The implementation of monetary policy in the euro area — General documentation on Eurosystem monetary policy instruments and procedures

CONTENTS

Introduction

CHAPTER 1

Overview of the monetary policy framework

1.1.	The European System of Central Banks

1.2.	Objectives of the Eurosystem

1.3.	Eurosystem monetary policy instruments

1.3.1.

Open market operations

1.3.2.

Standing facilities

1.3.3.

Minimum reserves

1.4.	Counterparties

1.5.	Underlying assets

1.6.	Modifications to the monetary policy framework

CHAPTER 2

Eligible counterparties

2.1.	General eligibility criteria

2.2.	Selection of counterparties for quick tenders and bilateral operations

2.3.	Sanctions in the event of non-compliance with counterparty obligations

2.4.	Suspension or exclusion on grounds of prudence

CHAPTER 3

Open market operations

3.1.	Reverse transactions

3.1.1.

General considerations

3.1.2.

Main refinancing operations

3.1.3.

Longer-term refinancing operations

3.1.4.

Fine-tuning reverse operations

3.1.5.

Structural reverse operations

3.2.	Outright transactions

3.3.	Issuance of ECB debt certificates

3.4.	Foreign exchange swaps

3.5.	Collection of fixed-term deposits

CHAPTER 4

Standing facilities

4.1.	The marginal lending facility

4.2.	The deposit facility

CHAPTER 5

Procedures

5.1.	Tender procedures

5.1.1.

General considerations

5.1.2.

Tender operations calendar

5.1.3.

Announcement of tender operations

5.1.4.

Preparation and submission of bids by counterparties

5.1.5.

Tender allotment procedures

5.1.6.

Announcement of tender results

5.2.	Procedures for bilateral operations

5.3.	Settlement procedures

5.3.1.

General considerations

5.3.2.

Settlement of open market operations

5.3.3.

End-of-day procedures

CHAPTER 6

Eligible assets

6.1.	General considerations

6.2.	Eligibility specifications for underlying assets

6.2.1.

Eligibility criteria for marketable assets

6.2.2.

Eligibility criteria for non-marketable assets

6.2.3.

Additional requirements for the use of eligible assets

6.3.	Eurosystem credit assessment framework

6.3.1.

Scope and elements

6.3.2.

Establishment of high credit standards for marketable assets

6.3.3.

Establishment of high credit standards for non-marketable assets

6.3.4.

Acceptance criteria for credit assessment systems

6.3.5.

Performance monitoring of credit assessment systems

6.4.	Risk control measures

6.4.1.

General principles

6.4.2.

Risk control measures for marketable assets

6.4.3.

Risk control measures for non-marketable assets

6.5.	Valuation principles for underlying assets

6.6.	Cross-border use of eligible assets

6.6.1.

Correspondent central banking model

6.6.2.

Links between securities settlement systems

CHAPTER 7

Minimum reserves

7.1.	General considerations

7.2.	Institutions subject to minimum reserve requirements

7.3.	Determination of minimum reserves

7.4.	Maintenance of reserve holdings

7.5.	Reporting, acknowledgement and verification of the reserve base

7.6.	Non-compliance with minimum reserve obligations

ANNEXES

1.	Examples of monetary policy operations and procedures

2.

Glossary

3.	Selection of counterparties for foreign exchange intervention operations and foreign exchange swaps for monetary policy purposes

4.	The reporting framework for the money and banking statistics of the European Central Bank

5.	The Eurosystem websites

6.	Procedures and sanctions to be applied in the event of non-compliance with counterparty obligations

7.	Creation of valid security over credit claims

LIST OF BOXES, CHARTS AND TABLES

Boxes

1.	Issuance of ECB debt certificates

2.	Foreign exchange swaps

3.	Operational steps for tender procedures

4.	Allotment of fixed rate tenders

5.	Allotment of variable rate tenders in euro

6.	Allotment of variable rate foreign exchange swap tenders

7.	Risk control measures

8.	Calculation of margin calls

9.	Reserve base and reserve ratios

10.	Calculation of the remuneration of holdings of required reserves

Charts

1.	Normal time frame for the operational steps in standard tenders (times are stated in ECB time (CET))

2.	Normal time frame for the operational steps in quick tenders

3.	The correspondent central banking model

4.	Links between securities settlement systems

Tables

1.	Eurosystem monetary policy operations

2.	Normal trade days for the main and the longer-term refinancing operations

3.	Normal settlement dates for Eurosystem open market operations

4.	Eligible assets for Eurosystem monetary policy operations

5.	Implicit credit assessments for euro area regional government, local authority and public sector entity issuers, debtors or guarantors without an ECAI credit assessment

6.	Liquidity categories for marketable assets

7.	Levels of valuation haircuts applied to eligible marketable assets in relation to fixed coupon and zero coupon instruments

8.	Levels of valuation haircuts applied to eligible marketable inverse floating rate debt instruments

9.	Levels of valuation haircuts applied to credit claims with fixed interest payments

ABBREVIATIONS

CCBM	correspondent central banking model
CET	Central European Time
CIs	credit institutions
CRD	Capital Requirements Directive
CSD	central securities depository
EC	European Community
ECAF	Eurosystem credit assessment framework
ECAI	external credit assessment institution
ECB	European Central Bank
EEA	European Economic Area
EEC	European Economic Community
ESA 95	European System of Accounts 1995
ESCB	European System of Central Banks
EU	European Union
ICAS	in-house credit assessment system
ICSD	international central securities depository
IDC	intraday credit
IRB	internal ratings-based system
ISIN	International Securities Identification Number
MFI	monetary financial institution
MMF	money market fund
NCB	national central bank
PD	probability of default
PSE	public sector entity
RMBD	retail mortgage-backed debt instrument
RoW	rest of the world
RT	rating tool
RTGS	real-time gross settlement
SSS	securities settlement system
TARGET	Trans-European Automated Real-time Gross settlement Express Transfer system
UCITS	undertaking for collective investment in transferable securities

Introduction

This document presents the operational framework chosen by the Eurosystem (1) for the single monetary policy in the euro area. The document, which forms part of the Eurosystem’s legal framework for monetary policy instruments and procedures, is intended to serve as the ‘General Documentation’ on the monetary policy instruments and procedures of the Eurosystem, and is aimed, in particular, at providing counterparties with the information they need in relation to the Eurosystem’s monetary policy framework.

The General Documentation in itself neither confers rights nor imposes obligations on counterparties. The legal relationship between the Eurosystem and its counterparties is established in appropriate contractual or regulatory arrangements.

This document is divided into seven chapters. Chapter 1 gives an overview of the operational framework for the monetary policy of the Eurosystem. In Chapter 2, eligibility criteria for counterparties taking part in Eurosystem monetary policy operations are specified. Chapter 3 describes open market operations, while Chapter 4 presents the standing facilities available to counterparties. Chapter 5 specifies procedures applied in the execution of monetary policy operations. In Chapter 6, the eligibility criteria for underlying assets in monetary policy operations are defined. Chapter 7 presents the Eurosystem’s minimum reserve system.

The annexes contain examples of monetary policy operations, a glossary, criteria for the selection of counterparties for Eurosystem foreign exchange intervention operations, a presentation of the reporting framework for the money and banking statistics of the European Central Bank, a list of the Eurosystem websites, a description of the procedures and sanctions to be applied in the event of non-compliance with counterparty obligations and additional legal requirements for the creation of valid security over credit claims when these are used as collateral with the Eurosystem.

CHAPTER 1

OVERVIEW OF THE MONETARY POLICY FRAMEWORK

1.1.   The European System of Central Banks

The European System of Central Banks (ESCB) consists of the European Central Bank (ECB) and the national central banks of the European Union (EU) Member States (2). The activities of the ESCB are carried out in accordance with the Treaty establishing the European Community (Treaty) and the Statute of the European System of Central Banks and of the European Central Bank (Statute of the ESCB). The ESCB is governed by the decision-making bodies of the ECB. In this respect, the Governing Council of the ECB is responsible for the formulation of monetary policy, while the Executive Board is empowered to implement monetary policy according to the decisions made and guidelines laid down by the Governing Council. To the extent deemed possible and appropriate and with a view to ensuring operational efficiency, the ECB has recourse to the national central banks (3) for carrying out the operations which form part of the tasks of the Eurosystem. The Eurosystem’s monetary policy operations are executed under uniform terms and conditions in all Member States (4).

1.2.   Objectives of the Eurosystem

The primary objective of the Eurosystem is to maintain price stability, as defined in Article 105 of the Treaty. Without prejudice to the primary objective of price stability, the Eurosystem has to support the general economic policies in the European Community. In pursuing its objectives, the Eurosystem has to act in accordance with the principle of an open market economy with free competition, favouring an efficient allocation of resources.

1.3.   Eurosystem monetary policy instruments

In order to achieve its objectives, the Eurosystem has at its disposal a set of monetary policy instruments; the Eurosystem conducts open market operations, offers standing facilities and requires credit institutions to hold minimum reserves on accounts with the Eurosystem.

1.3.1.   Open market operations

Open market operations play an important role in the monetary policy of the Eurosystem for the purposes of steering interest rates, managing the liquidity situation in the market and signalling the stance of monetary policy. Five types of instruments are available to the Eurosystem for the conduct of open market operations. The most important instrument is the reverse transaction (applicable on the basis of repurchase agreements or collateralised loans). The Eurosystem may also use outright transactions, the issuance of debt certificates, foreign exchange swaps and the collection of fixed-term deposits. Open market operations are initiated by the ECB, which also decides on the instrument to be used and on the terms and conditions for its execution. They can be executed on the basis of standard tenders, quick tenders or bilateral procedures (5). With regard to their aims, regularity and procedures, the Eurosystem’s open market operations can be divided into the following four categories (see also Table 1):

Table 1

Eurosystem monetary policy operations

Monetary policy operations	Types of transactions		Maturity	Frequency	Procedure
	Provision of liquidity	Absorption of liquidity
Open market operations
Main refinancing operations	Reverse transactions	-	One week	Weekly	Standard tenders
Longer-term refinancing operations	Reverse transactions	-	Three months	Monthly	Standard tenders
Fine-tuning operations	Reverse transactions Foreign exchange swaps	Reverse transactions Collection of fixed-term deposits Foreign exchange swaps	Non-standardised	Non-regular	Quick tenders Bilateral procedures
	Outright purchases	Outright sales	-	Non-regular	Bilateral procedures
Structural operations	Reverse transactions	Issuance of debt certificates	Standardised/non-standardised	Regular and non-regular	Standard tenders
	Outright purchases	Outright sales	-	Non-regular	Bilateral procedures
Standing facilities
Marginal lending facility	Reverse transactions	-	Overnight	Access at the discretion of counterparties
Deposit facility	-	Deposits	Overnight	Access at the discretion of counterparties

—

The main refinancing operations are regular liquidity-providing reverse transactions with a weekly frequency and a maturity of normally one week. These operations are executed by the national central banks on the basis of standard tenders. The main refinancing operations play a pivotal role in pursuing the objectives of the Eurosystem’s open market operations and provide the bulk of refinancing to the financial sector.

—

The longer-term refinancing operations are liquidity-providing reverse transactions with a monthly frequency and a maturity of normally three months. These operations are aimed at providing counterparties with additional longer-term refinancing and are executed by the national central banks on the basis of standard tenders. In these operations, the Eurosystem does not, as a rule, intend to send signals to the market and therefore normally acts as a rate taker.

—

Fine-tuning operations are executed on an ad hoc basis with the aim of managing the liquidity situation in the market and steering interest rates, in particular in order to smooth the effects on interest rates caused by unexpected liquidity fluctuations in the market. Fine-tuning operations are primarily executed as reverse transactions, but can also take the form of outright transactions, foreign exchange swaps and the collection of fixed-term deposits. The instruments and procedures applied in the conduct of fine-tuning operations are adapted to the types of transactions and the specific objectives pursued in the operations. Fine-tuning operations are normally executed by the national central banks through quick tenders or bilateral procedures. The Governing Council of the ECB can decide whether, under exceptional circumstances, fine-tuning bilateral operations may be executed by the ECB itself.

—

In addition, the Eurosystem may carry out structural operations through the issuance of debt certificates, reverse transactions and outright transactions. These operations are executed whenever the ECB wishes to adjust the structural position of the Eurosystem vis-à-vis the financial sector (on a regular or non-regular basis). Structural operations in the form of reverse transactions and the issuance of debt instruments are carried out by the national central banks through standard tenders. Structural operations in the form of outright transactions are executed through bilateral procedures.

1.3.2.   Standing facilities

Standing facilities are aimed at providing and absorbing overnight liquidity, signal the general stance of monetary policy and bound overnight market interest rates. Two standing facilities are available to eligible counterparties on their own initiative, subject to their fulfilment of certain operational access conditions (see also Table 1):

—

Counterparties can use the marginal lending facility to obtain overnight liquidity from the national central banks against eligible assets. Under normal circumstances, there are no credit limits or other restrictions on counterparties’ access to the facility, apart from the requirement to present sufficient underlying assets. The interest rate on the marginal lending facility normally provides a ceiling for the overnight market interest rate.

—

Counterparties can use the deposit facility to make overnight deposits with the national central banks. Under normal circumstances, there are no deposit limits or other restrictions on counterparties’ access to the facility. The interest rate on the deposit facility normally provides a floor for the overnight market interest rate.

The standing facilities are administered in a decentralised manner by the national central banks.

1.3.3.   Minimum reserves

The Eurosystem’s minimum reserve system applies to credit institutions in the euro area and primarily pursues the aims of stabilising money market interest rates and creating (or enlarging) a structural liquidity shortage. The reserve requirement of each institution is determined in relation to elements of its balance sheet. In order to pursue the aim of stabilising interest rates, the Eurosystem’s minimum reserve system enables institutions to make use of averaging provisions. Compliance with the reserve requirement is determined on the basis of the institutions’ average daily reserve holdings over the maintenance period. Institutions’ holdings of required reserves are remunerated at the rate of the Eurosystem’s main refinancing operations.

1.4.   Counterparties

The Eurosystem’s monetary policy framework is formulated with a view to ensuring the participation of a broad range of counterparties. Institutions subject to minimum reserve requirements according to Article 19.1 of the Statute of the ESCB may access the standing facilities and participate in open market operations based on standard tenders. The Eurosystem may select a limited number of counterparties to participate in fine-tuning operations. For outright transactions, no restrictions are placed a priori on the range of counterparties. For foreign exchange swaps conducted for monetary policy purposes, active players in the foreign exchange market are used. The set of counterparties for these operations is limited to those institutions selected for Eurosystem foreign exchange intervention operations which are located in the euro area.

1.5.   Underlying assets

Pursuant to Article 18.1 of the Statute of the ESCB, all Eurosystem credit operations (i.e. liquidity-providing monetary policy operations and intraday credit) have to be based on adequate collateral. The Eurosystem accepts a wide range of assets to underlie its operations. The Eurosystem has developed a single framework for eligible collateral common to all Eurosystem credit operations (also referred to as the ‘Single List’). On 1 January 2007, this single framework will replace the two-tier system that has been in place since the start of Economic and Monetary Union. The single framework covers marketable and non-marketable assets that fulfil uniform euro area-wide eligibility criteria specified by the Eurosystem. No distinction is made between marketable and non-marketable assets with regard to the quality of the assets and their eligibility for the various types of Eurosystem monetary policy operations, except that non-marketable assets are not used by the Eurosystem for outright transactions. All eligible assets may be used on a cross-border basis by means of the correspondent central banking model (CCBM) and, in the case of marketable assets, through eligible links between EU securities settlement systems (SSSs).

1.6.   Modifications to the monetary policy framework

The Governing Council of the ECB may, at any time, change the instruments, conditions, criteria and procedures for the execution of Eurosystem monetary policy operations.

CHAPTER 2

ELIGIBLE COUNTERPARTIES

2.1.   General eligibility criteria

Counterparties for Eurosystem monetary policy operations must fulfil certain eligibility criteria (6). These criteria are defined with a view to giving a broad range of institutions access to Eurosystem monetary policy operations, enhancing equal treatment of institutions across the euro area and ensuring that counterparties fulfil certain operational and prudential requirements:

—

Only institutions subject to the Eurosystem’s minimum reserve system according to Article 19.1 of the Statute of the ESCB are eligible to be counterparties. Institutions which are exempt from their obligations under the Eurosystem’s minimum reserve system (see Section 7.2) are not eligible to be counterparties to Eurosystem standing facilities and open market operations.

—

Counterparties must be financially sound. They should be subject to at least one form of harmonised EU/EEA supervision by national authorities (7). However, financially sound institutions subject to non-harmonised national supervision of a comparable standard can also be accepted as counterparties, e.g. branches established in the euro area of institutions that have their head office outside the European Economic Area (EEA).

—	Counterparties must fulfil any operational criteria specified in the relevant contractual or regulatory arrangements applied by the respective national central bank (or the ECB), so as to ensure the efficient conduct of Eurosystem monetary policy operations.

These general eligibility criteria are uniform throughout the euro area. Institutions fulfilling the general eligibility criteria may:

—	access the Eurosystem’s standing facilities; and

—	participate in Eurosystem open market operations that are based on standard tenders.

An institution may access the Eurosystem’s standing facilities and open market operations based on standard tenders only through the national central bank of the Member State in which it is established. If an institution has establishments (its head office or branches) in more than one Member State, each establishment has access to these operations through the national central bank of the Member State in which it is located, notwithstanding the fact that the bids of an institution may only be submitted by one establishment (either the head office or a designated branch) in each Member State.

