We noted in Edition 15 of this SCM Briefing that the European Central Bank (ECB) had issued a helpful consolidation of the "General Documentation" (as Guideline 2015/510 (ECB/2014/60)) which (amongst other things) sets out the collateral eligibility rules for asset-backed securities (ABS) such that the applicable rules for ABS were then all in one place (despite the addition of some unhelpful new language such as the rule restricting the eligibility of ABS backed by "leasing receivables with residual value leases"). As we noted, that "consolidated" version of the Guideline was subsequently subject to further amendments, as regards coupon structures, and was then amended again more recently, to revise the provisions on the eligibility of Eurosystem "counterparties" and to introduce "non-marketable debt instruments backed (directly or indirectly) by eligible credit claims" ("DECCs") as a new type of eligible instrument (see Edition 17 of this SCM Briefing for background on those later changes), such that the General Documentation is (very unhelpfully) no longer all contained in a single document. Now, a further set of amendments is being made to the General Documentation, by way of Guideline ECB/2015/34 and Guideline ECB/2015/35, which make the following changes:
This Guideline adds, in accordance with the earlier Guideline ECB/2015/27 (which added DECCs as a new type of eligible instrument), DECCs to the definition of instruments eligible for cross-border use through the Eurosystem's standard correspondent central banking model (CCBM) procedure, and makes consequential (minor) amendments to Article 148 on the cross-border use of eligible assets. It also adds to the existing definition of "leasing receivables" the following (clarificatory) language: "Personal Contract Purchase (PCP) agreements, i.e. agreements pursuant to which the obligor may exercise its option: (a) to make a final payment to acquire full legal title of the goods; or (b) return the goods in settlement of the agreement; are assimilated to leasing agreements." In addition, Guideline ECB/2015/34 removes the valuation haircuts for eligible assets from the General Documentation (by repealing Article 129 and the relevant Annex X) and sets them out separately in new Guideline ECB/2015/35 (see immediately below), and makes some (very minor) re-numbering changes to the relevant Article 128. Further, since (as established by a much earlier rule-change) international debt securities in global registered form issued after 30 September 2010 are only eligible as collateral where the New Safekeeping Structure for international debt securities (NSS) is used, the Table of security forms in Annex XI required minor amendment and is replaced by a new Annex XI.
This Guideline separates out the valuation haircuts for eligible assets from the main body of the General Documentation, to more easily effect changes to them without amending the General Documentation each time. General provisions relating to valuations haircuts are set out (which appear to replace Article 130 of the General Documentation, although this is not specifically repealed), along with the various "haircut categories" (all types of ABS remain in category V and remain subject to a flat haircut of 10% regardless of residual maturity or coupon structure - although ABS, covered bonds and unsecured debt issued by banks where those instruments are "theoretically valued" in accordance with Article 134 of the General Documentation are all subject to an additional haircut of 5%). However, Guideline ECB/2015/35 refines the haircut values for covered bonds such that "own-use" covered bonds (i.e. those issued or guaranteed by the counterparty seeking to use the covered bonds as collateral or a party with which it has "close links") are subject to an additional haircut (on the own-use share) of 8% (if they are allocated to credit quality steps 1 and 2 - i.e. investment grade-rated) or 12% (if they are allocated to credit quality step 3 - i.e. below-investment grade-rated). New Table 1 to Guideline ECB/2015/35 sets out the haircut categories for eligible assets, and Table 2 sets out the valuation haircut levels for (amongst other things) ABS and covered bonds. The higher valuation haircuts for covered bonds are expected to encourage banks to wean themselves off the cheap funding provided for covered bonds by the ECB.
The Guidelines will be published in the Official Journal of the EU in January 2016, and they are expected to take effect shortly after their date of publication, with compliance required from 25 January 2016.
European Central Bank Guideline 2015/510 (ECB/2014/60) the "General Documentation"