32000O0007

Guideline of the European Central Bank

of 31 August 2000

on monetary policy instruments and procedures of the Eurosystem

(ECB/2000/7)

(2000/776/ECB)

THE GOVERNING COUNCIL OF THE EUROPEAN CENTRAL BANK,

Having regard to the Treaty establishing the European Community (hereinafter referred to as the "Treaty") and in particular to the first indent of Article 105(2) and to Articles 12.1 and 14.3 of the Statute of the European System of Central Banks and of the European Central Bank (ECB) (hereinafter referred to as the "Statute"), in conjunction with the first indent of Article 3.1, Article 18.2 and the first paragraph of Article 20,

Whereas:

(1) The achievement of a single monetary policy entails the need to define the instruments to be used by the national central banks of Member States that have adopted the euro in accordance with the Treaty (respectively NCBs and participating Member States) and the European Central Bank (Eurosystem) in the implementation of such policy in a manner which is uniform throughout the participating Member States.

(2) The ECB is vested with the authority to establish the necessary Guidelines for the implementation of the single monetary policy and the NCBs have an obligation to act in accordance with such Guidelines.

(3) In accordance with Articles 12.1 and 14.3 of the Statute, ECB Guidelines form an integral part of Community law,

HAS ADOPTED THIS GUIDELINE:

Article 1

Principles, instruments, procedures and criteria for the implementation of the single monetary policy of the Eurosystem

The single monetary policy shall be implemented in accordance with the principles, instruments, procedures and criteria specified in Annexes I and II to this Guideline. The NCBs shall take all the appropriate measures to carry out the monetary policy operations in accordance with the principles, instruments, procedures and criteria specified in Annexes I and II to this Guideline.

Article 2

Verification

The NCBs shall forward details of the texts and means by which they intend to comply with this Guideline to the ECB by 15 October 2000 at the latest.

Article 3

Final provisions

1. This Guideline is addressed to the NCBs of participating Member States.

2. This Guideline shall enter into force on 1 January 2001.

3. This Guideline shall be published in the Official Journal of the European Communities.

Done at Frankfurt am Main, 31 August 2000.

On behalf of the Governing Council of the ECB

The President

Willem F. Duisenberg

ANNEX I

THE SINGLE MONETARY POLICY IN STAGE THREE

General documentation on Eurosystem monetary policy instruments and procedures

November 2000

CONTENTS

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Abbreviations

Countries

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Others

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In accordance with Community practice, the EU countries are listed in this document using the alphabetical order of the country names in the national languages.

Introduction

This document presents the operational framework chosen by the Eurosystem(1) for the single monetary policy in Stage Three of Economic and Monetary Union. The document, which forms part of the Eurosystem's legal framework for monetary policy instruments and procedures, is intended to serve as the "General documentation" on the monetary policy instruments and procedures of the Eurosystem, particularly aiming to provide counterparties with the information they need in relation to the Eurosystem's monetary policy framework.

The "General documentation" does not in itself confer rights on counterparties nor impose obligations. The legal relationship between the Eurosystem and its counterparties is established in appropriate contractual or regulatory arrangements.

This document is divided into seven chapters: Chapter 1 gives an overview of the operational framework for the monetary policy of the Eurosystem. In Chapter 2 eligibility criteria for counterparties taking part in Eurosystem monetary policy operations are specified. Chapter 3 describes open market operations, while Chapter 4 presents the standing facilities available to counterparties. Chapter 5 specifies procedures applied in the execution of monetary policy operations. In Chapter 6 the eligibility criteria for underlying assets in monetary policy operations are defined. Chapter 7 presents the Eurosystem's minimum reserve system.

Annexes to the document contain examples of monetary policy operations, a glossary, criteria for the selection of counterparties to Eurosystem foreign exchange intervention operations, a presentation of the reporting framework for the money and banking statistics of the European Central Bank, a list of the ECB and National Central Bank websites and a description of the procedures and sanctions to be applied in the event of non-compliance with counterparty obligations.

CHAPTER 1

1. OVERVIEW OF THE MONETARY POLICY FRAMEWORK

1.1. The European System of Central Banks

The European System of Central Banks (ESCB) consists of the European Central Bank (ECB) and the National Central Banks of the EU Member States(2). The activities of the ESCB are carried out in accordance with the Treaty establishing the European Community (Treaty) and the Statute of the European System of Central Banks and of the European Central Bank (Statute of the ESCB). The ESCB is governed by the decision-making bodies of the ECB. In this respect, the Governing Council of the ECB is responsible for the formulation of monetary policy, while the Executive Board is empowered to implement monetary policy according to the decisions and guidelines laid down by the Governing Council. To the extent deemed possible and appropriate and with a view to ensuring operational efficiency, the ECB shall have recourse to the National Central Banks(3) to carry out the operations which form part of the tasks of the Eurosystem. The Eurosystem monetary policy operations are executed on uniform terms and conditions in all Member States(4).

1.2. Objectives of the Eurosystem

The primary objective of the Eurosystem is to maintain price stability, as defined in Article 105 of the Treaty. Without prejudice to the primary objective of price stability, the Eurosystem has to support the general economic policies in the European Community. In pursuing its objectives, the Eurosystem has to act in accordance with the principle of an open market economy with free competition, favouring an efficient allocation of resources.

1.3. Eurosystem monetary policy instruments

In order to achieve its objectives, the Eurosystem has at its disposal a set of monetary policy instruments; the Eurosystem conducts open market operations, offers standing facilities and requires credit institutions to hold minimum reserves on accounts with the Eurosystem.

1.3.1. Open market operations

Open market operations play an important role in the monetary policy of the Eurosystem for the purposes of steering interest rates, managing the liquidity situation in the market and signalling the stance of monetary policy. The Eurosystem has available five types of instruments for the conduct of open market operations. The most important instrument is reverse transactions (applicable on the basis of repurchase agreements or collateralised loans). The Eurosystem may also use outright transactions, the issuance of debt certificates, foreign exchange swaps and the collection of fixed-term deposits. Open market operations are initiated by the ECB, which also decides on the instrument to be used and the terms and conditions for their execution. They can be executed on the basis of standard tenders, quick tenders or bilateral procedures(5). With regard to their aim, regularity and procedures, the Eurosystem's open market operations can be divided into the following four categories (see also Table 1):

- The main refinancing operations are regular liquidity-providing reverse transactions with a weekly frequency and a maturity of two weeks. These operations are executed by the National Central Banks on the basis of standard tenders. The main refinancing operations play a pivotal role in pursuing the purposes of the Eurosystem's open market operations and provide the bulk of refinancing to the financial sector.

- The longer-term refinancing operations are liquidity-providing reverse transactions with a monthly frequency and a maturity of three months. These operations aim to provide counterparties with additional longer-term refinancing and are executed by the National Central Banks on the basis of standard tenders. In these operations, the Eurosystem does not, as a rule, intend to send signals to the market and therefore normally acts as a rate taker.

- Fine-tuning operations are executed on an ad hoc basis with the aim of managing the liquidity situation in the market and of steering interest rates, in particular in order to smooth the effects on interest rates caused by unexpected liquidity fluctuations in the market. Fine-tuning operations are primarily executed as reverse transactions but can also take the form of outright transactions, foreign exchange swaps and the collection of fixed-term deposits. The instruments and procedures applied in the conduct of fine-tuning operations are adapted to the types of transactions and the specific objectives pursued in the operations. Fine-tuning operations are normally executed by the National Central Banks through quick tenders or bilateral procedures. The Governing Council of the ECB will decide whether, under exceptional circumstances, fine-tuning bilateral operations may be executed by the ECB itself.

- In addition, the Eurosystem may carry out structural operations through the issuance of debt certificates, reverse transactions and outright transactions. These operations are executed whenever the ECB wishes to adjust the structural position of the Eurosystem vis-à-vis the financial sector (on a regular or non-regular basis). Structural operations in the form of reverse transactions and the issuance of debt instruments are carried out by the National Central Banks through standard tenders. Structural operations in the form of outright transactions are executed through bilateral procedures.

