ANNEX I

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.

Possible measures on the grounds of prudence or following an event of default

2.4.1

Measures on the grounds of prudence

2.4.2.

Measures following the event of default

2.4.3.

Proportionate and non-discriminatory application of discretionary measures

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

3.2.1.

Type of instrument

3.2.2.

Legal nature

3.2.3.

Price terms

3.2.4.

Other operational features

3.3.

Issuance of ECB debt certificates

3.3.1.

Type of instrument

3.3.2.

Legal nature

3.3.3.

Interest terms

3.3.4.

Other operational features

3.4.

Foreign exchange swaps

3.4.1.

Type of instrument

3.4.2.

Legal nature

3.4.3.

Currency and exchange rate terms

3.4.4.

Other operational features

3.5.

Collection of fixed-term deposits

3.5.1.

Type of instrument

3.5.2.

Legal nature

3.5.3.

Interest terms

3.5.4.

Other operational features

CHAPTER 4 —   STANDING FACILITIES

4.1.

The marginal lending facility

4.1.1.

Type of instrument

4.1.2.

Legal nature

4.1.3.

Access conditions

4.1.4.

Maturity and interest terms

4.1.5.

Suspension of the facility

4.2.

The deposit facility

4.2.1.

Type of instrument

4.2.2.

Legal nature

4.2.3.

Access conditions

4.2.4.

Maturity and interest terms

4.2.5.

Suspension of the 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

5.2.1.

General considerations

5.2.2.

Direct contact with counterparties

5.2.3.

Operations executed through stock exchanges and market agents

5.2.4.

Announcement of bilateral operations

5.2.5.

Operating days

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

6.5.1.

Marketable assets

6.5.2.

Non-marketable assets

6.6.

Cross-border use of eligible assets

6.6.1.

Correspondent central banking model

6.6.2.

Links between securities settlement systems

6.7.

Acceptance of non-euro-denominated collateral in contingencies

CHAPTER 7 —   MINIMUM RESERVES

7.1.

General considerations

7.2.

Institutions subject to minimum reserve requirements

7.3.

Determination of minimum reserves

7.3.1.

Reserve base and reserve ratios

7.3.2.

Calculation of reserve requirements

7.4.

Maintenance of reserve holdings

7.4.1.

Maintenance period

7.4.2.

Reserve holdings

7.4.3

Remuneration of reserve holdings

7.5.

Reporting, acknowledgement and verification of the reserve base

7.6.

Non-compliance with minimum reserve obligations

APPENDIX 1 —

Examples of Monetary Policy Operations and Procedures

APPENDIX 2 —

Glossary

APPENDIX 3 —

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

APPENDIX 4 —

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

APPENDIX 5 —

The Eurosystem Websites

APPENDIX 6 —

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

APPENDIX 7 —

Creation of a valid security over credit claims

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	the Trans-European Automated Real-time Gross settlement Express Transfer system, as defined in Guideline ECB/2005/16
TARGET2	the Trans-European Automated Real-time Gross settlement Express Transfer system, as defined in Guideline ECB/2007/2
UCITS	undertaking for collective investment in transferable securities

Introduction

This document presents the operational framework chosen by the Eurosystem 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 appendices 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 central banks of the EU Member States (1). The activities of the ESCB are carried out in accordance with the Treaty on the Functioning of the European Union and the Statute of the European System of Central Banks and of the European Central Bank (hereinafter the ‘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 NCBs (2) for carrying out the operations which form part of the tasks of the Eurosystem. The NCBs may, if necessary for the implementation of monetary policy, share amongst the Eurosystem members individual information, such as operational data, related to counterparties participating in Eurosystem operations (3). 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 127(1) of the Treaty. Without prejudice to the primary objective of price stability, the Eurosystem has to support the general economic policies in the Union. 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 ECB 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):

(a)

The main refinancing operations are regular liquidity-providing reverse transactions with a weekly frequency and a maturity of normally 1 week. These operations are executed by the NCBs 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.

(b)

The longer-term refinancing operations are liquidity-providing reverse transactions with a monthly frequency and a maturity of normally 3 months. These operations are aimed at providing counterparties with additional longer-term refinancing and are executed by the NCBs 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.

(c)

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 may be conducted on the last day of a reserve maintenance period to counter liquidity imbalances which may have accumulated since the allotment of the last main refinancing operation. Fine-tuning operations are primarily executed as reverse transactions, but may also take the form of either foreign exchange swaps or 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 NCBs through quick tenders or bilateral procedures. The Governing Council of the ECB can decide that, under exceptional circumstances, fine-tuning bilateral operations may be executed by the ECB itself.

(d)

In addition, the Eurosystem may carry out structural operations through the issuance of ECB 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 NCBs through standard tenders. Structural operations in the form of outright transactions are normally executed by the NCBs through bilateral procedures. The Governing Council of the ECB can decide that, under exceptional circumstances, structural operations may be executed by the ECB itself.

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):

(a)

Counterparties can use the marginal lending facility to obtain overnight liquidity from the NCBs 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.

(b)

Counterparties can use the deposit facility to make overnight deposits with the NCBs. 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 NCBs.

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.

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	—	1 week	Weekly	Standard tenders
Longer-term refinancing operations	Reverse transactions	—	3 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
Structural operations	Reverse transactions	Issuance of ECB 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

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 as well as outright transactions. The Eurosystem may select a limited number of counterparties to participate in fine-tuning operations. 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 established in the euro area.

Counterparties shall be deemed to be aware of, and shall comply with, all obligations imposed on them by anti-money laundering and counter-terrorist financing legislation.

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 replaced the two-tier system that had been in place since the start of stage three 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 Union 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:

(a)

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.

(b)

Counterparties must be financially sound. They should be subject to at least one form of harmonised Union/EEA supervision by national authorities (7). In view of their specific institutional nature under Union law, financially sound institutions within the meaning of Article 123(2) of the Treaty that are subject to supervision of a standard comparable to supervision by competent national authorities can be accepted as counterparties. Financially sound institutions that are subject to non-harmonised supervision by competent national authorities of a standard comparable to harmonised Union/EEA supervision can also be accepted as counterparties, e.g. branches established in the euro area of institutions incorporated outside the EEA.

(c)	Counterparties must fulfil any operational criteria specified in the relevant contractual or regulatory arrangements applied by the respective NCB (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:

(a)	access the Eurosystem’s standing facilities; and

(b)	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 NCB of the Member State in which it is incorporated. 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 NCB of the Member State in which it is established, 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 established 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 Appendix 3.

For other operations based on quick tenders and bilateral procedures (fine-tuning reverse transactions and the collection of fixed-term deposits), each NCB 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 NCBs deal with the counterparties which are included in their respective set of fine-tuning counterparties. Quick tenders and bilateral operations may also be executed with a broader range of counterparties.

The Governing Council of the ECB can decide that, 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), Regulation (EC) No 2157/1999 of the European Central Bank 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) 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 abovementioned 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 NCB (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 NCBs (or by the ECB) as set out below.

