery methods: pledging or repo 5 Notes 20 Practical procedure 22 Glossary of terms 26 Further information 27 7 8 1.2 Asset categories 9 1.3 Credit standards 11 1.4 Risk control measures 12 1.5 Valuation of underlying assets 14 2 Delivery procedures 15 2.1 Using Euroclear Nederland or Euroclear Bank directly 2.2 Using the approved direct links 16 2.3 The ccbm model 17 2.4Collateral service charges 19 15 Introduction De Nederlandsche Bank frequently receives inquiries concerning collateral management, many of which relate to the pledging of collateral in order to obtain credit from De Nederlandsche Bank (DNB). In its role as ‘banker’s bank’, dnb extends intraday credit and monetary loans in euro. Intraday credit is extended by the central banks of the eu member states which, together with the European Central Bank (ecb), form the European System of Central Banks (escb). Monetary loans in euro are extended only by the central banks of the euro area countries that are united with the ecb in the Eurosystem. Chapter 2 describes the operational aspects of using collateral and details the procedures to be followed. One important aspect is that of timing: when does collateral have to be presented to (or withdrawn from) dnb to ensure the size of the credit facility is effectively changed on the desired date. This chapter also lists and explains the direct links between securities depositories and explains cross-border collateralisation of assets through national central banks. This brochure answers frequently asked questions on the use of collateral. For a full description, please refer to ‘The implementation of monetary policy in the Euro area’, published by the ecb1 and the ‘Monetary policy transactions Manual’ published by dnb.2 The present brochure is for information purposes only and is not legally binding. On page 22 we present a practical example of steps one needs to take in order to (de)collateralise assets. A glossary of terms and a list of useful addresses conclude this brochure. Chapter 1 explains in general terms how collateral is used, listing the different collateralisation methods (section 1.1) and what types of assets may be collateralised (section 1.2). Next is a description of the Eurosystem credit assessment framework, ecaf (section 1.3), followed by a section on several risk mitigation measures applied to the different types of collateral (section 1.4). Finally, the different collateral valuation methods are explained (section 1.5). Chapter 1: The use of collateral Lending by DNB to financial sector market parties is subject to the condition that parties provide sufficient collateral in the form of financial assets. Two types of lending facilities are distinguished: intraday credit and monetary lending. dnb provides loans during the day (‘intraday credit’) to credit institutions3 to promote the smooth operation of the European target payment system. Only credit institutions established in the Netherlands, which are subject to regulatory supervision and hold an account with dnb are eligible to receive intraday credit. Banks need intraday credit to make large-value payments to other banks and credit institutions. Through a link between top and the pan-European payment system target4, dnb provides eu-wide payment facilities to credit institutions. Of the collateralised assets in the books of dnb, a substantial part is used to obtain such intraday credit. Monetary loans are extended to any credit institution which has an establishment in the Netherlands and is subject to minimum reserve requirements. Monetary lending is effected by means of the Eurosystem’s two monetary policy instruments. These instruments are: open market operations and the marginal lending facility. The Eurosystem uses these instruments to influence market liquidity. The most important open market operations are the so-called Main Refinancing Operations. A Main Refinancing Operation has a maturity of one week. Other open market operations include Longer-term Refinancing Operations (with maturities of three months) and fine-tuning and structural operations which are carried out with non-standardised frequencies and at non-standardised maturities. The ecb requires credit institutions to hold minimum reserves5 on an account they hold with their respective central bank. The Eurosystem’s minimum reserve system pursues the aim of stabilising money market interest rates and of creating (or enlarging) a structural liquidity shortage. The minimum reserve of each credit institution is determined in relation to certain items on its balance sheet. Compliance with these requirements is determined on the basis of an institution’s average daily reserve holdings over the maintenance period. Credit institutions may also borrow liquidity through one of the Eurosystem’s standing facilities, the marginal lending facility. This facility may be used at the end of the day by credit institutions which have a residual overdraft on their payment /minimum reserve account with dnb. Like all other Eurosystem loans, these loans also need to be secured by sufficient and adequate collateral. Securities and the use of collateral in the context of intraday and monetary credit 1.1 Delivery methods: pledging or repo Before a credit facility may be actually provided, the assets deposited as collateral are first re-valued under risk control