2.2.   Selection of counterparties for quick tenders and bilateral operations

For outright transactions, no restrictions are placed a priori on the range of counterparties.

For foreign exchange swaps executed for monetary policy purposes, counterparties must be able to conduct large-volume foreign exchange operations efficiently under all market conditions. The range of counterparties to foreign exchange swaps corresponds to the counterparties located in the euro area which are selected for Eurosystem foreign exchange intervention operations. The criteria and procedures applied for the selection of counterparties to foreign exchange intervention operations are presented in Annex 3.

For other operations based on quick tenders and bilateral procedures (fine-tuning reverse transactions and the collection of fixed-term deposits), each national central bank selects a set of counterparties from among the institutions established in its Member State which fulfil the general counterparty eligibility criteria. In this respect, activity in the money market is the prime selection criterion. Other criteria which might be taken into account are, for example, the efficiency of the trading desk and the bidding potential.

In quick tenders and bilateral operations, the national central banks deal exclusively with the counterparties which are included in their respective set of fine-tuning counterparties. If, for operational reasons, a national central bank cannot deal in each operation with all of its fine-tuning counterparties, the selection of counterparties in this Member State will be based on a rotation scheme in order to ensure equitable access.

The Governing Council of the ECB can decide whether, under exceptional circumstances, fine-tuning bilateral operations may be carried out by the ECB itself. If the ECB were to carry out bilateral operations, the selection of counterparties would in such cases be made by the ECB according to a rotation scheme among those counterparties in the euro area which are eligible for quick tenders and bilateral operations in order to ensure equitable access.

2.3.   Sanctions in the event of non-compliance with counterparty obligations

The ECB shall impose sanctions, in accordance with Council Regulation (EC) No 2532/98 of 23 November 1998 concerning the powers of the European Central Bank to impose sanctions (8), European Central Bank Regulation (EC) No 2157/1999 of 23 September 1999 on the powers of the European Central Bank to impose sanctions (ECB/1999/4) (9), Council Regulation (EC) No 2531/98 of 23 November 1998 concerning the application of minimum reserves by the European Central Bank (10), as amended, and Regulation (EC) No 1745/2003 of the European Central Bank of 12 September 2003 on the application of minimum reserves (ECB/2003/9) (11), on institutions which do not comply with obligations arising from ECB Regulations and Decisions relating to the application of minimum reserves. The relevant sanctions and the procedural rules for their application are specified in the above-mentioned Regulations. In addition, in the case of serious infringements of the minimum reserve requirements, the Eurosystem may suspend counterparties’ participation in open market operations.

In accordance with the provisions of the contractual or regulatory arrangements applied by the respective national central bank (or by the ECB), the Eurosystem can and will impose financial penalties on counterparties, or suspend counterparties’ participation in open market operations, if counterparties fail to comply with their obligations under the contractual or regulatory arrangements applied by the national central banks (or by the ECB) as set out below.

This relates to cases of infringement of tender rules (if a counterparty is unable to transfer a sufficient amount of underlying assets to settle the amount of liquidity it has been allotted in a liquidity-providing operation, or if it is unable to deliver a sufficient amount of cash to settle the amount it has been allotted in a liquidity-absorbing operation), and of bilateral transaction rules (if a counterparty is unable to deliver a sufficient amount of eligible underlying assets, or if it is unable to deliver a sufficient amount of cash to settle the amount agreed in bilateral transactions).

This also applies to cases of non-compliance by a counterparty with the rules for the use of underlying assets (if a counterparty is using assets which are or have become ineligible, or which may not be used by the counterparty, e.g. owing to close links between, or the identity of, issuer/guarantor and counterparty), and to non-compliance with the rules for end-of-day procedures and access conditions for the marginal lending facility (if a counterparty which has a negative balance on the settlement account at the end of the day does not fulfil the access conditions for the marginal lending facility).

In addition, a suspension measure taken vis-à-vis a non-complying counterparty may be applied to branches of the same institution located in other Member States. Where, as an exceptional measure, this is required on account of the seriousness of a case of non-compliance, as evidenced by its frequency or duration, for instance, a counterparty may be suspended from all future monetary policy operations for a certain period of time.

Financial penalties imposed by national central banks in the event of non-compliance in relation to a breach of the rules concerning tender operations, bilateral transactions, underlying assets, end-of-day procedures or the access conditions to the marginal lending facility are calculated at a pre-specified penalty rate (as set out in Annex 6).

2.4.   Suspension or exclusion on grounds of prudence

In accordance with the provisions in the contractual or regulatory arrangements applied by the respective national central bank (or by the ECB), the Eurosystem may suspend or exclude counterparties’ access to monetary policy instruments on the grounds of prudence.

In addition, a suspension or exclusion of counterparties may be warranted in some of the cases which fall within the notion of the ‘default’ of a counterparty as defined in the contractual or regulatory arrangements applied by the national central banks.

CHAPTER 3

OPEN MARKET OPERATIONS

Open market operations play an important role in the Eurosystem’s monetary policy. They are used for steering interest rates, managing the liquidity situation in the market and signalling the stance of monetary policy. 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, whereas debt certificates may be used for structural absorption operations. In addition, the Eurosystem has three other instruments available for the conduct of fine-tuning operations: outright transactions, foreign exchange swaps and the collection of fixed-term deposits. In the following sections, specific features of the different types of open market instruments used by the Eurosystem are presented in detail.

3.1.   Reverse transactions

3.1.1.   General considerations

Type of instrument

Reverse transactions refer to operations where the Eurosystem buys or sells eligible assets under repurchase agreements or conducts credit operations against eligible assets as collateral. Reverse transactions are used for main refinancing operations and longer-term refinancing operations. In addition, the Eurosystem can use reverse transactions for structural and fine-tuning operations.

Legal nature

The national central banks may execute reverse transactions either in the form of repurchase agreements (i.e. the ownership of the asset is transferred to the creditor, while the parties agree to reverse the transaction through a re-transfer of the asset to the debtor at a future point in time) or as collateralised loans (i.e. an enforceable security interest is provided over the assets but, assuming fulfilment of the debt obligation, the ownership of the asset is retained by the debtor). Further provisions for reverse transactions based on repurchase agreements are specified in the contractual arrangements applied by the respective national central bank (or the ECB). Arrangements for reverse transactions based on collateralised loans take account of the different procedures and formalities required to enable the establishment and subsequent realisation of a relevant interest in the collateral (e.g. a pledge, an assignment or a charge) which apply in different jurisdictions.

Interest terms

The difference between the purchase price and the repurchase price in a repurchase agreement corresponds to the interest due on the amount of money borrowed or lent over the maturity of the operation, i.e. the repurchase price includes the respective interest to be paid. The interest rate on a reverse transaction in the form of a collateralised loan is determined by applying the specified interest rate on the credit amount over the maturity of the operation. The interest rate applied to Eurosystem reverse open market operations is a simple interest rate based on the day-count convention ‘actual/360’.

3.1.2.   Main refinancing operations

The main refinancing operations are the most important open market operations conducted by the Eurosystem, playing a pivotal role in pursuing the aims of steering interest rates, managing the liquidity situation in the market and signalling the stance of monetary policy. They also provide the bulk of refinancing to the financial sector.

The operational features of the main refinancing operations can be summarised as follows:

—	they are liquidity-providing reverse operations;

—	they are executed regularly each week (12);

—	they normally have a maturity of one week (13);

—	they are executed in a decentralised manner by the national central banks;

—	they are executed through standard tenders (as specified in Section 5.1);

—	all counterparties fulfilling the general eligibility criteria (as specified in Section 2.1) may submit bids for the main refinancing operations; and

—	marketable and non-marketable assets (as specified in Chapter 6) are eligible as underlying assets for the main refinancing operations.

3.1.3.   Longer-term refinancing operations

The Eurosystem also executes regular refinancing operations, normally with a three-month maturity, which are aimed at providing additional longer-term refinancing to the financial sector. These operations represent only a small part of the global refinancing volume. In these operations, the Eurosystem does not, as a rule, intend to send signals to the market and therefore normally acts as a rate taker. Accordingly, longer-term refinancing operations are usually executed in the form of variable rate tenders and, from time to time, the ECB indicates the operation volume to be allotted in forthcoming tenders. Under exceptional circumstances, the Eurosystem may also execute longer-term refinancing operations through fixed rate tenders.

The operational features of the longer-term refinancing operations can be summarised as follows:

—	they are liquidity-providing reverse operations;

—	they are executed regularly each month (12);

—	they normally have a maturity of three months (13);

—	they are executed in a decentralised manner by the national central banks;

—	they are executed through standard tenders (as specified in Section 5.1);

—	all counterparties fulfilling the general eligibility criteria (as specified in Section 2.1) may submit bids for the longer-term refinancing operations; and

—	marketable and non-marketable assets (as specified in Chapter 6) are eligible as underlying assets for the longer-term refinancing operations.

3.1.4.   Fine-tuning reverse operations

The Eurosystem can execute fine-tuning operations in the form of reverse open market transactions. Fine-tuning operations aim to manage the liquidity situation in the market and to steer interest rates, in particular in order to smooth the effects on interest rates caused by unexpected liquidity fluctuations in the market. The potential need for rapid action in the case of unexpected market developments makes it desirable to retain a high degree of flexibility in the choice of procedures and operational features in the conduct of these operations.

The operational features of the fine-tuning reverse operations can be summarised as follows:

—	they can take the form of liquidity-providing or liquidity-absorbing operations;

—	their frequency is not standardised;

—	their maturity is not standardised;

—	liquidity-providing fine-tuning reverse transactions are normally executed through quick tenders, although the possibility of using bilateral procedures is not excluded (see Chapter 5);

—	liquidity-absorbing fine-tuning reverse transactions are executed, as a rule, through bilateral procedures (as specified in Section 5.2);

—	these operations are normally executed in a decentralised manner by the national central banks (the Governing Council of the ECB can decide whether, under exceptional circumstances, bilateral fine-tuning reverse operations may be executed by the ECB);

—	the Eurosystem may select, according to the criteria specified in Section 2.2, a limited number of counterparties to participate in fine-tuning reverse operations; and

—	marketable and non-marketable assets (as specified in Chapter 6) are eligible as underlying assets for fine-tuning reverse operations.

3.1.5.   Structural reverse operations

The Eurosystem may execute structural operations in the form of reverse open market transactions aimed at adjusting the structural position of the Eurosystem vis-à-vis the financial sector.

The operational features of these operations can be summarised as follows:

—	they are liquidity-providing operations;

—	their frequency can be regular or non-regular;

—	their maturity is not standardised a priori;

—	they are executed through standard tenders (as specified in Section 5.1);

—	they are executed in a decentralised manner by the national central banks;

—	all counterparties fulfilling the general eligibility criteria (as specified in Section 2.1) may submit bids for structural reverse operations; and

—	marketable and non-marketable assets (as specified in Chapter 6) are eligible as underlying assets for structural reverse operations.

3.2.   Outright transactions

Type of instrument

Outright open market transactions refer to operations where the Eurosystem buys or sells eligible assets outright on the market. Such operations are executed only for structural and fine-tuning purposes.

Legal nature

An outright transaction implies a full transfer of ownership from the seller to the buyer with no connected reverse transfer of ownership. The transactions are executed in accordance with the market conventions for the debt instrument used in the transaction.

Price terms

In the calculation of prices, the Eurosystem acts in accordance with the most widely accepted market convention for the debt instruments used in the transaction.

Other operational features

The operational features of Eurosystem outright transactions can be summarised as follows:

—	they can take the form of liquidity-providing (outright purchase) or liquidity-absorbing (outright sale) operations;

—	their frequency is not standardised;

—	they are executed through bilateral procedures (as specified in Section 5.2);

—	they are normally executed in a decentralised manner by the national central banks (the Governing Council of the ECB can decide whether, under exceptional circumstances, fine-tuning outright operations may be executed by the ECB);

—	no restrictions are placed a priori on the range of counterparties to outright transactions; and

—	only marketable assets (as specified in Chapter 6) are used as underlying assets in outright transactions.

3.3.   Issuance of ECB debt certificates

Type of instrument

The ECB may issue debt certificates with the aim of adjusting the structural position of the Eurosystem vis-à-vis the financial sector so as to create (or enlarge) a liquidity shortage in the market.

Legal nature

The certificates constitute a debt obligation of the ECB vis-à-vis the holder of the certificate. The certificates are issued and held in book-entry form in securities depositories in the euro area. The ECB does not impose any restrictions on the transferability of the certificates. Further provisions related to ECB debt certificates will be contained in the terms and conditions for such certificates.

Interest terms

The certificates are issued at a discount, i.e. they are issued at below the nominal amount and are redeemed at maturity at the nominal amount. The difference between the issue amount and the redemption amount equals the interest accrued on the issue amount, at the agreed interest rate, over the maturity of the certificate. The interest rate applied is a simple interest rate based on the day-count convention ‘actual/360’. The calculation of the issue amount is shown in Box 1.

Other operational features

The operational features of the issuance of ECB debt certificates can be summarised as follows:

—	the certificates are issued in order to absorb liquidity from the market;

—	the certificates can be issued on a regular or non-regular basis;

—	the certificates have a maturity of less than 12 months;

—	the certificates are issued through standard tenders (as specified in Section 5.1);

—	the certificates are tendered and settled in a decentralised manner by the national central banks; and

—	all counterparties fulfilling the general eligibility criteria (as specified in Section 2.1) may submit bids for the subscription of ECB debt certificates.

BOX 1Issuance of ECB debt certificatesThe issue amount is: where:

N	=	nominal amount of the debt certificate
rI	=	interest rate (in %)
D	=	maturity of the debt certificate (in days)
PT	=	issue amount of the debt certificate

3.4.   Foreign exchange swaps

Type of instrument

Foreign exchange swaps executed for monetary policy purposes consist of simultaneous spot and forward transactions in euro against a foreign currency. They are used for fine-tuning purposes, mainly with the aim of managing the liquidity situation in the market and steering interest rates.

Legal nature

Foreign exchange swaps executed for monetary policy purposes refer to operations where the Eurosystem buys (or sells) euro spot against a foreign currency and, at the same time, sells (or buys) it back in a forward transaction on a specified repurchase date. Further provisions for foreign exchange swaps are specified in the contractual arrangement applied by the respective national central bank (or the ECB).

Currency and exchange rate terms

As a rule, the Eurosystem operates only in widely traded currencies and in accordance with standard market practice. In each foreign exchange swap operation, the Eurosystem and the counterparties agree on the swap points for the transaction. The swap points are the difference between the exchange rate of the forward transaction and the exchange rate of the spot transaction. The swap points of the euro vis-à-vis the foreign currency are quoted according to general market conventions. The exchange rate terms of foreign exchange swaps are specified in Box 2.

Other operational features

The operational features of foreign exchange swaps can be summarised as follows:

—	they can take the form of liquidity-providing or liquidity-absorbing operations;

—	their frequency is not standardised;

—	their maturity is not standardised;

—	they are executed through quick tenders or bilateral procedures (see Chapter 5);

—	they are normally executed in a decentralised manner by the national central banks (the Governing Council of the ECB can decide whether, under exceptional circumstances, bilateral foreign exchange swaps may be executed by the ECB); and

—	the Eurosystem may select, according to the criteria specified in Section 2.2 and Annex 3, a limited number of counterparties to participate in foreign exchange swaps.

BOX 2Foreign exchange swaps

S	=	spot (on the transaction date of the foreign exchange swap) of the exchange rate between the euro (EUR) and a foreign currency ABC
FM	=	forward exchange rate between the euro and a foreign currency ABC on the repurchase date of the swap (M)
ΔM	=	forward points between the euro and ABC on the repurchase date of the swap (M)
N(.)	=	spot amount of currency; N(.)M is the forward amount of currency: or or

3.5.   Collection of fixed-term deposits

Type of instrument

The Eurosystem may invite counterparties to place remunerated fixed-term deposits with the national central bank in the Member State in which the counterparty is established. The collection of fixed-term deposits is envisaged only for fine-tuning purposes in order to absorb liquidity in the market.

Legal nature

The deposits accepted from counterparties are for a fixed term and with a fixed rate of interest. No collateral is given by the national central banks in exchange for the deposits.

Interest terms

The interest rate applied to the deposit is a simple interest rate based on the day-count convention ‘actual/360’. Interest is paid at maturity of the deposit.

Other operational features

The operational features of the collection of fixed-term deposits can be summarised as follows:

—	the deposits are collected in order to absorb liquidity;

—	the frequency with which deposits are collected is not standardised;

—	the maturity of the deposits is not standardised;

—	the collection of deposits is normally executed through quick tenders, although the possibility of using bilateral procedures is not excluded (see Chapter 5);

—	the collection of deposits is normally executed in a decentralised manner by the national central banks (the Governing Council of the ECB can decide whether, under exceptional circumstances, the bilateral collection of fixed-term deposits (14) may be executed by the ECB); and

—	the Eurosystem may select, according to the criteria specified in Section 2.2, a limited number of counterparties for the collection of fixed-term deposits.

CHAPTER 4

STANDING FACILITIES

4.1.   The marginal lending facility

Type of instrument

Counterparties may use the marginal lending facility to obtain overnight liquidity from national central banks at a pre-specified interest rate against eligible assets (as set out in Chapter 6). The facility is intended to satisfy counterparties’ temporary liquidity needs. Under normal circumstances, the interest rate on the facility provides a ceiling for the overnight market interest rate. The terms and conditions of the facility are identical throughout the euro area.

