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GENERAL FRAMEWORK DNB-CEF WORKSH Powered By Docstoc
					                    The Monetary Policy Framework
                    of the Eurosystem, liquidity and
De Nederlandsche Bank

                      Collateral Management

                        Richard Derksen

                    Conference Financial Sector of Macedonia
                    on Payments and Securities Settlement
                    Systems

                    Ohrid
                    24 June 2008
                                                       De Nederlandsche Bank
                                                                   Eurosysteem
Contents
    Topics


    • The ESCB (Euro System of Central
    Banks) monetary policy framework

    •Collateral management framework

    •Trends in collateral: European and NL

    •Mobilising collateral



                                             De Nederlandsche Bank
                                                         Eurosysteem
Monetary policy strategy:

 Why central banks?
 What targets have central banks?
 Why to fight inflation?

Monetary policy implementation:
 How to implement these strategies?
 Role and functions of official interest rates?
 How can a central bank generate stable interest
  rate movements?
                                         De Nederlandsche Bank
                                                     Eurosysteem
Monetary policy strategy:
The monetary strategy determines which money
market interest rate level is required to maintain
price stability.


Monetary policy implementation:
The operational framework determines how to
achieve this interest rate level using the available
monetary instruments.                           De Nederlandsche Bank
                                                            Eurosysteem
Functions of the operational framework
Eurosystem sets and stabilises interest rates in
the short term money market in two ways:


Signalling its monetary policy stance to the money
 market

Managing the liquidity situation in the money
 market
                                               De Nederlandsche Bank
                                                           Eurosysteem
How to set (money market) interest rates?

Step 1: determine official interest rates

Step 2: make banks dependent on credit by the ECB

Step 3: extend credit to banks with the appropriate
        interest rate

Step 4: design framework to stabilise very
        short-term interest rates
                                             De Nederlandsche Bank
                                                         Eurosysteem
Monetary policy instruments:
• Minimum reserve requirements

Credit extension to banks via
• Open Market Operations
         Main refinancing operations
         Long-term refinancing operations
         Fine-tuning operations
         Structural operations
• Standing facilities
          Marginal lending facility
          Deposit facility              De Nederlandsche Bank
                                                    Eurosysteem
Basic requirements for successful
monetary policy implementation:

Confidence market players

Demand and supply

Regulatory framework

……

                                De Nederlandsche Bank
                                            Eurosysteem
Liquidity management Eurosystem:

 Demand               Supply
 - Reserve            – Open market operations
    requirements
                        - MROs (policy rate)
 - Excess reserves
                        - LTROs
 - Autonomous factors
                        - Fine tuning
  factors (net)
                        - Structural operations



 - deposit facility    –   marginal lending facility
                                           De Nederlandsche Bank
                                                       Eurosysteem
Liquidity management Eurosystem:

 Demand              =    Supply
 - Reserve         (over – Open market operations
    requirements
                     a      - MROs (policy rate)
 - Excess reserves
                  reserve   - LTROs
 - Autonomous factors
                  mainte-   - Fine tuning
  factors (net)
                   nance    - Structural operations
                      period)

 - deposit facility             –   marginal lending facility
                                                    De Nederlandsche Bank
                                                                Eurosysteem
    Consolidated Balance Sheet of the Eurosystem
    (July 2007 and March 2008) (EUR bn)

                                      July    March                                            July      March
                                      2007    2008                                             2007      2008


factors affecting the liquidity of                    factors affecting the liquidity of the
the banking system                    432.6   478.0   banking system                           692.0     737.9


net foreign assets (including gold)   316.7   350.5   banknotes in circulation                 639.6     660.8
                                                      government deposits with the
other assets (net)                    115.9   127.5   Eurosystem                               52.3      77.1

monetary policy operations of                         monetary policy operations of the
the Eurosystem                        451.8   486.0   Eurosystem                               192.4     226.1


main refinancing operations           301.7   216.0   current accounts - minimum reserves      192.0     225.1


longer-term refinancing operations    150.0   270.0   deposit facility                         0.4       1.0
marginal lending facility             0.1     0.0     other operations                         0.0       0.0
other operations                      0.0     0.0
total                                 884.4   964.0   total                                     884.4     964.0
                                                                                               De Nederlandsche Bank
                                                                                                           Eurosysteem
Future challenges:

a) the management of the volatility of short term
   interest rates
b) determining the optimal size and composition of
   central bank balance sheet
c) the appropriate level of communication with the
   financial markets
d) contribute to further integration of financial
   markets by harmonising and expanding collateral
   instruments
                                         De Nederlandsche Bank
                                                     Eurosysteem
Contents
    Topics