measures (see section 1.4). Next, part of the pool’s value is blocked and the corresponding amount debited from the institution’s refinancing account and credited to its cash reserve account. Alternatively, part of the pool may be blocked for special purposes. The rest of the credit facility will be made available in the form of a credit line. There are two ways to supply underlying assets as collateral for intraday credit or monetary lending. Assets may be pledged to dnb, or they may be sold and repurchased in a repurchase transaction, or repo. Both methods fall under the term reverse transactions. dnb usually applies the pledging method, unless a repo is legally prescribed. A repo is required in the case of cross-border collateralisation of assets residing in countries where the repo method is standard. An example of the latter is the use of French collateral via Banque de France. Repo The repo method used by some countries for lending operations is fundamentally different from the pledging method. A repo is a sale of assets under an agreement to repurchase them from the buyer after a stated period and at a stated price. The difference between the selling price and the (re)purchasing price represents the interest accruing during the interval. Pledging In pledging, the borrowing institution’s collateral pool is used to cover the various types of credit extended to that credit institution. There is no direct link between specific loans and specific underlying assets in the collateral pool. The most marked difference between both methods is that a repo does establish a direct connection between specific assets and the credit provided against them: every security acquired in a repo represents a positive balance in the cash account. As under the pledging method, the value of the assets used in a repo is first adjusted under risk control measures. Next, the assets’ adjusted value is transferred directly to the counter party’s payment / cash account held with dnb. Pledged assets may be used both to obtain intraday credit in the form of a credit line and as underlying assets for obtaining monetary loans, which translates into a positive balance in the borrower’s cash account. For collateralisation purposes, a credit institution will transfer assets it holds in an account held with a central securities depository ((i)csd), to the collateral account held there by dnb. In this account the assets are then added to the collateral pool of that credit institution with dnb. Chapter 1: The use of collateral Table 1 graphically shows the difference between the pledge and repo methods. Balance on payment / cash account (repo) 0 balance Credit line based on pledged assets (pledge) } Another purpose served by these criteria is that of guaranteeing equal treatment (a ‘level playing field’) to credit institutions using different kinds of assets. Finally the criteria also aim to increase operational efficiency by introducing standards for various types of assets. Total credit facility on the payment/ cash account The Eurosystem has developed a single framework for eligible assets.6 This single framework, referred to as the Single List, came into effect on 1 January 2007, replacing the earlier two-tier system. The single framework comprises two asset classes: • Marketable assets; • Non-marketable assets (i.e. credit claims and retail mortgage-backed debt instruments). 1.2 Asset categories National Central Banks (ncbs) will only extend credit to credit institutions if it is secured by sufficient and adequate collateral. Not all assets are accepted as collateral by ncbs. To be accepted as collateral assets must meet certain eligibility criteria set down by the Eurosystem. In other words, they must be ‘eligible assets’. The eligibility criteria aim to prevent the Eurosystem from incurring losses on the value of collateralised assets. This aim is achieved by imposing standards on the creditworthiness of the issuer (debtor) of the assets and by applying haircuts. Securities and the use of collateral in the context of intraday and monetary credit Table 2 lists the eligibility criteria for both marketable and non-marketable assets. Eligibility criteria Marketable assets Non-marketable assets Type of asset ECB debt certificates Other marketable debt instruments Credit claims Retail Mortgage-Backed Debt instruments (RMBDs) Credit standards The asset must meet high credit standards. The high credit standards are assessed using ECAF rules for marketable assets The debtor/guarantor must meet high credit standards. The creditworthiness is assessed using ECAF rules for credit claims. The asset must meet high credit standards. The high credit standards are assessed using ECAF rules for RMBDs. Place of issue European Economic Area (EEA) Not applicable Not applicable Settlement/handling procedures Place of settlement: euro area. Instruments must be centrally deposited in book-entry form with central banks or an SSS fulfilling the ECB´s minimum standards. Eurosystem procedures Eurosystem procedures Type of issuer/debtor/guarantor Central banks, Public sector, Private sector, International and supranational institutions Public sector, Non-financial corporations, International and supranational institutions Credit institutions Place of establishment of the issuer/debtor or guarantor Issuer: EEA or non-EEA G10 