1.3.2. Standing facilities

Standing facilities aim to provide and absorb overnight liquidity, signal the general stance of monetary policy and bound overnight market interest rates. Two standing facilities are available to eligible counterparties on their own initiative, subject to their fulfilment of certain operational access conditions (see also Table 1):

- Counterparties can use the marginal lending facility to obtain overnight liquidity from the National Central Banks against eligible assets. Under normal circumstances, there are no credit limits or other restrictions on counterparties' access to the facility apart from the requirement to present sufficient underlying assets. The interest rate on the marginal lending facility normally provides a ceiling for the overnight market interest rate.

- Counterparties can use the deposit facility to make overnight deposits with the National Central Banks. Under normal circumstances, there are no deposit limits or other restrictions to counterparties' access to the facility. The interest rate on the deposit facility normally provides a floor for the overnight market interest rate.

The standing facilities are administered in a decentralised manner by the National Central Banks.

1.3.3. Minimum reserves

The Eurosystem's minimum reserve system applies to credit institutions in the euro area and primarily pursues the aims of stabilising money market interest rates and creating (or enlarging) a structural liquidity shortage. The reserve requirement of each institution is determined in relation to elements of its balance sheet. In order to pursue the aim of stabilising interest rates, the Eurosystem's minimum reserve system enables institutions to make use of averaging provisions. Compliance with the reserve requirement is determined on the basis of the institutions' average daily reserve holdings over a one-month maintenance period. Institutions' holdings of required reserves are remunerated at the rate of the Eurosystem's main refinancing operations.

1.4. Counterparties

The Eurosystem monetary policy framework is formulated with a view to ensuring participation of a broad range of counterparties. Institutions subject to minimum reserves according to Article 19.1 of the Statute of the ESCB may access the standing facilities and participate in open market operations based on standard tenders. The Eurosystem may select a limited number of counterparties to participate in fine-tuning operations. For outright transactions, no restrictions are placed a priori on the range of counterparties. For foreign exchange swaps conducted for monetary policy purposes, active players in the foreign exchange market are used. The set of counterparties for these operations is limited to those institutions selected for Eurosystem foreign exchange intervention operations which are located in the euro area.

1.5. Underlying assets

Pursuant to Article 18.1 of the Statute of the ESCB, all Eurosystem credit operations (i.e. liquidity-providing operations) have to be based on adequate collateral. The Eurosystem accepts a wide range of assets underlying its operations. A distinction is made, essentially for purposes internal to the Eurosystem, between two categories of eligible assets: "tier one" and "tier two" respectively. Tier one consists of marketable debt instruments fulfilling uniform euro area-wide eligibility criteria specified by the ECB. Tier two consists of additional assets, marketable and non-marketable, which are of particular importance for national financial markets and banking systems and for which eligibility criteria are established by the National Central Banks, subject to ECB approval. No distinction is made between the two tiers with regard to the quality of the assets and their eligibility for the various types of Eurosystem monetary policy operations (except that tier two assets are normally not used by the Eurosystem in outright transactions). Eligible assets may be used on a cross-border basis, by means of the correspondent central banking model (CCBM) or through eligible links between EU securities settlement systems (SSS), to collateralise all types of Eurosystem credit(6). All assets eligible for Eurosystem monetary policy operations can also be used as underlying assets for intraday credit.

1.6. Modifications to the monetary policy framework

The Governing Council of the ECB may, at any time, change the instruments, conditions, criteria and procedures for the execution of Eurosystem monetary policy operations.

TABLE 1

Eurosystem monetary policy operations

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CHAPTER 2

2. ELIGIBLE COUNTERPARTIES

2.1. General eligibility criteria

Counterparties to Eurosystem monetary policy operations must fulfil certain eligibility criteria(7). These criteria are defined with a view to giving a broad range of institutions access to Eurosystem monetary policy operations, enhancing equal treatment of institutions across the euro area and ensuring that counterparties fulfil certain operational and prudential requirements:

- Only institutions subject to the Eurosystem's minimum reserve system according to Article 19.1 of the Statute of the ESCB are eligible to be counterparties. Institutions which are exempt from their obligations under the Eurosystem's minimum reserve system (see Section 7.2) are not eligible to be counterparties to Eurosystem standing facilities and open market operations.

- Counterparties must be financially sound. They should be subject to at least one form of EU/EEA harmonised supervision by national authorities(8). However, financially sound institutions subject to non-harmonised national supervision of a comparable standard can also be accepted as counterparties, e.g. branches established in the euro area of institutions that have their head office outside the European Economic Area.

- Counterparties must fulfil any operational criteria specified in the relevant contractual or regulatory arrangements applied by the respective National Central Bank (or the ECB), so as to ensure the efficient conduct of Eurosystem monetary policy operations.

These general eligibility criteria are uniform throughout the euro area. Institutions fulfilling the general eligibility criteria may:

- access the Eurosystem standing facilities, and

- participate in Eurosystem open market operations based on standard tenders.

Institutions may access the Eurosystem standing facilities and open market operations based on standard tenders only through the National Central Bank of the Member State in which the institution is established. If an institution has establishments (head office and branches) in more than one Member State, each establishment has access to these operations through the National Central Bank of the Member State in which it is located, notwithstanding the fact that the tender bids of an institution may only be submitted by one establishment (either the head office or a designated branch) in each Member State.

2.2. Selection of counterparties for quick tenders and bilateral operations

For outright transactions, no restrictions are placed a priori on the range of counterparties.

For foreign exchange swaps executed for monetary policy purposes, counterparties must be able to conduct large-volume foreign exchange operations efficiently under all market conditions. The range of counterparties to foreign exchange swaps corresponds to the counterparties located in the euro area which are selected for Eurosystem foreign exchange intervention operations. The criteria and procedures applied for the selection of counterparties for foreign exchange intervention operations are presented in Annex 3.

For other operations based on quick tenders and bilateral procedures (fine-tuning reverse transactions and the collection of fixed-term deposits), each National Central Bank selects a set of counterparties from among the institutions established in its Member State which fulfil the general counterparty eligibility criteria. In this respect, activity in the money market is the prime selection criterion. Other criteria which might be taken into account are, for example, the efficiency of the trading desk and the bidding potential.

In quick tenders and bilateral operations, the National Central Banks deal exclusively with the counterparties which are included in their respective set of fine-tuning counterparties. If, for operational reasons, a National Central Bank cannot deal in each operation with all its fine-tuning counterparties, the selection of counterparties in this Member State will be based on a rotation scheme in order to ensure equitable access.

The Governing Council of the ECB will decide whether, under exceptional circumstances, fine-tuning bilateral operations may be carried out by the ECB itself. If the ECB were to carry out bilateral operations, the selection of counterparties would in such cases be made by the ECB according to a rotation scheme among those counterparties in the euro area which are eligible for quick tenders and bilateral operations in order to ensure equitable access.

2.3. Sanctions in the event of non-compliance with counterparty obligations

The ECB shall impose sanctions, in accordance with Council Regulation (EC) No 2532/98 of 23 November 1998 concerning the power of the European Central Bank to impose sanctions (OJ L 318, 27.11.1998, p. 4), the European Central Bank Regulation (EC) No 2157/1999) of 23 September 1999 on the powers of the European Central Bank to impose sanctions (ECB/1999/4) (OJ L 264, 12.10.1999, p. 21), Council Regulation (EC) No 2531/98 of 23 November 1998 on the application of minimum reserves by the European Central Bank and the European Central Bank Regulation (EC) No 2818/98 of 1 December 1998 on the application of minimum reserves (ECB/1998/15) (OJ L 356, 30.12.1998, p. 1), on institutions which do not comply with obligations arising from ECB Regulations and Decisions relating to the application of minimum reserves. The relevant sanctions and the procedural rules for their application are specified in the abovementioned Regulations. In addition, in the case of serious infringements of the minimum reserve requirements, the Eurosystem may suspend counterparties from participation in open market operations.