    • The ESCB (Euro System of Central
    Banks) monetary policy framework

    •Collateral management framework

    •Trends in collateral: European and NL

    •Mobilising collateral



                                             De Nederlandsche Bank
                                                         Eurosysteem
Guiding Principles of the Collateral Framework
 •   Article 18.1 of the Statute requires all credit operations by the Eurosystem
     to be “based on adequate collateral”. The concept of adequacy has 2
     notions:
     1. Collateral must be able to protect the Eurosystem from incurring
          losses in its credit operations
     2. There must be sufficient collateral potentially available to ensure that
          the Eurosystem can carry out its tasks

 •   To reconcile both notions of “adequate collateral” may not be easy:
     1. The range of assets must be broad to ensure the sufficiency of
         collateral
     2. This may be in conflict with the desire for operational efficiency and
         transparency
     To what extent compromises on the principle of operational efficiency
     need to be made depends on the structure of financial markets
                                                                     De Nederlandsche Bank
                                                                                 Eurosysteem
Single list of collateral
          Operational on January 1st, 2007
          Drawbacks 2-tiers list (1999-2006): heterogeneity
           and no transparency
          2 asset classes:
             marketable assets and
             non-marketable assets (no quality difference)
          Marketable assets: high credit standards (single
           A↑), located in the euro area, denomination euro




                                                     De Nederlandsche Bank
                                                                 Eurosysteem
Single list of collateral
         Marketable assets:
          listed on regulated markets or certain accepted
          non-regulated markets
         Non-marketable assets:
          credit claims and Irish non-marketable retail
          mortgage backed debt instruments, no market
          criterion
         For both asset classes -> Eurosystem credit
          assessment framework




                                                    De Nederlandsche Bank
                                                                Eurosysteem
Eurosystem Credit Assessment
Framework
     ECAF sources:
      ECAI – External Credit Assessment Institutions
      ICAS – NCBs in-house credit assessment systems
      IRB – counterparties internal ratings-based systems
      RT – third-party providers rating tools.


     Additionally:
      PSE-list and guarantees


     (ECAF principles: consistency, accuracy and
       comparability)

                                                    De Nederlandsche Bank
                                                                Eurosysteem
ECAF benchmark/threshold

     ´Single A` (A-Fitch and S&P, A3 Moody´s)
                              Or
     Probability of default (PD) over a one-year
      horizon of 0,10%

  Default definition from EU Capital Requirements
    Directive (CRD)




                                                De Nederlandsche Bank
                                                            Eurosysteem
Valuation principles

     Marketable assets
         Define the most representative price source
         Rules for non-availability of prices
         Treatment of income flows
     Non-marketable assets
         Theoretical price or outstanding amount



                                                    De Nederlandsche Bank
                                                                Eurosysteem
Present collateral framework (NL)
     Legal technique: pledge
     Pool of collateral
      - total market value minus haircut (+interest) = credit line
      - integrated use of the collateral pool on request of credit
      institutions like supporting services, e.g. CCP margin
      and guarantees for special purposes
     Legal setting credit claims: public pledge, physical
      delivery loan documentation, ex ante notification of
      debtor
      [Situation before EMU/1999: extensive collateral list:
      equities, private loans, loans in other currencies]

                                                      De Nederlandsche Bank
                                                                  Eurosysteem
Stabilising features of the Eurosystem’s
    collateral framework

Key features of the Eurosystem’s collateral framework:
   Acceptance of a broad range of debt instruments as collateral
   No collateral differentiation between tender operations and standing
    facilities
   Single auction rate applicable to different types of collateral in tender
    operations
Performance during the turmoil:
   Sufficiency of collateral ensured, facilitating broad access to central
    bank money
   Low consumption of high opportunity cost collateral
   Mitigation of asset refinancing risk through large scale acceptance of
    ABS in the main refinancing operations
                                                                  De Nederlandsche Bank
                                                                              Eurosysteem
Contents
    Topics