countries. Guarantor: EEA Euro area Euro area Acceptable markets Regulated markets Non-regulated markets accepted by the ECB Not applicable Not applicable Currency Euro Euro Euro Minimum size Not applicable Minimum size at the time of submission of the credit claim: Between 1 January 2007 and 31 December 2011: -in Netherlands: € 1,000,000 -cross border use: € 500,000 As from 1 January 2012: common threshold of € 500,000 in euro area. Not applicable Governing laws related to credit claims Not applicable Governing law for credit claim agreement and mobilisation: law of a Member State of the euro area. The total number of different laws applicable to counterparty, creditor, debtor, guarantor, credit claim agreement and mobilisation agreement shall not exceed two. Not applicable Cross-border use Yes Yes Yes 10 Chapter 1: The use of collateral A 0.10% probability of default over a one-year period is considered equivalent to a ‘Single A’ credit rating. Dutch registered private claims on government bodies or other eligible debtors that are covered by a government guarantee (e.g. housing associations) are deemed to be equivalent to credit claims. For a marketable asset issued or guaranteed by a regional government, local authority or public sector entity (pse) located in the euro area a different procedure for credit assessment is followed in the absence of an ecai credit assessment. The issuer or guarantor is allocated to one of three classes in accordance with the Capital Requirements Directive (crd). Then an implicit credit assessment is derived from the ecai credit assessment of the central government of the country where the issuer or guarantor is established. Table 3 provides an overview. 1.3 Credit standards The Eurosystem credit assessment framework (ecaf7) defines the procedures, rules and techniques which ensure that the Eurosystem requirement of high credit standards is met. In the assessment of the credit standard of eligible assets the Eurosystem uses information from credit assessment systems belonging to one of four sources, namely: • External credit assessment institutions (ecai’s, i.e. Fitch, Standard & Poor’s, Moody’s, etc.); • ncb’s’ in-house credit assessment systems (icas’s); • Counterparties’ internal ratings-based systems (irb); • Third-party providers’ rating tools (rt’s). Also, in the assessment of the credit standard, the Eurosystem considers institutional criteria and features guaranteeing similar protection, such as guarantees. Table 3 Credit assessments for euro area regional government, local authority and pse issuers/guarantors In order to ensure consistency, accuracy and comparability of these four credit assessment sources, the Eurosystem has devised acceptance criteria for each of the sources and regularly monitors their credit assessment performance against the credit quality threshold. The Eurosystem’s benchmark minimum requirement for high credit standards (its credit quality threshold), is defined in terms of a ‘Single A’8 credit assessment. 11 Allocation of issuers, debtors or guarantors following the CRD ECAF derivation of the implicit credit assessment of the issuer, debtor or guarantor belonging to the corresponding class Class 1 Regional governments, local authorities and PSEs that, according to competent supervisory authorities, can be treated equally to the central government for capital requirements purposes Allocated the ECAI credit assessment of the central government of the country in which it is established Class 2 Regional governments, local authorities and PSEs that, according to competent supervisory authorities, can be treated equally to (credit) institutions for capital requirements purposes Allocated a credit assessment one credit quality step below the ECAI credit assessment of the central government of the country in which it is established Class 3 Other PSEs Treated like private sector issuers or debtors Securities and the use of collateral in the context of intraday and monetary credit 1.4 Risk control measures Marketable assets Eligible marketable assets are allocated to one of four liquidity categories (see Table 4) based on issuer classification and asset type. The haircut applied (see tables 5 and 6) depends on two additional factors: residual maturity and coupon structure (zero, fixed or inverse floater). To protect the Eurosystem against defaulting borrowers, risk control measures are applied to the assets under lying Eurosystem credit. Under these measures, the credit extended on collateral deposited is reduced by certain risk-based percentages. The risk control measure with respect to collateral is known as valuation haircut. This implies that the value of the underlying assets9 is calculated as the market value of the assets less a certain percentage. Table 4 Liquidity categories for marketable assets Category I Category II Category III Category IV Central government debt instruments Local and regional government debt instruments Traditional covered bank bonds Asset-backed securities Debt instruments issued by central banks Jumbo covered bank bonds Credit institutions debt instruments Agency debt instruments Debt instruments issued by corporate and other issuers Supranational debt instruments 12 Chapter 1: The use of collateral Table 5 Valuation haircuts applied to marketable assets Category I Category II Category III Category IV Residual maturity (years) Fixed coupon Zero coupon Fixed coupon Zero coupon Fixed coupon Zero coupon Fixed coupon Zero coupon 0-1 0.5 0.5 1 1 1,5 1,5 2 2 1-3 1,5 1,5 2,5 2,5 3 3 3,5 3,5 3-5 2,5 3 3,5 4 4,5 5 5,5 6 5-7 3 3,5 4,5 5 5,5 6 6,5 7 7-10 4 4,5 5,5 6,5 6,5 8 8 10 > 10 5,5 8,5 7,5 12 9 15 12 18 Table 6 Valuation haircuts applied to marketable inverse floating rate debt instruments Residual maturity (years) Inverse floater coupon 0-1 2 1-3 7 3-5 10 5-7 12 7-10 17 > 10 25 Credit claims are subject to specific valuation haircuts (see Table 7), according to the residual maturity, type of interest payment and the valuation method applied by the ncb. Non-marketable assets Non-marketable retail mortgage-backed debt instruments (rmbd’s) are subject to a valuation haircut of 20%. 