This relates to cases of infringement of: (a) tender rules, if a counterparty fails to transfer a sufficient amount of underlying assets or cash (12) to settle (at the settlement day), or to collateralise, until the maturity of the operation by means of corresponding margin calls, the amount of liquidity it has been allotted in a liquidity-providing operation, or if it fails to transfer a sufficient amount of cash to settle the amount it has been allotted in a liquidity-absorbing operation; and (b) bilateral transaction rules, if a counterparty fails to transfer a sufficient amount of eligible underlying assets, or if it fails to transfer a sufficient amount of cash to settle the amount agreed in bilateral transactions, or if it fails to collateralise an outstanding bilateral transaction at any time until its maturity by means of corresponding margin calls.

This also applies to cases of non-compliance by a counterparty with: (a) 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 (b) 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 established 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 NCBs 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 Appendix 6).

2.4.   Possible measures on the grounds of prudence or following an event of default

2.4.1.   Measures on the grounds of prudence

The Eurosystem may take the following measures on the grounds of prudence:

(a)	in accordance with the contractual or regulatory arrangements applied by the respective NCB or by the ECB, the Eurosystem may suspend, limit or exclude an individual counterparty’s access to monetary policy instruments;

(b)	the Eurosystem may reject, limit the use of or apply supplementary haircuts to assets submitted as collateral in Eurosystem credit operations by specific counterparties.

2.4.2.   Measures following the event of default

The Eurosystem may suspend, limit or exclude access to monetary policy operations with regard to counterparties that are in default pursuant to any contractual or regulatory arrangements applied by the NCBs.

2.4.3.   Proportionate and non-discriminatory application of discretionary measures

All discretionary measures required to ensure prudent risk management are applied and calibrated by the Eurosystem in a proportionate and non-discriminatory manner. Any discretionary measure taken vis-à-vis an individual counterparty will be duly justified.

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 ECB debt certificates may be used for structural absorption operations. Structural operations may also be conducted by means of outright transactions, i.e. purchases and sales. In addition, the Eurosystem has two other instruments available for the conduct of fine-tuning operations: 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

3.1.1.1.   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.

3.1.1.2.   Legal nature

The NCBs 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 retransfer 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 NCB (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.

3.1.1.3.   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.

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

(a)	they are liquidity-providing reverse operations;

(b)	they are executed regularly each week (13);

(c)	they normally have a maturity of 1 week (14);

(d)	they are executed in a decentralised manner by the NCBs;

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

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

(g)	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 3-month maturity, which are aimed at providing additional longer-term refinancing to the financial sector. 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:

(a)	they are liquidity-providing reverse operations;

(b)	they are executed regularly each month (15);

(c)	they normally have a maturity of 3 months (16);

(d)	they are executed in a decentralised manner by the NCBs;

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

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

(g)	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. Fine-tuning operations may be conducted on the last day of a reserve maintenance period to counter liquidity imbalances which may have accumulated since the allotment of the last main refinancing operation. 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:

(a)	they can take the form of liquidity-providing or liquidity-absorbing operations;

(b)	their frequency is not standardised;

(c)	their maturity is not standardised;

(d)	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);

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

(f)	they are normally executed in a decentralised manner by the NCBs (the Governing Council of the ECB can decide that, under exceptional circumstances, bilateral fine-tuning reverse operations may be executed by the ECB);

(g)	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

(h)	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:

(a)	they are liquidity-providing operations;

(b)	their frequency can be regular or non-regular;

(c)	their maturity is not standardised a priori;

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

(e)	they are executed in a decentralised manner by the NCBs;

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

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

3.2.   Outright transactions

3.2.1.   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 purposes.

3.2.2.   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.

3.2.3.   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.

3.2.4.   Other operational features

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

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

(b)	their frequency is not standardised;

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

(d)	they are normally executed in a decentralised manner by the NCBs (the Governing Council of the ECB can decide that, under exceptional circumstances, outright transactions may be executed by the ECB);

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

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

3.3.   Issuance of ECB debt certificates

3.3.1.   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.

3.3.2.   Legal nature

ECB debt certificates constitute a debt obligation of the ECB vis-à-vis the holder of the certificate. They 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.

3.3.3.   Interest terms

ECB debt 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 discounted issue amount and the redemption amount equals the interest accrued on the discounted 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 discounted issue amount is shown in Box 1.

BOX 1 Issuance of ECB debt certificates The discounted issue amount is: where: N = nominal amount of the ECB debt certificate rI = interest rate (in %) D = maturity of the ECB debt certificate (in days) PT = discounted issue amount of the ECB debt certificate

3.3.4.   Other operational features

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

(a)	the certificates are issued in order to absorb liquidity from the market;

(b)	the certificates can be issued on a regular or non-regular basis;

(c)	the certificates have a maturity of less than 12 months;

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

(e)	the certificates are tendered and settled in a decentralised manner by the NCBs; and

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

3.4.   Foreign exchange swaps

3.4.1.   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.

3.4.2.   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 NCB (or the ECB).

3.4.3.   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.

3.4.4.   Other operational features

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

(a)	they can take the form of liquidity-providing or liquidity-absorbing operations;

(b)	their frequency is not standardised;

(c)	their maturity is not standardised;

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

(e)	they are normally executed in a decentralised manner by the NCBs (the Governing Council of the ECB can decide that, under exceptional circumstances, bilateral foreign exchange swaps may be executed by the ECB); and

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

BOX 2 Foreign 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) ΔΜ = forward points between the euro and ABC at the repurchase date of the swap (M) Δ M = FM – S N(.) = spot amount of currency; N(.)M is the forward amount of currency:   N (ABC) = N (EUR) × S or   N (ABC) M = N (EUR) M × F M or

3.5.   Collection of fixed-term deposits

3.5.1.   Type of instrument

The Eurosystem may invite counterparties to place remunerated fixed-term deposits with the NCB 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.

3.5.2.   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 NCBs in exchange for the deposits.

3.5.3.   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.

3.5.4.   Other operational features

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

(a)	the deposits are collected in order to absorb liquidity;

(b)	the frequency with which deposits are collected is not standardised;

(c)	the maturity of the deposits is not standardised;

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

(e)	the collection of deposits is normally executed in a decentralised manner by the NCBs (the Governing Council of the ECB can decide that, under exceptional circumstances, the bilateral collection of fixed-term deposits (17) may be executed by the ECB); and

(f)	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

4.1.1.   Type of instrument

Counterparties may use the marginal lending facility to obtain overnight liquidity from NCBs 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.

4.1.2.   Legal nature

The NCBs 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 retransfer 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 NCB. 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.

4.1.3.   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 NCB in the Member State in which the institution is established. Access to the marginal lending facility is granted only on days when TARGET2 (18) is operational (19). On days when the SSSs are not operational, access to the marginal lending facilities is granted on the basis of underlying assets which have already been pre-deposited with the NCBs.

