Alessandro Bonara (ECB) Richard Derksen (CCBM2 Project)

Amsterdam, 21 October 2010

Integrated central bank collateral management services

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1. The Eurosystem collateral framework

II. Move towards integrated collateral management services

II.1 Existing solutions II.2 The CCBM2 project

Table of contents

III. A closer look into CCBM2

I. The Eurosystem Collateral Framework

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Full collateralisation: all credit operations have to be based on adequate collateral.

Sufficiency of collateral: broad range of assets covering the needs of all counterparties.

I. The Eurosystem collateral framework

Two techniques: •  pledge/pooling: a charge granted over the relevant assets •  repo/earmarking: transfer of ownership of the assets

Cross-border use: eligible collateral must be accessible in whole euro area.

Eurosystem standards for SSS’s collateral can only be held in eligible SSS’s.

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Collateral figures in EUR billions* (average)

* Excluding credit claims

2007 2008 2009

Outstanding eligible collateral in the market

9,500 11,100 13,123

Collateral deposited by counterparties in the pools and used in repos

1,100 1,600 2,035

I. The Eurosystem collateral framework

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Since start of EMU further increase of the use of pledge/pooling systems

Average Jan – Dec 1999

Average Jan – Dec 2009

Pooling Earmarking Pooling Earmarking 79% 21% 93% 7%

I. The Eurosystem collateral framework

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Differing national solutions in place prior to Economic and Monetary Union

<1999:

1999: Introduction of two-tier collateral framework to ensure smooth transition to the euro while accommodating differences in financial structures between euro-area countries

Marketable debt instruments fulfilling euro area-wide eligibility criteria

Assets of importance for certain national markets fulfilling national eligibility criteria (e.g. equities, credit claims*)

* Legal term for bank loans

I. The Eurosystem collateral framework

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– Marketable assets (debt instruments): Issued in EEA and settled in an euro area SSS that fulfils the ECB standards

– Non-marketable assets •  Credit claims •  Retail mortgage-backed debt instrument

– Eurosystem credit assessment frame work (ECAF) to ensure that requirements for high credit standards are met

I. The Eurosystem collateral framework

2007: Single List of collateral

II. Move towards integrated collateral management services

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Introduction of the euro: need for mechanisms to mobilise collateral cross-border

Market solution: Links between Securities Settlement Systems (SSS)

54 eligible links in 2009 of which 45 used for Eurosystem collateral purposes

Links not available between all euro area SSSs

However: Country A Country B

NCB A

SSS A

Counterparty

SSS B Credit

Transfer instruction

Info on collateral

SSS A (investor SSS) holds assets in SSS B (issuer SSS)

II.1 Existing solutions: links between SSSs

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II.1 Existing solutions: CCBM

–  Set of agreed procedures between the NCBs to mobilise collateral on a cross-border basis

–  NCBs hold securities accounts with each other –  NCB has two roles:

•  Home central bank (holding assets in another NCB) •  Correspondent central bank (holding assets for

another NCB, CCB holds assets in national SSS)

Eurosystem solution:

Correspondent Central Banking Model (CCBM)

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The current framework for the delivery of collateral

II.1 Existing solutions: Domestic and cross-border

NCB in country A

Bank in country A

D5: Release of credit

CB7: Release of credit

SSS A

Custodian

D3: Matching

D4: Confirmation

SSS B

NCB in country B

Custodian

CB5: Confirmation

CB6: Receipt

D = Domestic

CB = Cross-border

D1: Request for credit

D2: Transfer instruction / delivery of collateral

CB3: CCBM message

CB1: Request for credit

CB2: Transfer instruction / delivery of collateral

CB4: Matching

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CCBM is main channel for transferring cross-border collateral

of which:

11% 40%

1% 11%

II.1 Existing solutions: main channels

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Increased cross-border use emphasizes drawbacks:

Collateral transferred via CCBM

Dec-99

Dec-09 € 569 billion

€ 163 billion

II.1 Existing solutions: current shortcomings

–  CCBM involves different players which follow varying procedures, complexity impacts efficiency (e.g. processing time)

–  Collateral management in Eurosystem technically decentralized

–  Inconvenient for multi-country banks

–  Facilities for mobilising collateral differ across euro area.