13 Securities and the use of collateral in the context of intraday and monetary credit Table 7 Valuation haircuts applied to credit claims with fixed coupon Residual maturity (years) Fixed coupon and a valuation based on a theoretical price assigned by the NCB Fixed coupon and a valuation according to the outstanding amount assigned by the NCB 0-1 7 9 1-3 9 15 3-5 11 20 5-7 12 24 7-10 13 29 > 10 17 41 The haircut applied to credit claims with variable coupons is 7%, irrespective of the valuation method applied by the ncb. dnb applies the outstanding value method for credit claims. then reduced by the risk control measures (valuation haircuts) described in section 1.4. Table 8 shows the calculation methods for the resulting credit provided on the basis of a fixed-rate central government bond with a residual maturity of 2.5 years. In this example, a coupon rate of 4.5% is assumed, accrued over a 4 month (=112 day) period. Given the residual maturity a valuation haircut of 1.5% is applied (see table 5). 1. 5 Valuation of underlying assets When valuing the underlying assets used, dnb applies the following principles: • For each eligible marketable asset a representative price source to be used for the calculation of the market value is defined; • The value of the marketable asset is calculated on the basis of the most representative price on the previous business day preceding the valuation date; • The market or theoretical value of a marketable debt instrument is calculated including accrued interest. Table 8 Calculation of collateral value The value of the collateral is calculated as the sum total of the values of individual holdings, which reflect market price and accrued interest. This total value is 14 Par value 1,000.00 Market price (100.87) 1,008.70 Accrued interest (r=4.5%, t=112) (+) 13.81 Subtotal 1,022.51 Valuation haircut (1.5%, see table 5, Category I) (-) 15.34 Collateral value 1,007.17 Chapter 2: Delivery procedures Changes in the collateral pool lead to a recalculation of the credit facility. When assets are deposited, an eligibility check (see section 1.2) and a credit quality check (see section 1.3) are performed. The value is calculated, taking into account the risk control measures (see section 1.4). After the actual entry of the assets in the books of DNB, the credit line of the credit institution on its payment / cash account is increased. Before assets are withdrawn from the pool, dnb will check whether the then resulting credit facility would be sufficient to cover outstanding obligations. Only then will the withdrawal be carried out. When using credit claims as collateral credit institutions need to send an mt598 to dnb to record the credit claim in the ecms12 database. At the same time the credit institution sends the physical documents (the loan document and pledge agreement) to dnb. After debtor confirmation and eligibility assessment dnb sends an mt598 back to the credit institution and mobilisation of the credit claims as collateral can start. A credit institution may deposit assets into its collateral pool by transferring them directly from its account with the central securities depository (csd) Euroclear Nederland or the international csd (icsd) Euroclear Bank, to the account of dnb held with this (i)csd. Alternatively, both the credit institution and dnb may use the approved direct links between csd’s. Finally, euro-denominated assets not issued in the Netherlands may be transferred to dnb via the local ncb: this method is also known as the ccbm model. Each of the three delivery methods is explained in the next sections. Changes to the collateral pool (i.e. mobilisation of eligible assets) are made by means of standard swift messages (mt540 and mt542). 2.1 U sing Euroclear Nederland or Euroclear Bank directly Credit institutions that also hold accounts in csd Euroclear Nederland or icsd Euroclear Bank (in the case of Eurobonds), may pledge assets from these accounts to the custody account held by dnb within the same (i)csd. Once dnb has received a deposit confirmation from the depository, dnb will update the credit institution’s collateral pool and hence the total value of this institution’s credit facility. dnb uses the collateral management system ecms (Euro Collateral Management System10). ecms is a system which is shared with nbb, the Belgian central bank. Characterised by a high degree of straight through processing (stp), ecms relies on harmonised standards and procedures.11 ecms accepts only free-of-payment (fop) instructions, regardless of the delivery method. 