At the end of each business day, counterparties’ debit positions on their settlement account with the NCBs 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 NCB in the Member State in which the counterparty is established. For the NCB to process the request on the same day in TARGET2, the request must be received by the NCB at the latest 15 minutes following the TARGET2 closing time (20), (21). As a general rule, the TARGET2 closing time is 6 p.m. ECB time (CET). The deadline for requesting access to the marginal lending facility is postponed by an additional 15 minutes on the last Eurosystem business day of a reserve maintenance period. The request must specify the amount of credit and, if underlying assets for the transaction have not already been pre-deposited with the NCB, the underlying assets to be delivered for the transaction.

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.

4.1.4.   Maturity and interest terms

The maturity of credit extended under the facility is overnight. For counterparties participating directly in TARGET2, the credit is repaid on the next day on which (i) TARGET2; and (ii) the relevant SSSs 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 (22), (23). Interest under the facility is payable with the repayment of the credit.

4.1.5.   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

4.2.1.   Type of instrument

Counterparties can use the deposit facility to make overnight deposits with NCBs. 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 (24).

4.2.2.   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.

4.2.3.   Access conditions (25)

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 NCB in the Member State in which the institution is established. Access to the deposit facility is granted only on days when TARGET2 is open (26).

To be granted access to the deposit facility, the counterparty must send a request to the NCB in the Member State in which the counterparty is established. For the NCB to process the request on the same day in TARGET2, the request must be received by the NCB at the latest 15 minutes following the TARGET2 closing time, which is, as a general rule, 6 p.m. ECB time (CET) (27), (28). The deadline for requesting access to the deposit facility is postponed by an additional 15 minutes on the last Eurosystem business day of a reserve maintenance period. The request must specify the amount to be deposited under the facility.

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

4.2.4.   Maturity and interest terms

The maturity of deposits under the facility is overnight. For counterparties participating directly in TARGET2, deposits held under the facility mature on the next day on which TARGET2 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 (29). Interest on the deposits is payable on maturity of the deposit.

4.2.5.   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.

5.1.1.1.   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 2 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.

5.1.1.2.   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.

5.1.1.3.   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 (30). 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 NCBs (31).

BOX 3 Operational steps for tender procedures Step 1   Tender announcement a. Announcement by the ECB through public wire services and the ECB’s website b. Announcement by the NCBs 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 results through public wire services and the ECB’s website Step 5   Certification of individual allotment results Step 6   Settlement of the transactions (see Section 5.3)

5.1.2.   Tender operations calendar

5.1.2.1.   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 (32). The calendar is published at least 3 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.

5.1.2.2.   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 (33) in all Member States.

5.1.2.3.   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 NCBs 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))

Note: The figures refer to the operational steps as defined in Box 3.

Chart 2

Normal time frame for the operational steps in quick tenders

Note: The figures refer to the operational steps as defined in Box 3.

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 (34)

5.1.3.   Announcement of tender operations

Eurosystem standard tenders are publicly announced by means of wire services and the ECB’s website. In addition, NCBs may announce the tender operation directly to counterparties without access to wire services. The public tender announcement message normally contains the following information:

(a)	the reference number of the tender operation;

(b)	the date of the tender operation;

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

(d)	the maturity of the operation;

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

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

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

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

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

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

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

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

(m)	the maximum bid limit (if any);

(n)	the minimum individual allotment amount (if any);

(o)	the minimum allotment ratio (if any);

(p)	the time schedule for the submission of bids;

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

(r)	the ISIN code of the issue (in the case of the issuance of ECB 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 which is not announced publicly in advance, the selected counterparties are contacted directly by the NCBs. In a quick tender which is announced publicly, the NCB may contact the selected counterparties directly.

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 NCBs for the relevant operation. The bids must be submitted to the NCB 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 NCBs (35).

In variable rate tenders, counterparties may submit bids for up to 10 different interest rate/price/swap point levels. In exceptional circumstances the Eurosystem may impose a limit on the number of bids that may be submitted as regards variable rate tenders. In each bid, counterparties must state the amount of money that they are willing to transact with the NCBs and the relevant interest rate (36), (37). The interest rates bid must be expressed as multiples of 0,01 percentage points. 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 points.

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 NCB 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 (38). The contractual or regulatory arrangements applied by the relevant NCB allow the imposition of penalties if a counterparty fails 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 NCBs. The NCBs discard all the bids of a counterparty if the aggregate amount bid exceeds any maximum bid limit established by the ECB. The NCBs 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 NCBs may discard bids which are incomplete or which do not follow the pro forma example. If a bid is discarded, the respective NCB informs the counterparty about its decision prior to the tender allotment.

5.1.5.   Tender allotment procedures

5.1.5.1.   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 4 Allotment of fixed rate tenders The percentage of allotment is: The amount allotted to the ith counterparty is: alli = all % × (ai ) 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

5.1.5.2.   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 ECB 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 ECB debt certificates, the amount allotted to each counterparty is rounded to the nearest multiple of the denomination of the ECB 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 5 Allotment 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: all (rm ) i = all%(rm ) × a(rm)i The total amount allotted to the ith counterparty is: where: A = total amount allotted r s = 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:   r 1 ≥ rs ≥ rm for a liquidity-providing tender   rm ≥ rs ≥ r 1 for a liquidity-absorbing tender r m–1 = interest rate before the marginal interest rate (last interest rate at which bids are completely satisfied):   rm–1 > rm for a liquidity-providing tender   rm > r m–1 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

5.1.5.3.   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 (39). 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.

5.1.5.4.   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 6 Allotment of variable rate foreign exchange swap tenders The percentage of allotment at the marginal swap point quotation is: The allotment to the ith counterparty at the marginal swap point quotation is: all (Δ m ) i = all% (Δ m ) × a(Δm)i The total amount allotted to the ith counterparty is: where: A = total amount allotted Δ s = 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 (Δs) by the ith counterparty a(Δ s ) = total amount bid at the sth swap point quotation (Δs) Δ m = marginal swap point quotation:   Δ m ≥ Δ s ≥ Δ1 for a liquidity-providing foreign exchange swap   Δ1 ≥ Δ s ≥ Δ m 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):   Δ m > Δ m–1 for a liquidity-providing foreign exchange swap   Δ m–1 > Δ m 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 and the ECB’s website. In addition, NCBs may announce the allotment result directly to counterparties without access to wire services. The public tender result message normally contains the following information:

(a)	the reference number of the tender operation;

(b)	the date of the tender operation;

(c)	the type of operation;

(d)	the maturity of the operation;

(e)	the total amount bid by Eurosystem counterparties;

(f)	the number of bidders;

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

(h)	the total amount allotted;

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

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

(k)	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);

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

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

(n)	the minimum individual allotment amount (if any);

(o)	the minimum allotment ratio (if any);

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

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

The NCBs will directly certify the individual allotment result to successful counterparties.

5.2.   Procedures for bilateral operations

5.2.1.   General considerations

The NCBs may execute operations on the basis of bilateral procedures. These procedures may be used for fine-tuning open market operations and structural outright operations (40). 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.

5.2.2.   Direct contact with counterparties

In this procedure, the NCBs 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 NCBs decide whether to enter into a deal with the counterparties. The transactions are settled through the NCBs.

