Edition 15 of this SCM Briefing noted that the European Central Bank (ECB) had issued a helpful consolidation of the "General Documentation" (as Guideline 2015/510 (ECB/2014/60)) earlier in 2015, which sets out the collateral eligibility rules for asset-backed securities (ABS) such that the applicable rules for ABS were then all in one place. However, as we outlined, that Guideline was subsequently amended, by (what became) Guideline 2015/732 of the ECB, as regards coupon structures, such that the General Documentation is (very unhelpfully) no longer all in one place. Now, a further amendment is being made to the General Documentation, by way of Guideline ECB/2015/27, which makes the following changes:
- To revise the provisions on the eligibility of Eurosystem "counterparties" (i.e. those institutions submitting assets as collateral for funding) such that the ECB can take into account in its eligibility assessment quarterly information on the capital, leverage and liquidity ratios of individual institutions, as reported in accordance with the Capital Requirements Regulation (CRR) (see the new Article 55a of the General Documentation, which sets out the information that the Eurosystem may take into account, which may be prudential information of a "standard comparable" to that reported under CRR). The new provision also clarifies that asset management vehicles resulting from a resolution action (e.g. under the Bank Recovery and Resolution Directive) are not eligible to access Eurosystem monetary policy operations.
- To introduce a new class of eligible asset - "non-marketable debt instruments backed (directly or indirectly) by eligible credit claims" ("DECCs"). These are essentially debt instruments that are: (a) backed by credit claims that are also eligible as collateral within the Eurosystem on an individual basis; and (b) that have a dual recourse feature to: (i) the credit institution that is the originator of the underlying claims; and to (ii) the underlying credit claims themselves; and (c) for which there is no tranching of risk. Only the use of domestic DECCs is envisaged (i.e. debt instruments backed by credit claims issued and held in the issuer's home country), until a cross-border framework for the use of DECCs has been fully developed. The Guideline sets out how the General Documentation will be amended to incorporate the eligibility criteria for DECCs (see Article 99), which include provisions requiring legal verification of the credit claims (in terms of verification, validity, enforcement and lack of restrictions on perfection and enforcement and banking secrecy), and eligibility criteria for DECCs, which cover similar aspects to the ABS eligibility criteria, including rules on coupon structure, denomination of the underlying credit claims in Euro, the SPV issuer must be based in a Member State whose currency is the Euro, the governing law is where the issuer is established, there must be no subordination, and compliance with credit quality and transparency requirements (including the provision of loan-level data, with the same quality requirements as apply to ABS). The underlying credit claims must comply with the existing eligibility for credit claims set out in Section 1, Chapter 1 of Title III (Part 4) of the General Documentation, subject to a series of modifications which include the legal verification procedures mentioned above, one-off verification (and then subsequent checks) of the procedures used to submit the information on the underlying credit claims by the relevant National Central Bank (NCB) in accordance with a fairly strict set of steps, and the completion of all legal formalities (including any notification to debtors about the transfer of their credit claims to the issuer) to ensure the validity of the agreements and transfer mechanisms. While the DECCs themselves do not require a rating, the underlying credit claims do, and that rating must be at least "Credit Quality Step 3" (i.e. BBB+ to BBB-). Provisions for valuation haircuts are also set out, and other tweaks across the General Documentation are made which allow the Eurosystem/ECB greater discretion in allowing counterparties to access its various monetary policy operations going forward.
The Guideline will be published in the Official Journal of the EU in due course, and it is due to take effect from 2 November 2015. It will be interesting to see whether banks (that would typically submit ABS as collateral) would alternatively submit DECCs, as this gives banks an alternative by using bundles of loans as collateral without the structuring required to complete an ABS issue.
ECB Guideline 2015/510 (ECB/2014/60) (the General Documentation)