In accordance with provisions in the contractual or regulatory arrangements applied by the respective National Central Bank (or by the ECB), the Eurosystem shall impose financial penalties on counterparties or suspend counterparties from participation in open market operations if counterparties fail to comply with their obligations under the contractual or regulatory arrangements applied by the National Central Banks (or by the ECB) as set out below.

This relates to cases of infringement of tender rules (if a counterparty is not able to transfer a sufficient amount of underlying assets to settle the amount of liquidity it has been allotted in a liquidity-providing operation or if it is not able to deliver a sufficient amount of cash to settle the amount it has been allotted in a liquidity-absorbing operation), and of bilateral transactions (if a counterparty is not able to deliver a sufficient amount of eligible underlying assets or if it is not able to deliver a sufficient amount of cash to settle the amount agreed in bilateral transactions).

This also applies to cases of non-compliance by a counterparty with the rules for the use of underlying assets (if a counterparty is using assets which are or which have become ineligible, e.g. due to close links between, or identity of issuer and counterparty), and to non-compliance with the rules for end-of-day procedures and access conditions to the marginal lending facility (if a counterparty which has a negative balance on the settlement account at the end of the day does not fulfil the access conditions for the marginal lending facility).

In addition, a suspension measure to be taken vis-à-vis the non-complying counterparty may be applied to branches of the same institution located in other Member States. Where, as an exceptional measure, this is required given the seriousness of a case of non-compliance, as evidenced by its frequency or duration, for instance, a counterparty may be suspended from all future monetary policy operations for a certain period of time.

Financial penalties imposed by National Central Banks in the event of non-compliance in relation to a breach of the rules concerning tender operations, bilateral transactions, underlying assets, end-of-day procedures or the access conditions to the marginal lending facility shall be calculated at a pre-specified penalty rate (as set out in Annex 6).

2.4. Suspension or exclusion on grounds of prudence

In accordance with provisions in the contractual or regulatory arrangements applied by the respective National Central Bank (or by the ECB), the Eurosystem may suspend or exclude counterparties' access to monetary policy instruments on the grounds of prudence.

In addition, suspension or exclusion of counterparties may be warranted in some cases falling within the notion of the "default" of a counterparty as defined in the contractual or regulatory arrangements applied by the National Central Banks.

CHAPTER 3

3. OPEN MARKET OPERATIONS

Open market operations play an important role in the Eurosystem's monetary policy, pursuing the aims of steering interest rates, managing the liquidity situation in the market and signalling the stance of monetary policy. With regard to their aim, regularity and procedures, Eurosystem open market operations can be divided into four categories: main refinancing operations, longer-term refinancing operations, fine-tuning operations and structural operations. As for the instruments used, reverse transactions are the main open market instrument of the Eurosystem and can be employed in all four categories of operations, whereas debt certificates may be used for structural absorption operations. In addition, the Eurosystem has three other instruments available for the conduct of fine-tuning operations: outright transactions, foreign exchange swaps and the collection of fixed-term deposits. In the following sections, specific features of the different types of open market instruments used by the Eurosystem are presented in detail.

3.1. Reverse transactions

3.1.1. General considerations

a) Type of instrument

Reverse transactions refer to operations where the Eurosystem buys or sells eligible assets under repurchase agreements or conducts credit operations against eligible assets as collateral. Reverse transactions are used for the main refinancing operations and the longer-term refinancing operations. In addition, the Eurosystem can use reverse transactions for structural and fine-tuning operations.

b) Legal nature

The National Central Banks may execute reverse transactions either in the form of repurchase agreements (i.e. the ownership of the asset is transferred to the creditor, while the parties agree to reverse the transaction through a re-transfer of the asset to the debtor at a future point in time) or as collateralised loans (i.e. an enforceable security interest is provided over the assets but, assuming fulfilment of the debt obligation, the ownership of the asset is retained by the debtor). Further provisions for reverse transactions based on repurchase agreements are specified in the contractual arrangements applied by the respective National Central Bank (or the ECB). Arrangements for reverse transactions based on collateralised loans take account of the different procedures and formalities required to enable the establishment and subsequent realisation of a relevant interest in the collateral (e.g. a pledge) which apply in different jurisdictions.

c) Interest terms

The difference between the purchase price and the repurchase price in a repurchase agreement corresponds to the interest due on the amount of money borrowed or lent over the maturity of the operation, i.e. the repurchase price includes the respective interest to be paid. The interest rate on a reverse transaction in the form of a collateralised loan is determined by applying the specified interest rate on the credit amount over the maturity of the operation. The interest rate applied to Eurosystem reverse open market operations is a simple interest rate with the day-count convention "actual/360".

3.1.2. Main refinancing operations

The main refinancing operations are the most important open market operations conducted by the Eurosystem, playing a pivotal role in pursuing the aims of steering interest rates, managing the liquidity situation in the market and signalling the stance of monetary policy. They also provide the bulk of refinancing to the financial sector. The operational features of the main refinancing operations can be summarised as follows:

- They are liquidity-providing operations.

- They are executed regularly each week(9).

- They normally have a maturity of two weeks(10).

- They are executed in a decentralised manner by the National Central Banks.

- They are executed through standard tenders (as specified in Section 5.1).

- All counterparties fulfilling the general eligibility criteria (as specified in Section 2.1) may submit tender bids for the main refinancing operations.

- Both tier one and tier two assets (as specified in Chapter 6) are eligible as underlying assets for the main refinancing operations.

3.1.3. Longer-term refinancing operations

The Eurosystem also executes regular refinancing operations with a three-month maturity, which are aimed at providing additional longer-term refinancing to the financial sector. These operations represent only a limited part of the global refinancing volume. In these operations, the Eurosystem does not, as a rule, intend to send signals to the market and therefore normally acts as a rate taker. Accordingly, longer-term refinancing operations are usually executed in the form of variable rate tenders and from time to time the ECB indicates the operation volume to be allotted in forthcoming tenders. Under exceptional circumstances, the Eurosystem may also execute longer-term refinancing operations through fixed rate tenders.

The operational features of the longer-term refinancing operations can be summarised as follows:

- They are liquidity-providing operations.

- They are executed regularly each month(11).

- They normally have a maturity of three months(12).

- They are executed in a decentralised manner by the National Central Banks.

- They are executed through standard tenders (as specified in Section 5.1).

- All counterparties fulfilling the general eligibility criteria (as specified in Section 2.1) may submit tender bids for the longer-term refinancing operations.

- Both tier one and tier two assets (as specified in Chapter 6) are eligible as underlying assets for the longer-term refinancing operations.

3.1.4. Fine-tuning reverse operations

The Eurosystem can execute fine-tuning operations in the form of reverse open market transactions. Fine-tuning operations aim to manage the liquidity situation in the market and to steer interest rates, in particular in order to smooth the effects on interest rates caused by unexpected liquidity fluctuations in the market. The potential need for rapid action in the case of unexpected market developments makes it desirable for the Eurosystem to retain a high degree of flexibility in the choice of procedures and operational features in the conduct of these operations:

- They can take the form of liquidity-providing or liquidity-absorbing operations.

- Their frequency is not standardised.

- Their maturity is not standardised.

- Liquidity-providing fine-tuning reverse transactions are normally executed through quick tenders, although the possibility of using bilateral procedures is not excluded (see Chapter 5).

- Liquidity-absorbing fine-tuning reverse transactions are executed, as a rule, through bilateral procedures (as specified in Section 5.2).

- They are normally executed in a decentralised manner by the National Central Banks (the Governing Council of the ECB will decide whether, under exceptional circumstances, bilateral fine-tuning reverse operations may be executed by the ECB).