Legal nature

The national central banks may provide liquidity under the marginal lending facility either in the form of overnight repurchase agreements (i.e. the ownership of the asset is transferred to the creditor, while the parties agree to reverse the transaction through a re-transfer of the asset to the debtor on the next business day) or as overnight collateralised loans (i.e. an enforceable security interest is provided over the assets but, assuming fulfilment of the debt obligation, ownership of the asset is retained by the debtor). Further provisions for repurchase agreements are specified in the contractual arrangements applied by the respective national central bank. Arrangements for providing the liquidity in the form of collateralised loans take account of the different procedures and formalities required to enable the establishment and subsequent realisation of a relevant interest in the collateral (a pledge, an assignment or a charge) which apply in different jurisdictions.

Access conditions

Institutions fulfilling the general counterparty eligibility criteria specified in Section 2.1 may access the marginal lending facility. Access to the marginal lending facility is granted through the national central bank in the Member State in which the institution is established. Access to the marginal lending facility is granted only on days when the relevant national real-time gross settlement (RTGS) system and the relevant securities settlement system(s) (SSS(s)) are operational.

At the end of each business day, counterparties’ intraday debit positions on their settlement account with the national central banks are automatically considered to be a request for recourse to the marginal lending facility. The procedures for end-of-day access to the marginal lending facility are specified in Section 5.3.3.

A counterparty may also be granted access to the marginal lending facility by sending a request to the national central bank in the Member State in which the counterparty is established. For the national central bank to process the request on the same day, the request must be received by the national central bank at the latest 30 minutes after the actual closing time of TARGET (15)  (16). As a general rule, the closing time for the TARGET system is 6 p.m. ECB time (CET). The deadline for requesting access to the marginal lending facility is postponed by an additional 30 minutes on the last Eurosystem business day of a reserve maintenance period. In the request, the amount of credit must be stated and, if underlying assets for the transaction have not already been pre-deposited with the national central bank, the underlying assets to be delivered for the transaction must be specified.

Apart from the requirement to present sufficient underlying eligible assets, there is no limit to the amount of funds that can be advanced under the marginal lending facility.

Maturity and interest terms

The maturity of credit extended under the facility is overnight. For counterparties participating directly in TARGET, the credit is repaid on the next day on which the relevant national RTGS system and the relevant SSS(s) are operational, at the time at which those systems open.

The interest rate is announced in advance by the Eurosystem and is calculated as a simple interest rate based on the day-count convention ‘actual/360’. The ECB may change the interest rate at any time, effective, at the earliest, from the following Eurosystem business day (17)  (18). Interest under the facility is payable with the repayment of the credit.

Suspension of the facility

Access to the facility is granted only in accordance with the objectives and general monetary policy considerations of the ECB. The ECB may adapt the conditions of the facility or suspend it at any time.

4.2.   The deposit facility

Type of instrument

Counterparties can use the deposit facility to make overnight deposits with national central banks. The deposits are remunerated at a pre-specified interest rate. Under normal circumstances, the interest rate on the facility provides a floor for the overnight market interest rate. The terms and conditions of the deposit facility are identical throughout the euro area (19).

Legal nature

The overnight deposits accepted from counterparties are remunerated at a fixed rate of interest. No collateral is given to the counterparty in exchange for the deposits.

Access conditions (20)

Institutions fulfilling the general counterparty eligibility criteria specified in Section 2.1 may access the deposit facility. Access to the deposit facility is granted through the national central bank in the Member State in which the institution is established. Access to the deposit facility is granted only on days when the relevant national RTGS system is open.

To be granted access to the deposit facility, the counterparty must send a request to the national central bank in the Member State in which the counterparty is established. For the national central bank to process the request on the same day, the request must be received by the national central bank at the latest 30 minutes after the actual closing time of TARGET, which is, as a general rule, 6 p.m. ECB time (CET) (21)  (22). The deadline for requesting access to the deposit facility is postponed by an additional 30 minutes on the last Eurosystem business day of a reserve maintenance period. In the request, the amount to be deposited under the facility is to be stated.

There is no limit to the amount a counterparty may deposit under the facility.

Maturity and interest terms

The maturity of deposits under the facility is overnight. For counterparties participating directly in TARGET, deposits held under the facility mature on the next day on which the relevant national RTGS system is operational, at the time at which this system opens.

The interest rate is announced in advance by the Eurosystem and is calculated as a simple interest rate based on the day-count convention ‘actual/360’. The ECB may change the interest rate at any time, effective, at the earliest, from the following Eurosystem business day (23). Interest on the deposits is payable on maturity of the deposit.

Suspension of the facility

Access to the facility is granted only in accordance with the objectives and general monetary policy considerations of the ECB. The ECB may adapt the conditions of the facility or suspend it at any time.

CHAPTER 5

PROCEDURES

5.1.   Tender procedures

5.1.1.   General considerations

Eurosystem open market operations are normally executed in the form of tenders. The Eurosystem’s tender procedures are performed in six operational steps, as specified in Box 3.

The Eurosystem distinguishes between two different types of tender procedures: standard tenders and quick tenders. The procedures for standard and quick tenders are identical, except for the time frame and the range of counterparties.

Standard tenders

For standard tenders, a maximum of 24 hours elapses from the announcement of the tender to the certification of the allotment result (where the time between the submission deadline and the announcement of the allotment result is approximately two hours). Chart 1 gives an overview of the normal time frame for the operational steps for standard tenders. The ECB may decide to adjust the time frame in individual operations, if deemed appropriate.

The main refinancing operations, the longer-term refinancing operations and structural operations (with the exception of outright transactions) are always executed in the form of standard tenders. Counterparties fulfilling the general eligibility criteria specified in Section 2.1 may participate in standard tenders.

Quick tenders

Quick tenders are normally executed within 90 minutes of the announcement of the tender, with certification taking place immediately after the announcement of the allotment result. The normal time frame for the operational steps for quick tenders is specified in Chart 2. The ECB may decide to adjust the time frame in individual operations, if deemed appropriate. Quick tenders are only used for the execution of fine-tuning operations. The Eurosystem may select, according to the criteria and procedures specified in Section 2.2, a limited number of counterparties to participate in quick tenders.

Fixed rate and variable rate tenders

The Eurosystem has the option of conducting either fixed rate (volume) or variable rate (interest) tenders. In a fixed rate tender, the ECB specifies the interest rate in advance and participating counterparties bid the amount of money they want to transact at the fixed interest rate (24). In a variable rate tender, counterparties bid the amounts of money and the interest rates at which they want to enter into transactions with the national central banks (25).

BOX 3Operational steps for tender procedures

Step 1	Tender announcement a. Announcement by the ECB through public wire services b. Announcement by the national central banks through national wire services and directly to individual counterparties (if deemed necessary)
Step 2	Counterparties’ preparation and submission of bids
Step 3	Compilation of bids by the Eurosystem
Step 4	Tender allotment and announcement of tender results a. ECB allotment decision b. Announcement of the allotment result
Step 5	Certification of individual allotment results
Step 6	Settlement of the transactions (see Section 5.3)

5.1.2.   Tender operations calendar

Main and longer-term refinancing operations

The main and the longer-term refinancing operations are executed according to an indicative calendar published by the Eurosystem (26). The calendar is published at least three months before the start of the year for which it is valid. The normal trade days for the main and the longer-term refinancing operations are specified in Table 2. The ECB aims to ensure that counterparties in all Member States can participate in the main and the longer-term refinancing operations. Therefore, when compiling the calendar for these operations, the ECB makes appropriate adjustments to the normal schedule to take into account bank holidays in the individual Member States.

Structural operations

Structural operations through standard tenders are not executed according to any pre-specified calendar. However, they are normally conducted and settled only on days which are NCB business days (27) in all Member States.

Fine-tuning operations

Fine-tuning operations are not executed according to any pre-specified calendar. The ECB may decide to conduct fine-tuning operations on any Eurosystem business day. Only national central banks of Member States in which the trade day, the settlement day and the reimbursement day are NCB business days participate in such operations.

CHART 1

Normal time frame for the operational steps in standard tenders (times are stated in ECB time (CET))

CHART 2

Normal time frame for the operational steps in quick tenders

Table 2

Normal trade days for the main and the longer-term refinancing operations

Type of operation	Normal trade day (T)
Main refinancing operations	Each Tuesday
Longer-term refinancing operations	The last Wednesday of each calendar month (28)

5.1.3.   Announcement of tender operations

Eurosystem standard tenders are publicly announced by means of wire services. In addition, national central banks may announce the tender operation directly to counterparties without access to wire services. The public tender announcement message normally contains the following information:

—	the reference number of the tender operation;

—	the date of the tender operation;

—	the type of operation (provision or absorption of liquidity and the type of monetary policy instrument to be used);

—	the maturity of the operation;

—	the type of auction (fixed rate or variable rate tender);

—	the method of allotment (‘Dutch’ or ‘American’ auction, as defined in Section 5.1.5);

—	the intended operation volume (normally only in the case of longer-term refinancing operations);

—	the fixed tender interest rate/price/swap point (in the case of fixed rate tenders);

—	the minimum/maximum accepted interest rate/price/swap point (if applicable);

—	the start date and maturity date of the operation (if applicable), or the value date and maturity date of the instrument (in the case of the issuance of debt certificates);

—	the currencies involved and the currency, the amount of which is kept fixed (in the case of foreign exchange swaps);

—	the reference spot exchange rate to be used for the calculation of bids (in the case of foreign exchange swaps);

—	the maximum bid limit (if any);

—	the minimum individual allotment amount (if any);

—	the minimum allotment ratio (if any);

—	the time schedule for the submission of bids;

—	the denomination of the certificates (in the case of the issuance of debt certificates); and

—	the ISIN code of the issue (in the case of the issuance of debt certificates).

With a view to enhancing transparency in its fine-tuning operations, the Eurosystem normally announces quick tenders publicly in advance. However, under exceptional circumstances, the ECB may decide not to announce quick tenders publicly in advance. The announcement of quick tenders follows the same procedures as those for standard tenders. In a quick tender, regardless of whether it is announced publicly or not, the selected counterparties are contacted directly by the national central banks.

5.1.4.   Preparation and submission of bids by counterparties

Counterparties’ bids must be in a form that follows the pro forma example provided by the national central banks for the relevant operation. The bids must be submitted to the national central bank of a Member State in which the institution has an establishment (head office or branch). The bids of an institution may only be submitted by one establishment (either the head office or a designated branch) in each Member State.

In fixed rate tenders, counterparties must state in their bids the amount of money that they are willing to transact with the national central banks (29).

In variable rate tenders, counterparties may submit bids for up to ten different interest rate/price/swap point levels. In each bid, they must state the amount of money that they are willing to transact with the national central banks and the respective interest rate (30)  (31). The interest rates bid must be expressed as multiples of 0,01 percentage point. In the case of a variable rate foreign exchange swap tender, the swap points must be quoted according to standard market conventions and bids must be expressed as multiples of 0,01 swap point.

For the main refinancing operations, the minimum bid amount is EUR 1 000 000. Bids exceeding this amount must be expressed as multiples of EUR 100 000. The same minimum bid and multiple amounts are applied in fine-tuning and structural operations. The minimum bid amount is applied to each individual interest rate/price/swap point level.

For the longer-term refinancing operations, each national central bank defines a minimum bid amount in the range from EUR 10 000 to EUR 1 000 000. Bids exceeding the defined minimum bid amount must be expressed as multiples of EUR 10 000. The minimum bid amount is applied to each individual interest rate level.

The ECB may impose a maximum bid limit in order to prevent disproportionately large bids. Any such maximum bid limit is always specified in the public tender announcement message.

Counterparties are expected always to be in a position to cover the amounts allotted to them with a sufficient amount of eligible underlying assets (32). The contractual or regulatory arrangements applied by the respective national central bank allow the imposition of penalties if a counterparty is unable to transfer a sufficient amount of underlying assets or cash to settle the amount it has been allotted in a tender operation.

Bids are revocable up to the tender submission deadline. Bids submitted after the deadline specified in the tender announcement message are invalid. Respect of the deadline is judged by the national central banks. The national central banks discard all the bids of a counterparty if the aggregate amount bid exceeds any maximum bid limit established by the ECB. The national central banks also discard any bid which is below the minimum bid amount or which is below any minimum or above any maximum accepted interest rate/price/swap point. Furthermore, the national central banks may discard bids which are incomplete or which do not follow the pro forma example. If a bid is discarded, the respective national central bank informs the counterparty about its decision prior to the tender allotment.

5.1.5.   Tender allotment procedures

Fixed rate tender operations

In the allotment of a fixed rate tender, the bids received from counterparties are added together. If the aggregate amount bid exceeds the total amount of liquidity to be allotted, the submitted bids will be satisfied pro rata, according to the ratio of the amount to be allotted to the aggregate amount bid (see Box 4). The amount allotted to each counterparty is rounded to the nearest euro. However, the ECB may decide to allot a minimum amount/ratio to each bidder in fixed rate tenders.

BOX 4Allotment of fixed rate tendersThe percentage of allotment is: The amount allotted to the i th counterparty is: where:

A	=	total amount allotted
n	=	total number of counterparties
ai	=	bid amount of the ith counterparty
all%	=	percentage of allotment
alli	=	total amount allotted to the ith counterparty

Variable rate tenders in euro

In the allotment of liquidity-providing variable rate tenders in euro, bids are listed in descending order of offered interest rates. Bids with the highest interest rate levels are satisfied first and subsequently bids with successively lower interest rates are accepted until the total liquidity to be allotted is exhausted. If, at the lowest interest rate level accepted (i.e. the marginal interest rate), the aggregate amount bid exceeds the remaining amount to be allotted, the remaining amount is allocated pro rata among the bids according to the ratio of the remaining amount to be allotted to the total amount bid at the marginal interest rate (see Box 5). The amount allotted to each counterparty is rounded to the nearest euro.

In the allotment of liquidity-absorbing variable rate tenders (which may be used for the issuance of debt certificates and the collection of fixed-term deposits), bids are listed in ascending order of offered interest rates (or descending order of offered prices). Bids with the lowest interest rate (highest price) levels are satisfied first and subsequently bids with successively higher interest rates (lower price bids) are accepted until the total liquidity to be absorbed is exhausted. If, at the highest interest rate (lowest price) level accepted (i.e. the marginal interest rate/price), the aggregate bid amount exceeds the remaining amount to be allotted, the remaining amount is allocated pro rata among the bids according to the ratio of the remaining amount to be allotted to the total bid amount at the marginal interest rate/price (see Box 5). For the issuance of debt certificates, the amount allotted to each counterparty is rounded to the nearest multiple of the denomination of the debt certificates. For other liquidity-absorbing operations, the amount allotted to each counterparty is rounded to the nearest euro.

The ECB may decide to allot a minimum amount to each successful bidder in variable rate tenders.

BOX 5Allotment of variable rate tenders in euro(the example refers to bids quoted in the form of interest rates)The percentage of allotment at the marginal interest rate is:The allotment to the ith counterparty at the marginal interest rate is:The total amount allotted to the ith counterparty is:where:

A	=	total amount allotted
rs	=	sth interest rate bid by the counterparties
n	=	total number of counterparties
a(r s )i	=	amount bid at the sth interest rate (r s ) by the ith counterparty
a(r s )	=	total amount bid at the sth interest rate (r s )
r m	=	marginal interest rate: for a liquidity-providing tender for a liquidity-absorbing tender
r m-1	=	interest rate before the marginal interest rate (last interest rate at which bids are completely satisfied): for a liquidity-providing tender for a liquidity-absorbing tender
all%(r m )	=	percentage of allotment at the marginal interest rate
all(r s ) i	=	allotment to the ith counterparty at the sth interest rate
all i	=	total amount allotted to the ith counterparty

Variable rate foreign exchange swap tenders

In the allotment of liquidity-providing variable rate foreign exchange swap tenders, bids are listed in ascending order of swap point quotations (33). The bids with the lowest swap point quotations are satisfied first and subsequently successively higher swap point quotations are accepted until the total amount of the fixed currency to be allotted is exhausted. If, at the highest swap point quotation accepted (i.e. the marginal swap point quotation), the aggregate amount bid exceeds the remaining amount to be allotted, the remaining amount is allocated pro rata among the bids according to the ratio of the remaining amount to be allotted to the total amount bid at the marginal swap point quotation (see Box 6). The amount allotted to each counterparty is rounded to the nearest euro.

In the allotment of liquidity-absorbing variable rate foreign exchange swap tenders, bids are listed in descending order of offered swap point quotations. The bids with the highest swap point quotations are satisfied first and subsequently successively lower swap point quotations are accepted until the total amount of the fixed currency to be absorbed is exhausted. If, at the lowest swap point quotation accepted (i.e. the marginal swap point quotation), the aggregate amount bid exceeds the remaining amount to be allotted, the remaining amount is allocated pro rata among the bids according to the ratio of the remaining amount to be allotted to the total amount bid at the marginal swap point quotation (see Box 6). The amount allotted to each counterparty is rounded to the nearest euro.

Type of auction

For variable rate tenders, the Eurosystem may apply either single rate or multiple rate auction procedures. In a single rate auction (Dutch auction), the allotment interest rate/price/swap point applied for all satisfied bids is equal to the marginal interest rate/price/swap point (i.e. that at which the total allotment is exhausted). In a multiple rate auction (American auction), the allotment interest rate/price/swap point is equal to the interest rate/price/swap point offered for each individual bid.

