Collateral Management Framework & Collateral trends in Europe and the Netherlands

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. 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

4. 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 The ESCB framework: Basics

5. 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

6. 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) Single list of collateral

7. 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 Eurosystem Credit Assessment Framework

8. ´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 benchmark/threshold

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

12. Eurosystem collateral framework compared to other systems

14. Risk control measures Eurosystem

15. 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

16. 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 [Situation before EMU/1999: extensive collateral list: equities, private loans, loans in other currencies, and limits on the use of certain debtors/assettype]

17. Topics • The ESCB (Euro System of Central Banks) collateral framework • Collateral management at DNB (De Nederlandsche Bank) • Trends in collateral: European and NL • Mobilising collateral

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 Credit claims ± € 24 bn vault Domestic ± € 99 bn ENL Eurobonds € 58 bn EB € 30 bn CCBM

25. Asset types NL collateral pool 2009 – end-of-March figures (based on collateral values)

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

27. Influence financial markets turbulence in NL

28. Topics • The ESCB (Euro System of Central Banks) collateral framework • Collateral management at DNB (De Nederlandsche Bank) • Trends in collateral: European and NL • Mobilising collateral

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

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

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

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 2 CCB HCB 4 3 1 CSD 5 (= €) 2 1 Custodian/ Agent BankA CCBM - Correspondent Central Bank Model CCB - Correspondent Central Bank HCB - Home Central Bank CSD - Central Securities Depository

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

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. Today’s situation in the field of Eurosystem collateral management 2007 • 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 € 557,920 mio Collateral transferred via CCBM 1999 € 162,659 mio

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?