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 NCBs acting as the operating arm of the ECB), the procedures for such operations would be adapted accordingly. In this case, the ECB (or the NCB(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 NCB(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 NCBs.

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.

5.2.3.   Operations executed through stock exchanges and market agents

The NCBs 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.

5.2.4.   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.

5.2.5.   Operating days

The ECB may decide to conduct fine-tuning bilateral operations on any Eurosystem business day. Only NCBs 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 NCBs or on the accounts of settlement banks participating in TARGET2. 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 NCBs or to be settled with said NCBs 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 (41). Counterparties without a safe custody account with an NCB 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 NCBs (or the ECB) for the specific monetary policy instruments. The settlement procedures may differ slightly between NCBs owing to differences in national law and operational practices.

Table 3

Normal settlement dates for Eurosystem open market operations  (42)

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 (43)	T
Outright transactions	—	According to market convention for underlying assets
Issuance of ECB debt certificates	T + 2	—
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 TARGET2 and all relevant SSSs are open. However, the issuance of ECB debt certificates is settled on the second day following the trade day on which TARGET2 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 occasionally apply for operational reasons other settlement dates for these operations, in particular for outright transactions 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 TARGET2. As a general rule, the TARGET2 closing time is 6 p.m. ECB time (CET). No further payment orders are accepted for processing in TARGET2 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 NCB at the latest 15 minutes following the TARGET2 closing time. The deadline for requesting access to the Eurosystem’s standing facilities is postponed by an additional 15 minutes on the last Eurosystem business day of a minimum reserve maintenance period.

Any negative balances on the settlement accounts in TARGET2 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 NCBs 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) (44).

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’, entered into effect on 1 January 2007 and replaced the two-tier system which had been in place from the start of stage three of economic and monetary union.

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 and are set out in Section 6.2 (45). 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 (46). The Eurosystem shall only provide counterparties with advice regarding eligibility as Eurosystem collateral if already issued marketable assets or outstanding non-marketable assets are submitted to the Eurosystem as collateral. There shall thus be no pre-issuance advice.

6.2.1.   Eligibility criteria for marketable assets

Debt certificates issued by the ECB and all debt certificates issued by the NCBs 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):

6.2.1.1.   Type of asset

It must be a debt instrument having:

(a)	a fixed, unconditional principal amount (47); 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 52 of the UCITS Directive (48) (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 fulfil the following requirements:

(a)	the acquisition of such assets must be governed by the law of an EU Member State;

(b)

they must be acquired from the originator or from 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, or the intermediary and its creditors, including in the event of the originator’s or the intermediary’s insolvency;

(c)	they must be originated and sold to the issuer by an originator or, if applicable, an intermediary incorporated in the EEA;

(d)

they must not consist, in whole or in part, actually or potentially, of tranches of other asset-backed securities (49). In addition, they must not consist, in whole or in part, actually or potentially, of credit-linked notes, swaps or other derivatives instruments (50), (51), or synthetic securities;

(e)

if they are credit claims, the obligors and the creditors must be incorporated (or, if natural persons, resident) in the EEA and, if relevant, the related security must be located in the EEA. The law governing those credit claims must be the law of an EEA country. If they are bonds, the issuers must be incorporated in the EEA, they must be issued in an EEA country under the law of an EEA country and any related security must be located in the EEA (52).

In cases where originators or, if applicable, intermediaries, were incorporated in the euro area, or in the United Kingdom, the Eurosystem has verified that there were no severe clawback provisions in those jurisdictions. If the originator or, if applicable, the intermediary, is incorporated in another EEA country, the asset-backed securities can only be considered eligible if the Eurosystem ascertains that its rights would be protected in an appropriate manner against claw back provisions considered relevant by the Eurosystem under the law of the relevant EEA country. For this purpose, an independent legal assessment in a form acceptable to the Eurosystem must be submitted setting out the applicable clawback rules in the country, before the asset-backed securities can be considered eligible (53). To decide whether its rights are adequately protected against claw back rules, the Eurosystem may require other documents, including a solvency certificate from the transferee, for the suspect period. Claw back rules which the Eurosystem considers to be severe and therefore not acceptable include rules whereby the sale of underlying assets can be invalidated by the liquidator solely on the basis that it was concluded within a certain period (suspect period) before the declaration of insolvency of the seller (originator/intermediary), or where such invalidation can only be prevented by the transferee if they can prove that they were not aware of the insolvency of the seller (originator/intermediary) at the time of the sale.

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 if, in accordance with the priority of payment applicable after the delivery of an enforcement notice, as set out in the prospectus, no other tranche (or sub-tranche) is given priority over that tranche or sub-tranche in respect of receiving payment (principal and interest), and thereby such tranche (or sub-tranche) is last in incurring losses among the different tranches or sub-tranches of a structured issue. For structured issues where the prospectus provides for the delivery of an acceleration and an enforcement notice, non-subordination of a tranche (or sub-tranche) must be ensured under both acceleration and enforcement notice-related priority of payments.

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.

6.2.1.2.   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.

6.2.1.3.   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 (54). In case a marketable debt instrument is issued by a non-financial corporation (55) that is not rated by an accepted external credit assessment institution (ECAI), the place of issue must be the euro area.

6.2.1.4.   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 Member State.

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 (56).

6.2.1.5.   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 amending Council Directives 85/611/EEC and 93/6/EEC and Directive 2000/12/EC of the European Parliament and of the Council and repealing Council Directive 93/22/EEC (57), or traded on certain non-regulated markets as specified by the ECB (58). The assessment of non-regulated markets by the Eurosystem is based on three principles – safety, transparency and accessibility (59).

6.2.1.6.   Type of issuer/guarantor

The debt instrument may be issued or guaranteed by central banks of the EU Member States, public sector entities, private sector entities, or international or supranational institutions.

6.2.1.7.   Place of establishment of the issuer/guarantor

The issuer must be established in the EEA or in one of the non-EEA G10 countries (60)  (61). 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, unless a guarantee is not needed to establish the high credit standards for marketable assets, as set out in Section 6.3.2.

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.

6.2.1.8.   Currency of denomination

The debt instrument must be denominated in euro (62).

6.2.2.   Eligibility criteria for non-marketable assets

Three types of non-marketable assets are eligible as collateral in the single framework for eligible assets: fixed-term deposits from eligible counterparties, credit claims and non-marketable retail mortgage-backed debt instruments (RMBDs) (63).

6.2.2.1.   Credit claims

To be eligible, a credit claim (64) has to fulfil the following eligibility criteria (see also Table 4):

(a)

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 other tranches or sub-tranches in the same syndicated loan) or debt instruments of the same issuer.

(b)

The credit claim must have (i) a fixed, unconditional principal amount and (ii) 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. Furthermore, credit claims with interest rate linked to the inflation rate are also eligible. These features must be maintained until the redemption of the obligation.

(c)

Type of debtor/guarantor: Eligible debtors and guarantors are non-financial corporations (65), 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).