BOX 6Allotment of variable rate foreign exchange swap tendersThe percentage of allotment at the marginal swap point quotation is:The allotment to the ith counterparty at the marginal swap point quotation is:The total amount allotted to the ith counterparty is:where:

A	=	total amount allotted
Δs	=	sth swap point quotation bid by the counterparties
n	=	total number of counterparties
a(Δ s ) i	=	amount bid at the sth swap point quotation (Δ s ) by the ith counterparty
a(Δ s )	=	total amount bid at the sth swap point quotation (Δ s )
Δ m	=	marginal swap point quotation: for a liquidity-providing foreign exchange swap for a liquidity-absorbing foreign exchange swap
Δ m-1	=	swap point quotation before the marginal swap point quotation (last swap point quotation at which bids are completely satisfied): for a liquidity-providing foreign exchange swap for a liquidity-absorbing foreign exchange swap
all%(Δ m )	=	percentage of allotment at the marginal swap point quotation
all(Δ s ) i	=	allotment to the ith counterparty at the sth swap point quotation
all i	=	total amount allotted to the ith counterparty

5.1.6.   Announcement of tender results

The results of standard and quick tenders are announced publicly by means of wire services. In addition, national central banks may announce the allotment result directly to counterparties without access to wire services. The public tender result message normally contains the following information:

—	the reference number of the tender operation;

—	the date of the tender operation;

—	the type of operation;

—	the maturity of the operation;

—	the total amount bid by Eurosystem counterparties;

—	the number of bidders;

—	the currencies involved (in the case of foreign exchange swaps);

—	the total amount allotted;

—	the percentage of allotment (in the case of fixed rate tenders);

—	the spot exchange rate (in the case of foreign exchange swaps);

—	the marginal interest rate/price/swap point accepted and the percentage of allotment at the marginal interest rate/price/swap point (in the case of variable rate tenders);

—	the minimum bid rate, maximum bid rate and weighted average allotment rate (in the case of multiple rate auctions);

—	the start date and maturity date of the operation (if applicable) or the value date and maturity date of the instrument (in the case of the issuance of debt certificates);

—	the minimum individual allotment amount (if any);

—	the minimum allotment ratio (if any);

—	the denomination of the certificates (in the case of the issuance of debt certificates); and

—	the ISIN code of the issue (in the case of the issuance of debt certificates).

The national central banks will directly certify the individual allotment result to successful counterparties.

5.2.   Procedures for bilateral operations

General considerations

The national central banks may execute operations on the basis of bilateral procedures (34). These procedures may be used for fine-tuning open market operations and structural outright operations. They are defined in a broad sense as any procedures where the Eurosystem conducts a transaction with one or a few counterparties without a tender. In this respect, two different types of bilateral procedures can be distinguished: operations where counterparties are contacted directly by the Eurosystem, and operations executed through stock exchanges and market agents.

Direct contact with counterparties

In this procedure, the national central banks directly contact one or a few domestic counterparties, which are selected according to the criteria specified in Section 2.2. According to the precise instructions given by the ECB, the national central banks decide whether to enter into a deal with the counterparties. The transactions are settled through the national central banks.

If the Governing Council of the ECB were to decide that, under exceptional circumstances, bilateral operations could also be executed by the ECB itself (or by one or a few national central banks acting as the operating arm of the ECB), the procedures for such operations would be adapted accordingly. In this case, the ECB (or the national central bank(s) acting as the operating arm of the ECB) would directly contact one or a few counterparties in the euro area, selected according to the criteria specified in Section 2.2. The ECB (or the national central bank(s) acting as the operating arm of the ECB) would decide whether to enter into a deal with the counterparties. The transactions would nevertheless be settled in a decentralised manner through the national central banks.

Bilateral operations through direct contact with counterparties can be applied for reverse transactions, outright transactions, foreign exchange swaps and the collection of fixed-term deposits.

Operations executed through stock exchanges and market agents

The national central banks can execute outright transactions through stock exchanges and market agents. For these operations, the range of counterparties is not restricted a priori and the procedures are adapted to the market conventions for the debt instruments transacted. The Governing Council of the ECB will decide whether, under exceptional circumstances, the ECB itself (or one or a few national central banks acting as the operating arm of the ECB) may execute fine-tuning outright operations through stock exchanges and market agents.

Announcement of bilateral operations

Bilateral operations are normally not announced publicly in advance. In addition, the ECB may decide not to announce the results of bilateral operations publicly.

Operating days

The ECB may decide to conduct fine-tuning bilateral operations on any Eurosystem business day. Only national central banks of Member States where the trade day, the settlement day and the reimbursement day are NCB business days participate in such operations.

Outright bilateral operations for structural purposes are normally only conducted and settled on days which are NCB business days in all Member States.

5.3.   Settlement procedures

5.3.1.   General considerations

Money transactions relating to the use of Eurosystem standing facilities or to participation in open market operations are settled on the counterparties’ accounts with the national central banks (or on the accounts of settlement banks participating in the TARGET system). Money transactions are settled only after (or at the moment of) the final transfer of the assets underlying the operation. This implies that underlying assets need either to have been pre-deposited in a safe custody account at the national central banks or to be settled with said national central banks on an intraday delivery-versus-payment basis. The transfer of underlying assets is executed via the counterparties’ securities settlement accounts with SSSs fulfilling the ECB’s minimum standards (35). Counterparties without a safe custody account with a national central bank or a securities settlement account with an SSS fulfilling the ECB’s minimum standards may settle the transactions of underlying assets through the securities settlement account or the safe custody account of a correspondent credit institution.

Further provisions related to the settlement procedures are defined in the contractual arrangements applied by the national central banks (or the ECB) for the specific monetary policy instruments. The settlement procedures may differ slightly between national central banks owing to differences in national law and operational practices.

Table 3

Normal settlement dates for Eurosystem open market operations (36)

Monetary policy instrument	Settlement date for operations based on standard tenders	Settlement date for operations based on quick tenders or bilateral procedures
Reverse transactions	T + 1 (37)	T
Outright transactions	—	According to market convention for the underlying assets
Issuance of debt certificates	T + 1	—
Foreign exchange swaps	—	T, T + 1 or T + 2
Collection of fixed-term deposits	—	T

5.3.2.   Settlement of open market operations

Open market operations based on standard tenders (i.e. main refinancing operations, longer-term refinancing operations and structural operations) are normally settled on the first day following the trade day on which all relevant national RTGS systems and all relevant SSSs are open. As a matter of principle, the Eurosystem aims to settle the transactions related to its open market operations at the same time in all Member States with all counterparties that have provided sufficient underlying assets. However, owing to operational constraints and the technical features of SSSs, the timing within the day of the settlement of open market operations may differ across the euro area. The time of settlement of the main and the longer-term refinancing operations normally coincides with the time of reimbursement of a previous operation of corresponding maturity.

The Eurosystem aims to settle open market operations based on quick tenders and bilateral procedures on the trade day. However, the Eurosystem may, for operational reasons, occasionally apply other settlement dates for these operations, in particular for outright transactions (for fine-tuning as well as structural purposes) and foreign exchange swaps (see Table 3).

5.3.3.   End-of-day procedures

The end-of-day procedures are specified in documentation related to the national RTGS systems and the TARGET system. As a general rule, the closing time for the TARGET system is 6 p.m. ECB time (CET). No further payment orders are accepted for processing in the national RTGS systems after the closing time, although remaining payment orders accepted before the closing time are still processed. Counterparties’ requests for access to the marginal lending facility or to the deposit facility must be submitted to the respective national central bank at the latest 30 minutes after the actual closing time of the TARGET system (38).

Any negative balances on the settlement accounts (in the national RTGS systems) of eligible counterparties remaining after the finalisation of the end-of-day control procedures are automatically considered to be a request for recourse to the marginal lending facility (see Section 4.1).

CHAPTER 6

ELIGIBLE ASSETS

6.1.   General considerations

Article 18.1 of the Statute of the ESCB allows the ECB and the national central banks to transact in financial markets by buying and selling underlying assets outright or under repurchase agreements and requires all Eurosystem credit operations to be based on adequate collateral. Consequently, all Eurosystem liquidity-providing operations are based on underlying assets provided by the counterparties either in the form of the transfer of ownership of assets (in the case of outright transactions or repurchase agreements) or in the form of a pledge, an assignment or a charge granted over relevant assets (in the case of collateralised loans) (39).

With the aims of protecting the Eurosystem from incurring losses in its monetary policy operations and of ensuring the equal treatment of counterparties, as well as of enhancing operational efficiency and transparency, underlying assets have to fulfil certain criteria in order to be eligible for Eurosystem monetary policy operations. The Eurosystem has developed a single framework for eligible assets common to all Eurosystem credit operations. This single framework (also referred to as the ‘Single List’) will come into effect on 1 January 2007 and will replace the two-tier system which has been in place from the start of Economic and Monetary Union and will be phased out by 31 May 2007 (40).

The single framework comprises two distinct asset classes – marketable assets and non-marketable assets. No distinction is made between the two asset classes with regard to the quality of the assets and their eligibility for the various types of Eurosystem monetary policy operations, except that non-marketable assets are not used by the Eurosystem for outright transactions. The assets eligible for Eurosystem monetary policy operations can also be used as underlying assets for intraday credit.

The eligibility criteria for the two asset classes are uniform across the euro area (41) and are set out in Section 6.2. To ensure that the two asset classes comply with the same credit standards, a Eurosystem credit assessment framework (ECAF) has been set up, which relies on different credit assessment sources. The procedures and rules establishing and controlling the Eurosystem’s requirement of ‘high credit standards’ for all eligible collateral are outlined in Section 6.3. The risk control measures and valuation principles for underlying assets are set out in Sections 6.4 and 6.5. Eurosystem counterparties may use eligible assets on a cross-border basis (see Section 6.6).

6.2.   Eligibility specifications for underlying assets

The ECB establishes, maintains and publishes a list of eligible marketable assets (42). For non-marketable assets, the ECB will neither publish a list of eligible assets nor a list of eligible debtors/guarantors.

6.2.1.   Eligibility criteria for marketable assets

Debt certificates issued by the ECB and all debt certificates issued by the national central banks of the Eurosystem prior to the date of adoption of the euro in their respective Member State are eligible.

To determine the eligibility of other marketable assets, the following eligibility criteria are applied (see also Table 4):

Type of asset

It must be a debt instrument having:

(a)	a fixed, unconditional principal amount; and

(b)

a coupon that cannot result in a negative cash flow. In addition, the coupon should be one of the following: (i) a zero coupon; (ii) a fixed rate coupon; or (iii) a floating rate coupon linked to an interest rate reference. The coupon may be linked to a change in the rating of the issuer itself. Furthermore, inflation-indexed bonds are also eligible.

These features must be maintained until the redemption of the obligation. Debt instruments may not afford rights to the principal and/or the interest that are subordinated to the rights of holders of other debt instruments of the same issuer.

Requirement (a) does not apply to asset-backed securities, with the exception of bonds issued by credit institutions in accordance with the criteria set out in Article 22 of the UCITS Directive (43) (referred to as ‘covered bank bonds’). The Eurosystem assesses the eligibility of asset-backed securities other than covered bank bonds against the following criteria.

The cash flow-generating assets backing the asset-backed securities must:

(a)

be legally acquired in accordance with the laws of a Member State from the originator or an intermediary by the securitisation special-purpose vehicle in a manner which the Eurosystem considers to be a ‘true sale’ that is enforceable against any third party, and be beyond the reach of the originator and its creditors, including in the event of the originator’s insolvency; and

(b)	not consist, in whole or in part, actually or potentially, of credit-linked notes or similar claims resulting from the transfer of credit risk by means of credit derivatives.

Within a structured issue, in order to be eligible, a tranche (or sub-tranche) may not be subordinated to other tranches of the same issue. A tranche (or sub-tranche) is considered to be non-subordinated vis-à-vis other tranches (or sub-tranches) of the same issue, and is ‘senior’ if, in accordance with the priority of payment applicable after the delivery of an enforcement notice, as set out in the offering circular, that tranche (or sub-tranche) is given priority over other tranches or sub-tranches in respect of receiving payment (principal and interest), or is last in incurring losses in relation to underlying assets.

The Eurosystem reserves the right to request from any relevant third party (such as the issuer, the originator or the arranger) any clarification and/or legal confirmation that it considers necessary to assess the eligibility of asset-backed securities.

Credit standards

The debt instrument must meet the high credit standards specified in the ECAF rules for marketable assets, as set out in Section 6.3.2.

Place of issue

The debt instrument must be deposited/registered (issued) in the EEA with a central bank or with a central securities depository (CSD) which fulfils the minimum standards established by the ECB (44). In case a marketable debt instrument is issued by a non-financial corporation (45) that is not rated by an accepted external credit assessment institution (ECAI), the place of issue must be the euro area.

Settlement procedures

The debt instrument must be transferable in book-entry form. It must be held and settled in the euro area through an account with the Eurosystem or with an SSS that fulfils the standards established by the ECB, so that perfection and realisation are subject to the law of a euro area country.

If the CSD where the asset is issued and the SSS where it is held are not identical, then the two institutions have to be connected by a link approved by the ECB (35).

Acceptable markets

The debt instrument must be admitted to trading on a regulated market as defined in the Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments (46), or traded on certain non-regulated markets as specified by the ECB (47). The assessment of non-regulated markets by the Eurosystem is based on three principles – safety, transparency and accessibility (48).

Type of issuer/guarantor

The debt instrument may be issued or guaranteed by central banks, public sector entities, private sector entities, or international or supranational institutions. Debt instruments other than covered bank bonds that are issued by credit institutions are only eligible if they are admitted to trading on a regulated market as defined above.

Place of establishment of the issuer/guarantor

The issuer must be established in the EEA or in one of the non-EEA G10 countries (49). In the latter case, the debt instruments can only be considered eligible if the Eurosystem ascertains that its rights would be protected in an appropriate manner, as determined by the Eurosystem, under the laws of the respective non-EEA G10 country. For this purpose, a legal assessment in a form and with substance acceptable to the Eurosystem will have to be submitted before the assets can be considered eligible. In the case of an asset-backed security, the issuer must be established in the EEA.

The guarantor must be established in the EEA.

International or supranational institutions are eligible issuers/guarantors irrespective of their place of establishment. In case a marketable debt instrument is issued by a non-financial corporation that is not rated by an ECAI, the issuer/guarantor must be established in the euro area.

Currency of denomination

The debt instrument must be denominated in euro (50).

6.2.2.   Eligibility criteria for non-marketable assets

Two types of non-marketable assets are eligible as collateral in the single framework for eligible assets: credit claims and non-marketable retail mortgage-backed debt instruments (RMBDs) (51).

Credit claims

To be eligible, a credit claim (52) has to fulfil the following eligibility criteria (see also Table 4):

—

Type of asset: It must be a credit claim which is a debt obligation of a debtor vis-à-vis a Eurosystem counterparty. Credit claims that have a ‘reducing balance’ (i.e. where the principal and interest are paid off according to a pre-agreed schedule) are also eligible. Undrawn credit lines (e.g. undrawn facilities of revolving credit claims), current account overdrafts and letters of credit (which authorise the use of credit but are not credit claims per se) are not eligible. The share of a syndicate member institution in a syndicated loan is considered an eligible type of credit claim. Credit claims may not afford rights to the principal and/or the interest that are subordinated to the rights of holders of other credit claims or debt instruments of the same issuer. The credit claim must have (a) a fixed, unconditional principal amount and (b) an interest rate that cannot result in a negative cash flow. In addition, the interest rate should be one of the following: (i) zero coupon-style; (ii) fixed; or (iii) floating linked to another interest rate reference. These features must be maintained until the redemption of the obligation.

—

Type of debtor/guarantor: Eligible debtors or guarantors are non-financial corporations (53), public sector entities and international or supranational institutions. Each debtor is individually and severally liable for the full repayment of the credit claim in question (co-debtors jointly liable for individual credit claims are excluded).

—	Place of establishment of the debtor/guarantor: The debtor/guarantor must be established in the euro area. This requirement does not apply to international or supranational institutions.

—	Credit standards: The quality of credit claims is assessed through the underlying creditworthiness of the debtor/guarantor. Credit claims must meet the high credit standards specified in the ECAF rules for non-marketable assets, as set out in Section 6.3.3.

—

Minimum size: At the time of submission for use as collateral (mobilisation) by the counterparty, the credit claim must meet a minimum size threshold. In an interim period (1 January 2007 to 31 December 2011), each national central bank may apply a minimum size of its choice for domestic credit claims. For cross-border use, a common minimum threshold of EUR 500 000 is applicable in the interim period (54). As from 1 January 2012 a common minimum threshold of EUR 500 000 will be applicable to all credit claims throughout the euro area.

—	Handling procedures: The credit claim must be handled according to the Eurosystem procedures as defined in the respective national documentation.

—

Governing laws: The credit claim agreement and the agreement between the counterparty and the national central bank mobilising the credit claim as collateral (‘mobilisation agreement’) must both be governed by the law of a Member State belonging to the euro area. Furthermore, the total number of different governing laws that are applicable to (i) the counterparty, (ii) the creditor, (iii) the debtor, (iv) the guarantor (if relevant), (v) the credit claim agreement and (vi) the mobilisation agreement may not exceed two.

—	Currency of denomination: The credit claim must be denominated in euro (55).