- The Eurosystem may select, according to the criteria specified in Section 2.2, a limited number of counterparties to participate in fine-tuning reverse operations.

- Both tier one and tier two assets (as specified in Chapter 6) are eligible as underlying assets for fine-tuning reverse operations.

3.1.5. Structural reverse operations

The Eurosystem may execute structural operations in the form of reverse open market transactions aimed at adjusting the structural position of the Eurosystem vis-à-vis the financial sector. The operational features of these operations can be summarised as follows:

- They are liquidity-providing operations.

- Their frequency can be regular or non-regular.

- Their maturity is not standardised a priori.

- They are executed through standard tenders (as specified in Section 5.1).

- They are executed in a decentralised manner by the National Central Banks.

- All counterparties fulfilling the general eligibility criteria (as specified in Section 2.1) may submit tender bids for structural reverse operations.

- Both tier one and tier two assets (as specified in Chapter 6) are eligible as underlying assets for structural reverse operations.

3.2. Outright transactions

a) Type of instrument

Outright open market transactions refer to operations where the Eurosystem buys or sells eligible assets outright on the market. Outright open market operations are executed only for structural and fine-tuning purposes.

b) Legal nature

An outright transaction implies a full transfer of ownership from the seller to the buyer with no connected reverse transfer of ownership. The transactions are executed in accordance with the market conventions for the debt instrument used in the transaction.

c) Price terms

In the calculation of prices, the Eurosystem acts in accordance with the most widely accepted market convention for the debt instruments used in the transaction.

d) Other operational features

The operational features of Eurosystem outright transactions can be summarised as follows:

- They can take the form of liquidity-providing (outright purchase) or liquidity-absorbing (outright sales) operations.

- Their frequency is not standardised.

- They are executed through bilateral procedures (as specified in Section 5.2).

- They are normally executed in a decentralised manner by the National Central Banks (the Governing Council of the ECB will decide whether, under exceptional circumstances, fine-tuning outright operations may be executed by the ECB).

- No restrictions are placed a priori on the range of counterparties to outright transactions.

- Only tier one instruments (as specified in Section 6.1) are normally used as underlying assets in outright transactions.

3.3. Issuance of ECB debt certificates

a) Type of instrument

The ECB may issue debt certificates with the aim of adjusting the structural position of the Eurosystem vis-à-vis the financial sector so as to create (or enlarge) a liquidity shortage in the market.

b) Legal nature

The certificates constitute a debt obligation of the ECB vis-à-vis the holder of the certificate. The certificates are issued and held in a book-entry form in securities depositories in the euro area. The ECB does not impose any restrictions on the transferability of the certificates. Further provisions related to the certificates will be contained in the terms and conditions for ECB debt certificates.

c) Interest terms

The certificates are issued in discount form, i.e. they are issued at below the nominal amount and are redeemed at maturity at the nominal amount. The difference between the issue amount and the redemption amount equals the interest accrued on the issue amount, at the agreed interest rate, over the maturity of the certificate. The interest rate applied is a simple interest rate with the day-count convention "actual/360". The calculation of the issue amount is shown in Box 1.

BOX 1

Issuance of ECB debt certificates

Where:

N: Nominal amount of the debt certificate

rI: Interest rate (as a %)

D: Maturity of the debt certificate (in days)

PT: Issue amount of the debt certificate

The issue amount is:

>REFERENCE TO A GRAPHIC>

d) Other operational features

The operational features of the issuance of ECB debt certificates can be summarised as follows:

- The certificates are issued in order to absorb liquidity from the market.

- The certificates can be issued on a regular or non-regular basis.

- The certificates have a maturity of less than twelve months.

- The certificates are issued through standard tenders (as specified in Section 5.1).

- The certificates are tendered and settled in a decentralised manner by the National Central Banks.

- All counterparties fulfilling the general eligibility criteria (as specified in Section 2.1) may submit tender bids for the subscription of ECB debt certificates.

3.4. Foreign exchange swaps

a) Type of instrument

Foreign exchange swaps executed for monetary policy purposes consist of simultaneous spot and forward transactions of the euro against foreign currency. They are used for fine-tuning purposes, mainly with the aim of managing the liquidity situation in the market and steering interest rates.

b) Legal nature

Foreign exchange swaps executed for monetary policy purposes refer to operations where the Eurosystem buys (or sells) euro spot against a foreign currency and, at the same time, sells (or buys) it back forward at a specified repurchase date. Further provisions for foreign exchange swaps are specified in the contractual arrangement applied by the respective National Central Bank (or the ECB).

c) Currency and exchange rate terms

As a rule, the Eurosystem operates only in widely traded currencies and in accordance with standard market practice. In each foreign exchange swap operation, the Eurosystem and the counterparties agree on the swap points for the transaction. The swap points are the difference between the exchange rate of the forward transaction and the exchange rate of the spot transaction. The swap points of the euro vis-à-vis the foreign currency are quoted according to general market conventions. The exchange rate terms of foreign exchange swaps are specified in Box 2.

BOX 2

Foreign exchange swaps

S: Spot (at the transaction date of the foreign exchange swap) of the exchange rate between the euro (EUR) and a foreign currency ABC (ABC)

>REFERENCE TO A GRAPHIC>

FM: Forward exchange rate between the euro and a foreign currency ABC at the repurchase date of the swap (M)

>REFERENCE TO A GRAPHIC>

ΔM: Forward points between the euro and ABC for the repurchase date of the swap (M)

>REFERENCE TO A GRAPHIC>

N(.): Spot amount of currency; N(.)M is the forward amount of currency:

>REFERENCE TO A GRAPHIC>

or

>REFERENCE TO A GRAPHIC>

>REFERENCE TO A GRAPHIC>

or

>REFERENCE TO A GRAPHIC>

d) Other operational features

The operational features of foreign exchange swaps can be summarised as follows:

- They can take the form of liquidity-providing or liquidity-absorbing operations.

- Their frequency is not standardised.

- Their maturity is not standardised.

- They are executed through quick tenders or bilateral procedures (see Chapter 5).

- They are normally executed in a decentralised manner by the National Central Banks (the Governing Council of the ECB will decide whether, under exceptional circumstances, bilateral foreign exchange swaps may be executed by the ECB).

- The Eurosystem may select, according to the criteria specified in Section 2.2 and Annex 3, a limited number of counterparties to participate in foreign exchange swaps.

3.5. Collection of fixed-term deposits

a) Type of instrument

The Eurosystem may invite counterparties to place remunerated fixed-term deposits with the National Central Bank in the Member State in which the counterparty is established. The collection of fixed-term deposits is envisaged only for fine-tuning purposes in order to absorb liquidity in the market.

b) Legal nature

The deposits accepted from counterparties are for a fixed term and with a fixed rate of interest. No collateral is given by the National Central Banks in exchange for the deposits.

c) Interest terms

The interest rate applied to the deposit is a simple interest rate with the day-count convention "actual/360". Interest is paid at maturity of the deposit.

d) Other operational features

The operational features of the collection of fixed-term deposits can be summarised as follows:

- The deposits are collected in order to absorb liquidity.

- The frequency with which deposits are collected is not standardised.

- The maturity of the deposits is not standardised.

- The collection of deposits is normally executed through quick tenders, although the possibility of using bilateral procedures is not excluded (see Chapter 5).

- The collection of deposits is normally executed in a decentralised manner by the National Central Banks (the Governing Council of the ECB will decide whether, under exceptional circumstances, the bilateral collection of fixed-term deposits may be executed by the ECB)(13).

- The Eurosystem may select, according to the criteria specified in Section 2.2, a limited number of counterparties for the collection of fixed-term deposits.