(d)

Place of establishment of the debtor and guarantor: The debtor must be established in the euro area. The guarantor must also be established in the euro area, unless a guarantee is not needed to establish the high credit standards for non-marketable assets, as set out in Section 6.3.3. This requirement does not apply to international or supranational institutions.

(e)	Credit standards: The quality of credit claims is assessed through the underlying creditworthiness of the debtor or 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.

(f)

Minimum size: At the time of submission for use as collateral (mobilisation) by the counterparty, the credit claim must meet a minimum size threshold. Each NCB 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. It is envisaged that as soon as practicable in the course of 2013 a common minimum threshold of EUR 500 000 will be introduced for all credit claims throughout the euro area.

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

(h)

Governing laws: The credit claim agreement and the agreement between the counterparty and the NCB mobilising the credit claim as collateral (‘mobilisation agreement’) must both be governed by the law of a Member State. 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; (vi) the mobilisation agreement may not exceed two.

(i)	Currency of denomination: The credit claim must be denominated in euro (66).

6.2.2.2.   Non-marketable retail mortgage-backed debt instruments

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

(a)

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 (67).

(b)	The RMBD must have (i) a fixed, unconditional principal amount and (ii) an interest rate that cannot result in a negative cash flow.

(c)	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.

(d)	Type of issuer: Eligible issuers are credit institutions that are eligible counterparties.

(e)	Place of establishment of the issuer: The issuer must be established in the euro area.

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

(g)	Currency of denomination: The RMBD must be denominated in euro (68).

6.2.3.   Additional requirements for the use of eligible assets

6.2.3.1.   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:

(a)	the verification of the existence of credit claims;

(b)	the notification of the debtor about the mobilisation of the credit claim or the registration of such mobilisation;

(c)	the absence of restrictions related to banking secrecy and confidentiality;

(d)	the absence of restrictions on the mobilisation of the credit claim;

(e)	the absence of restrictions on the realisation of the credit claim.

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

6.2.3.2.   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 (69).

‘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:

(a)	the counterparty owns directly, or indirectly, through one or more other undertakings, 20 % or more of the capital of the issuer/debtor/guarantor;

(b)	the issuer/debtor/guarantor owns directly, or indirectly through one or more other undertakings, 20 % or more of the capital of the counterparty; or

(c)	a third party owns more than 20 % of the capital of the counterparty and more than 20 % of the capital of the issuer/debtor/guarantor, either directly or indirectly, through one or more undertakings.

For monetary policy implementation purposes, in particular for the monitoring of compliance with the rules for the use of eligible assets concerning close links, the Eurosystem internally shares information on capital holdings provided by supervisory authorities for such purposes. The information is subject to the same secrecy standards as applied by supervisory authorities.

The above provisions concerning close links do not apply to: (a) close links between the counterparty and an EEA public sector entity which has the right to levy taxes, or in the case where a debt instrument is guaranteed by an EEA public sector entity which has the right to levy taxes; (b) covered bank bonds issued in accordance with the criteria set out in Article 52(4) of the UCITS Directive; or (c) cases in which debt instruments are protected by specific legal safeguards comparable to those instruments given under (b) such as in the case of: (i) non-marketable RMBDs which are not securities; or (ii) residential real estate loan-backed structured covered bank bonds or commercial mortgage loan-backed structured covered bank bonds, i.e. certain covered bank bonds not declared UCITS compliant by the European Commission, that fulfil all the criteria that apply to asset-backed securities, as set out in Sections 6.2 and 6.3 and the following additional criteria:

In the case of residential real estate loan-backed structured covered bank bonds:

(a)

Any residential real estate loans underlying the structured covered bank bonds must be denominated in euro; the issuer (and the debtor and guarantor, if they are legal persons) must be incorporated in a Member State, their underlying assets must be located in a Member State, and the law governing the loan must be that of a Member State.

(b)

Residential real estate loans are eligible for the cover pool of relevant structured covered bank bonds, if they are guaranteed by an eligible guarantee or secured by a mortgage. An eligible guarantee must be payable within 24 months upon default. Eligible guarantees for the purposes of such guaranteed loans can be provided in different contractual formats, including contracts of insurance, provided that they are granted by a public sector entity or a financial institution subject to public supervision. The guarantor for the purposes of such guaranteed loans must not have close links to the issuer of the covered bank bonds, and must be rated at least [A+/A1/AH] by an accepted ECAI over the life of the transaction.

(c)	High quality substitute collateral up to 10 % of the cover pool is accepted. This threshold can only be exceeded after an in-depth review by the relevant NCB.

(d)	The maximum portion of each individual eligible loan that can be funded through the structured covered bank bond issuance is 80 % loan-to-value (LTV). The LTV calculation must be based on a conservative market valuation.

(e)	The minimum mandatory over-collateralisation is 8 %.

(f)	The maximum loan amount for residential real estate loans is EUR 1 million.

(g)	The stand-alone credit assessment of the cover pool must correspond to an annual PD level of 10 basis points in line with the ‘single A’ threshold (see Section 6.3.1).

(h)	A long-term minimum threshold of ‘single A’ (‘A-’ by Fitch or Standard & Poor’s, or ‘A3’ by Moody’s, or ‘AL’ by DBRS) must be applied to the issuer and related entities which are part of or relevant to the transaction relating to the structured covered bank bond.

In the case of commercial mortgage loan-backed structured covered bank bonds:

(a)

Any commercial mortgage loans underlying the structured covered bank bonds must be denominated in euro; the issuer (and the debtor and guarantor, if they are legal persons) must be incorporated in a Member State, their underlying assets must be located in a Member State, and the law governing the loan must be that of a Member State.

(b)	High quality substitute collateral up to 10 % of the cover pool is accepted. This threshold can only be exceeded after an in-depth review by the relevant NCB.

(c)	The maximum portion of each individual eligible loan that can be funded through the structured covered bank bond issuance is 60 % LTV. The LTV calculation must be based on a conservative market valuation.

(d)	The minimum mandatory over-collateralisation is 10 %.

(e)	The share of each borrower in the cover pool, after aggregating all individual loan amounts outstanding from a given borrower, must not exceed 5 % of the cover pool’s total.

(f)	The stand-alone credit assessment of the cover pool must correspond to credit quality step 1 in line with the Eurosystem rating scale (see Section 6.3.1).

(g)	Credit quality step 2 must be applied to the issuer and related entities which are part of or relevant to the transaction relating to the structured covered bank bond.

(h)

All underlying commercial mortgage loans need to be revalued at least on an annual basis. Price decreases of properties must be fully reflected in the revaluation. In the case of price increases, a 15 % haircut is applied. Loans that do not fulfil the LTV threshold requirement must be replaced by new loans, or must be over-collateralised, subject to the relevant NCB’s approval. The primary valuation methodology to be applied is the market value, i.e. the estimated price that would be obtained if the assets were sold on the market using reasonable efforts. This estimation must be based on the most conservative assumption. Statistical methods can also be applied but only as a secondary valuation methodology.

(i)	Liquidity cushion in the form of cash in euro deposited with an eligible counterparty must be maintained at all times to cover all interest payments related to covered bank bonds for the subsequent 6-month period.