Non-marketable retail mortgage-backed debt instruments

The following eligibility criteria are applied to RMBDs (see also Table 4):

—

Type of asset: It must be a debt instrument (a promissory note or a bill of exchange) that is secured by a pool of residential mortgages and that falls short of full securitisation. Substitution of assets in the underlying pool must be possible and a mechanism needs to be in place to ensure that the Eurosystem enjoys priority over creditors other than those exempted for public policy reasons (56). The RMBD must have (a) a fixed, unconditional principal amount and (b) an interest rate that cannot result in a negative cash flow.

—	Credit standards: The RMBD must meet high credit standards, which are assessed through the part of the ECAF that addresses RMBDs, as set out in Section 6.3.3.

—	Type of issuer: Eligible issuers are credit institutions that are eligible counterparties.

—	Place of establishment of the issuer: The issuer must be located in the euro area.

—	Handling procedures: The RMBD must be handled according to the Eurosystem procedures as defined in the respective national documentation.

—	Currency of denomination: The RMBD must be denominated in euro (55).

6.2.3.   Additional requirements for the use of eligible assets

Additional legal requirements for credit claims

In order to ensure that a valid security is created over credit claims and that the credit claim can be swiftly realised in the event of a counterparty default, additional legal requirements have to be met. These legal requirements relate to:

—	the verification of the existence of credit claims;

—	the notification of the debtor about the mobilisation of the credit claim or the registration of such mobilisation;

—	the absence of restrictions related to banking secrecy and confidentiality;

—	the absence of restrictions on the mobilisation of the credit claim;

—	the absence of restrictions on the realisation of the credit claim.

The content of these legal requirements is set out in Annex 7. Further details of the specific features of the national jurisdictions are provided in the respective national documentation.

Rules for the use of eligible assets

Marketable assets can be used for all monetary policy operations which are based on underlying assets, i.e. reverse and outright open market transactions and the marginal lending facility. Non-marketable assets can be used as underlying assets for reverse open market transactions and the marginal lending facility. They are not used in Eurosystem outright transactions. All marketable and non-marketable assets can also be used as underlying assets for intraday credit.

Irrespective of the fact that a marketable or non-marketable asset fulfils all eligibility criteria, a counterparty may not submit as collateral any asset issued or guaranteed by itself or by any other entity with which it has close links (57).

‘Close links’ means a situation in which the counterparty is linked to an issuer/debtor/guarantor of eligible assets by reason of the fact that:

(i)

the counterparty owns 20 % or more of the capital of the issuer/debtor/guarantor, or one or more undertakings in which the counterparty owns the majority of the capital own 20 % or more of the capital of the issuer/debtor/guarantor, or the counterparty and one or more undertakings in which the counterparty owns the majority of the capital together own 20 % or more of the capital of the issuer/debtor/guarantor; or

(ii

the issuer/debtor/guarantor owns 20 % or more of the capital of the counterparty, or one or more undertakings in which the issuer/debtor/guarantor owns the majority of the capital own 20 % or more of the capital of the counterparty, or the issuer/debtor/guarantor and one or more undertakings in which the issuer/debtor/guarantor owns the majority of the capital together own 20 % or more of the capital of the counterparty; or

(iii)

a third party owns both the majority of the capital of the counterparty and the majority of the capital of the issuer/debtor/guarantor, either directly or indirectly, through one or more undertakings in which that third party owns the majority of the capital.

The above provision on close links does not apply to: (a) close links between the counterparty and the public authorities of EEA countries (including the case where the public authority is a guarantor of the issuer/debtor/guarantor); (b) covered bank bonds issued in accordance with the criteria set out in Article 22(4) of the UCITS Directive; or (c) cases in which debt instruments are protected by specific legal safeguards comparable to those for the instruments given under (b).

Furthermore, in spite of their eligibility, national central banks may decide not to accept the following marketable or non-marketable assets as collateral:

—	debt instruments falling due before the maturity date of the monetary policy operation for which they are being used as underlying assets (58); and

—	debt instruments with an income flow (e.g. a coupon payment) occurring in the period up to the maturity date of the monetary policy operation for which they are being used as underlying assets.

All eligible marketable and non-marketable assets must be usable in a cross-border context throughout the euro area. This implies that all Eurosystem counterparties must be able to use eligible assets either through links with their domestic SSSs in the case of marketable assets or through other eligible arrangements to receive credit from the national central bank of the Member State in which the counterparty is established (see Section 6.6).

Table 4

Eligible assets for Eurosystem monetary policy operations

Eligibility criteria	Marketable assets (59)	Non-marketable assets (60)
Type of asset	ECB debt certificates Other marketable debt instruments (61)	Credit claims	RMBDs
Credit standards	The asset must meet high credit standards. The high credit standards are assessed using ECAF rules for marketable assets (61).	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	EEA (61)	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/guarantors	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 (61): EEA or non-EEA G10 countries Guarantor (61): 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 threshold at the time of submission of the credit claim. Between 1 January 2007 and 31 December 2011: — for domestic use: choice of the NCB; — for cross-border use: common threshold of EUR 500 000 (62). As from 1 January 2012: common minimum threshold of EUR 500 000 throughout the 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 (i) the counterparty, (ii) the creditor, (iii) the debtor, (iv) the guarantor (if relevant), (v) the credit claim agreement, and (vi) the mobilisation agreement shall not exceed two.	Not applicable
Cross-border use	Yes	Yes	Yes

6.3.   Eurosystem credit assessment framework

6.3.1.   Scope and elements

The Eurosystem credit assessment framework (ECAF) defines the procedures, rules and techniques which ensure that the Eurosystem requirement of high credit standards for all eligible assets is met.

Within the general framework, in the establishment of high credit standards, the Eurosystem differentiates between marketable and non-marketable assets (see Sections 6.3.2 and 6.3.3) in order to take account of the different legal nature of these assets and for operational efficiency reasons.

In the assessment of the credit standard of eligible assets, the Eurosystem takes into account credit assessment information from credit assessment systems belonging to one of four sources, namely external credit assessment institutions (ECAIs), NCBs’ in-house credit assessment systems (ICASs), counterparties’ internal ratings-based (IRB) systems or third-party providers’ rating tools (RTs). Additionally, in the assessment of the credit standard, the Eurosystem takes into account institutional criteria and features guaranteeing similar protection for the instrument holder such as guarantees.

The Eurosystem’s benchmark for establishing its minimum requirement for high credit standards (its ‘credit quality threshold’) is defined in terms of a ‘single A’ credit assessment (63). The Eurosystem considers a probability of default (PD) over a one-year horizon of 0.10 % as equivalent to a ‘single A’ credit assessment, subject to a regular review. The ECAF follows the definition of a default event given in the EU Capital Requirements Directive (CRD) (64). The Eurosystem publishes the lowest rating grade meeting the required credit quality threshold for each accepted ECAI, without assuming any responsibility of its assessment of the ECAI, again subject to regular review.

The Eurosystem reserves the right to determine whether an issue, issuer, debtor or guarantor fulfils its requirements for high credit standards on the basis of any information it may consider relevant and may reject assets on such grounds. In case such a rejection is based on prudential information, the use of any such information transmitted either by counterparties or by supervisors shall be strictly commensurate with, and necessary for, the performance of the Eurosystem’s tasks of conducting monetary policy.

In order to ensure the consistency, accuracy and comparability of the four credit assessment sources used in the ECAF, the Eurosystem has devised acceptance criteria for each of these sources (see Section 6.3.4) and regularly monitors their credit assessment performance against the credit quality threshold (see Section 6.3.5).

6.3.2.   Establishment of high credit standards for marketable assets

The high credit standards for marketable assets are established on the basis of the following set of criteria:

—

ECAI credit assessment: At least one credit assessment from an accepted ECAI (as set out in Section 6.3.4) for the issue (or, in its absence, for the issuer) must comply with the Eurosystem’s credit quality threshold (65)  (66). The ECB publishes the credit quality threshold for any accepted ECAI, as established under Section 6.3.1 (67).

—

Guarantees: In the absence of an (acceptable) ECAI credit assessment of the issuer, high credit standards can be established on the basis of guarantees provided by financially sound guarantors. The financial soundness of the guarantor is assessed on the basis of ECAI credit assessments meeting the Eurosystem’s credit quality threshold. The guarantee must meet the following requirements: — A guarantee is deemed acceptable if the guarantor has unconditionally and irrevocably guaranteed the obligations of the issuer in relation to the payment of principal, interest and any other amounts due under the debt instruments to the holders thereof until they are discharged in full. — The guarantee has to be payable on first demand (independently from the underlying debt obligation). Guarantees given by public entities entitled to levy taxes should either be payable on first demand or otherwise provide for prompt and punctual payment following default. The obligations of the guarantor under the guarantee need to rank at least equally and rateably (pari passu) with all other unsecured obligations of the guarantor. — The guarantee must be governed by the law of an EU Member State and be legally valid, binding and enforceable against the guarantor. — A legal confirmation concerning the legal validity, binding effect and enforceability of the guarantee will have to be submitted in a form and with substance acceptable to the Eurosystem before the asset supported by the guarantee can be considered eligible. If the guarantor is established in a jurisdiction other than the one of the law governing the guarantee, the legal confirmation must also confirm that the guarantee is valid and enforceable under the law governing the establishment of the guarantor. The legal confirmation should be submitted for review to the national central bank that is reporting a certain asset supported by a guarantee for inclusion in the list of eligible assets (68). The need for a legal confirmation does not apply to guarantees given in respect of debt instruments with an individual asset rating or to guarantees given by public entities entitled to levy taxes. The requirement of enforceability is subject to any insolvency or bankruptcy laws, general principles of equity and other similar laws and principles applicable to the guarantor and generally affecting creditors’ rights against the guarantor.

In the absence of an ECAI credit assessment for the issue, issuer or guarantor, the high credit standards are established as follows:

—

Euro area public sector issuers or guarantors: If a marketable asset is issued or guaranteed by a regional government, local authority or public sector entity (PSE) located in the euro area as defined in the CRD, the following procedure applies: — The issuer or guarantor is allocated to one of three classes in accordance with the CRD (69) as explained in Table 5. — An implicit credit assessment for issuers or guarantors belonging to classes 1 and 2 is derived from the ECAI credit assessment of the central government of the country where the issuer or guarantor is established. This implicit credit assessment has to meet the Eurosystem credit quality threshold. No implicit credit assessment is derived for issuers/guarantors belonging to class 3.

—

Euro area non-financial corporate issuers or guarantors: If the high credit standards for marketable assets which are issued/guaranteed by non-financial corporations (70) located in the euro area cannot be established on the basis of an ECAI credit assessment for the issue, issuer or guarantor, the ECAF rules for credit claims will be applicable and counterparties are allowed to make use of their own IRB system, NCBs’ in-house credit assessment systems or third-party rating tools. The non-rated marketable debt instruments issued by non-financial corporations are not included in the public list of eligible marketable assets.

Table 5

Implicit credit assessments for euro area regional government, local authority and public sector entity issuers, debtors or guarantors without an ECAI credit assessment

	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 (71) below the ECAI credit assessment of the central government ofthe country in which it is established
Class 3	Other PSEs	Treated like private sector issuers or debtors

6.3.3.   Establishment of high credit standards for non-marketable assets

Credit claims

In order to establish the requirement for high credit standards for the debtors or guarantors of credit claims, counterparties have to select one main credit assessment source from among those that are available and accepted by the Eurosystem. A counterparty will select one system from an available credit assessment source, except in the case of ECAIs, where all accepted ECAI systems may be used.

Counterparties have to stick to the selected source for a minimum period of one year so as to preclude ‘hopping’ between credit assessments (i.e. looking for the best credit assessment that guarantees eligibility among all available sources or systems on a debtor-by-debtor basis). Counterparties wishing to change credit assessment sources after the minimum period of one year have to submit a reasoned request to the relevant NCB.

Counterparties may be allowed to use more than one system or source upon submission of a reasoned request. The main credit assessment source chosen is expected to cover the largest number of submitted debtors by the counterparty. The use of more than one credit assessment source or system should be supported by the existence of an adequate business case. In principle, such a case could stem from a lack of sufficient coverage of the primary credit assessment source or system.

Counterparties must inform the national central bank promptly of any credit event, including a delay of payments by the submitted debtors, that is known to the counterparty and, if necessary, withdraw or replace the assets. Furthermore, counterparties are responsible for ensuring that they use the most recent credit assessment updates available from their selected credit assessment system or source for the debtors (72) or guarantors of submitted assets.

Credit assessments of debtors/guarantors: The high credit standards of the debtors or guarantors of credit claims are established according to rules differentiating between public sector and non-financial corporate debtors/guarantors:

—

Public sector debtors or guarantors: The following rules are applied in a sequential order: (i) A credit assessment from the system or source selected by the counterparty exists and is used to establish whether the public sector debtor or guarantor meets the credit quality threshold. (ii) In the absence of a credit assessment under (i), an ECAI credit assessment of the debtor or guarantor is used (73). (iii) If no credit assessment is available under either (i) or (ii), the same procedure as for marketable assets applies: — The debtor or guarantor is allocated to one of three classes in accordance with the CRD (74) as explained in Table 5. — An implicit credit assessment for debtors or guarantors belonging to classes 1 and 2 is derived from the ECAI credit assessment of the central government of the country where the debtor or guarantor is established. This implicit assessment has to meet the Eurosystem credit quality threshold. If a credit assessment from the system or source selected by the counterparty (or from an ECAI in case (ii) for public sector debtors or guarantors) exists but is below the credit quality threshold, the debtor or guarantor is ineligible.

—

Non-financial corporate debtors or guarantors: If the source selected by the counterparty provides a credit assessment equal to or exceeding the credit quality threshold, the debtor or guarantor is eligible (75)  (76). If a credit assessment from the system or source selected by the counterparty exists but is below the credit quality threshold, the debtor or guarantor is ineligible. If no credit assessment is available to establish the credit standards, the debtor or guarantor is considered ineligible.

Guarantees: A guarantee must meet the following requirements:

—

A guarantee is deemed acceptable if the guarantor has unconditionally and irrevocably guaranteed the obligations of the debtor in relation to the payment of principal, interest and any other amounts due under the credit claim to the holder thereof until they are discharged in full. In this regard, a guarantee deemed acceptable does not need to be specific to the credit claim but might apply to the debtor only, provided that it also covers the credit claim in question.

—

The guarantee has to be payable on first demand (independently from the underlying credit claim). Guarantees given by public entities entitled to levy taxes should either be payable on first demand or otherwise provide for prompt and punctual payment following default. The obligations of the guarantor under the guarantee need to rank at least equally and rateably (pari passu) with all other unsecured obligations of the guarantor.

—	The guarantee must be governed by the law of an EU Member State and be legally valid, binding and enforceable against the guarantor.

—

A legal confirmation concerning the legal validity, binding effect and enforceability of the guarantee will have to be submitted in a form and with substance acceptable to the Eurosystem before the asset supported by the guarantee can be considered eligible. The legal confirmation should also state that the guarantee is not a personal one, only enforceable by the creditor of the credit claim. If the guarantor is established in a jurisdiction other than the one of the law governing the guarantee, the legal confirmation must also confirm that the guarantee is valid and enforceable under the law governing the establishment of the guarantor. The legal confirmation should be submitted for review to the national central bank in the jurisdiction of the law governing the credit claim. The need for a legal confirmation does not apply to guarantees given by public entities entitled to levy taxes. The requirement of enforceability is subject to any insolvency or bankruptcy laws, general principles of equity and other similar laws and principles applicable to the guarantor and generally affecting creditors’ rights against the guarantor.

Non-marketable retail mortgage-backed debt instruments

The high credit standards for non-marketable RMBDs must meet the Eurosystem’s credit quality threshold. A jurisdiction-specific credit assessment framework for these debt instruments will be specified in the applicable national documentation by the national central banks.

6.3.4.   Acceptance criteria for credit assessment systems

The ECAF builds on credit assessment information from four sources. Under each source, there might be a set of credit assessment systems.

The accepted ECAIs, ICASs and third-party RTs and their providers are listed on the ECB’s website (www.ecb.int) (77).

External credit assessment institution source

The ECAI source encompasses those institutions whose credit assessments may be used by credit institutions for determining the risk weight of exposures according to the CRD (78). For the purposes of the ECAF, the general acceptance criteria for ECAIs are the following:

—	ECAIs must be formally recognised by the relevant EU supervisory authority for the euro area countries in which they will be used, in line with the CRD.

—

ECAIs must fulfil operational criteria so as to ensure the efficient implementation of the ECAF. In particular, the use of their credit assessments is subject to the availability to the Eurosystem of information on these assessments, as well as information for the comparison and the assignment (mapping) of the assessments with the ECAF credit quality steps and the credit quality threshold and for the implementation of performance monitoring (see Section 6.3.5).

The Eurosystem reserves the right to decide whether it accepts an ECAI for its lending operations, making use, among other factors, of its performance monitoring process.

NCB in-house credit assessment system source

The ICAS source currently consists of the four credit assessment systems operated by the Deutsche Bundesbank, the Banco de España, the Banque de France and the Oesterreichische Nationalbank. National central banks deciding to develop their own ICAS would be subject to a validation procedure by the Eurosystem. ICASs are subject to the Eurosystem performance monitoring process (see Section 6.3.5).

Furthermore, the counterparty must inform the ICAS NCB promptly about any credit event that is known only to the counterparty, including a delay of payments by the submitted debtors.

Moreover, in countries in which RMBDs are mobilised, the respective national central bank implements a credit assessment framework for this type of asset in accordance with the ECAF. Such frameworks are subject to a yearly performance monitoring process.