CHAPTER 4

4. STANDING FACILITIES

4.1. The marginal lending facility

a) Type of instrument

Counterparties may use the marginal lending facility to obtain overnight liquidity from National Central Banks at a pre-specified interest rate against eligible assets (as specified in Chapter 6). The facility is intended to satisfy counterparties' temporary liquidity needs. Under normal circumstances, the interest rate on the facility provides a ceiling for the overnight market interest rate. The terms and conditions of the facility are identical throughout the euro area.

b) Legal nature

The National Central Banks may provide liquidity under the marginal lending facility either in the form of overnight repurchase agreements (i.e. the ownership of the asset is transferred to the creditor, while the parties agree to reverse the transaction through a re-transfer of the asset to the debtor on the next business day) or as overnight collateralised loans (i.e. an enforceable security interest is provided over the assets but, assuming fulfilment of the debt obligation, ownership of the asset is retained by the debtor). Further provisions for repurchase agreements are specified in the contractual arrangements applied by the respective National Central Bank. Arrangements for providing the liquidity in the form of collateralised loans take account of the different procedures and formalities required to enable the establishment and subsequent realisation of a relevant interest in the collateral (a pledge) which apply in different jurisdictions.

c) Access conditions

Institutions fulfilling the general counterparty eligibility criteria specified in Section 2.1 may access the marginal lending facility. Access to the marginal lending facility is granted through the National Central Bank in the Member State in which the institution is established. Access to the marginal lending facility is granted only on days when the relevant national RTGS (real-time gross settlement) system and the relevant SSS(s) are operational(14).

At end-of-day, counterparties' intraday debit positions on their settlement account with the National Central Banks are automatically considered to be a request for recourse to the marginal lending facility. The procedures for end-of-day access to the marginal lending facility are specified in Section 5.3.3.

A counterparty may also be granted access to the marginal lending facility by sending a request to the National Central Bank in the Member State in which the counterparty is established. In order for the National Central Bank to process the request on the same day, the request must be received by the National Central Bank at the latest 30 minutes after the actual closing time of TARGET(15). As a general rule, the closing time for the TARGET system is 6 p.m. ECB time (CET). The deadline for requesting access to the marginal lending facility is postponed by an additional 30 minutes on the last Eurosystem business day of a reserve maintenance period(16). In the request, the amount of credit is to be stated and, if underlying assets for the transaction have not already been pre-deposited with the National Central Bank, the underlying assets to be delivered for the transaction are to be specified.

Apart from the requirement to present sufficient underlying eligible assets, there is no limit to the amount of funds to be advanced under the marginal lending facility.

d) Maturity and interest terms

The maturity of credit extended under the facility is overnight. For counterparties participating directly in TARGET, the credit is repaid on the next day on which the relevant national RTGS system and the relevant SSS(s) are operational, at the time at which those systems open.

The interest rate is announced in advance by the Eurosystem and is calculated as a simple interest rate with the day-count convention "actual/360". The ECB may change the interest rate at any time, with effect not earlier than the following Eurosystem business day(17). Interest under the facility is payable with the repayment of the credit.

e) Suspension of the facility

Access to the facility is granted only in accordance with the objectives and general monetary policy considerations of the ECB. The ECB may adapt the conditions of the facility or suspend it at any time.

4.2. The deposit facility

a) Type of instrument

Counterparties can use the deposit facility to make overnight deposits with National Central Banks. The deposits are remunerated at a pre-specified interest rate. Under normal circumstances, the interest rate on the facility provides a floor for the overnight market interest rate. The terms and conditions of the deposit facility are identical throughout the euro area(18).

b) Legal nature

The overnight deposits accepted from counterparties are remunerated at a fixed rate of interest. No collateral is given to the counterparty in exchange for the deposits.

c) Access conditions(19)

Institutions fulfilling the general counterparty eligibility criteria specified in Section 2.1 may access the deposit facility. Access to the deposit facility is granted through the National Central Bank in the Member State in which the institution is established. Access to the deposit facility is granted only on days when the relevant national RTGS system is open.

To be granted access to the deposit facility, the counterparty must send a request to the National Central Bank in the Member State in which the counterparty is established. In order for the National Central Bank to process the request on the same day, the request must be received by the National Central Bank at the latest 30 minutes after the actual closing time of TARGET, which is, as a general rule, 6 p.m. ECB time (CET)(20). The deadline for requesting access to the deposit facility is postponed by an additional 30 minutes on the last Eurosystem business day of a reserve maintenance period(21). In the request, the amount to be deposited under the facility is to be stated.

There is no limit to the amount a counterparty may deposit under the facility.

d) Maturity and interest terms

The maturity of deposits under the facility is overnight. For counterparties participating directly in TARGET, deposits held under the facility mature on the next day on which the relevant national RTGS system is operational, at the time at which the system opens. The interest rate is announced in advance by the Eurosystem and is calculated as a simple interest rate with the day-count convention "actual/360". The ECB may change the interest rate at any time, with effect not earlier than the following Eurosystem business day. Interest on the deposits is payable at maturity of the deposit.

e) Suspension of the facility

Access to the facility is granted only in accordance with the objectives and general monetary policy considerations of the ECB. The ECB may adapt the conditions of the facility or suspend it at any time.

CHAPTER 5

5. PROCEDURES

5.1. Tender procedures

5.1.1. General considerations

Eurosystem open market operations are normally executed in the form of tender procedures. The Eurosystem tender procedures are performed in six operational steps as specified in Box 3.

The Eurosystem distinguishes between two different types of tender procedures: standard tenders and quick tenders. The procedures for standard and quick tenders are identical except for the time frame and the range of counterparties.

BOX 3

Operational steps for tender procedures

Step 1. Tender announcement

a) Announcement by the ECB through public wire services

b) Announcement by the National Central Banks through national wire services and directly to individual counterparties (if deemed necessary)

Step 2. Counterparties' preparation and submission of bids

Step 3. Compilation of bids by the Eurosystem

Step 4. Tender allotment and announcement of tender results

a) ECB allotment decision

b) Announcement of the allotment result

Step 5. Certification of individual allotment results

Step 6. Settlement of the transactions (see Section 5.3)

a) Standard tenders

Standard tenders are executed within 24 hours from the announcement of the tender to certification of the allotment result (where the time between the submission deadline and the announcement of the allotment result is approximately two hours). Chart 1 gives an overview of the normal time frame for the operational steps for standard tenders. The ECB may decide to adjust the time frame in individual operations, if deemed appropriate.

The main refinancing operations, the longer-term refinancing operations and structural operations (with the exception of outright transactions) are always executed in the form of standard tenders. Counterparties fulfilling the general eligibility criteria specified in Section 2.1 may participate in standard tenders.

CHART 1

Normal time frame for the operational steps for standard tenders

(times are stated in ECB time (CET))

>PIC FILE= "L_2000310EN.002102.EPS">

Note:

The figures refer to the operational steps as defined in Box 3.

b) Quick tenders

Quick tenders are normally executed within one hour from the announcement of the tender to certification of the allotment result. The normal time frame for the operational steps for quick tenders is specified in Chart 2. The ECB may decide to adjust the time frame in individual operations, if deemed appropriate. Quick tenders are only used for the execution of fine-tuning operations. The Eurosystem may select, according to the criteria and procedures specified in Section 2.2, a limited number of counterparties to participate in quick tenders.

CHART 2

Normal time frame for the operational steps for quick tenders

>PIC FILE= "L_2000310EN.002201.EPS">

Note:

The figures refer to the operational steps as defined in Box 3.

c) Fixed rate and variable rate tenders

The Eurosystem has the option of conducting either fixed rate (volume) or variable rate (interest) tenders. In a fixed rate tender, the ECB specifies the interest rate in advance and participating counterparties bid the amount of money they want to transact at the fixed interest rate(22). In a variable rate tender, counterparties bid the amounts of money and the interest rates at which they want to enter into transactions with the National Central Banks(23).