(j)

Whenever the short-term credit rating of the borrower of an underlying commercial mortgage loan falls below credit quality step 2 in the 9 months before a hard bullet covered bank bond matures, such borrower must post an amount of cash in euro sufficient to cover the relevant part of the covered bank bond principal payment as well as related expenses scheduled to be paid by the issuer under the covered bank bond to the liquidity cushion.

(k)

In case of liquidity stress, the original maturity date can be extended up to 12 months to compensate for maturity mismatches between the amortising loans in the cover pool and the bullet redemption of the covered bank bond. However, the covered bank bond will become ineligible for own use after the original maturity date.

Furthermore, for residential real estate loan-backed structured covered bank bonds or commercial mortgage loan-backed structured covered bank bonds, counterparties have to provide legal confirmation from a reputable law firm confirming the fulfilment of the following conditions:

(a)	The issuer of the covered bank bonds is a credit institution incorporated in an EU Member State, and is not a special-purpose vehicle, even if such covered bank bonds are guaranteed by a credit institution incorporated in an EU Member State.

(b)	The issuer/issue of the covered bank bonds is subject, by the law of the Member State where the issuer is incorporated or where the covered bank bonds were issued, to special public supervision designed to protect covered bank bond holders.

(c)	In the event of the insolvency of the issuer, covered bank bond holders have priority as regards reimbursement of the principal and payment of interest deriving from the (underlying) eligible assets.

(d)	Sums deriving from the issue of the covered bank bonds must be invested (according to the investment rules set out by the covered bank bond documentation) in conformity with the relevant national covered bank bond legislation or other legislation applicable to the assets in question.

Moreover, a counterparty may not submit as collateral any asset-backed security if the counterparty (or any third party with which it has close links) provides a currency hedge to the asset-backed security by entering into a currency hedge transaction with the issuer as a hedge counterparty or provides liquidity support for 20 % or more of the outstanding amount of the asset-backed security.

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 NCB 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 (70)	Non-marketable assets (71)
Type of asset	ECB debt certificates Other marketable debt instruments (72)	Credit claims	RMBDs
Credit standards	The asset must meet high credit standards. The high credit standards are assessed using ECAF rules for marketable assets (72)	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 (72)	Not applicable	Not applicable
Settlement/handling procedures	Place of settlement: euro area Instruments must be centrally deposited in book-entry form with NCBs or a SSS fulfilling the ECB’s minimum standards	Eurosystem procedures	Eurosystem procedures
Type of issuer/debtor/guarantors	NCBs 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 and guarantor	Issuer (72): EEA or non-EEA G10 countries Debtor: EEA Guarantor (72): 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 — for domestic use: choice of the NCB, — for cross-border use: common threshold of EUR 500 000 , As soon as practicable in the course of 2013: Introduction of common minimum threshold of EUR 500 000 throughout the euro area	Not applicable
Governing laws	For asset-backed securities the acquisition of the underlying assets must be governed by the law of an EU Member State. The law governing underlying credit claims must be the law of an EEA country	Governing law for credit claim agreement and mobilisation: law of a Member State The total number of different laws applicable to (a) the counterparty; (b) the creditor; (c) the debtor; (d) the guarantor (if relevant); (e) the credit claim agreement; and (f) 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 Section 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.

With regard to the ECAI source, the assessment must be based on a public rating. The Eurosystem reserves the right to request any clarification that it considers necessary. For asset-backed securities, ratings must be explained in a publicly available credit rating report, namely a detailed pre-sale or new issue report, including, inter alia, a comprehensive analysis of structural and legal aspects, a detailed collateral pool assessment, an analysis of the transaction participants, as well as an analysis of any other relevant particularities of a transaction. Moreover ECAIs must publish regular surveillance reports for asset-backed securities. The publication of these reports should be in line with the frequency and timing of coupon payments. These reports should at least contain an update of the key transaction data (e.g. composition of the collateral pool, transaction participants, capital structure), as well as performance data.

The Eurosystem’s benchmark for establishing its minimum requirement for high credit standards (its ‘credit quality threshold’) is defined in terms of a credit assessment of credit quality step 3 in the Eurosystem’s harmonised rating scale (73). The Eurosystem considers a PD over a 1-year horizon of 0,40 % as equivalent to a credit assessment of credit quality step 3, subject to regular review. The ECAF follows the definition of a default event given in the Capital Requirements Directive (CRD) (74). The Eurosystem publishes the lowest rating grade meeting the required credit quality threshold for each accepted ECAI, without assuming any responsibility for its assessment of the ECAI, again subject to regular review. With regard to asset-backed securities, the Eurosystem’s benchmark for establishing its minimum requirements for high credit standards is defined in terms of a ‘triple A’ credit assessment (75) at issuance. Over the lifetime of the asset-backed security, the Eurosystem’s minimum threshold of credit quality step 2 of the Eurosystem’s harmonised rating scale (‘single A’) must be retained (76). With regard to RMBDs, the Eurosystem’s benchmark for establishing its minimum requirement for high credit standards is defined in terms of a credit assessment of credit quality step 2 in the Eurosystem’s harmonised rating scale (‘single A’). The Eurosystem considers a PD over a 1-year horizon of 0,10 % as equivalent to a credit assessment of credit quality step 2, 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, limit the use of assets or apply supplementary haircuts on such grounds if required to ensure adequate risk protection of the Eurosystem in line with Article 18.1 of the Statute of the ESCB. Such measures can also be applied to specific counterparties, in particular if the credit quality of the counterparty appears to exhibit a high correlation with the credit quality of the collateral assets submitted by the counterparty. 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.

Assets issued or guaranteed by entities subject to a freezing of funds and/or other measures imposed by the Union under Article 75 of the Treaty or by an EU Member State restricting the use of their funds, or in respect of which the ECB’s Governing Council has issued a decision suspending or excluding their access to open market operations or the Eurosystem’s standing facilities, may be excluded from the list of eligible assets.

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:

(a)

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 (77), (78). The ECB publishes the credit quality threshold for any accepted ECAI, as established under Section 6.3.1 (79).

(b)

ECAI credit assessment of asset-backed securities: For asset-backed securities issued on or after 1 March 2010, the Eurosystem requires at least two credit assessments from any accepted ECAIs for the issue. To determine the eligibility of these securities, the ‘second-best rule’ is applied, which means that not only the best, but also the second-best available ECAI credit assessment must comply with the credit quality threshold for asset-backed securities. Based on this rule, the Eurosystem requires for both credit assessments an ‘AAA’/‘Aaa’ level at issuance and a ‘single A’ level over the life of the security in order for the securities to be eligible. From 1 March 2011 all asset-backed securities, regardless of their date of issuance, must have at least two credit assessments from any accepted ECAI for the issue, and the second-best rule must be complied with in order for the securities to remain eligible. Concerning asset-backed securities issued before 1 March 2010 that have only one credit assessment, a second assessment must be obtained before 1 March 2011. For asset-backed securities issued before 1 March 2009 both credit assessments must comply with the ‘single A’ level over the life of the security. For asset-backed securities issued between 1 March 2009 and 28 February 2010, the first credit assessment must comply with the ‘AAA’/‘Aaa’ level at issuance and the ‘single A’ level over the life of the security, while the second credit assessment must comply with the ‘single A’ level both at issuance (80) and over the life of the security. Fungible tap issuances of asset-backed securities are considered to be new issuances of asset-backed securities. All asset-backed securities issued under the same ISIN code must comply with the eligibility criteria in place at the date of the latest fungible tap issuance. For fungible tap issues of asset-backed securities which are not compliant with the eligibility criteria in place at the date of the latest fungible tap issuance, all the asset-backed securities issued under the same ISIN code are considered ineligible. This rule shall not apply in the case of fungible tap issuances of asset-backed securities which were on the Eurosystem list of eligible assets on 10 October 2010 if the latest tap issuance occurred before that date. Non-fungible tap issuances are considered to be different asset-backed securities.

