Underlying assets

6. Eligible assets

In order to conduct their operations, the European Central Bank and the national central banks may open accounts for credit institutions, public entities and other market participants, and accept assets, including book entry securities, as collateral.

Table 1. Underlying tier one assets used in the transactions

- In pooling systems, by definition, counterparties may substitute underlying assets on a daily basis,

- Both tier one and tier two assets (as specified in Chapter 6) are eligible as underlying assets for structural reverse operations.

- Both tier one and tier two assets (as specified in Chapter 6) are eligible as underlying assets for the main refinancing operations.

All assets eligible for Eurosystem monetary policy operations can also be used as underlying assets for intraday credit.

In the request, the amount of credit is to be stated and, if underlying assets for the transaction have not already been pre-deposited with the National Central Bank, the underlying assets to be delivered for the transaction are to be specified.

- Both tier one and tier two assets (as specified in Chapter 6) are eligible as underlying assets for fine-tuning reverse operations.

- Both tier one and tier two assets (as specified in Chapter 6) are eligible as underlying assets for the longer-term refinancing operations.

The precise procedure of the CCBM depends on whether the eligible assets are earmarked for each individual transaction or whether they are held in a pool of underlying assets(62).

For underlying assets used in liquidity-absorbing reverse open market operations, the eligibility criteria are identical to those applied for underlying assets used in liquidity-providing reverse open market operations.

This account can be used for all eligible assets held in Euroclear, i.e. including eligible assets transferred to Euroclear through eligible links.

- If, after valuation, the underlying assets do not match the requirements as calculated on that day, symmetric margin calls are performed.

A mechanism has been developed by the National Central Banks (and by the ECB) to ensure that all eligible assets may be used on a cross-border basis.

Eligible assets may be used on a cross-border basis, by means of the correspondent central banking model (CCBM) or through eligible links between EU securities settlement systems (SSS), to collateralise all types of Eurosystem credit(6).

a risk control measure applied to underlying assets used in reverse transactions, implying that the central bank calculates the value of underlying assets as the market value of the asset reduced by a certain percentage (haircut).

- Debt instruments falling due for repayment before the maturity date of the monetary policy operation for which they are being used as underlying assets(47);

- Debt instruments falling due for repayment before the maturity date of the monetary policy operation for which they are used as underlying assets(54),

- Equities with a payment of any kind (including in specie) or with any other right attached to them which may affect their suitability to be used as underlying assets for the period until the maturity date of the monetary policy operation for which they are being used as underlying assets.

This implies that counterparties need to provide underlying assets with a value at least equal to the liquidity provided by the Eurosystem plus the value of the initial margin.

The Eurosystem shall suspend a counterparty for infringements of rules related to tender operations and bilateral transactions, and of rules for underlying assets as set out below:

Pooling system

- Debt instruments with an income flow (e.g. a coupon payment) occurring in the period until the maturity date of the monetary policy operation for which they are being used as underlying assets.

- Debt instruments with an income flow (e.g. a coupon payment) occurring in the period until the maturity date of the monetary policy operation for which they are being used as underlying assets;

This implies that underlying assets either need to have been pre-deposited in a safe custody account at the National Central Banks or to be settled on an intraday delivery-versus-payment basis with the said central banks.

Eurosystem counterparties may use eligible assets on a cross-border basis, i.e. they may obtain funds from the National Central Bank of the Member State in which they are established by making use of assets located in another Member State (see Section 6.6).

Table 3. Pooling system

(58) National Central Banks may decide not to accept as underlying assets in reverse transactions debt instruments with an income flow (e.g. a coupon payment) or equities with a payment of any kind (or with any other right attached to them which may affect their suitability as underlying assets) occurring in the period until the maturity date of the monetary policy operation (see Sections 6.2 and 6.3).

In earmarking systems, the valuation of underlying assets is carried out on a daily basis.

Table 2. Earmarking system

(36) In addition, the ECB may allow the National Central Banks to consider as eligible for intraday credit certain types of assets which are not eligible as underlying assets for Eurosystem monetary policy operations (see footnote 47).

Cross-border use of eligible assets

(61) Eligible assets may be used through an account of a central bank in an SSS located in a country other than that of the central bank in question if the Eurosystem has approved the use of such account.

b) Suspension after infringements of rules for underlying assets

Eurosystem counterparties may use eligible assets on a cross-border basis, i.e. they may obtain funds from the National Central Bank of the Member State in which they are established by making use of assets located in another Member State.

- In earmarking systems, the substitution of underlying assets may be permitted by National Central Banks,

With the aim of protecting the Eurosystem from incurring losses in its monetary policy operations, ensuring the equal treatment of counterparties and enhancing operational efficiency, underlying assets have to fulfil certain criteria in order to be eligible for Eurosystem monetary policy operations.

By contrast with an earmarking system, the underlying assets are not earmarked for individual transactions in a pooling system.

(48) In addition to the tier two assets eligible for Eurosystem monetary policy operations, the ECB may authorise National Central Banks to grant intraday credit against debt instruments which are considered eligible for intraday credit by non-participating EU central banks and which are:

The Eurosystem applies "valuation haircuts" in the valuation of underlying assets.

Financial penalties imposed by National Central Banks in the event of non-compliance in relation to a breach of the rules concerning tender operations, bilateral transactions, underlying assets, end-of-day procedures or the access conditions to the marginal lending facility shall be calculated at a pre-specified penalty rate (as set out in Annex 6).

Despite their inclusion in the tier one list, National Central Banks shall not accept as underlying assets debt instruments issued or guaranteed by the counterparty, or by any other entity with which the counterparty has close links, as defined according to Directive 2000/12/EC relating to the taking up and pursuit of the business of credit institutions(45)(46).

In an earmarking system (I = 1), a margin call is effected when:

Despite their inclusion in the tier two lists, National Central Banks shall not accept as underlying assets debt obligations against or equities of the counterparty, or any other entity with which the counterparty has close links, as defined according to Article 1(26), of Directive 2000/12/EC relating to the taking up and pursuit of the business of credit institutions(52)(53).

In Chapter 6 the eligibility criteria for underlying assets in monetary policy operations are defined.

(55) Owing to operational differences across Member States in respect of the procedures for counterparties' delivery of underlying assets to the National Central Banks (in the form of a pool of collateral pledged with the National Central Bank or as repurchase agreements based on individual assets specified for each transaction), minor differences may occur with regard to the timing of the valuation and other operational features of the margin framework.

The risk control framework in the pooling system is described in Table 3.

(3) This applies if a counterparty is using assets that are or have become ineligible to secure an outstanding credit..