15 Securities and the use of collateral in the context of intraday and monetary credit The information flow is illustrated by diagram 1. By exception same day settlement is possible. Credit institutions that want to use the latter possibility need to communicate this explicitly to dnb for each transaction. Diagram 1 Pool change effected through csd Euroclear Nederland or icsd Euroclear Bank Table 9 Euroclear Nederland and Euroclear Bank time limits for depositing collateral at dnb 2 confirmation DNB 07:00 1 instruction 17:30 DNB operating times Euroclear Netherlands FoP 2 confirmation 1 instruction Euroclear Bank FoP, overnight Euroclear Bank FoP, daylight 17:30 S-1 17:00 17:00 1 instruction Euroclear NL / Bank Bank 2.2 Using the approved direct links Direct links enable borrowers to use eligible marketable assets located in another emu Member State to obtain credit from dnb. Eligible non-marketable assets cannot be transferred through direct links. Direct links involve a cross-border relationship between central securities depositories (csd’s). Each depository holds an account with other csd’s, thus creating bilateral links between each pair. Such a link enables assets issued in the country of one csd, to be held through another csd. In the Netherlands, the csd is Euroclear Nederland. Diagram 2 illustrates one such link. Table 9 shows when instructions should be sent to dnb by a credit institution in order to deposit assets in its collateral pool on the date desired by that credit institution. Thirty minutes after receipt of instructions via the swift network, the total credit facility is adjusted for the collateral movement. In the case of Euroclear Bank, to ensure settlement on day S, credit institutions must send instructions to dnb on day S-1 due to Euroclear Bank’s overnight settlement process. Please be aware that when instructing the with drawal of collateral from the pool account with dnb, the credit facility will be lowered immediately after the receipt of the credit institution’s instruction to do so. 16 Chapter 2: Delivery procedures Diagram 2 Pool change effected through the use of a direct link 2.3 The ccbm model The abbreviation ccbm stands for Correspondent Central Banking Model. This term refers to a co-operative system involving euro area ncb’s and the ecb.14 ccbm enables credit institutions to deposit assets with the ncb of another euro area state in order to obtain credit (liquidity) from dnb. The model is unique in that it allows collateral to be transferred from any csd in the euro area to the respective ncb.15 3 confirmation DNB 1 instruction 3 confirmation 2 transfer Euroclear Nederland 1 instruction Collateral pool deposits and withdrawals by Dutch credit institutions in the context of ccbm involve dnb in its role as Home Central Bank (hcb). This means that dnb will extend loans to credit institutions in the Netherlands on the basis of collateral held, at the request of dnb, by a fellow ncb in the Eurozone, referred to as the Correspondent Central Bank (ccb). dnb will then count these assets as part of the collateral pool against which credit may be obtained. The precise procedure of the ccbm depends on whether the eligible assets are earmarked for each individual transaction or whether they are held in a pool of underlying assets.16 1 instruction Euroclear France Bank Table 10 lists the ecb-approved direct links to Euroclear Nederland.13 The table shows when instructions should be sent to dnb by a credit institution in order to deliver assets from its collateral pool on the date desired by that credit institution. dnb will process these instructions within thirty minutes, thus updating the credit facility. Table 10 Approved direct links time limits for depositing collateral at dnb 07:00 The assets must meet the same ecb eligibility criteria as all other assets used as collateral for central bank lending.17 Broadly speaking both marketable and nonmarketable assets may be used in ccbm collateralisation. Due to their specific characteristics specific ccbm solutions18 have been implemented for the mobilisation of non-marketable assets (i.e. credit claims and rmbd). Diagram 3 illustrates the ccbm model. 17:30 DNB operating times OEKB (AT) 15:30 Clearstream Frankfurt (DE) 15:30 Iberclear (ES) 15:30 Euroclear France (FR) S-1 16:30 Monte Titoli (IT) 15:30 17 Securities and the use of collateral in the context of intraday and monetary credit Diagram 3 Using the ccbm model for marketable assets 3 confirmation CCB DNB (HCB) 1 instruction 1 matching 3 confirmation 3 confirmation CSD 1 instruction 2 transfer 1 instruction Custodian Bank CCBM: Correspondent Central Banking Model CSD: Central Securities Depository CCB: Correspondent Central Bank HCB: Home Central Bank The speed with which foreign assets are transferred to dnb and vice versa depends on local time limits. Within the ccbm, a standardised maximum instruction processing time of half an hour applies. The ccbm is available to counterparties between 9:00 and 16:00 cet on each Eurosystem business day. Also the counterparty must ensure that the collateral for securing monetary policy operations is delivered to the account of the correspondent central bank by 16:45 cet at the latest. Table 11 charts the processing hours of the ccbm model. 