On 4 September 2014, the European Central Bank ("ECB") announced its intention to purchase asset-backed securities ("ABS") and covered bonds under several programmes ("Purchase Programmes"). This initiative has been discussed in our October newsletter. The ECB published its formal decisions to purchase covered bonds on 15 October 2014 (ECB/2014/40) and ABS on 19 November 2014 (ECB/2014/45) (the "Decisions"). The Decisions include the eligibility criteria for ABS and covered bonds to be purchased by the ECB. Nearly all of the eligibility criteria have been made public prior to the Decisions, save for a few.

One of the new eligibility criteria specifically relates to retained ABS and is set forth in Article 2(7) of ECB/2014/45. In order for a tranche of retained ABS to be eligible for purchases by the ECB, an external investor without a close link to the originator should (also) purchase part of the relevant tranche (with the same or fungible ISIN).  

For the interpretation of a 'close link' reference is made to Section of Guideline ECB/2011/14 on monetary policy instruments and procedures of the Eurosystem, which provides, with respect to close links in relation to an issuer, that the external investor has a close link to the issuer if it owns directly or indirectly 20 per cent. or more of the capital of the issuer, or vice versa or if there is a third party which owns more than 20 per cent. of the capital of the external investor and 20 per cent. of the capital of the issuer. Pursuant to Article 2(7) of ECB/2014/45 this interpretation applies mutatis mutandis to close links in relation to an originator. 

Furthermore, the external investor without close links should acquire 'part of the relevant tranche' in order for such tranche to be eligible. It is unclear whether in order to meet this requirements a specific minimum percentage of the tranche should be acquired by such investor.  

As at 12 December 2014, the ECB purchased ABS for approximately EUR 788 million, including the notes issued by Delta Lloyd's Arena NHG 2014-II, and covered bonds for approximately EUR 25 million.   

Click here for an overview of the Purchase Programmes and the amounts outstanding.