Integrated central bank collateral management services Alessandro Bonara (ECB) Richard Derksen (CCBM2 Project) Amsterdam, 21 October 2010
Table of contents 1. The Eurosystem collateral framework II. Move towards integrated collateral management services II.1 Existing solutions II.2 The CCBM2 project III. A closer look into CCBM2 2
I. The Eurosystem Collateral Framework
I. The Eurosystem collateral framework 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. 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. Two techniques: pledge/pooling: a charge granted over the relevant assets repo/earmarking: transfer of ownership of the assets 4
I. The Eurosystem collateral framework Collateral figures in EUR billions* (average) 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 * Excluding credit claims 5
I. The Eurosystem collateral framework 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% 6
I. The Eurosystem collateral framework <1999: Differing national solutions in place prior to Economic and Monetary Union 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 7
I. The Eurosystem collateral framework 2007: Single List of collateral 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 8
II. Move towards integrated collateral management services
II.1 Existing solutions: links between SSSs Introduction of the euro: need for mechanisms to mobilise collateral cross-border Market solution: Links between Securities Settlement Systems (SSS) However: Country A Country B Credit NCB A Info on collateral SSS A Transfer instruction Counterparty SSS B SSS A (investor SSS) holds assets in SSS B (issuer SSS) Links not available between all euro area SSSs 54 eligible links in 2009 of which 45 used for Eurosystem collateral purposes 10
II.1 Existing solutions: CCBM Eurosystem solution: Correspondent Central Banking Model (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) 11
II.1 Existing solutions: Domestic and cross-border The current framework for the delivery of collateral D = Domestic Custodian D2: Transfer instruction / delivery of collateral SSS A D1: Request for credit D3: Matching Bank in country A D5: Release of credit CB1: Request for credit CB7: Release of credit NCB in country A CB3: CCBM message CB6: Receipt D4: Confirmation NCB in country B CB4: Matching CB5: Confirmation CB2: Transfer instruction / delivery of collateral SSS B CB = Cross-border Custodian 12
II.1 Existing solutions: main channels CCBM is main channel for transferring crossborder collateral of which: 11% 40% 1% 11% 13
II.1 Existing solutions: current shortcomings Increased cross-border use emphasizes drawbacks: Dec-09 569 billion Facilities for mobilising collateral differ across euro area. Dec-99 163 billion CCBM involves different players which follow varying procedures, complexity impacts efficiency (e.g. processing time) Collateral transferred via CCBM Collateral management in Eurosystem technically decentralized Inconvenient for multi-country banks Therefore: CCBM2 (Collateral Central Bank Management) 14
II.2 The CCBM2 project 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 15
II.1 The CCBM2 project CCBM2 Single procedure for domestic and cross-border use of collateral (harmonised procedure) Custodian 2. Transfer instruction / delivery of collateral SSS X 1. Request for credit 3. Matching Bank in country A 5. Release of credit NCB A NCB B 4. Confirmation 16
III. A closer look into CCBM2
III. A closer look to CCBM2 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 able to use all eligible SSS and eligible links between SSS 18
III. A closer look to CCBM2 Message Router CSDs / Counterparties NCBs SSSs Data providers Securities Funct. External Collateral Management Systems NCB proprietary Collateral Management Systems CCBM 2 Message Router A2A & U2A Interfaces Securities Module Mobilisation Corporate Actions Credit & Collateral Module Pooling Earmarking Mandatory Work flow Manager Credit Claims Module Recording Mobilisation Support Functions Monitoring & Reporting Static Data Application Reference Data Eligible Collateral Database T A R G E T 2 T A R G E T 2 S e c u r i t i e s Credit claims Funct. Credit & Collateral Functionality collateral position = value of assets global position credit position = outstanding credit 19
III. A closer look to CCBM2 Message router functionality Handles communication: internally and with external parties Supports different communication networks (SWIFTNet, secure internet). Securities functionality Mobilisation / demobilisation of marketable assets domestic / cross-border and related custody services 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 20
III. A closer look to CCBM2 3 Main Parts: A2A interface U2A interface Work flow manager 21
III. A closer look to CCBM2 One system for all collateralisation techniques Earmarking and Pooling Repo and Pledge Harmonising SWIFT messages for counterparties, respecting required (I)CSD-formats Improved monitoring and reporting possibilities for NCBs and for counterparties 22
III. A closer look to CCBM2 Non-marketable assets data management. Credit claims (de-)mobilisation Custody related activities Legal requirements 23
III. A closer look to CCBM2 Global position per counterparty View on global collateral & credit position. Collateral Bank A Credit Collateral Position Securities Credit Claims Other collateral (e.g. tri-party) TOTAL COLLATERAL Credit Position Open Market Operations Marginal Lending Other Credit (e.g. Guarantees) TOTAL CREDIT Remaining Credit Line = COLLATERAL CREDIT = available intraday credit 24
III. A closer look to CCBM2 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 25
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 26
IV. A closer look to CCBM2 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 27
IV. A closer look to CCBM2 The move towards integrated collateral management services The Eurosystem magic triangle 28
Thank you for your attention! Questions? 29