    • The ESCB (Euro System of Central
    Banks) monetary policy framework

    •Collateral management framework

    •Trends in collateral: European and NL

    •Mobilising collateral



                                             De Nederlandsche Bank
                                                         Eurosysteem
Evolution of eligible marketable and non-
marketable collateral by asset type (€ billion)



10000                                  Non-marketable
                                       assets
 9000
                                       Other marketable
 8000                                  assets

                                       ABS
 7000

 6000                                  Corporate bonds
 5000
                                       Covered bank bonds
 4000

 3000                                  Uncovered bank
                                       bonds
 2000
                                       Regional government
 1000

    0                                  Central government
        2004   2005    2006    2007
                                             De Nederlandsche Bank
                                                            Eurosysteem
Trend towards use of more illiquid collateral



  100%                                 Non-marketable
                                       assets
  90%
                                       Other marketable
  80%                                  assets

                                       ABS
  70%

  60%                                  Corporate bonds
  50%
                                       Covered bank bonds
  40%

  30%                                  Uncovered bank
                                       bonds
  20%
                                       Regional government
  10%

   0%                                  Central government
         2004   2005   2006    2007
                                             De Nederlandsche Bank
                                                          Eurosysteem
Situation NL: Statistics on collateral in the pool
        (end December 2006 versus end March 2008)


                                Total
                     (Marketvalue, before haircuts)
                 € 74 bn                       € 138 bn

                Credit claims
vault      ± € 2,3 bn ± € 2,9 bn

                  Domestic                        Via link:
ENL        ± € 17 bn ± € 78,3 bn          ± € 2,7 bn       € 2,8 bn

                                                 Eurobonds
 EB                                        ± € 19,6 bn   € 31 bn

                                                 DE ± 8/ IT ± 11
CCBM                                                       € 23 Eurosysteem
                                           ± € 32,4 bn De Nederlandsche Bank
                                                                   bn
    Infrastructure

                                                CSD
   Collateral management                      foreign
      domestic                 ICSD
                             (eurobonds)
           DNB vault                          CCB

           Euroclear
            Netherlands                        DNB
            (CSD)
                                         CCB
      Foreign (cross           CSD
                                                                   CSD
                                                                 domestic
        border)                foreign
           Direct links
           Euroclear Bank
                                                         De Nederlandsche Bank
           CCBM                                                     Eurosysteem
Domestic
      Structure of domestic safekeeping

                                  DNB

                   2
                                       1
                             3 (= €)


     Euroclear
                         1
    Netherlands                  Bank A

                                           De Nederlandsche Bank
                                                       Eurosysteem
Eligible links
             Structure of eligible links

    Bank A                       1
                   3 (= €)              DNB



                             1
                                           2



    (I)CSD                            Euroclear
 (Monte Titoli)                      Netherlands
                                                   De Nederlandsche Bank
                                                               Eurosysteem
CCBM
   Dutch Eurosystem counterparty sends Swift
    MT540 to DNB (and MT542 to its own
    custodian)
   DNB sends MT540 to the respective CCB
   Upon receipt of the securities, the CCB
    sends an MT544 to DNB
   DNB updates its collateral management
    system and increases the credit facility for
    the Dutch Eurosystem counterparty

                                           De Nederlandsche Bank
                                                       Eurosysteem
 CCBM
                         Structure of CCBM
                             4
           CCB                                      HCB

               3                                        1
           CSD
                                              5 (= €)
                2
            Custodian/                    1
              Agent                               Bank A

CCBM - Correspondent Central Bank Model
CCB - Correspondent Central Bank
HCB - Home Central Bank
                                                            De Nederlandsche Bank
CSD - Central Securities Depository                                     Eurosysteem
      The current framework for the use of collateral

                                       Step1: Request                    Step2:
                                            for credit                   Matching
National domestic                                                                   SSS A
                           CPY A                          NCB A
procedures                             Step4:                           Step 3:
                                       Release credit             Confirmation/receipt

