Insight Session: T2S Auto-collateralisation

Transcription

1 Insight Session: T2S Auto-collateralisation T2S Info Session Vienna, 5 October 2012 T2S Programme Office European Central Bank ECB-PUBLIC 0

2 Table of Contents T2S Auto-collateralisation 1 Why is auto-collateralisation a key feature of T2S? 2 Which are the characteristics of auto-collateralisation in T2S? 3 Which T2S tools are available to manage auto-collateralisation? 4 How will the auto-collateralisation process work in T2S? 5 What are the benefits of auto-collateralisation in T2S? 1

3 Introduction Why is auto-collateralisation a key feature of T2S? It is one of three ways to obtain liquidity in order to support securities settlement Auto-collateralisation will lead to major liquidity savings - Single cash account and securities account can be used for all T2S markets, this enables the pooling of liquidity and collateral Auto-collateralisation is a new feature for many T2S participating markets Single framework allows for back office savings a same procedure and same cut off times apply to across all T2S markets Auto-collateralisation between central banks & payment banks is provided at no extra cost In addition, it will be available to payment banks and their clients 2

4 Auto-collateralisation in T2S Which are the characteristics of auto-collateralisation in T2S? Auto-collateralisation is an automatic process facilitating smooth real-time DvP settlement in central bank money An auto-collateralisation operation is triggered when a buyer does not have sufficient funds to settle securities transactions The liquidity obtained is immediately used to settle the underlying securities transaction It is complemented by other T2S settlement optimisation process such as technical netting There are two types of auto-collateralisation: - central bank auto-collateralisation in case that the credit provider is the central bank; - client auto-collateralisation in case that the credit provided is a payment bank The same process is followed for auto-collateralisation on flow as well as on stock The feature covers automatic reimbursement of credit at the end of the day (if not reimbursed earlier) 3

5 Set-up: flexibility and best risk-management practice Which T2S tools are available to manage auto-collateralisation? Static Data - Various static data objects which vary depending on credit provider and credit consumer, e.g.: - Credit provider is enabled to define which securities are eligible for auto collateralisation at which value - Credit consumer is able to earmark securities positions or accounts in order to define its collateral pool Limits - Used to manage relationship between central bank and payment bank: - Central bank auto-collateralisation limit - Used to manage relationship between payment banks and their clients: - External guarantee limit - Client auto-collateralisation limit - Unsecured credit limit CMB (Credit Memorandum Balance) - Defines which CSD participant is allowed to use the above limits, e.g. for auto-collateralisation 4

6 Auto-collateralisation process (I) How will the auto-collateralisation process work in T2S? Trigger of central bank auto-collateralisation - Lack of cash on payment bank DCA (Dedicated Cash Account) during settlement attempt Trigger of client auto-collateralisation - Lack of external guarantee limit headroom of the payment bank client during settlement attempt Preliminary checks - Validation of transaction(s) triggering auto-collateralisation - Ensuring successful settlement following credit provision while respecting all relevant limits - Availability of collateral - Ensuring optimal collateral usage with least liquidity surplus 5

7 Auto-collateralisation process (II) How will the auto-collateralisation process work in T2S? Provision of credit - Automatic generation of additional settlement instructions - Debiting the credit provider s DCA in favour of the credit consumer - Delivering the credit consumer s collateral to the credit provider s securities account - Automatic generation of reverse settlement instructions on-hold - Aiming at credit reimbursement upon release of payment bank - Settlement of transaction triggering the auto-collateralisation process Reimbursement of credit - Release of reimbursement instructions by payment bank during the day - Dynamic reimbursement triggered if securities provided as collateral are needed to settle another settlement instruction - Automatic reimbursement of central bank auto-collateralisation at the end of the day 6

8 Use case - Central bank auto-collateralisation How can central bank auto-collateralisation be used to provide cash on a DCA? The following scenario illustrates a central bank auto-collateralisation example: - Party A s DCA is not sufficiently funded to settle a buy transaction against Party B - Settlement can take place supported by central bank auto-collateralisation, depending on availability of collateral and sufficient central bank auto-collateralisation limit headroom Movements 1 and 2 take place on an all-or-none basis to ensure that collateralisation is used exclusively for the respective transaction 150 Party B Party A - Payment Bank Central Bank Sec. Acc. DCA 1a Sec. Acc. earm. Sec. Acc. for coll. provision Securities settlement DCA 2a Delivery of collateral Sec. Acc. for receiving coll. 200 CB Cash Acc. 1b Cash settlement 2b Provision of cash/ limit utilisation 7

9 Use case - Client auto-collateralisation How can client auto-collateralisation be used to facilitate settlement? The following scenario illustrates a client auto-collateralisation example: - Party A exceeded its external guarantee limit while attempting to settle a buy against Party B - Settlement can take place supported by client auto-collateralisation, depending on availability of collateral and sufficient client auto-collateralisation limit headroom Party B Party A - PB Client Payment Bank Movements 1-2 take place on an all-or-none basis, together with the update of the limit utilisation, to ensure that collateralisation is used exclusively for the respective transaction 150 Sec. Acc. DCA Sec. Acc. earmarked for 1a Sec. Acc. coll. provision Securities settlement b Cash settlement 2a Delivery of collateral Sec. Acc. for receiving collateral 200 DCA for managing client s cash 900 2b Provision of cash/ limit utilisation 8

10 Conclusion What are the benefits of auto-collateralisation in T2S? Likely to generate significant collateral and liquidity savings Facilitates smoother settlement cycles Reduces failed securities settlement transactions Is likely to extend the offering of auto-collateralisation to more markets as well as to increase the number of users Harmonises auto-collateralisation practices across all T2S markets Provides payment banks with flexible tools to create tailor-made service offering for their clients 9

11 Further references Where can I find further information about T2S auto-collateralisation? T2S Special Series Paper: T2S Auto-collateralisation T2S Technical Dialogue 23 May 2012 in Amsterdam: - Implementing the relationship between Payment Banks and their clients in T2S Presentation User Requirements Document Version Section 8.2 Auto-collateralisation User Detailed Functional Specification Version Section Auto-collateralisation Business Process Description Version Section 3.4 Auto-collateralisation 10