18 Chapter 2: Delivery procedures Table 11 ccbm time limits ESCB Collateralisation methods used by local NCB (as an HCB) for marketable and non-marketable assets Processing times BE Pooling Earmarking 09:00 16:00 16:30 DE Yes No 09:00 16:00 16:30 GR Yes No 09:00 16:00 16:30 ES Yes No 09:00 16:00 16:30 FR19 No No 09:00 16:00 16:30 IE No Yes 09:00 16:00 16:30 LU Yes No 09:00 16:00 16:30 AT Yes No 09:00 16:00 16:30 PT Yes No 09:00 16:00 16:30 FI Yes No 09:00 16:00 16:30 SI Yes No 09:00 16:00 16:30 IT Yes No 09:00 16:00 16:30 2.4 Collateral service charges dnb may also be asked to perform the opposite role of ccb, when another ncb, acting as the hcb, requests dnb to receive Dutch assets. dnb then acts as the custodian of those assets, while the other ncb (the hcb) provides credit against them. Given its readership, this brochure will not go any further into this aspect. For its services as custodian dnb charges a custody fee and a transaction fee. The custody fee is calculated (on a daily basis) as a share of the nominal value and is billed quarterly. Information to borrowers is sent daily by means of a ‘Statement of Holdings’ through an mt535 swift message. In addition to the collateral information sent via the swift network, and to encourage a more 19 Securities and the use of collateral in the context of intraday and monetary credit flexible use of collateral information within credit institutions, dnb offers optional Overviews of Collateral Value, which are sent by email. In order to promote Straight through Processing (stp), dnb will send confirmations of securities orders through swift (mt544 and mt546) and expects all securities orders to be sent over the swift network as well. Charges relating to the use of swift are included in the basic custody fee. 1See www.ecb.int. Go to “Monetary policy” and see section “Backgrounders”. 2 See www.dnb.nl, under “Payments” and “Downloads”. 3See glossary of terms for the definition of a credit institution. Dutch credit institutions are listed in the Register pursuant to Section 1:107 of the Financial Supervision Act. 4As of 18 February 2008 DNB will migrate to TARGET2, the future RTGS of the Eurosystem which is based on a single platform infrastructure. 5For a description of which institutions are subject to minimum reserve requirements see ‘The implementation of monetary policy in the Euro area’ and also the Statute of the ESCB, section 19. 6For a comprehensive list of the eligible marketable assets, see the ECB website (www.ecb.int), under “Monetary policy”, section “Collateral”. Eligible non-marketable assets are not published by the ECB; NCBs are responsible for the eligibility assessment of nonmarketable assets. To check for eligibility of a non-marketable asset, please refer to the NCB. 7For detailed information on ECAF, see the ECB publication ‘The implementation of monetary policy in the euro area’, section 6.3. 8“Single A” means a minimum long-term rating of “A-” by Fitch or Standard & Poor’s, or “A3” by Moody’s. 9In case of a repo DNB will not accept underlying assets falling due before the maturity date of the monetary policy operation. 10ECMS was jointly developed with the Belgian central bank. 11See for detailed instructions the publication ‘ECMS SWIFT Templates’ on DNB’s website www.dnb.nl, under “Payments” and “Downloads”. 12DNB’s SWIFT BIC for changes in the collateral pool is ECMSNL2ACCB. 13An updated list of direct links is to be found on the ECB website under “Monetary policy”, “Collateral”, “Mobilise collateral” and “Links between SSSs”. 14CCBM is also available to counterparties of the Bank of England, Danmarks Nationalbank and Sveriges Riksbank. 15For full details, please refer to the ECB website for the brochure ‘CCBM- procedures for Eurosystem counterparties’. 16For more on the earmarking and pooling methods see the brochure ‘CCBM- procedures for Eurosystem counterparties’. 17For Finnish assets to be deposited in the collateral pool, additional requirements apply: a sub account in the name of the credit institution must be opened with the central bank of Finland, and a ‘deed of pledge’ is required for the right of pledge on the Finnish assets to be duly registered. 18For detailed information see the brochure ‘CCBM-procedures for Eurosystem counterparties’ (annex 2), available on the ECB website. 19The collateralisation method used by the Banque de France when acting as HCB is repo with global margining for marketable and nonmarketable assets. 20 Practical procedure 21 Securities and the use of collateral in the context of intraday and monetary credit Practical procedure Assuming you have read the theoretical framework, we will now explain the steps you should take in order to deposit assets into your collateral pool. (If you wish to withdraw assets from the pool, begin at Step 3.) Practical procedure Assuming you have read the theoretical framework, we will now explain the steps you should take in order to step 1 assets into your collateral pool. (If you wish to withdraw assets from the pool, begin at Step 3.) deposit Once you have selected the security you wish to deposit, you may verify on the ecb website (www.ecb.int) whether it is eligible. An asset is eligible if it is listed in the Eligible Assets Database. See the example below. STEP 1 Once you have selected the security you wish to deposit, you may verify on the ECB website (www.ecb.int) whether it is eligible. An asset is eligible