                                              Step2: transfer instruction




                            Step1: Request           Step2: CCBM               Step3:
A common procedure                                                             Matching
with minimum                     for credit              message
harmonisation for       CPY A                 NCB A                NCB B                     SSS B
cross-border use                   Step6:                                      Step 4:
                                                        Step5: Receipt         Confirmatio
(level of automation,              Release credit
communication                                                                  n
protocols)                                      Step3: transfer instruction




                                                                                     De Nederlandsche Bank
                                                                                                 Eurosysteem
  CCBM2 – A single procedure for domestic and cross-border
  use of collateral


            CPY A                NCB A              SSS A


           CPY B         NCB B       NCB A          SSS A

                           CCBM2 platform




                                Single
        Harmonised           procedure
       procedures for            for
       counterparties         domestic
                             and cross-
                               border

                                                        De Nederlandsche Bank
                                                                    Eurosysteem
PSSC/SWG/2007/414
Synergies with other Eurosystem initiatives




         TARGET2-Securities
                                                 Single
                      Securities
         Sub -Cash
                      accounts
                                              Eurosystem
         accounts
                                   Custody     Interface
                                   accounts


               TARGET2             CCBM2

                   Cash
                 accounts




                                                De Nederlandsche Bank
                                                            Eurosysteem
Summing up

   Basics on monetary and collateral framework
   Single list and ECAF
   NL situation
   Collateral mobilisation




                                          De Nederlandsche Bank
                                                      Eurosysteem
Thank you very much !
     Qu€stions?

                  De Nederlandsche Bank
                              Eurosysteem
Some detailed slides




                       De Nederlandsche Bank
                                   Eurosysteem
Minimum reserve requirements:

During a reserve maintenance period banks have
on average to maintain a certain percentage of
certain banks’ balance sheet items (2%) on an
account at the central banks

Create / increase money market shortage
(counterparties vis à vis Eurosystem)

Averaging feature helps stabilising overnight and
intraday money market rates
                                           De Nederlandsche Bank
                                                       Eurosysteem
Minimum reserve requirements:

Interest paid over required reserves

Excess reserves not remunerated,
giving incentive to go to the market

Penalty in case of non-compliance

Banks with large payment flows prefer large
 reserve requirements
                                        De Nederlandsche Bank
                                                    Eurosysteem
Minimum reserve requirements:

Current amount reserve requirements for the
 Eurosystem ± EUR 202 billion

 (The Netherlands ± EUR 20 billion,
 largest 5 counterparties account for ± 90% in NL)




                                         De Nederlandsche Bank
                                                     Eurosysteem
Open markt operations:
Main refinancing operations (MROs)
   about 70% of total credit extension

Long term refinancing transactions (LTROs)
    about 30% of total credit extension

Fine-tuning operations (FTOs)
    nowadays last day of the reserve maintenance
    period

Structural operations                   De Nederlandsche Bank
                                                     Eurosysteem
Main refinancing operations (MROs):
Open for all banks with a minimum reserve
 requirement (cf US system of primary dealers)

Interest rate on MROs is main ECB interest rate

Main source credit extension Eurosystem

Variable rate tender (opposite to fixed rate tender)

Marginal rate few base points above min. bidrate
                                           De Nederlandsche Bank
                                                       Eurosysteem
Main refinancing operations (MROs):
  Graph Counterparties eligible for OMO by country
  Number and percentages respectively end of March 2007.

                              PT; 33
                                    SI; 20FI; 13 BE; 94
                      NE; 79AT; 32
        LU; 154
    IT; 74



     IE; 39
     FR; 127
                                                                      DE; 849
               ES; 132
                         GR; 29

          BE     DE      GR   ES   FR     IE   IT    LU    NE   AT   PT   SI   FI


  Source: ECB.
                                                                                De Nederlandsche Bank
                                                                                            Eurosysteem
Long term refinancing transactions
(LTROs):
Liquidity providing

Monthly auction via variable rate tender

Three month maturity



                                            De Nederlandsche Bank
                                                        Eurosysteem
Long term refinancing transactions
(LTROs):
Reverse transactions

