The European Central Bank (ECB) has announced a forthcoming series of changes to its collateral eligibility rules. The changes announced by the ECB are as follows:
- The current requirement for asset-backed securities (ABS) to have two AAA ratings at issuance (albeit temporarily relaxed for certain securities by Decision ECB/2011/25 and Decision ECB/2012/11) will be replaced with a requirement for two 'Single A' ratings at issuance for those ABS currently subject to the ECB's loan-level reporting requirements (namely, residential mortgage-backed securities, SME-loan backed ABS, commercial mortgage-backed securities, consumer finance ABS, leasing ABS and auto loan ABS).
- The current valuation haircuts for senior tranches of ABS will be reduced from 16% to 10%, and for lower-rated tranches, from 26-32% to 22%, in accordance with a new Annex. Covered bonds rated AAA to A- will attract reduced haircuts, depending on maturity (e.g. a 5-7 year maturity covered bond now attracts a haircut of 4.5% (compared to 6.5% previously)). However, covered bond haircuts for retained assets will be increased such that they are subject to an additional 8% haircut (for AAA to A- rated covered bonds), and an additional 12% haircut where they are rated BBB+ or below.
- The eligibility criteria and haircuts for pools of credit claims and certain types of "additional credit claims" will be adjusted, such that (broadly) haircuts are slightly reduced for AAA to AA- rated assets, and slightly increased for BBB+ and lower-rated assets (further detail of the changes in eligibility criteria for these instruments is awaited).
In addition, the ECB's Press Release notes that the ECB is continuing to investigate how to improve funding conditions for small- and medium-sized enterprises (SMEs), in particular as regards the possible acceptance of SME-linked ABS guaranteed mezzanine tranches as collateral in Eurosystem operations, in line with established guarantee policies.
The changes are expected to be formalised by a Legal Act that will amend the General Documentation in due course. The date on which these measures take effect will be specified in the Legal Act, although this is not expected to be until September or October 2013. The ECB expects that the overall effect of the changes will be neutral, and the change has not made any significant improvement in new deal-flow, which has now begun its typical summer slowdown.
Edition 4 of this Briefing reported that the ECB had suspended the application of the minimum rating threshold (currently two ratings of BBB or above, which has been in temporary application since 14 September 2012) to marketable debt instruments (including ABS) issued or guaranteed by the Cypriot Government, from 9 May 2013 until further notice. This allowed Cypriot instruments eligible for the ECB's repo facility to be rated below BBB (with applicable valuation haircuts). In a further decision dated 28 June 2013, the ECB has now repealed that earlier decision such that Cypriot instruments (including ABS) must now meet the overall minimum rating threshold (which, as per the above notice is shortly to become two 'Single A' ratings at issuance).