Internal ratings-based system source

A counterparty intending to use an IRB system to assess the credit quality of the debtors, issuers or guarantors of eligible debt instruments has to obtain the permission of its home national central bank. For that purpose, it must file a request, together with the following documents (79):

—

A copy of the decision of the relevant banking supervisory authority within the EU authorising the counterparty to use its IRB system for capital requirements purposes on a consolidated or unconsolidated basis, together with any specific conditions for such use. Such a copy is not requested when such information is transmitted directly by the relevant supervisory authority to the relevant national central bank.

—	Information on its approach to assigning probabilities of default to debtors, as well as data on the rating grades and associated one-year probabilities of default used to determine eligible rating grades.

—	A copy of the Pillar 3 (market discipline) information that the counterparty is required to publish on a regular basis in accordance with the requirements on market discipline under Pillar 3 of the Basel II framework and the CRD.

—	The name and the address of both the competent banking supervisor and the external auditor.

The request has to be signed by the counterparty’s chief executive officer (CEO), chief financial officer (CFO) or a manager of similar seniority, or by an authorised signatory on behalf of one of them.

The above provisions apply to all counterparties regardless of their status – parent, subsidiary or branch – and regardless of whether the endorsement of the IRB system comes from the supervisor in the same country (for a parent company and possibly for subsidiaries) or from a supervisor in the home country of the parent (for branches and possibly for subsidiaries).

Any branch or subsidiary of a counterparty may rely on the IRB system of its parent if the Eurosystem has accepted the use of the IRB system for ECAF purposes.

Counterparties using an IRB system as described above are also subject to the Eurosystem performance monitoring process (see Section 6.3.5). In addition to the information requirements for this process, the counterparty is under an obligation to communicate the following information on an annual basis (or as and when required by the relevant national central bank) unless such information is transmitted directly by the relevant supervisory authority to the relevant national central bank:

—	a copy of the most up-to-date assessment of the counterparty’s IRB system by the counterparty’s supervisor translated in a working language of the home national central bank;

—	any changes to the counterparty’s IRB system recommended or required by the supervisor, together with the deadline by which such changes must be implemented;

—	the annual update of the Pillar 3 (market discipline) information that the counterparty is required to publish on a regular basis in accordance with the requirements of the Basel II framework and the CRD.

—	information on the competent banking supervisor and the external auditor.

This yearly communication has to be signed by the counterparty’s CEO, CFO or a manager of similar seniority, or by an authorised signatory on behalf of one of them. The relevant supervisor and, where applicable, the external auditor of the counterparty receive a copy of this letter from the Eurosystem.

Third-party rating tool source

The RT source consists of third-party applications that assess the credit quality of debtors using, among other information, audited accounts. The tools have to be operated by the RT providers. Counterparties wishing to use a specific RT for ECAF purposes have to submit a request to their respective national central bank, using the appropriate template provided by the Eurosystem, complemented by additional documentation of the RT as specified in the application form. The Eurosystem decides on the acceptance of the proposed RT. The decision is based upon the evaluation of the compliance with the acceptance criteria set by the Eurosystem (80).

Furthermore, the counterparty must inform the RT provider of any credit event that is known only to the counterparty, including a delay of payments by the submitted debtors.

The RT provider participating in the ECAF needs to subject itself by agreement to the Eurosystem performance monitoring process (81) (see Section 6.3.5). The RT provider is obliged to set up and maintain the necessary infrastructure for monitoring the so-called static pool. Construction and evaluation of the static pool have to be in line with the general requirements on performance monitoring under the ECAF. The RT provider has to undertake to inform the Eurosystem of the results of the performance evaluation as soon as it has been carried out by the RT provider. Therefore, RT providers prepare a report on the RT’s static pool performance. They have to undertake to keep internal records of static pools and default details for five years.

6.3.5.   Performance monitoring of credit assessment systems

The ECAF performance monitoring process consists of an annual ex post comparison of the observed default rate for the set of all eligible debtors (the static pool) and the credit quality threshold of the Eurosystem given by the benchmark PD. It aims to ensure that the results from credit assessments are comparable across systems and sources. The monitoring process takes place one year after the date on which the static pool was defined.

The first element of the process is the annual compilation by the credit assessment system provider of a static pool of eligible debtors, i.e. a pool consisting of all corporate and public debtors, receiving a credit assessment from the system satisfying the following condition:

PD(i, t) ≤ 0.10 % (benchmark PD(t))

All debtors fulfilling this condition at the beginning of period t constitute the static pool for t. At the end of the foreseen 12-month period, the realised default rate for the static pool of debtors at time t is computed. On an annual basis, the rating system provider has to agree to submit to the Eurosystem the number of eligible debtors contained in the static pool at time t and the number of those debtors in the static pool (t) that defaulted in the subsequent 12-month period.

The realised default rate of the static pool of a credit assessment system recorded over a one-year horizon serves as input to the ECAF performance monitoring process which comprises an annual rule and a multi-period assessment. In case of a significant deviation between the observed default rate of the static pool and the credit quality threshold over an annual and/or a multi-annual period, the Eurosystem consults the rating system provider to analyse the reasons for that deviation. This procedure may result in a correction of the credit quality threshold applicable to the system in question.

The Eurosystem may decide to suspend or exclude the credit assessment system in cases where no improvement in performance is observed over a number of years. In addition, in the event of an infringement of the rules governing the ECAF, the credit assessment system will be excluded from the ECAF.

6.4.   Risk control measures

6.4.1.   General principles

Risk control measures are applied to the assets underlying Eurosystem credit operations in order to protect the Eurosystem against the risk of financial loss if underlying assets have to be realised owing to the default of a counterparty. The risk control measures at the disposal of the Eurosystem are described in Box 7.

The Eurosystem applies specific risk control measures according to the types of underlying assets offered by the counterparty. The ECB determines the appropriate risk control measures for both marketable and non-marketable eligible assets. The risk control measures are broadly harmonised across the euro area (82) and ought to ensure non-discriminatory conditions for any type of eligible asset across the euro area.

BOX 7Risk control measuresThe Eurosystem currently applies the following risk control measures:

—	Valuation haircuts The Eurosystem applies ‘valuation haircuts’ in the valuation of underlying assets. This implies that the value of the underlying asset is calculated as the market value of the asset less a certain percentage (haircut).

—

Variation margins (marking to market) The Eurosystem requires the haircut-adjusted market value of the underlying assets used in its liquidity-providing reverse transactions to be maintained over time. This implies that if the value, measured on a regular basis, of the underlying assets falls below a certain level, the national central bank will require the counterparty to supply additional assets or cash (i.e. it will make a margin call). Similarly, if the value of the underlying assets, following their revaluation, exceeds a certain level, the counterparty may retrieve the excess assets or cash. (The calculations relevant for the execution of margin calls are presented in Box 8.)

The following risk control measures are currently not applied by the Eurosystem:

—	Initial margins The Eurosystem may apply initial margins in its liquidity-providing reverse transactions. This would imply that counterparties would need to provide underlying assets with a value at least equal to the liquidity provided by the Eurosystem plus the value of the initial margin.

—	Limits in relation to issuers/debtors or guarantors The Eurosystem may apply limits to the exposure vis-à-vis issuers/debtors or guarantors.

—	Additional guarantees The Eurosystem may require additional guarantees from financially sound entities in order to accept certain assets.

—	Exclusion The Eurosystem may exclude certain assets from use in its monetary policy operations.

6.4.2.   Risk control measures for marketable assets

The risk control framework for eligible marketable assets includes the following main elements:

—

Eligible marketable assets are allocated to one of four liquidity categories, based on issuer classification and asset type. The allocation is described in Table 6. Table 6 Liquidity categories for marketable assets (83) 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 (84) Jumbo covered bank bonds (85) Credit institution debt instruments     Agency debt instruments (86) Debt instruments issued by corporate and other issuers (86)     Supranational debt instruments

—

Individual debt instruments are subject to specific valuation haircuts. The haircuts are applied by deducting a certain percentage from the market value of the underlying asset. The haircuts differ according to the residual maturity and coupon structure of the debt instruments as described in Table 7 for eligible marketable fixed coupon and zero coupon debt instruments (87).

—	The valuation haircuts applied to all marketable inverse floating rate debt instruments are the same for all liquidity classes and are described in Table 8.

—	The haircut applied to marketable debt instruments with variable rate coupons (88) is that applied to the zero-to-one-year maturity bucket of fixed coupon instruments in the liquidity category to which the instrument is assigned.

—

The risk control measures applied to a marketable debt instrument with more than one type of coupon payment depend only on the coupon payments during the remaining life of the instrument. The valuation haircut applied to such an instrument is set equal to the highest of the haircuts applicable to debt instruments with the same residual maturity, and coupon payments of any one of the types occurring in the remaining life of the instrument are considered.

—	No valuation haircuts are applied in liquidity-absorbing operations.

—

Depending on both the jurisdiction and national operational systems, national central banks allow for the pooling of underlying assets and/or require the earmarking of the assets used in each individual transaction. In pooling systems, the counterparty makes a pool of sufficient underlying assets available to the central bank to cover the related credits received from the central bank, thus implying that individual assets are not linked to specific credit operations. By contrast, in an earmarking system, each credit operation is linked to specific identifiable assets. Table 7 Levels of valuation haircuts applied to eligible marketable assets in relation to fixed coupon and zero coupon instruments (percentages) Residual maturity (years) Liquidity categories Category I Category II Category III Category IV 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

—	The assets are subject to daily valuation. On a daily basis, national central banks calculate the required value of underlying assets taking into account changes in outstanding credit volumes, the valuation principles outlined in Section 6.5 and the required valuation haircuts.

—

If, after valuation, the underlying assets do not match the requirements as calculated on that day, symmetric margin calls are performed. In order to reduce the frequency of margin calls, national central banks may apply a trigger point. If applied, this trigger point is 0.5 % of the amount of liquidity provided. Depending on the jurisdiction, national central banks may require margin calls to be effected either through the supply of additional assets or by means of cash payments. This implies that if the market value of the underlying assets falls below the lower trigger point, counterparties have to supply additional assets (or cash). Similarly, if the market value of the underlying assets, following their revaluation, were to exceed the upper trigger point, the national central bank would return the excess assets (or cash) to the counterparty (see Box 8). Table 8 Levels of valuation haircuts applied to eligible marketable inverse floating rate debt instruments (percentages) Residual maturity (years) Inverse floater coupon 0-1 2 1-3 7 3-5 10 5-7 12 7-10 17 >10 25

—	In pooling systems, counterparties may substitute underlying assets on a daily basis.

—	In earmarking systems, the substitution of underlying assets may be permitted by national central banks.

—	The ECB may at any time decide to remove individual debt instruments from the published list of eligible marketable assets (89).

BOX 8Calculation of margin callsThe total amount of eligible assets J (for j = 1 to J; value Cj,t at time t) a counterparty must provide for a set of liquidity-providing operations I (for i = 1 to I; amount Li,t at time t) is determined by the following formula: (1)where:hj is the valuation haircut applied to eligible asset j.Let τ be the time period between revaluations. The margin call base at time t + τ equals: (2)Depending on the operational features of the national central banks’ collateral management systems, national central banks may also take into account interest accrued on liquidity provided in outstanding operations in the calculation of the margin call base.Margin calls are effected only if the margin call base exceeds a certain trigger point level.Let k = 0.5 % denote the trigger. In an earmarking system (I=1), a margin call is effected when: (the counterparty pays the margin call to the national central bank);or (the national central bank pays the margin call to the counterparty).In a pooling system, the counterparty has to bring more assets into the pool if:Conversely, the amount of intraday credit (IDC) available to the counterparty in a pooling system can be expressed as follows: (if positive)In both earmarking and pooling systems, margin calls shall ensure that the relation expressed in (1) above is re-established.

6.4.3.   Risk control measures for non-marketable assets

Credit claims

The risk control framework for eligible credit claims includes the following main elements:

—	Individual credit claims are subject to specific valuation haircuts. The haircuts differ according to the residual maturity, type of interest payment (fixed or variable) and the valuation methodology applied by the national central bank (see Section 6.5), as described in Table 9.

—

The haircut applied to credit claims with variable rate interest payments is 7 %, irrespective of the valuation methodology applied by the national central bank. An interest payment is considered a variable rate payment if it is linked to a reference interest rate and if the resetting period corresponding to this payment is no longer than one year. Interest payments for which the resetting period is longer than one year are treated as fixed rate payments, with the relevant maturity for the haircut being the residual maturity of the credit claim.

—

The risk control measures applied to a credit claim with more than one type of interest payment depend only on the interest payments during the remaining life of the credit claim. If there is more than one type of interest payment during the remaining life of the credit claim, the remaining interest payments are treated as fixed rate payments, with the relevant maturity for the haircut being the residual maturity of the credit claim.

—	The national central banks apply the same trigger point (if applicable) for the execution of margin calls for marketable and non-marketable assets.

Non-marketable retail mortgage-backed debt instruments

Non-marketable retail mortgage-backed debt instruments are subject to a valuation haircut of 20 %.

Table 9

Levels of valuation haircuts applied to credit claims with fixed interest payments

(percentages)
Residual maturity (years)	Fixed interest payment and a valuation based on a theoretical price assigned by the NCB	Fixed interest payment 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

6.5.   Valuation principles for underlying assets

When determining the value of underlying assets used in reverse transactions, the Eurosystem applies the following principles:

Marketable assets

—	For each eligible marketable asset, the Eurosystem defines the most representative price source to be used for the calculation of the market value.

—

The value of a marketable asset is calculated on the basis of the most representative price on the business day preceding the valuation date. If more than one price is quoted, the lowest of these prices (normally the bid price) is used. In the absence of a representative price for a particular asset on the business day preceding the valuation date, the last trading price is used. If the reference price obtained is older than five days, or has not moved for at least five days, the Eurosystem defines a theoretical price.

—	The market or theoretical value of a debt instrument is calculated including accrued interest.

—

Depending on differences in national legal systems and operational practices, the treatment of income flows (e.g. coupon payments) related to an asset which are received during the life of a reverse transaction may differ between national central banks. If the income flow is transferred to the counterparty, national central banks ensure that the relevant operations will still be fully covered by a sufficient amount of underlying assets before the transfer of the income takes place. The national central banks aim to ensure that the economic effect of the treatment of income flows is equivalent to a situation in which the income is transferred to the counterparty on the payment day (90).

Non-marketable assets

Non-marketable assets are assigned a value corresponding either to the theoretical price or to the outstanding amount.

If the national central bank opts for the valuation corresponding to the outstanding amount, the non-marketable assets may be subject to higher haircuts (see Section 6.4.3).

6.6.   Cross-border use of eligible assets

Eurosystem counterparties may use eligible assets on a cross-border basis, i.e. they may obtain funds from the national central bank of the Member State in which they are established by making use of assets located in another Member State. Underlying assets must be usable on a cross-border basis throughout the euro area for the handling of all types of operations in which the Eurosystem provides liquidity against eligible assets.

A mechanism has been developed by the national central banks (and by the ECB) to ensure that all eligible assets issued/deposited in the euro area may be used on a cross-border basis. This is the correspondent central banking model (CCBM), under which national central banks act as custodians (‘correspondents’) for each other (and for the ECB) in respect of assets accepted in their local depository or settlement system. Specific solutions can be used for non-marketable assets, i.e. credit claims and RMBDs, which cannot be transferred through an SSS (91). The CCBM may be used to collateralise all kinds of Eurosystem credit operations. In addition to the CCBM, eligible links between SSSs can be used for the cross-border transfer of marketable assets (92).

6.6.1.   Correspondent central banking model

The correspondent central banking model is illustrated in Chart 3 below.

CHART 3   The correspondent central banking model

All national central banks maintain securities accounts with each other for the purpose of the cross-border use of eligible assets. 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 (93).

—

In an earmarking system, as soon as a counterparty’s bid for credit is accepted by the national central bank of the Member State in which the counterparty is established (i.e. the ‘home central bank’), the counterparty instructs (via its own custodian, if necessary) the SSS in the country in which its marketable assets are held to transfer them to the central bank of that country for the account of the home central bank. Once the home central bank has been informed by the correspondent central bank that the collateral has been received, it transfers the funds to the counterparty. Central banks do not advance funds until they are certain that the counterparties’ marketable assets have been received by the correspondent central bank. Where necessary to meet settlement deadlines, counterparties may be able to pre-deposit assets with correspondent central banks for the account of their home central bank using the CCBM procedures.

—

In a pooling system, the counterparty is able at any time to provide the correspondent central bank with marketable assets for the account of the home central bank. Once the home central bank has been informed by the correspondent central bank that the marketable assets have been received, it will add these marketable assets to the pool account of the counterparty.

Specific procedures for cross-border use have been developed for non-marketable assets, i.e. credit claims and RMBDs (93). When credit claims are used as collateral in a cross-border context (94), a CCBM variant is applied to credit claims, which is based on a transfer of ownership to, an assignment to, a pledge in favour of the home central bank, or a charge in favour of the correspondent central bank acting as the agent for the home central bank. A further ad hoc variant based on the charge in favour of the correspondent central bank acting as the agent for the home central bank has been implemented to allow the cross-border use of RMBDs.