if it is listed in the Eligible Assets Database. See the example below. Please enter the search criteria to query the Eligible Assets Database ISIN Code: Other registration number: Asset Type: Bond Medium-term note (Treasury) bill / commercial paper / certificate of deposit Private loan to central government Reference Market: Duesseldorfer Boerse (Amtlicher Handel, Geregelter Markt) (MTS): w holesale market for governement securities AIAF, Mercado de Renta Fija Amtlicer Wertpapierhandel-Wiener Boerse Arvopaperiporssi(Stock Exchange) Athens Stock Exchange Baden-Wuerttembergische Wertpapierboerse (Amtlicher Handel, Geregelter Markt) Boerse Berlin-Bremen (Amtlicher Handel, Geregelter Markt) Denomination: Austria, Schillings Belgium, Francs European Economic and Monetary Union, Euros Finland, Markkaa Issuance Date from: to: (DD/MM/YYYY) Maturity Date from: to: (DD/MM/YYYY) 22 Denomination: Issuance Date Austria, Schillings Belgium, Francs European Economic and Monetary Union, Euros Finland, Markkaa Practical procedure from: to: (DD/MM/YYYY) Maturity Date from: to: (DD/MM/YYYY) Country of location: Austria Belgium Belgium-Luxembourg Bulgaria Issuer Name: Other Issuer Name: Issuer Residence: Issuer Group: Austria Belgium Bulgaria Canada Agency - Credit Institution Agency - Non Credit Institution Central Bank Central Government Guarantor Name: Other Guarantor Name: Guarantor Residence: Guarantor Group: Coupon Definition: Valuation Haircut Austria Belgium Bulgaria Cyprus Agency - Credit Institution Agency - Non Credit Institution Central Bank Central Government Fixed Inverse floater Variable Zero from: % to: % 23 Coupon Definition: Fixed Inverse floater Securities and the use of collateral in the context of intraday and monetary credit Variable Zero Valuation Haircut from: % to: Sort by: <none> and then by: <none> % STEP step 2 2 theselected selectedassets assets are are eligible, eligible, you useuse thethe table below to determine in what they may bemay be delivered If Ifthe youmay maythen then table below to determine in way(s) what way(s) they delivered to (or, in the case of a withdrawal, by) DNB. to (or, in the case of a withdrawal, by) dnb. Direct Approved direct link Approved CCBM direct link Direct yes/no yes/no yes/no yes / no yes / no CCBM yes / no Country of issue BEof issue Country DE BE GR DE FR IE GR IT FR LU IE NL AT IT PT LU SI FI NL ES AT EUROCLEAR PT STEP 3 Direct Approved direct link CCBM X link Approved direct Direct X X X x x X X X X X X CCBM x x x x x X X x x X X x X X X X X x x x x SI x FI x Find the deadline by which your instruction should reach DNB in the appropriate table so that you may realise ES x x the desired increase or decrease of your credit line at the desired time. EUROCLEAR Method Direct x Table 9 24 Practical procedure step 3 Find the deadline by which your instruction should reach dnb in the appropriate table so that you may realise the desired increase or decrease of your credit line at the desired time. Method Table Direct 9 Approved direct link 10 CCBM 11 step 4 Initiate the deposit or withdrawal procedure by sending the appropriate instruction messages to dnb and to your custodian through swift. step 5 dnb will increase (or decrease) your credit line on the basis of the value of the assets deposited (withdrawn). Should you have any questions after reading this brochure, please do not hesitate to call the Investment Services section of dnb at telephone number +31 20 524 2474. You may also contact Investment Services by e-mail at [email protected] 25 Securities and the use of collateral in the context of intraday and monetary credit Glossary of terms Intraday credit: credit extended for a period of less than one business day. It may be extended by central banks to even out mismatches in payment settlements and can take the form of (i) a collateralised overdraft or (ii) a lending operation against a pledge or in a repurchase agreement. Inverse floating rate instrument: a structured note where the rate of interest paid to the note holder varies inversely with changes in a certain reference interest rate. Link between two securities settlement systems: a link consists of all the procedures and arrangements for the transfer of securities between two such systems through a book-entry process. Longer-term refinancing operation: a regular open market operation executed by the Eurosystem in the form of a reverse transaction. Longer-term refinancing operations are executed through monthly standard tenders and have a maturity of three months. Main refinancing operation: a regular open market operation executed by the Eurosystem in the form of a reverse transaction. Main refinancing operations are conducted through weekly standard tenders and normally have a maturity of one week. Open market operation: an operation executed on the initiative of the central bank in the financial market. With regard to their aims, regularity and procedures, Eurosystem open market operations can be divided into four categories: main refinancing operations, longer-term refinancing operations, fine-tuning operations and structural operations. As for the instruments used, reverse transactions are the main open market instrument of the Eurosystem and can be employed in all four categories of operations. Repo operation: a liquidity-providing reverse transaction based on a repurchase