(c)

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: (i) 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. (ii) 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. (iii) The guarantee must be governed by the law of an EU Member State and be legally valid, and binding and enforceable against the guarantor. (iv) 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 central bank that is reporting a certain asset supported by a guarantee for inclusion in the list of eligible assets (81). 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: (a) 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) established in the euro area as defined in the CRD, the following procedure applies: (i) The issuer or guarantor is allocated to one of three classes in accordance with the CRD (82) as explained in Table 5. (ii) 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. (b) Euro area non-financial corporate issuers or guarantors: If the high credit standards for marketable assets which are issued/guaranteed by non-financial corporations (83) established 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 (84) below the ECAI credit assessment of the central government of the country in which it is established Class 3 Other PSEs Treated like private sector issuers or debtors

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

6.3.3.1.   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 1 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 1 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 NCB 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 (85) 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:

(a)

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 (86). (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 (87) 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.

(b)

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 (88), (89). 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)

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.

(b)

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.

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

(d)

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 NCB 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.

6.3.3.2.   Non-marketable retail mortgage-backed debt instruments

The high credit standards for non-marketable RMBDs must be in line with credit quality step 2 of the Eurosystem’s harmonised rating scale (90). A jurisdiction-specific credit assessment framework for these debt instruments will be specified in the applicable national documentation by the NCBs.

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 at www.ecb.europa.eu (91).

6.3.4.1.   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 (92). For the purposes of the ECAF, the general acceptance criteria for ECAIs are the following:

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

(b)

ECAIs must fulfil operational criteria and provide relevant coverage 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.

6.3.4.2.   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. NCBs 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 NCB 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.

6.3.4.3.   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 NCB. For that purpose, it must file a request, together with the following documents (93):

(a)

a copy of the decision of the relevant banking supervisory authority within the Union 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 NCB;

(b)	information on its approach to assigning probabilities of default to debtors, as well as data on the rating grades and associated 1-year probabilities of default used to determine eligible rating grades;

(c)	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;

(d)	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 NCB) unless such information is transmitted directly by the relevant supervisory authority to the relevant NCB:

(a)	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 NCB;

(b)	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;

(c)	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;

(d)	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.

6.3.4.4.   Third-party rating tool source

The RT source consists of entities that assess the credit quality of debtors by using primarily quantitative models in a systematic and mechanical manner, relying among other information on audited accounts, and whose credit assessments are not intended for general public disclosure. An RT provider wishing to participate in the ECAF has to submit a request to the NCB of the country in which it is incorporated, using the template provided by the Eurosystem, supplemented by additional documentation as specified in the template. Counterparties wishing to use a specific RT provider for ECAF purposes that is not accepted by the Eurosystem have to submit a request to the NCB of the country in which they are incorporated, using the template provided by the Eurosystem, supplemented by additional documentation as specified in the template. The Eurosystem decides whether to accept the RT provider based on evaluation of compliance with the acceptance criteria set by the Eurosystem (94).

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 (95) (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 5 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 1 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 the static pools of eligible debtors, i.e. pools consisting of all corporate and public debtors, receiving a credit assessment from the system satisfying one of the following conditions:

Static pool	Condition
Static Pool for credit quality steps 1 and 2	PD(i,t) (*1) ≤ 0,10 %
Static Pool for credit quality step 3	0,10 % < PD(i,t) ≤ 0,40 %

All debtors fulfilling one of these conditions at the beginning of period t constitute the corresponding static pool at time t. At the end of the foreseen 12-month period, the realised default rate for the static pools 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 pools 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 1-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 (96) and ought to ensure consistent, transparent and non-discriminatory conditions for any type of eligible asset across the euro area.

The Eurosystem reserves the right to apply additional risk control measures if required to ensure adequate risk protection of the Eurosystem in line with Article 18.1 of the Statute of the ESCB. Such risk control measures, which shall be applied in a consistent, transparent and non-discriminatory manner, can also be applied at the level of individual counterparties if required to ensure such protection.

BOX 7 Risk control measures The Eurosystem applies the following risk control measures: (a)   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). (b)   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 NCB 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.) (c)   Limits in relation to the use of unsecured debt instruments The Eurosystem applies limits to the use of unsecured debt instruments as described in Section 6.4.2. The following risk control measures may also be applied by the Eurosystem at any time if required to ensure adequate risk protection of the Eurosystem in line with Article 18.1 of the Statute of the ESCB: (d)   Initial margins The Eurosystem may apply initial margins in its liquidity-providing reverse transactions. This means 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. (e)   Limits in relation to issuers/debtors or guarantors The Eurosystem may apply additional limits, other than those applied to the use of unsecured debt instruments, to the exposure vis-à-vis issuers/debtors or guarantors. Such limits can also be applied to specific counterparties, in particular if the credit quality of the counterparty appears to exhibit a high correlation with the credit quality of the collateral submitted by the counterparty. (f)   Application of supplementary haircuts The Eurosystem may apply supplementary haircuts if required to ensure adequate risk protection of the Eurosystem in line with Article 18.1 of the Statute of the ESCB. (g)   Additional guarantees The Eurosystem may require additional guarantees from financially sound entities in order to accept certain assets. (h)   Exclusion The Eurosystem may exclude certain assets from use in its monetary policy operations. Such exclusion may also be applied to specific counterparties, in particular if the credit quality of the counterparty appears to exhibit a high correlation with the credit quality of the collateral submitted by the counterparty.

6.4.2.   Risk control measures for marketable assets

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

(a)	Eligible marketable assets are allocated to one of five liquidity categories, based on issuer classification and asset type. The allocation is described in Table 6.

(b)

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 applied to debt instruments included in categories I to IV 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 (97).

(c)

The Eurosystem limits the use of unsecured debt instruments issued by a credit institution or by any other entity with which the credit institution has close links as defined in Section 6.2.3. Such assets may only be used as collateral by a counterparty to the extent that the value assigned to that collateral by the Eurosystem after the application of haircuts does not exceed 5 % of the total value of the collateral submitted by that counterparty after the haircuts. This limit does not apply to such assets that are guaranteed by a public sector entity which has the right to levy taxes, or if the value after haircuts of the assets does not exceed EUR 50 million. In the event of a merger between two or more issuers of such assets or the establishment of a close link between such issuers, these issuers are treated as one issuer group, in the context of this limitation, only up until 1 year after the date of the merger or the establishment of the close link.

