A detailed Feature Piece in Edition 13 of this SCM Briefing provided a summary of the detailed eligibility criteria published by the European Central Bank (ECB) for asset-backed securities (ABS) and covered bonds eligible for outright purchase under the 'ABSPP' and 'CBPP3' purchase programmes. The ECB made a long-awaited announcement in January 2015 about the expansion of ABSPP and CBPP3 as part of its wider programme of Quantitative Easing (QE), to increase purchases to a level of €60 billion per month until at least end-September 2016, and to add (from March 2015) Euro-denominated sovereign bonds to the purchases. Having committed to providing further detail and eligibility criteria on the expanded asset purchases, the ECB released a further Press Release and Technical Annex which sets out some additional criteria to be met, specifically by sovereign bonds (see Edition 13 for details of the original ABSPP and CBPP3 criteria as set out in Decisions ECB/2014/45 and ECB/2014/40 respectively - which remain unchanged by this announcement, subject to the additions noted below). Euro-denominated securities issued by Eurozone Central Governments, agencies and European institutions (sovereign bonds), which can be inflation-linked and floating-rate securities, must meet the following eligibility criteria:
● They must meet all of the eligibility criteria for "marketable assets" as set out in Guideline ECB/2011/14, as amended (otherwise known as the "General Documentation"), as well as the three bullet points immediately below;
● They are issued by an entity established in the Euro area which must be one of the following: central government, certain agencies established in the Euro area or certain international or supranational institutions located in the Euro area;
● They have a "first-best" (i.e. their highest) credit assessment from a rating agency of at least Credit Quality Step 3 (i.e. be rated 'BBB+' to 'BBB-' or higher) for the issuer or the guarantor, and the guarantee must be eligible in accordance with the General Documentation; and
● If the CQS3 rating is not possible, the securities will still be eligible, provided the Eurosystem's minimum credit quality threshold (BBB+) is not applied. Also, where a country is subject to a review in the context of a financial assistance programme (e.g. Greece), the eligibility of securities from that country will be suspended until there is a positive outcome of the review.
In addition, regarding creditor treatment, the Eurosystem accepts the same (i.e. pari passu) treatment as private investors, in accordance with the terms of the securities. Holdings of sovereign bonds will be valued at amortised cost, will be eligible for securities lending, and transactions in securities purchased will be published in a weekly report (and holdings will be published on a monthly basis). Losses will be shared (but not on ABSPP or CBPP3 purchases) to the extent of 80% by the national central banks and 20% by the ECB.
While the existing eligibility criteria for ABSPP and CBPP3 remain unchanged by the QE programme, the ECB has additionally decided that securities purchased under the expanded programme that are not covered by the ABSPP or CBPP3:
● must have a minimum remaining maturity of two years and a maximum remaining maturity of 30 years at the time of purchase;
● will be subject to an issue limit, an aggregate holding limit and other "operational modalities", in order to preserve market functioning/pricing, and to ensure the operation of collective action clauses is not obstructed; and
● purchases will be allocated across issuers from the various Euro area countries on the basis of the ECB's "capital key".
The ECB is providing weekly updates on the levels of purchases made under ASBPP and CBPP3, and (as of the 20 February 2015 reference date), has confirmed that it has purchased some €3 billion of ABS and €48.7 billion of covered bonds.
European Central Bank announcement
European Central Bank Press Release and Technical Annex