Therefore: CCBM2 (Collateral Central Bank Management)

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CCBM2 will bring:

–  a joint collateral management system for the NCBs (so one technical platform)

–  technical consolidation

–  harmonisation

–  efficiency gains (faster processing) and

–  a single procedure for banks mobilising domestic and cross-border collateral

II.2 The CCBM2 project

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CCBM2 – Single procedure for domestic and cross-border use of collateral (harmonised procedure)

II.1 The CCBM2 project

NCB A Bank in country

A

5. Release of credit

SSS X

Custodian

3. Matching

4. Confirmation

1. Request for credit

2. Transfer instruction / delivery of collateral

NCB B

III. A closer look into CCBM2

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III. A closer look to CCBM2

able to use all eligible SSS and eligible links between SSS

central bank IT platform for the collateral management for Eurosystem credit operations, complying with the decentralised access to credit

fully compatible with T2 and T2S, i.e. with the communication interfaces and securities settlement procedures of T2S

domestic & cross-border, pooling & earmarking, pledge & repo

for all eligible collateral

real-time straight-through-processing

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CCBM 2

Securities Module

Mobilisation Corporate

Actions

Credit Claims Module

Recording Mobilisation

Monitoring & Reporting

Static Data

Application Reference Data

Eligible Collateral Database

Support Functions

Credit & Collateral Module

Pooling Earmarking

Message Router A2A & U2A Interfaces

Mandatory Work flow Manager

III. A closer look to CCBM2

Message Router

global position

collateral position = value of assets

credit position = outstanding credit

Securities Funct. Credit claims Funct.

Credit & Collateral Functionality

External Collateral Management Systems

T A R G E T 2 S e c u r i t i e s

T A R G E T 2

NCBs Counterparties CSDs / SSSs Data

providers

NCB proprietary Collateral Management Systems

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Message router functionality Handles communication: internally and with external parties Supports different communication networks (SWIFTNet, secure internet).

Credit claims functionality Recording and mobilisation of credit claims

Credit and collateral functionality Management of counterparties’ collateral positions Assigns each counterparty a single global position Optional functionalities

III. A closer look to CCBM2

Securities functionality Mobilisation / demobilisation of marketable assets domestic / cross-border and related custody services

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III. A closer look to CCBM2

3 Main Parts:

• A2A interface • U2A interface • Work flow manager

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One system for all collateralisation techniques

Harmonising SWIFT messages for counterparties, respecting required (I)CSD-formats

Improved monitoring and reporting possibilities for NCBs and for counterparties

III. A closer look to CCBM2

Earmarking and Pooling Repo and Pledge

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Non-marketable assets data management.

Credit claims (de-)mobilisation

Legal requirements

III. A closer look to CCBM2

Custody related activities

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Global position per counterparty View on global collateral & credit position.

III. A closer look to CCBM2

Collateral Credit

•  Collateral Position •  Securities •  Credit Claims •  Other collateral (e.g. tri-party)

•  Credit Position •  Open Market Operations •  Marginal Lending •  Other Credit (e.g. Guarantees)

TOTAL COLLATERAL TOTAL CREDIT

Remaining Credit Line = COLLATERAL – CREDIT = available intraday credit

Bank A

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CCBM2 is voluntary for NCBs to participate - If opted for CCBM2: Message Router is mandatory

One optional functionality: Credit claims - If not opted for, a domestic proprietary NCB alternative is used

Current status: nearly complete participation in CCBM2

III. A closer look to CCBM2

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III. A closer look to CCBM2

Use of collateral for specific purposes: e.g. guarantees

Collateral pooling –

Global view on global position of entities of the same group

Integration with existing market solutions: - triparty collateral management services (incl. cross border)

Support to autocollateralisation procedures in current CSD/SSS infrastructures and in T2S

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Third party (ICSD) acting as an agent for both collateral taker (Eurosystem) and collateral provider (counterparty). Collateral taker and provider enter into an agreement with triparty agent on the level of outsourcing.

Delegation of tasks to third party could take different forms and include e.g. eligibility checks/screening, valuation, margin and haircut facilities, automatic collateral allocation and substitution, monitoring and reporting

The three existing variations in the euro area (CBF/XEMAC, CBL/CmaX and EB/Autoselect will be facilitated by CCBM2

IV. A closer look to CCBM2

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IV. A closer look to CCBM2

The move towards integrated collateral management services

The Eurosystem “magic triangle“

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Thank you for your attention !

Questions?