agreement. Repurchase agreement: an arrangement whereby an asset is sold while the seller simultaneously obtains the right and obligation to repurchase it at a specific price on a future date or on demand. Such an agreement is similar to collateralised borrowing, with the difference that ownership of the securities is not retained by the seller. The Eurosystem uses repurchase agreements with a fixed maturity in its reverse transactions. Reverse transaction: an operation whereby the national central bank buys or sells assets under a repurchase agreement or conducts credit operations against collateral. Securities settlement system (SSS): a system which permits the holding and transfer of securities or other financial assets, either free of payment (FOP) or against payment (delivery versus payment). Treaty: the Treaty establishing the European Community (or EC Treaty). It comprises the original EEC Treaty (Treaties of Rome) as amended. Valuation haircut: a risk control measure applied to underlying assets used in reverse transactions, implying that the central bank calculates the value of underlying assets as the market value of the assets reduced by a certain percentage (haircut). The Eurosystem applies valuation haircuts reflecting features of the specific assets, such as the residual maturity. Central securities depository (CSD): an entity which holds and administers securities or other financial assets, holds the issuance accounts and enables transactions to be processed by book entry. Assets may exist either physically (but immobilised within the CSD) or in dematerialised form (i.e. only as electronic records). Collateral pooling system: a system for the management of assets deposited as collateral to secure various transactions with the central bank. A pooling system differs from an ‘earmarking’ system in that individual underlying assets are not associated with individual transactions. Correspondent Central Banking Model (CCBM): a mechanism established by the ESCB with the aim of enabling counterparties to use underlying assets in a cross-border context. In the CCBM, national central banks act as custodians for each other. This implies that each national central bank has a securities account in its securities administration for each of the other national central banks (and for the ECB). Credit institution: refers in this document to an institution covered by the definition contained in Article 1(1) of Directive 2000/12/EC of the European Parliament and of the Council of 20 March 2000 relating to the taking up and pursuit of the business of credit institutions, as amended by Directive 2000/28/EC of the European Parliament and of the Council of 18 September 2000. Thus, a credit institution is: (i) an undertaking whose business is to receive deposits or other repayable funds from the public and to grant credit for its own account; or (ii) an undertaking or any other legal person, other than those under (i), which issues means of payment in the form of electronic money. ‘Electronic money’ shall mean monetary value as represented by a claim on the issuer which is: (a) stored on an electronic device; (b) issued on receipt of funds of an amount not lower in value than the monetary value issued; and (c) accepted as a means of payment by undertakings other than the issuer. Custodian: an entity which undertakes the safekeeping and admini stration of securities and other financial assets on behalf of others. Depository: an agent with the primary role of recording securities either physically or electronically and keeping records of the ownership of these securities Euro area: the term by which the EU Member States which have adopted the euro as their single currency in accordance with the Treaty are collectively defined. European System of Central Banks (ESCB): refers to the ECB and the national central banks of the EU Member States (see Eurosystem). Eurosystem: Comprises the ECB and the national central banks of the EU Member States of the euro area. The decision-making bodies of the Eurosystem are the Governing Council and the Executive Board of the ECB. Fixed-rate instrument: a financial instrument for which the coupon is fixed throughout the life of the instrument. Floating-rate instrument: a financial instrument for which the coupon is periodically reset relative to a reference index to reflect changes in short or medium-term market interest rates. Floating rate instruments have either pre-fixed coupons or post-fixed coupons. 26 Further information For questions on operational matters: De Nederlandsche Bank N.V. Payments and Securities Department Investment Services P.O. Box 98 1000 AB Amsterdam Telephone: Fax: E-mail: +31 20 524 2474 +31 20 524 2521 [email protected] De Nederlandsche Bank N.V. Payments and Securities Department Relationship management P.O. Box 98 1000 AB Amsterdam Telephone: Fax: E-mail: +31 20 524 3209 +31 20 524 2880 [email protected] De Nederlandsche Bank N.V. Communication and Information Department P.O. Box 98 1000 AB Amsterdam Telephone: Internet: E-mail: +31 20 524 9111 www.dnb.nl [email protected] Information Centre Visitors to the Information Centre of De Nederlandsche Bank receive an introduction to the bank and its duties. Please consult the bank’s website (www.dnb.nl) or contact the Information Centre directly at telephone number +31 20 524 3339.