5.1.2. Tender operations calendar

a) Main and longer-term refinancing operations

The main and the longer-term refinancing operations are executed according to an indicative calendar published by the Eurosystem(24). The calendar is published at least three months before the start of the year for which it is valid. The normal trade days for the main and the longer-term refinancing operations are specified in Table 2. The ECB aims to ensure that counterparties in all Member States can participate in the main and the longer-term refinancing operations. Therefore, when compiling the calendar for these operations, the ECB makes appropriate adjustments to the normal schedule so as to take into account bank holidays in the individual Member States.

TABLE 2

Normal trade days for the main and the longer-term refinancing operations

>TABLE>

b) Structural operations

Structural operations through standard tenders are not executed according to any pre-specified calendar. However, structural operations are normally conducted and settled only on days which are NCB business days(25) in all Member States.

c) Fine-tuning operations

Fine-tuning operations are not executed according to any pre-specified calendar. The ECB may decide to conduct fine-tuning operations on any Eurosystem business day. Only National Central Banks of Member States where the trade day, the settlement day and the reimbursement day are NCB business days participate in such operations.

5.1.3. Announcement of tender operations

Eurosystem standard tenders are publicly announced by means of wire services. In addition, National Central Banks may announce the tender operation directly to counterparties without access to wire services. The public tender announcement message normally contains the following information:

- the reference number of the tender operation,

- the date of the tender operation,

- the type of operation (provision or absorption of liquidity and the type of monetary policy instrument to be used),

- the maturity of the operation,

- the type of auction (fixed rate or variable rate tender),

- the method of allotment ("Dutch" or "American" auction, as defined in Section 5.1.5. d),

- the intended operation volume (normally only in the case of the longer-term refinancing operations),

- the fixed tender interest rate/price/swap point (in the case of fixed rate tenders),

- the minimum/maximum accepted interest rate/price/swap point (if applicable),

- the start date and the maturity date of the operation (if applicable) or the value date and maturity date of the instrument (in the case of the issuance of debt certificates),

- the currencies involved and the currency, the amount of which is kept fixed (in the case of foreign exchange swaps),

- the reference spot exchange rate to be used for the calculation of bids (in the case of foreign exchange swaps),

- the maximum bid limit (if any),

- the minimum individual allotment amount (if any),

- the minimum allotment ratio (if any),

- the time schedule for the submission of bids,

- the denomination of the certificates (in the case of the issuance of debt certificates),

- the ISIN code of the issue (in the case of the issuance of debt certificates).

With a view to enhancing transparency in its fine-tuning operations, the Eurosystem normally announces quick tenders publicly in advance. However, under exceptional circumstances, the ECB may decide not to announce quick tenders publicly in advance. The announcement of quick tenders follows the same procedures as those for standard tenders. In a quick tender, regardless of whether it is announced publicly or not, the selected counterparties are contacted directly by the National Central Banks.

5.1.4. Counterparties' preparation and submission of tender bids

Counterparties' tender bids must be in a form that follows the pro forma example provided by the National Central Banks for the relevant operation. The tender bids must be submitted to the National Central Bank of a Member State in which the institution has an establishment (head office or branch). The tender bids of an institution may only be submitted by one establishment (either the head office or a designated branch) in each Member State.

In fixed rate tenders, counterparties shall state in their bids the amount of money that they are willing to transact with the National Central Banks(26).

In variable rate tenders, counterparties may submit bids for up to ten different interest rate/price/swap point levels. In each bid they shall state the amount of money that they are willing to transact with the National Central Banks, and the respective interest rate(27)(28). The interest rates bid must be expressed as multiples of 0,01 percentage point. In the case of a variable rate foreign exchange swap tender, the swap points are to be quoted according to standard market conventions and bids must be expressed as multiples of 0,01 swap point.

For the main refinancing operations, the minimum bid amount is EUR 1000000. Bids exceeding the minimum bid amount must be expressed as multiples of EUR 100000. The same minimum bid and multiple amounts are applied in fine-tuning and structural operations. The minimum bid amount is applied to each individual interest rate/price/swap point level.

For the longer-term refinancing operations, each National Central Bank defines a minimum bid amount in the range from EUR 10000 to EUR 1000000. Bids exceeding the minimum bid amount must be expressed as multiples of EUR 10000. The minimum bid amount is applied to each individual interest rate level.

The ECB may impose a maximum bid limit in order to prevent disproportionately large bids. Any such maximum bid limit is always specified in the public tender announcement message.

Counterparties are expected always to be in a position to cover the amounts allotted to them by a sufficient amount of eligible underlying assets(29). The contractual or regulatory arrangements applied by the respective National Central Bank allow the imposition of penalties if a counterparty is not able to transfer a sufficient amount of underlying assets or cash to settle the amount it has been allotted in a tender operation.

Bids are revocable up to the tender submission deadline. Bids submitted after the deadline specified in the tender announcement message are invalid. Respect of the deadline is judged by the National Central Banks. The National Central Banks discard all the bids of a counterparty if the aggregate amount bid exceeds any maximum bid limit established by the ECB. The National Central Banks also discard any bid which is below the minimum bid amount or which is below any minimum or above any maximum accepted interest rate/price/swap point. Furthermore, the National Central Banks may discard bids which are incomplete or which do not follow the pro forma example. If a bid is discarded, the respective National Central Bank informs the counterparty about its decision prior to the tender allotment.

5.1.5. Tender allotment procedures

a) Fixed rate tender operations

In the allotment of a fixed rate tender, the bids received from counterparties are added together. If the aggregate amount bid exceeds the total amount of liquidity to be allotted, the submitted bids will be satisfied pro rata, according to the ratio of the amount to be allotted to the aggregate amount bid (see Box 4). The amount allotted to each counterparty is rounded to the nearest euro. However, the ECB may decide to allot a minimum amount/ratio to each bidder in fixed rate tenders.

BOX 4

Allotment of fixed rate tenders

Where:

A: total amount allotted

n: total number of counterparties

ai: bid amount of the ith counterparty

all%: percentage of allotment

alli: total amount allotted to the ith counterparty

The percentage of allotment is:

>REFERENCE TO A GRAPHIC>

The amount allotted to the ith counterparty is:

>REFERENCE TO A GRAPHIC>

b) Variable rate tenders in euro

In the allotment of liquidity-providing variable rate tenders in euro, bids are listed in diminishing order of offered interest rates. Bids with the highest interest rate levels are satisfied as having priority and bids with successively lower interest rates are accepted until the total liquidity to be allotted is exhausted. If, at the lowest interest rate level accepted (i.e. the marginal interest rate), the aggregate amount bid exceeds the remaining amount to be allotted, the remaining amount is allocated pro rata among the bids according to the ratio of the remaining amount to be allotted to the total amount bid at the marginal interest rate (see Box 5). The amount allotted to each counterparty is rounded to the nearest euro.

BOX 5

Allotment of variable rate tenders in euro

(the example refers to bids quoted in the form of interest rates)

Where:

A: total amount allotted

rs: sth interest rate bid by the counterparties

n: total number of counterparties

a(rs)i: amount bid at the sth interest rate (rs) by the ith counterparty

a(rs): total amount bid at the sth interest rate (rs)

>REFERENCE TO A GRAPHIC>

rm: marginal interest rate

>REFERENCE TO A GRAPHIC>

for a liquidity-providing tender,

>REFERENCE TO A GRAPHIC>

for a liquidity-absorbing tender

rm-1: interest rate before the marginal interest rate (last interest rate at which bids are completely satisfied),

>REFERENCE TO A GRAPHIC>

for a liquidity-providing tender,

>REFERENCE TO A GRAPHIC>

for a liquidity-absorbing tender

all%(rm): percentage of allotment at the marginal interest rate

all(rs)i: allotment to the ith counterparty at the sth interest rate

alli: total amount allotted to the ith counterparty

The percentage of allotment at the marginal interest rate is:

>REFERENCE TO A GRAPHIC>

The allotment to the ith counterparty at the marginal interest rate is:

>REFERENCE TO A GRAPHIC>

The total amount allotted to the ith counterparty is:

>REFERENCE TO A GRAPHIC>

In the allotment of liquidity-absorbing variable rate tenders (which may be used for the issuance of debt certificates and the collection of fixed-term deposits), bids are listed in increasing order of offered interest rates (or diminishing order of offered prices). Bids with the lowest interest rate (highest price) levels are satisfied as having priority and bids with successively higher interest rates (lower price bids) are accepted until the total liquidity to be absorbed is exhausted. If, at the highest interest rate (lowest price) level accepted (i.e. the marginal interest rate/price), the aggregate bid amount exceeds the remaining amount to be allotted, the remaining amount is allocated pro rata among the bids according to the ratio of the remaining amount to be allotted to the total bid amount at the marginal interest rate/price (see Box 5). For the issuance of debt certificates, the amount allotted to each counterparty is rounded to the nearest multiple of the denomination of the debt certificates. For other liquidity-absorbing operations, the amount allotted to each counterparty is rounded to the nearest euro.