The CCBM is available to counterparties (both for marketable and non-marketable assets) from 9 a.m. to 4 p.m. ECB time (CET) on each Eurosystem business day. A counterparty wishing to make use of the CCBM must advise the national central bank from which it wishes to receive credit – i.e. its home central bank – before 4 p.m. ECB time (CET). Furthermore, the counterparty must ensure that the collateral for securing monetary policy operations is delivered to the account of the correspondent central bank by 4.45 p.m. ECB time (CET) at the latest. Instructions or deliveries not respecting this deadline will only be considered for credit given on the following business day. When the counterparties foresee a need to use the CCBM late in the day, they should, where possible, deliver the assets in advance (i.e. pre-deposit them). In exceptional circumstances or when required for monetary policy purposes, the ECB may decide to extend the closing time of the CCBM until the closing time of TARGET.

Chart 4   Links between securities settlement systems

6.6.2.   Links between securities settlement systems

In addition to the CCBM, eligible links between EU SSSs can be used for the cross-border transfer of marketable assets.

A direct or relayed link between two SSSs allows a participant in one SSS to hold securities issued in another SSS without being a participant in that other SSS (95). Before these links can be used to transfer collateral for Eurosystem credit operations, they have to be assessed and approved against the standards for the use of EU SSSs (96)  (97).

From a Eurosystem perspective, the CCBM and the links between EU SSSs fulfil the same role of allowing counterparties to use collateral on a cross-border basis, i.e. both enable counterparties to use collateral to obtain credit from their home central bank, even if this collateral was issued in an SSS of another country. The CCBM and the links between SSSs perform this function in different ways. In the CCBM, the cross-border relationship is between the national central banks. They act as custodians for one another. Using the links, the cross-border relationship is between the SSSs. They open omnibus accounts with one another. Assets deposited with a correspondent central bank can only be used to collateralise Eurosystem credit operations. Assets held through a link can be used for Eurosystem credit operations, as well as for any other purpose selected by the counterparty. When using links between SSSs, the counterparties hold the assets on their own account with their home SSS and have no need for a custodian.

CHAPTER 7

MINIMUM RESERVES (98)

7.1.   General considerations

The ECB requires credit institutions to hold minimum reserves on accounts with the national central banks within the framework of the Eurosystem’s minimum reserve system. The legal framework for this system is laid down in Article 19 of the Statute of the ESCB, Council Regulation (EC) No 2531/98 of 23 November 1998 concerning the application of minimum reserves by the European Central Bank (99) and Regulation (EC) No 1745/2003 of the European Central Bank on the application of minimum reserves (ECB/2003/9) (100). The application of Regulation ECB/2003/9 ensures that the terms and conditions of the Eurosystem’s minimum reserve system are uniform throughout the euro area.

The amount of minimum reserves to be held by each institution is determined in relation to its reserve base. The Eurosystem’s minimum reserve system enables counterparties to make use of averaging provisions, implying that compliance with reserve requirements is determined on the basis of the average of the end-of-calendar-day balances on the counterparties’ reserve accounts over a maintenance period. Institutions’ holdings of required reserves are remunerated at the rate on the Eurosystem’s main refinancing operations.

The Eurosystem’s minimum reserve system primarily pursues the following monetary functions:

—	Stabilisation of money market interest rates: The averaging provision of the Eurosystem’s minimum reserve system aims to contribute to the stabilisation of money market interest rates by giving institutions an incentive to smooth the effects of temporary liquidity fluctuations.

—	Creation or enlargement of a structural liquidity shortage: The Eurosystem’s minimum reserve system contributes to creating or enlarging a structural liquidity shortage. This may be helpful in improving the ability of the Eurosystem to operate efficiently as a supplier of liquidity.

In the application of minimum reserves, the ECB is bound to act in pursuance of the objectives of the Eurosystem as defined in Article 105 (1) of the Treaty and Article 2 of the Statute of the ESCB, which implies, inter alia, the principle of not inducing significant undesirable delocation or disintermediation.

7.2.   Institutions subject to minimum reserve requirements

Pursuant to Article 19.1 of the Statute of the ESCB, the ECB requires credit institutions established in Member States to hold minimum reserves. This implies that branches in the euro area of entities with no registered office in the euro area are also subject to the Eurosystem’s minimum reserve system. However, branches located outside the euro area of credit institutions established in the euro area are not subject to this system.

Institutions will be automatically exempt from reserve requirements from the start of the maintenance period within which their authorisation is withdrawn or surrendered, or within which a decision to submit the institution to winding-up proceedings is taken by a judicial authority or any other competent authority of a participating Member State. According to Council Regulation (EC) No 2531/98 and Regulation ECB/2003/9, the ECB may also exempt institutions from their obligations under the Eurosystem’s minimum reserve system on a non-discriminatory basis if the purposes of this system would not be met by imposing these obligations on those particular institutions. In its decision on any such exemption, the ECB takes into account one or more of the following criteria:

—	the institution is pursuing special purpose functions;

—	the institution is not exercising active banking functions in competition with other credit institutions; and/or

—	the institution has all its deposits earmarked for purposes related to regional and/or international development assistance.

The ECB establishes and maintains a list of institutions subject to the Eurosystem’s minimum reserve system. The ECB also makes public a list of any institutions exempt from their obligations under this system for reasons other than their being subject to reorganisation measures (101). Counterparties may rely on these lists in deciding whether their liabilities are owed to another institution that is itself subject to reserve requirements. The lists, available to the public after close of business on the last Eurosystem business day of each calendar month, are valid for the calculation of the reserve base for the maintenance period beginning in the calendar month two months later. For example, the list published at the end of February would be valid for the calculation of the reserve base for the maintenance period beginning in April.

7.3.   Determination of minimum reserves

Reserve base and reserve ratios

The reserve base of an institution is defined in relation to elements of its balance sheet. The balance sheet data are reported to the national central banks within the general framework of the ECB’s money and banking statistics (see Section 7.5) (102). For institutions subject to full reporting requirements, the balance sheet data referring to the end of a given calendar month are used to determine the reserve base for the maintenance period starting in the calendar month two months later. For example, the reserve base calculated from the balance sheet of the end of February would be used to calculate the reserve requirements to be fulfilled by counterparties in the maintenance period beginning in April.

The reporting framework for the ECB’s money and banking statistics includes the possibility of relieving small institutions of some of the reporting burden. Institutions to which this provision applies only need to report a limited set of balance sheet data on a quarterly basis (as end-of-quarter data) and with a reporting deadline which is longer than that set for larger institutions. For these institutions, the balance sheet data reported for a specific quarter are used to determine, with a lag of two months, the reserve base for the consecutive three reserve maintenance periods. For example, the balance sheet of the end of the first quarter – March – would be valid for the calculation of the reserve base for the maintenance periods beginning in June, July and August.

According to Council Regulation (EC) No 2531/98, the ECB is entitled to include liabilities resulting from the acceptance of funds together with liabilities resulting from off-balance-sheet items in the reserve base of institutions. In the Eurosystem’s minimum reserve system, only the liability categories ‘deposits’ and ‘debt securities issued’ are actually included in the reserve base (see Box 9).

Liabilities vis-à-vis other institutions included in the list of institutions subject to the Eurosystem’s minimum reserve system and liabilities vis-à-vis the ECB and the national central banks are not included in the reserve base. In this respect, for the liability category ‘debt securities issued’, the issuer needs to be able to prove the actual amount of these instruments held by other institutions subject to the Eurosystem’s minimum reserve system in order to be entitled to deduct them from the reserve base. If such proof cannot be presented, issuers may apply a standardised deduction of a fixed percentage (103) to this balance sheet item.

The reserve ratios are determined by the ECB subject to the maximum limit specified in Council Regulation (EC) No 2531/98. The ECB applies a uniform non-zero reserve ratio to most of the items included in the reserve base. This reserve ratio is specified in Regulation ECB/2003/9. The ECB sets a zero reserve ratio on the following liability categories: ‘deposits with an agreed maturity of over two years’, ‘deposits redeemable at notice of over two years’, ‘repos’ and ‘debt securities with an agreed maturity of over two years’ (see Box 9). The ECB may change the reserve ratios at any time. Changes in reserve ratios are announced by the ECB in advance of the first maintenance period for which the change is effective.

Calculation of reserve requirements

The reserve requirement of each individual institution is calculated by applying, to the amount of eligible liabilities, the reserve ratios for the corresponding categories of liabilities.

Each institution deducts an allowance of E100 000 from its reserve requirement in each Member State in which it has an establishment. The granting of such an allowance is without prejudice to the legal obligations of institutions subject to the Eurosystem’s minimum reserve system (104).

The reserve requirement for each maintenance period is rounded to the nearest euro.

BOX 9Reserve base and reserve ratiosA   Liabilities included in the reserve base and to which the positive reserve ratio is appliedDeposits (105)

—	Overnight deposits

—	Deposits with an agreed maturity of up to two years

—	Deposits redeemable at notice up of to two years

Debt securities issued

—	Debt securities with an agreed maturity of up to two years

B   Liabilities included in the reserve base and to which a zero reserve ratio is appliedDeposits (105)

—	Deposits with an agreed maturity of over two years

—	Deposits redeemable at notice of over two years

—

Repos

Debt securities issued

—	Debt securities with an agreed maturity of over two years

C   Liabilities excluded from the reserve base

—	Liabilities vis-à-vis other institutions subject to the Eurosystem’s minimum reserve system

—	Liabilities vis-à-vis the ECB and the national central banks

7.4.   Maintenance of reserve holdings

Maintenance period

The ECB publishes a calendar of the reserve maintenance periods at least three months before the start of each year (106). The maintenance period begins on the settlement day of the first main refinancing operation following the meeting of the Governing Council, at which the monthly assessment of the monetary policy stance is pre-scheduled. Under special circumstances, the published calendar may be amended, depending, among other things, on changes in the schedule of Governing Council meetings.

Reserve holdings

Each institution must hold its minimum reserves on one or more reserve accounts with the national central bank in the Member State in which it is established. For institutions with more than one establishment in a Member State, the head office is responsible for fulfilling the aggregate minimum reserves of all the domestic establishments of the institution (107). An institution with establishments in more than one Member State is required to hold minimum reserves with the national central bank of each Member State in which it has an establishment, in relation to its reserve base in the corresponding Member State.

Institutions’ settlement accounts with the national central banks may be used as reserve accounts. Reserve holdings on settlement accounts may be used for intraday settlement purposes. The daily reserve holding of an institution is calculated as the end-of-day balance on its reserve account.

An institution may apply to the national central bank in the Member State in which the institution is resident for permission to hold all its minimum reserves indirectly through an intermediary. The possibility of holding minimum reserves through an intermediary is, as a rule, restricted to institutions which are constituted in such a way that part of the administration (e.g. treasury management) is normally effected by the intermediary (e.g. networks of savings banks and cooperative banks may centralise their reserve holdings). The holding of minimum reserves through an intermediary is subject to the provisions specified in Regulation ECB/2003/9.

Remuneration of reserve holdings

Holdings of required reserves are remunerated at the average, over the maintenance period, of the ECB’s rate (weighted according to the number of calendar days) on the main refinancing operations, calculated using the formula specified in Box 10. Reserve holdings exceeding the required reserves are not remunerated. The remuneration is paid on the second NCB business day following the end of the maintenance period over which the remuneration was earned.

BOX 10Calculation of the remuneration of holdings of required reservesThe holding of required reserves is remunerated according to the following formula: where:

Rt	=	remuneration to be paid on holdings of required reserves for the maintenance period t.
Ht	=	average daily holdings of required reserves for the maintenance period t.
nt	=	number of calendar days in the maintenance period t.
rt	=	rate of remuneration on holdings of required reserves for the maintenance period t. Standard rounding of the rate of remuneration to two decimals shall be applied.
i	=	ith calendar day of the maintenance period t.
MRi	=	marginal interest rate for the most recent main refinancing operation settled on or before calendar day i.

7.5.   Reporting, acknowledgement and verification of the reserve base

The reserve base items for the application of minimum reserves are calculated by the institutions subject to minimum reserves themselves and are reported to the national central banks within the general framework of the ECB’s money and banking statistics (see Annex 4). Article 5 of Regulation ECB/2003/9 defines procedures for the notification and acknowledgement of the reserve base and the reserve requirement of the institution.

The procedure for the notification and acknowledgement of an institution’s minimum reserves is as follows. Either the relevant national central bank or the institution takes the initiative to calculate that institution’s minimum reserves for the relevant maintenance period. The calculated minimum reserves are notified by the calculating party at the latest three NCB business days before the start of the maintenance period. The relevant national central bank may specify an earlier date as a time limit for the notification of minimum reserves. It may also specify additional time limits for the institution to notify any revisions to the reserve base, and any revisions to the notified minimum reserves. The notified party shall acknowledge the calculated minimum reserves at the latest on the NCB business day preceding the start of the maintenance period. If the notified party has not replied to the notification by the end of the NCB business day preceding the start of the maintenance period, it shall be deemed to have acknowledged the amount of minimum reserves of the institution for the relevant maintenance period. Once acknowledged, the institution’s minimum reserves for the relevant maintenance period cannot be revised.

For institutions that are allowed to act as intermediaries for indirect reserve holdings of other institutions, special reporting requirements are specified in Regulation ECB/2003/9. The holding of reserves through an intermediary does not change the statistical reporting obligations of institutions holding reserves via an intermediary.

The ECB and the national central banks have the right, within the scope of Council Regulation (EC) No 2531/98, to verify the accuracy and quality of collected data.

7.6.   Non-compliance with minimum reserve obligations

Non-compliance with the minimum reserve obligations arises if an institution’s average end-of-calendar-day balance on its reserve account(s) over the maintenance period is less than its reserve requirement for the corresponding maintenance period.

Where an institution fails to comply with all or part of the reserve requirement, the ECB may, in accordance with Council Regulation (EC) No 2531/98, impose any one of the following sanctions:

—	a payment of up to 5 percentage points above the marginal lending rate, applied to the amount of the reserve requirement which the relevant institution failed to provide; or

—	a payment of up to two times the marginal lending rate, applied to the amount of the reserve requirement which the relevant institution failed to provide; or

—

the requirement for the relevant institution to establish non-interest-bearing deposits with the ECB or the national central banks of up to three times the amount of the reserve requirement which the relevant institution failed to provide. The maturity of the deposit may not exceed the period during which the institution failed to comply with the reserve requirement.

Where an institution fails to comply with other obligations under ECB Regulations and Decisions related to the Eurosystem’s minimum reserve system (e.g. if relevant data are not transmitted in time or are not accurate), the ECB is empowered to impose sanctions in accordance with Council Regulation (EC) No 2532/98 of 23 November 1998 concerning the powers of the European Central Bank to impose sanctions and European Central Bank Regulation (EC) No 2157/1999 of 23 September 1999 on the powers of the European Central Bank to impose sanctions (ECB/1999/4) (108). The Executive Board of the ECB may specify and publish the criteria according to which it will apply the sanctions provided for in Article 7(1) of Council Regulation (EC) No 2531/98 (109).

In addition, in the case of serious infringements of the minimum reserve requirements, the Eurosystem may suspend counterparties from participation in open market operations.

ANNEX 1

EXAMPLES OF MONETARY POLICY OPERATIONS AND PROCEDURES

LIST OF EXAMPLES

Example 1

Liquidity-providing reverse transaction by fixed rate tender

Example 2

Liquidity-providing reverse transaction by variable rate tender

Example 3

Issuance of ECB debt certificates by variable rate tender

Example 4

Liquidity-absorbing foreign exchange swap by variable rate tender

Example 5

Liquidity-providing foreign exchange swap by variable rate tender

Example 6

Risk control measures

EXAMPLE 1Liquidity-providing reverse transaction by fixed rate tenderThe ECB decides to provide liquidity to the market by means of a reverse transaction organised with a fixed rate tender procedure.Three counterparties submit the following bids:

Counterparty	Bid (EUR millions)
Bank 1	30
Bank 2	40
Bank 3	70
Total	140

The ECB decides to allot a total of EUR 105 million.The percentage of allotment is:The allotment to the counterparties is:

Counterparty	Bid (EUR millions)	Allotment (EUR millions)
Bank 1	30	22,5
Bank 2	40	30,0
Bank 3	70	52,5
Total	140	105,0

EXAMPLE 2Liquidity-providing reverse transaction by variable rate tenderThe ECB decides to provide liquidity to the market by means of a reverse transaction organised with a variable rate tender procedure.Three counterparties submit the following bids:

Interest rate (%)	Amount (EUR millions)
	Bank 1	Bank 2	Bank 3	Total bids	Cumulative bids
3,15				0	0
3,10		5	5	10	10
3,09		5	5	10	20
3,08		5	5	10	30
3,07	5	5	10	20	50
3,06	5	10	15	30	80
3,05	10	10	15	35	115
3,04	5	5	5	15	130
3,03	5		10	15	145
Total	30	45	70	145

The ECB decides to allot EUR 94 million, implying a marginal interest rate of 3,05 %.All bids above 3,05 % (for a cumulative amount of EUR 80 million) are fully satisfied. At 3,05 % the percentage of allotment is:The allotment to Bank 1 at the marginal interest rate is, for example:0,4 × 10 = 4The total allotment to Bank 1 is:5 + 5 + 4 = 14The allotment results can be summarised as follows:

Counterparties	Amount (EUR millions)
	Bank 1	Bank 2	Bank 3	Total
Total bids	30,0	45,0	70,0	145
Total allotment	14,0	34,0	46,0	94

If the allotment procedure follows a single rate (Dutch) auction, the interest rate applied to the amounts allotted to the counterparties is 3,05 %.If the allotment procedure follows a multiple rate (American) auction, no single interest rate is applied to the amounts allotted to the counterparties; for example, Bank 1 receives EUR 5 million at 3,07 %, EUR 5 million at 3,06 % and EUR 4 million at 3,05 %.

