The Eurosystem Collateral Management Framework at De Nederlandsche Bank

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

2. Agenda • The Eurosystem collateral framework • Collateral management at the Nederlandsche Bank • Impact of turmoil on financial markets • European collateral trends • Mobilising collateral • CCBM1 → CCBM2

3. 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

4. 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)

5. 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)

6. Single list of collateral (2) • 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.

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. To sum up (1)

10. To sum up (2)

11. Risk control measures Eurosystem

12. 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

13. Comparison with other frameworks

14. Comparison with other frameworks (2)

15. Agenda • The Eurosystem collateral framework • Collateral management at the Nederlandsche Bank • Impact of turmoil on financial markets • European collateral trends • Mobilising collateral • CCBM1 → CCBM2

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

17. Agenda • The Eurosystem collateral framework • Collateral management at the Nederlandsche Bank • Impact of turmoil on financial markets • European collateral trends • Mobilising collateral • CCBM1 → CCBM2

18. 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

19. Agenda • The Eurosystem collateral framework • Collateral management at the Nederlandsche Bank • Impact of turmoil on financial markets • European collateral trends • Mobilising collateral • CCBM1 → CCBM2

20. Eligible collateral by asset type

21. European evolution of collateral used by asset type

22. Use of collateral for credit operations

23. Agenda • The Eurosystem collateral framework • Collateral management at the Nederlandsche Bank • Impact of turmoil on financial markets • European collateral trends • Mobilising collateral • CCBM1 → CCBM2

24. 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

25. Structure of domestic safekeeping DNB 2 1 3 (= credit line) 1 Euroclear Netherlands Bank A

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

27. Structure of CCBM 2 CCB HCB 5 4 CSD 6 1a 3 1b Custodian/ Agent BankA CCBM - Correspondent Central Bank Model CCB - Correspondent Central Bank HCB - Home Central Bank CSD - Central Securities Depository

28. Agenda • The Eurosystem collateral framework • Collateral management at the Nederlandsche Bank • European collateral trends • Mobilising collateral • CCBM1 → CCBM2

29. Topics CCBM2 • Why CCBM2? • Principles • Benefits of CCBM2 • CCBM2, The Modules • Planning

30. 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

31. 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

32. 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

33. 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

34. Press release March 8, 2007 andDecision 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

35. Topics CCBM2 • Why CCBM2? • Principles • Benefits of CCBM2 • CCBM2, The Modules • Planning

36. CCBM2 principles • Central Bank IT platform for collateral management • Domestic & cross border, pooling & earmarking, pledge & repo • For all eligible collateral • Real-time straight-through-processing • Fully compatible with T2 and new systems to be developed in future • Eligible SSS and eligible links between SSS

37. Important features • No separate legal entity, but an ICT solution • No compulsion, no prohibition • Different modules

38. Topics CCBM2 • Why CCBM2? • Principles • Benefits of CCBM2 • CCBM2, The Modules • Planning

39. 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

40. 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

41. 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

42. Topics CCBM2 • Why CCBM2? • Principles • Benefits of CCBM2 • CCBM2, The Modules • Planning

43. (I)CSDs/SSSs Counterparties CCBM2 Message Router External TARGET2 CMS Credit& Credit Securities Collateral claims Module Module Module Details of CCBM2, The Modules

44. (I)CSDs/SSSs Counterparties CCBM2 Message Router External TARGET2 CMS Credit& Credit Securities Collateral claims Module Module Module Message Router

45. 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)

46. (I)CSDs/SSSs Counterparties CCBM2 Message Router External TARGET2 CMS Credit& Credit Securities Collateral claims Module Module Module Credit and Collateral Module

47. 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

48. (I)CSDs/SSSs Counterparties CCBM2 Message Router External TARGET2 CMS Credit& Credit Securities Collateral claims Module Module Module Securities Module

49. 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

50. (I)CSDs/SSSs Counterparties CCBM2 Message Router External TARGET2 CMS Credit& Credit Securities Collateral claims Module Module Module Credit claims Module