ICMA Welcomes ECB Moves to Widen Scope of Collateral to be Accepted

European Central Bank (ECB) will include more asset-backed securities in the scope of collateral it will accept.

The move is intended to further strengthen its risk control framework. To maintain adequate risk protection, the ECB regularly adjusts its collateral eligibility rules and haircuts applied when accepting collateral in Eurosystem monetary policy operations.

At the same time, the list of collateral accepted under the permanent Eurosystem collateral framework will be expanded. These measures taken together have an overall neutral effect on the amount of collateral available.

In the biennial review of its risk control framework applied in Eurosystem monetary policy operations, the ECB’s Governing Council decided in particular to:
– Update the haircuts for marketable instruments;
– Adjust the risk control measures for retained covered bonds to take into account the additional risk which results from the use of such securities by the issuer itself and to ensure a level playing field between securities with comparable risks;
– Replace the current requirement of two ‘triple A’ ratings with the requirement of two ‘single A’ ratings for the six classes of asset-backed securities (ABS) subject to loan level reporting requirements, reflecting their improved transparency and standardization;
– Reduce the haircuts applicable to ABS eligible under the permanent and temporary Eurosystem collateral framework.

In addition, the Governing Council has adjusted the eligibility criteria and haircuts applied by National Central Banks (NCBs) to pools of credit claims and certain types of the additional credit claims (ACC) eligible under the temporary Eurosystem collateral framework. The amendments will lead to more consistency of the ACC framework and is expected to generate collateral gains without affecting the overall risk contribution of ACCs, said the ECB. The Banque de France is understood to be in discussions with the German Bundesbank, Banca d’Italia and the Dutch central bank about creating pools of credit claims.

The move to widen the scope of collateral to be accepted to include more ABS instruments has been welcomed by the securities industry, but has been expected given the requirement for OTC derivatives clearing as mandated by the European Markets Infrastructure Regulation (EMIR), the requirements of which must be adhered to by September 15, 2013.

“It is clear the ECB looks at the market requirements that for the time being go beyond normal eligibility criteria – so they (ECB) accommodate bonds like ABS and loans,” says Godfried De Vidts, chairman of the International Capital Markets Association European Repo Council. “Over time this may again be reduced when the market can facilitate all of the EMIR and Dodd Frank collateralization requirements. Eventually the good collateral will be mainly going to the central counterparties and the Eurosystem so the market would be left financing all of the other less creditworthy securities and asset backed loans.

“The Bank of France is working on the securitization of credit claims with the French banks but also talking to other central banks in Europe. This new product in a way pools loans from one particular bank into different tranches through securitizations, which will make it easier to be shifted from one bank to another bank because it’s a basket of loans and not individual loans. So these are the reasons why in my view the ECB development is very welcome and not unexpected.”

The ECB’s stance supports the apparent return of the securitizations market, which collapsed after the death of sub-prime mortgages. These alternative funding instruments are expected to go a long way in addressing the perceived collateral shortage. “There are a lot of discussions in the market about the potential collateral crunch,” says De Vidts. “It is more about collateral scarcity in certain areas. In this area it is a good thing that we and central bank officials look at this from the point of view of why not prepare the market for a wider acceptance of different types of collateral before it boils over. Its better to prevent then cure – the central banks have this same type of forward-looking view.”