EXAMPLE 3Issuance of ecb debt certificates by variable rate tenderThe ECB decides to absorb liquidity from the market by issuing debt certificates using a variable rate tender procedure.Three counterparties submit the following bids:

Interest rate (%)	Amount (EUR millions)
	Bank 1	Bank 2	Bank 3	Total	Cumulative bids
3,00				0	0
3,01	5		5	10	10
3,02	5	5	5	15	25
3,03	5	5	5	15	40
3,04	10	5	10	25	65
3,05	20	40	10	70	135
3,06	5	10	10	25	160
3,08	5		10	15	175
3,10		5		5	180
Total	55	70	55	180

The ECB decides to allot a nominal amount of EUR 124.5 million, implying a marginal interest rate of 3,05 %.All bids below 3,05 % (for a cumulative amount of EUR 65 million) are fully satisfied. At 3,05 % the percentage of allotment is:The allotment to Bank 1 at the marginal interest rate is, for example:0,85 × 20 = 17The total allotment to Bank 1 is:5 + 5 + 5 + 10 + 17 = 42The allotment results can be summarised as follows:

Counterparties	Amount (EUR millions)
	Bank 1	Bank 2	Bank 3	Total
Total bids	55,0	70,0	55,0	180,0
Total allotment	42,0	49,0	33,5	124,5

EXAMPLE 4Liquidity-absorbing foreign exchange swap by variable rate tenderThe ECB decides to absorb liquidity from the market by executing a foreign exchange swap on the EUR/USD rate by means of a variable rate tender procedure. (Note: The euro is traded at a premium in this example.)Three counterparties submit the following bids:

Swap points (× 10 000)	Amount (EUR millions)
	Bank 1	Bank 2	Bank 3	Total	Cumulative bids
6,84				0	0
6,80	5		5	10	10
6,76	5	5	5	15	25
6,71	5	5	5	15	40
6,67	10	10	5	25	65
6,63	25	35	40	100	165
6,58	10	20	10	40	205
6,54	5	10	10	25	230
6,49		5		5	235
Total	65	90	80	235

The ECB decides to allot EUR 158 million, implying 6,63 marginal swap points. All bids above 6,63 (for a cumulative amount of EUR 65 million) are fully satisfied. At 6,63 the percentage of allotment is:The allotment to Bank 1 at the marginal swap points is, for example:0,93 × 25 = 23,25The total allotment to Bank 1 is:5 + 5 + 5 + 10 + 23,25 = 48,25The allotment results can be summarised as follows:

Counterparties	Amount (EUR millions)
	Bank 1	Bank 2	Bank 3	Total
Total bids	65,0	90,0	80,0	235,0
Total allotment	48,25	52,55	57,20	158,0

The ECB fixes the spot EUR/USD exchange rate for the operation at 1,1300.If the allotment procedure follows a single rate (Dutch) auction, on the start date of the operation the Eurosystem buys EUR 158 000 000 and sells USD 178 540 000. On the maturity date of the operation, the Eurosystem sells EUR 158 000 000 and buys USD 178 644 754 (the forward exchange rate is 1,130663 = 1,1300 + 0,000663).If the allotment procedure follows a multiple rate (American) auction, the Eurosystem exchanges the amounts of euro and US dollars shown in the following table:

Spot transaction			Forward transaction
Exchange rate	Buy EUR	Sell USD	Exchange rate	Sell EUR	Buy USD
1,1300			1,130684
1,1300	10 000 000	11 300 000	1,130680	10 000 000	11 306 800
1,1300	15 000 000	16 950 000	1,130676	15 000 000	16 960 140
1,1300	15 000 000	16 950 000	1,130671	15 000 000	16 960 065
1,1300	25 000 000	28 250 000	1,130667	25 000 000	28 266 675
1,1300	93 000 000	105 090 000	1,130663	93 000 000	105 151 659
1,1300			1,130658
1,1300			1,130654
1,1300			1,130649
Total	158 000 000	178 540 000		158 000 000	178 645 339

EXAMPLE 5Liquidity-providing foreign exchange swap by variable rate tenderThe ECB decides to provide liquidity to the market by executing a foreign exchange swap on the EUR/USD rate by means of a variable rate tender procedure. (Note: The euro is traded at a premium in this example.)Three counterparties submit the following bids:

Swap points (× 10 000)	Amount (EUR millions)
	Bank 1	Bank 2	Bank 3	Total	Cumulative bids
6,23
6,27	5		5	10	10
6,32	5		5	10	20
6,36	10	5	5	20	40
6,41	10	10	20	40	80
6,45	20	40	20	80	160
6,49	5	20	10	35	195
6,54	5	5	10	20	215
6,58		5		5	220
Total	60	85	75	220

The ECB decides to allot EUR 197 million, implying 6,54 marginal swap points. All bids below 6,54 (for a cumulative amount of EUR 195 million) are fully satisfied. At 6,54 the percentage of allotment is:The allotment to Bank 1 at the marginal swap points is, for example:0,10 × 5 = 0,5The total allotment to Bank 1 is:5 + 5 + 10 + 10 + 20 + 5 + 0,5 = 55,5The allotment results can be summarised as follows:

Counterparties	Amount (EUR millions)
	Bank 1	Bank 2	Bank 3	Total
Total bids	60,0	85,0	75,0	220
Total allotment	55,5	75,5	66,0	197

The ECB fixes the spot EUR/USD exchange rate for the operation at 1,1300.If the allotment procedure follows a single rate (Dutch) auction, at the start date of the operation the Eurosystem sells EUR 197 000 000 and buys USD 222 610 000. At the maturity date of the operation, the Eurosystem buys EUR 197 000 000 and sells USD 222 738 838 (the forward exchange rate is 1,130654 = 1,1300 + 0,000654).If the allotment procedure follows a multiple rate (American) auction, the Eurosystem exchanges the amounts of euro and US dollars shown in the following table:

Spot transaction			Forward transaction
Exchange rate	Sell EUR	Buy USD	Exchange rate	Buy EUR	Sell USD
1,1300			1,130623
1,1300	10 000 000	11 300 000	1,130627	10 000 000	11 306 270
1,1300	10 000 000	11 300 000	1,130632	10 000 000	11 306 320
1,1300	20 000 000	22 600 000	1,130636	20 000 000	22 612 720
1,1300	40 000 000	45 200 000	1,130641	40 000 000	45 225 640
1,1300	80 000 000	90 400 000	1,130645	80 000 000	90 451 600
1,1300	35 000 000	39 550 000	1,130649	35 000 000	39 572 715
1,1300	2 000 000	2 260 000	1,130654	2 000 000	2 261 308
1,1300			1,130658
Total	197 000 000	222 610 000		197 000 000	222 736 573

EXAMPLE 6Risk control measuresThis example illustrates the risk control framework applied to underlying assets used in the Eurosystem’s liquidity-providing operations (110). The example is based on the assumption that a counterparty participates in the following Eurosystem monetary policy operations:

—	a main refinancing operation starting on 28 July 2004 and ending on 4 August 2004 where the counterparty is allotted EUR 50 million at an interest rate of 4,24 %;

—	a longer-term refinancing operation starting on 29 July 2004 and ending on 21 October 2004 where the counterparty is allotted EUR 45 million at an interest rate of 4,56 %; and

—	and a main refinancing operation starting on 4 August 2004 and ending on 11 August 2004 where the counterparty is allotted EUR 35 million at an interest rate of 4,26 %.

The characteristics of the underlying marketable assets used by the counterparty to cover these operations are specified in Table 1 below.Table 1 Underlying marketable assets used in the transactions

Characteristics
Name	Asset class	Maturity date	Coupon definition	Coupon frequency	Residual maturity	Haircut
Asset A	Asset-backed instrument	29.08.2006	Fixed rate	6 months	2 years	3,50 %
Asset B	Central government bond	19.11.2008	Variable rate	12 months	4 years	0,50 %
Asset C	Corporate bond	12.05.2015	Zero coupon rate		>10 years	15,00 %

Prices in percentages (including accrued interest) (111)
28.07.2004	29.07.2004	30.07.2004	2.08.2004	3.08.2004	4.08.2004	5.08.2004
102,63	101,98	100,55	101,03	100,76	101,02	101,24
	98,35	97,95	98,15	98,56	98,73	98,57
					55,01	54,87

Earmarking systemFirst, it is assumed that the transactions are carried out with a national central bank using a system where underlying assets are earmarked for each transaction. The valuation of underlying assets is carried out on a daily basis. The risk control framework can then be described as follows (see also Table 2 below):

1.

On 28 July 2004, the counterparty enters into a repurchase transaction with the national central bank, which purchases EUR 50,6 million of Asset A. Asset A is an asset-backed instrument with a fixed coupon maturing on 29 August 2006. It thus has a residual maturity of two years, therefore requiring a valuation haircut of 3,5 %. The market price of Asset A on its reference market on that day is 102,63 %, which includes the accrued interest on the coupon. The counterparty is required to provide an amount of Asset A, which – after deduction of the 3,5 % valuation haircut – exceeds the allotted amount of EUR 50 million. The counterparty therefore delivers Asset A for a nominal amount of EUR 50,6 million, the adjusted market value of which is EUR 50 113 203 on that day.

2.

On 29 July 2004, the counterparty enters into a repurchase transaction with the national central bank, which purchases EUR 21 million of Asset A (market price 101,98 %, valuation haircut 3,5 %) and EUR 25 million of Asset B (market price 98,35 %). Asset B is a central government bond with variable rate coupon payments, to which a 0,5 % valuation haircut is applied. The adjusted market value of Asset A and Asset B on that day is EUR 45 130 810, thus exceeding the required amount of EUR 45 000 000. On 29 July 2004, the assets underlying the main refinancing operation initiated on 28 July 2004 are revalued. With a market price of 101,98 %, the haircut-adjusted market value of Asset A is still within the lower and upper trigger amounts. The initially pledged collateral is consequently considered to cater for both the initial amount of liquidity provided and the accrued interest amounting to EUR 5 889.

3.

On 30 July 2004, the underlying assets are revalued: the market price of Asset A is 100,55 % and the market price of Asset B is 97,95 %. Accrued interest amounts to EUR 11 778 on the main refinancing operation initiated on 28 July 2004 and EUR 5 700 on the longer-term refinancing operation initiated on 29 July 2004. As a result, the adjusted market value of Asset A in the first transaction falls below the transaction’s amount to be covered (i.e. the liquidity provided plus the accrued interest) by EUR 914 218, but also below the lower trigger level of EUR 49 761 719. The counterparty delivers EUR 950 000 of Asset A in nominal value terms, which – after deducting a 3,5 % haircut from the market value based on a price of 100,55 % – restores sufficient collateral coverage (112). A margin call is also needed on the second transaction since the adjusted market value of the underlying assets used in this transaction (EUR 44 741 520) is below the lower trigger level (EUR 44 780 672). The counterparty therefore provides EUR 270 000 of Asset B with an adjusted market value of EUR 263 143.

4.	On 2 and 3 August 2004, the underlying assets are revalued, without resulting in any margin call for the transactions entered into on 28 and 29 July 2004.

5.

On 4 August 2004, the counterparty repays the liquidity provided under the main refinancing operation initiated on 28 July 2004, including the accrued interest of EUR 41 222. The national central bank returns EUR 51 550 000 of Asset A in nominal value. On the same day, the counterparty enters into a new repurchase transaction with the national central bank, which purchases EUR 75 million of Asset C in nominal value terms. Since Asset C is a zero coupon corporate bond with a residual maturity of more than ten years that requires a valuation haircut of 15 %, the corresponding haircut-adjusted market value on that day is of EUR 35 068 875. The revaluation of assets underlying the long-term refinancing operation initiated on 29 July 2004 reveals that the adjusted market value of the assets provided exceeds the upper trigger level by approximately EUR 262 000 and leads to the national central bank returning EUR 262 000 of Asset B in nominal value to the counterparty (113).

Pooling systemSecond, it is assumed that the transactions are carried out with a national central bank using a pooling system. Assets included in the pool of assets used by the counterparty are not earmarked for specific transactions.The same sequence of transactions is used in this example as in the above example illustrating an earmarking system. The main difference is that, on the revaluation dates, the adjusted market value of all the assets in the pool has to cover the total amount of all of the counterparty’s outstanding operations with the national central bank. The margin call of EUR 1 178 398 occurring on 30 July 2004 is identical in this example to the one required in the earmarking system case. The counterparty delivers EUR 1 300 000 of Asset A in nominal value terms, which – after deducting a 3,5 % haircut from the market value based on a price of 100,55 % – restores sufficient collateral coverage.Moreover, on 4 August 2004, when the main refinancing operation entered into on 28 July 2004 matures, the counterparty may keep the assets on its pledge account. An asset can also be exchanged for another asset as shown in the example, where EUR 51,9 million of Asset A in nominal value are replaced with EUR 75,5 million of Asset C in nominal value to cover the liquidity provided and the accrued interest under all refinancing operations.The risk control framework in the pooling system is described in Table 3.

Table 2: Earmarking system

Date	Outstanding transactions	Start date	End date	Interest rate	Liquidity provided	Accrued interest	Total amount to be covered	Lower trigger amount	Upper trigger amount	Adjusted market value	Margin call
28.07.2004	Main refinancing	28.07.2004	04.08.2004	4,24	50 000 000	—	50 000 000	49 750 000	50 250 000	50 113 203	—
29.07.2004	Main refinancing	28.07.2004	04.08.2004	4,24	50 000 000	5 889	50 005 889	49 755 859	50 255 918	49 795 814	—
	Longer-term refinancing	29.07.2004	27.10.2004	4,56	45 000 000	—	45 000 000	44 775 000	45 225 000	45 130 810	—
30.07.2004	Main refinancing	28.07.2004	04.08.2004	4,24	50 000 000	11 778	50 011 778	49 761 719	50 261 837	49 097 560	– 914 218
	Longer-term refinancing	29.07.2004	27.10.2004	4,56	45 000 000	5 700	45 005 700	44 780 672	45 230 729	44 741 520	– 264 180
02.08.2004	Main refinancing	28.07.2004	04.08.2004	4,24	50 000 000	29 444	50 029 444	49 779 297	50 279 592	50 258 131	—
	Longer-term refinancing	29.07.2004	27.10.2004	4,56	45 000 000	22 800	45 022 800	44 797 686	45 247 914	45 152 222	—
03.08.2004	Main refinancing	28.07.2004	4.08.2004	4,24	50 000 000	35 333	50 035 333	49 785 157	50 285 510	50 123 818	—
	Longer-term refinancing	29.07.2004	27.10.2004	4,56	45 000 000	28 500	45 028 500	44 803 358	45 253 643	45 200 595	—
04.08.2004	Main refinancing	04.08.2004	11.08.2004	4,26	35 000 000	—	35 000 000	34 825 000	35 175 000	35 068 875	—
	Longer-term refinancing	29.07.2004	27.10.2004	4,56	45 000 000	34 200	45 034 200	44 809 029	45 259 371	45 296 029	261 829
05.08.2004	Main refinancing	04.08.2004	11.08.2004	4,26	35 000 000	4 142	35 004 142	34 829 121	35 179 162	34 979 625	—
	Longer-term refinancing	29.07.2004	27.10.2004	4,56	45 000 000	39 900	45 039 900	44 814 701	45 265 100	45 043 420	—

Table 3: Pooling system

Date	Outstanding transactions	Start date	End date	Interest rate	Liquidity provided	Accrued interest	Total amount to be covered	Lower trigger amount (114)	Upper trigger amount (115)	Adjusted market value	Margin call
28.07.2004	Main refinancing	28.07.2004	04.08.2004	4,24	50 000 000	—	50 000 000	49 750 000	Not applicable	50 113 203	—
29.07.2004	Main refinancing	28.07.2004	04.08.2004	4,24	50 000 000	5 889	95 005 889	94 530 859	Not applicable	94 926 624	—
	Longer-term refinancing	29.07.2004	27.10.2004	4,56	45 000 000	—
30.07.2004	Main refinancing	28.07.2004	04.08.2004	4,24	50 000 000	11 778	95 017 478	94 542 390	Not applicable	93 839 080	–1 178 398
	Longer-term refinancing	29.07.2004	27.10.2004	4,56	45 000 000	5 700
02.08.2004	Main refinancing	28.07.2004	04.08.2004	4,24	50 000 000	29 444	95 052 244	94 576 983	Not applicable	95 487 902	—
	Longer-term refinancing	29.07.2004	27.10.2004	4,56	45 000 000	22 800
03.08.2004	Main refinancing	28.07.2004	04.08.2004	4,24	50 000 000	35 333	95 063 833	94 588 514	Not applicable	95 399 949	—
	Longer-term refinancing	29.07.2004	27.10.2004	4,56	45 000 000	28 500
04.08.2004	Main refinancing	04.08.2004	11.08.2004	4,26	35 000 000	—	80 034 200	79 634 029	Not applicable	80 333 458	—
	Longer-term refinancing	29.07.2004	27.10.2004	4,56	45 000 000	34 200
05.08.2004	Main refinancing	04.08.2004	11.08.2004	4,26	35 000 000	4 142	80 044 042	79 643 821	Not applicable	80 248 396	—
	Longer-term refinancing	29.07.2004	27.10.2004	4,56	45 000 000	39 900