(d)	Individual debt instruments included in category V are subject to a unique haircut of 16 % regardless of maturity or coupon structure.

(e)

Individual asset-backed securities, covered bank bonds (jumbo covered bank bonds, traditional covered bank bonds and other covered bank bonds) and unsecured credit institution debt instruments that are theoretically valued in accordance with Section 6.5 are subject to an additional valuation haircut. This haircut is directly applied at the level of theoretical valuation of the individual debt instrument in the form of a valuation markdown of 5 %. Table 6 Liquidity categories for marketable assets  (98) Category I Category II Category III Category IV Category V Central government debt instruments Local and regional government debt instruments Traditional covered bank bonds Credit institution debt instruments (unsecured) Asset-backed securities Debt instruments issued by NCBs (99) Jumbo covered bank bonds (100) Debt instruments issued by non-financial corporations and other issuers (101) Debt instruments issued by financial corporations other than credit institutions (unsecured)   Agency debt instruments (101) Other covered bank bonds (102)     Supranational debt instruments

(f)	The valuation haircuts applied to all marketable inverse floating rate debt instruments included in categories I to IV are the same and are described in Table 8.

(g)	The haircut applied to marketable debt instruments included in liquidity categories I to IV with variable rate coupons (103) is that applied to the zero-to-one-year maturity bucket of fixed coupon instruments in the liquidity category and credit quality category to which the instrument is assigned.

(h)

The risk control measures applied to a marketable debt instrument included in categories I to IV with more than one type of coupon payment solely depend 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.

(i)	No valuation haircuts are applied in liquidity-absorbing operations.

(j)

Depending on both the jurisdiction and national operational systems, NCBs 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.

(k)

The assets are subject to daily valuation. On a daily basis, NCBs 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. Table 7 Levels of valuation haircuts applied to eligible marketable assets Credit quality Residual maturity (years) Liquidity categories Category I Category II (*2) Category III (*2) Category IV (*2) Category V (*2) fixed coupon zero coupon fixed coupon zero coupon fixed coupon zero coupon fixed coupon zero coupon Steps 1 and 2 (AAA to A-) (*3) 0-1 0,5 0,5 1,0 1,0 1,5 1,5 6,5 6,5 16 1-3 1,5 1,5 2,5 2,5 3,0 3,0 8,5 9,0 3-5 2,5 3,0 3,5 4,0 5,0 5,5 11,0 11,5 5-7 3,0 3,5 4,5 5,0 6,5 7,5 12,5 13,5 7-10 4,0 4,5 5,5 6,5 8,5 9,5 14,0 15,5 > 10 5,5 8,5 7,5 12,0 11,0 16,5 17,0 22,5 Step 3 (BBB + to BBB-) (*3) 0-1 5,5 5,5 6,0 6,0 8,0 8,0 15,0 15,0 Not eligible 1-3 6,5 6,5 10,5 11,5 18,0 19,5 27,5 29,5 3-5 7,5 8,0 15,5 17,0 25,5 28,0 36,5 39,5 5-7 8,0 8,5 18,0 20,5 28,0 31,5 38,5 43,0 7-10 9,0 9,5 19,5 22,5 29,0 33,5 39,0 44,5 > 10 10,5 13,5 20,0 29,0 29,5 38,0 39,5 46,0 Table 8 Levels of valuation haircuts applied to eligible marketable inverse floating rate debt instruments included in categories I to IV Credit quality Residual maturity (years) Inverse floater coupon Steps 1 and 2 (AAA to A-) 0-1 7,5 1-3 11,5 3-5 16,0 5-7 19,5 7-10 22,5 > 10 28,0 Step 3 (BBB + to BBB-) 0-1 21,0 1-3 46,5 3-5 63,5 5-7 68,0 7-10 69,0 > 10 69,5

(l)

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, NCBs may apply a trigger point. If applied, this trigger point is 0.5 % of the amount of liquidity provided. Depending on the jurisdiction, NCBs 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 NCB would return the excess assets (or cash) to the counterparty (see Box 8).

(m)	In pooling systems, counterparties may substitute underlying assets on a daily basis.

(n)	In earmarking systems, the substitution of underlying assets may be permitted by NCBs.

(o)

The ECB may at any time decide to remove individual debt instruments from the published list of eligible marketable assets (104). BOX 8 Calculation of margin calls The 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 NCBs’ 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 = l), a margin call is effected when:   Mt + τ > k · L i,t + τ (the counterparty pays the margin call to the NCB); or   M t + τ < – k · L i,t + τ (the NCB 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

6.4.3.1.   Credit claims

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

(a)	Individual credit claims are subject to specific valuation haircuts. The haircuts differ according to the residual maturity, type of interest payment (fixed or variable), the credit quality category and the valuation methodology applied by the NCB (see Section 6.5), as described in Table 9 (105).

(b)

The haircut applied to credit claims with variable rate interest payments is that applied to the credit claims with fixed interest payments classified in the zero-to-one-year maturity bucket corresponding to the same credit quality and the same valuation methodology (valuation based on a theoretical price assigned by the NCB or on the outstanding amount assigned by the NCB). 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 1 year. Interest payments for which the resetting period is longer than 1 year are treated as fixed rate payments, with the relevant maturity for the haircut being the residual maturity of the credit claim.

(c)

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.

(d)

The NCBs apply the same trigger point (if applicable) for the execution of margin calls for marketable and non-marketable assets. Table 9 Levels of valuation haircuts applied to credit claims with fixed interest payments Credit quality Residual maturity (years) Valuation methodology Fixed interest payment and valuation based on a theoretical price assigned by the NCB Fixed interest payment and valuation based on the outstanding amount assigned by the NCB Steps 1 and 2 (AAA to A-) 0-1 8,0 10,0 1-3 11,5 17,5 3-5 15,0 24,0 5-7 17,0 29,0 7-10 18,5 34,5 > 10 20,5 44,5 Step 3 (BBB + to BBB-) 0-1 15,5 17,5 1-3 28,0 34,0 3-5 37,0 46,0 5-7 39,0 51,0 7-10 39,5 55,5 > 10 40,5 64,5

6.4.3.2.   Non-marketable retail mortgage-backed debt instruments

Non-marketable retail mortgage-backed debt instruments are subject to a valuation haircut of 24 %.

6.4.3.3.   Fixed-term deposits

Fixed-term deposits are not subject to any valuation haircut.

6.5.   Valuation principles for underlying assets

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

6.5.1.   Marketable assets

(a)

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

(b)

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 5 days or has not moved for at least 5 days, the Eurosystem defines a theoretical price.

(c)

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

(d)

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 NCBs. If the income flow is transferred to the counterparty, NCBs 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 NCBs 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 (106).

6.5.2.   Non-marketable assets

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

If the NCB 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 NCB 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 NCBs (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 NCBs 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 (107). 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 (108).

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