The ECB may decide to allot a minimum amount to each successful bidder in variable rate tenders.

c) Variable rate foreign exchange swap tenders

In the allotment of liquidity-providing variable rate foreign exchange swap tenders, bids are listed in increasing order of swap point quotations(30). The bids with the lowest swap point quotations are satisfied as having priority and successively higher swap point quotations are accepted until the total amount of the fixed currency to be allotted is exhausted. If, at the highest swap point quotation accepted (i.e. the marginal swap point quotation), the aggregate amount bid exceeds the remaining amount to be allotted, the remaining amount is allocated pro rata among the bids according to the ratio of the remaining amount to be allotted to the total amount bid at the marginal swap point quotation (see Box 6). The amount allotted to each counterparty is rounded to the nearest euro.

BOX 6

Allotment of variable rate foreign exchange swap tenders

Where:

A: total amount allotted

Δs: sth swap point quotation bid by the counterparties

n: total number of counterparties

a(Δs)i: amount bid at the sth swap point quotation (Δs) by the ith counterparty

a(Δs): total amount bid at the sth swap point quotation (Δs)

>REFERENCE TO A GRAPHIC>

Δm: marginal swap point quotation

>REFERENCE TO A GRAPHIC>

for a liquidity-providing foreign exchange swap,

>REFERENCE TO A GRAPHIC>

for a liquidity-absorbing foreign exchange swap

Δm-1: swap point quotation before the marginal swap point quotation (last swap point quotation at which bids are completely satisfied),

>REFERENCE TO A GRAPHIC>

for a liquidity-providing foreign exchange swap,

>REFERENCE TO A GRAPHIC>

for a liquidity-absorbing foreign exchange swap

all%(Δm): percentage of allotment at the marginal swap point quotation

all(Δs)i: allotment to the ith counterparty at the sth swap point quotation

alli: total amount allotted to the ith counterparty

The percentage of allotment at the marginal swap point quotation is:

>REFERENCE TO A GRAPHIC>

The allotment to the ith counterparty at the marginal swap point quotation is:

>REFERENCE TO A GRAPHIC>

The total amount allotted to the ith counterparty is:

>REFERENCE TO A GRAPHIC>

In the allotment of liquidity-absorbing variable rate foreign exchange swap tenders, bids are listed in diminishing order of offered swap point quotations. The bids with the highest swap point quotations are satisfied as having priority and successively lower swap point quotations are accepted until the total amount of the fixed currency to be absorbed is exhausted. If, at the lowest swap point quotation accepted (i.e. the marginal swap point quotation), the aggregate amount bid exceeds the remaining amount to be allotted, the remaining amount is allocated pro rata among the bids according to the ratio of the remaining amount to be allotted to the total amount bid at the marginal swap point quotation (see Box 6). The amount allotted to each counterparty is rounded to the nearest euro.

d) Type of auction

For variable rate tenders, the Eurosystem may apply either single rate or multiple rate auction procedures. In a single rate auction (Dutch auction), the allotment interest rate/price/swap point applied for all satisfied bids is equal to the marginal interest rate/price/swap point (i.e. the interest rate/price/swap point at which the total allotment was exhausted). In a multiple rate auction (American auction), the allotment interest rate/price/swap point is equal to the interest rate/price/swap point offered for each individual bid.

5.1.6. Announcement of tender results

The results of standard and quick tenders are announced publicly by means of wire services. In addition, National Central Banks may announce the allotment result directly to counterparties without access to wire services. The public tender result message normally contains the following information:

- reference number of the tender operation,

- the date of the tender operation,

- the type of operation,

- the maturity of the operation,

- the total amount bid by Eurosystem counterparties,

- the number of bidders,

- the currencies involved (in the case of foreign exchange swaps),

- the total amount allotted,

- the percentage of allotment (in the case of fixed rate tenders),

- the spot exchange rate (in the case of foreign exchange swaps),

- the marginal interest rate/price/swap point accepted and the percentage of allotment at the marginal interest rate/price/swap point (in the case of variable rate tenders),

- the minimum bid rate, maximum bid rate and weighted average allotment rate (in the case of multiple rate auctions),

- the start date and the maturity date of the operation (if applicable) or the value date and maturity date of the instrument (in the case of the issuance of debt certificates),

- the minimum individual allotment amount (if any),

- the minimum allotment ratio (if any),

- the denomination of the certificates (in the case of the issuance of debt certificates),

- the ISIN code of the issue (in the case of the issuance of debt certificates).

The National Central Banks will directly certify the individual allotment result to successful counterparties.

5.2. Procedures for bilateral operations

a) General considerations

The National Central Banks may execute operations on the basis of bilateral procedures(31). Bilateral procedures may be used for fine-tuning open market operations and structural outright operations. Bilateral procedures are defined in a broad sense as any procedures where the Eurosystem conducts a transaction with one or a few counterparties without a tender. In this respect, two different types of bilateral procedures can be distinguished: operations where counterparties are contacted directly by the Eurosystem, and operations executed through stock exchanges and market agents.

b) Direct contact with counterparties

In this procedure, the National Central Banks directly contact one or a few domestic counterparties, which are selected according to the criteria specified in Section 2.2. According to the precise instructions given by the ECB, the National Central Banks decide whether to enter into a deal with the counterparties. The transactions are settled through the National Central Banks.

If the Governing Council of the ECB were to decide that, under exceptional circumstances, bilateral operations could also be executed by the ECB itself (or by one or a few National Central Banks acting as the operating arm of the ECB), the procedures for such operations would be adapted accordingly. In this case, the ECB (or the National Central Bank(s) acting as the operating arm of the ECB) would directly contact one or a few counterparties in the euro area, selected according to the criteria specified in Section 2.2. The ECB (or the National Central Bank(s) acting as the operating arm of the ECB) would decide whether to enter into a deal with the counterparties. The transactions would nevertheless be settled in a decentralised manner through the National Central Banks.

Bilateral operations through direct contact with counterparties can be applied for reverse transactions, outright transactions, foreign exchange swaps and the collection of fixed-term deposits.

c) Operations executed through stock exchanges and market agents

The National Central Banks can execute outright transactions through stock exchanges and market agents. For these operations, the range of counterparties is not restricted a priori and the procedures are adapted to the market conventions for the debt instruments transacted. The Governing Council of the ECB will decide whether, under exceptional circumstances, the ECB itself (or one or a few National Central Banks acting as the operating arm of the ECB) may execute fine-tuning outright operations through stock exchanges and market agents.

d) Announcement of bilateral operations

Bilateral operations are normally not announced publicly in advance. In addition, the ECB may decide not to announce the results of bilateral operations publicly.

e) Operating days

The ECB may decide to conduct fine-tuning bilateral operations on any Eurosystem business day. Only National Central Banks of Member States where the trade day, the settlement day and the reimbursement day are NCB business days participate in such operations.

Outright bilateral operations for structural purposes are normally conducted and settled only on days which are NCB business days in all Member States.