Pre-announced 50 billion euro size each

Particularly designed for smaller banks

Amount allotted is sufficient to balance supply
 and demand

                                           De Nederlandsche Bank
                                                       Eurosysteem
Fine-tuning operations (FTOs):

Smooth out effects on interest rates of unexpected
 liquidity fluctuations

Liquidity providing or liquidity absorbing

Ad hoc basis and regular basis i.e. last day of a
 reserve maintenance period


                                            De Nederlandsche Bank
                                                        Eurosysteem
Fine-tuning operations (FTOs):

Short-term basis

Tender or bilateral operation

Selected group of fine-tuning counterparties




                                          De Nederlandsche Bank
                                                      Eurosysteem
Structural operations:

Liquidity-providing or liquidity-absorbing

Conducted on an ad hoc basis (never used yet)

Maturity not standardised

Tender or bilateral operations


                                         De Nederlandsche Bank
                                                     Eurosysteem
Types of open market operations:

Reverse transactions

Outright transactions

Foreign exchange swaps

Collection of fixed-term deposits

Issuance of ECB debt certificates
                                     De Nederlandsche Bank
                                                 Eurosysteem
Stabilizing money market interest
rates:

Fine-tuning instruments

Averaging facility on the reserve requirements

Standing facilities



                                         De Nederlandsche Bank
                                                     Eurosysteem
Standing facilities :
Deposit facility
           overnight liquidity absorption
           at relatively low (official) interest rate
           floor for market rates
           normally no restrictions
Marginal lending facility
           overnight liquidity provision
           at relatively high (official) interest rate
           ceiling for market rates
           normally no restrictions except collateral
                                              De Nederlandsche Bank
                                                          Eurosysteem
Standing facilities :
General:

Providing / absorbing liquidity at the discretion of
 banks/at the initiative of counterparties

Limiting maximum interest volatility

Signal general stance of monetary policy


                                            De Nederlandsche Bank
                                                        Eurosysteem
                   MARKETABLE ASSETS
Type of assets                ECB debt certificates; other marketable debt
                              instruments
Credit standards              Asset of high credit standard; using ECAF rules
Place of issue                EEA
Settlement/handling           Settled in euro area; centrally deposited in book-
procedures                    entry form with central banks or SSS fulfilling
                              ECB’s minimum standards
Type of                       Central banks; public sector; private sector;
issuer/debtor/guarantor       international and supranational institutions
Place of establishment of     Issuer: EEA or non-EEA G10 countries; Guarantor
Issuer/debtor/guarantor       EEA
Acceptable markets            Regulated markets; non-regulated market
                              accepted by ECB
Currency                      Euro
Cross-border use              Yes
(No minimum size; no governing law)                                       De Nederlandsche Bank
                                                                                      Eurosysteem
        NON-MARKETABLE ASSETS: CREDIT CLAIMS

Type of assets                         Credit claims
Credit standards                       High credit standard for debtor/guarantor; using ECAF
                                       rules

Settlement/handling                    Eurosystem procedures
procedures
Type of                                Public sector; non-financial corporations; international
issuer/debtor/guarantor                and supranational institutions
Place of establishment of              Euro area
Issuer/debtor/guarantor
Currency                               Euro
Minimum size                           Until Dec 2011: NCB choice for domestic use; 500,000
                                       for cross-border use. After 1 Jan 2012: 500,000
Governing law                          Law of a euro area Member State;
Cross-border use                       Yes
(Additional legal requirement: verification of existence, notification of debtor or
registration, no restrictions from banking secrecy, no restrictions on
                                                                                   De Nederlandsche Bank
mobilisation or realisation). (Not applicable: place of issue; acceptable markets)             Eurosysteem
               Marketable assets       Credit claims
Risk control
measures

Valuation       Liquidity category     Residual maturity
haircut         Coupon type            Type of interest rate
                Residual maturity     payment
                                       Valuation methodology
                                       (NCBs)


Variation      Trigger point (0.5%)      Trigger point (0.5%)
margin          Assets or cash
               (depends on NCBs)




                                                            De Nederlandsche Bank
                                                                        Eurosysteem

				
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