5.3. Settlement procedures

5.3.1. General considerations

Money transactions relating to the use of Eurosystem standing facilities or to participation in open market operations are settled on the counterparties' accounts with the National Central Banks (or on the accounts of settlement banks participating in TARGET). Money transactions are settled only after (or at the moment of) the final transfer of the assets underlying the operation. This implies that underlying assets either need to have been pre-deposited in a safe custody account at the National Central Banks or to be settled on an intraday delivery-versus-payment basis with the said central banks. The transfer of underlying assets is executed via the counterparties' securities settlement accounts with SSSs fulfilling the ECB's minimum standards(32). Counterparties without a safe custody account with a National Central Bank or a securities settlement account with an SSS fulfilling the ECB's minimum standards may settle the transactions of underlying assets through the securities settlement account or the safe custody account of a correspondent credit institution.

Further provisions related to the settlement procedures are defined in the contractual arrangements applied by the National Central Banks (or the ECB) for the specific monetary policy instruments. The settlement procedures may differ slightly between National Central Banks owing to differences in national law and operational practices.

5.3.2. Settlement of open market operations

Open market operations based on standard tenders (the main refinancing operations, the longer-term refinancing operations and structural operations) are normally settled on the first day following the trade day on which all relevant national RTGS and all relevant SSSs are open. As a matter of principle, the Eurosystem aims to settle the transactions related to its open market operations at the same time in all Member States with all counterparties that have provided sufficient underlying assets. However, owing to operational constraints and the technical features of SSSs, the timing within the day of the settlement of open market operations may differ across the euro area. The time of settlement of the main and the longer-term refinancing operations normally coincides with the time of reimbursement of a previous operation of corresponding maturity.

The Eurosystem aims to settle open market operations based on quick tenders and bilateral procedures on the trade day. However, the Eurosystem may, for operational reasons, occasionally apply other settlement dates for these operations, in particular for outright transactions (for fine-tuning as well as structural purposes) and foreign exchange swaps (see Table 3).

TABLE 3

Normal settlement dates for Eurosystem open market operations((T refers to the trade day. The settlement date connotation refers to Eurosystem business days.))

>TABLE>

5.3.3. End-of-day procedures

The end-of-day procedures are specified in documentation related to the national RTGS systems and the TARGET system. As a general rule, the closing time for the TARGET system is 6 p.m. ECB time (CET). No further payment orders are accepted for processing in the national RTGS systems after the closing time, although remaining payment orders accepted before the closing time are still processed. Counterparties' requests for access to the marginal lending facility or to the deposit facility must be submitted to the respective National Central Bank at the latest 30 minutes after the actual closing time of TARGET(33)(34).

Any negative balances on the settlement accounts (in the national RTGS systems) of eligible counterparties remaining after the finalisation of the end-of-day control procedures are automatically considered to be a request for recourse to the marginal lending facility (see Section 4.1).

CHAPTER 6

6. ELIGIBLE ASSETS

6.1. Eligible assets

Article 18.1 of the Statute of the ESCB allows the ECB and the National Central Banks to transact in financial markets by buying and selling underlying assets outright or under repurchase agreements and requires all Eurosystem credit operations to be based on adequate collateral. Consequently, all Eurosystem liquidity-providing operations are based on underlying assets provided by the counterparties either in the form of the transfer of ownership of assets (in the case of outright transactions or repurchase agreements) or in the form of a pledge granted over relevant assets (in the case of collateralised loans)(35).

With the aim of protecting the Eurosystem from incurring losses in its monetary policy operations, ensuring the equal treatment of counterparties and enhancing operational efficiency, underlying assets have to fulfil certain criteria in order to be eligible for Eurosystem monetary policy operations.

It is recognised that the harmonisation of eligibility criteria throughout the euro area would contribute to ensuring equal treatment and operational efficiency. At the same time, due attention has to be paid to existing differences in financial structure across Member States. A distinction is therefore made, essentially for purposes internal to the Eurosystem, between two categories of assets eligible for Eurosystem monetary policy operations. These two categories are referred to as "tier one" and "tier two" respectively:

- tier one consists of marketable debt instruments fulfilling uniform euro area-wide eligibility criteria specified by the ECB,

- tier two consists of additional assets, marketable and non-marketable, which are of particular importance to national financial markets and banking systems and for which eligibility criteria are established by the National Central Banks, subject to the minimum eligibility criteria established by the ECB. The specific eligibility criteria for tier two applied by the respective National Central Banks are subject to approval by the ECB.

No distinction is made between the two tiers with regard to the quality of the assets and their eligibility for the various types of Eurosystem monetary policy operations (except for the fact that tier two assets are not normally used by the Eurosystem in outright transactions). The assets eligible for Eurosystem monetary policy operations can also be used as underlying assets for intraday credit(36).

Tier one and tier two assets are subject to the risk control measures specified in Section 6.4.

Eurosystem counterparties may use eligible assets on a cross-border basis, i.e. they may obtain funds from the National Central Bank of the Member State in which they are established by making use of assets located in another Member State (see Section 6.6).

6.2. Tier one assets

The ECB establishes and maintains a list of tier one assets. This list is available to the public(37).

Debt certificates issued by the ECB are listed as tier one assets. Debt certificates issued by the National Central Banks prior to the adoption of the euro in their respective Member State are also included in the tier one list.

The following eligibility criteria are applied to other tier one assets (see also Table 4):

- They must be debt instruments(38),

- They must meet high credit standards. In the assessment of the credit standard of debt instruments, the ECB takes into account, inter alia, available ratings by market agencies, as well as certain institutional criteria which would ensure particularly high protection of the holders(39),

- They must be located in the euro area (so that realisation is subject to the law of a Member State of the euro area), transferable in book-entry form and deposited with a National Central Bank or with a central securities depository which fulfils the minimum standards established by the ECB(40),

- They must be denominated in euro(41),

- They must be issued (or guaranteed) by entities established in the EEA(42),

- They must, at least, be listed or quoted on a regulated market as defined according to the Investment Services Directive(43), or listed, quoted or traded on certain non-regulated markets as specified by the ECB(44). Furthermore, market liquidity may be taken into account by the ECB when determining the eligibility of individual debt instruments.

Despite their inclusion in the tier one list, National Central Banks shall not accept as underlying assets debt instruments issued or guaranteed by the counterparty, or by any other entity with which the counterparty has close links, as defined according to Directive 2000/12/EC relating to the taking up and pursuit of the business of credit institutions(45)(46).

Despite their inclusion in the tier one list, National Central Banks may decide not to accept as underlying assets the following instruments:

- Debt instruments falling due for repayment before the maturity date of the monetary policy operation for which they are being used as underlying assets(47);

- Debt instruments with an income flow (e.g. a coupon payment) occurring in the period until the maturity date of the monetary policy operation for which they are being used as underlying assets.

All tier one assets may be used in a cross-border context, implying that a counterparty can receive credit from the National Central Bank of the Member State in which the counterparty is established by making use of tier one instruments located in another Member State (see Section 6.6).

Tier one assets are eligible for all monetary policy operations which are based on underlying assets, i.e. reverse and outright open market transactions and the marginal lending facility.

6.3. Tier two assets(48)

In addition to debt instruments fulfilling the eligibility criteria for tier one, National Central Banks may consider as eligible other assets, tier two assets, which are of particular importance to their national financial markets and banking systems. Eligibility criteria for tier two assets are established by the National Central Banks in accordance with the minimum eligibility criteria stated below. The specific national eligibility criteria for tier two assets are subject to approval by the ECB. The National Central Banks establish and maintain national lists of eligible tier two assets. These lists are available to the public(49).

Tier two assets have to fulfil the following minimum eligibility criteria (see also Table 4):

- They must be either debt instruments (marketable or non-marketable) or equities (traded on a regulated market as defined according to the Investment Services Directive(50)). Equities issued by credit institutions and debt instruments issued by credit institutions which do not comply strictly with the criteria set out in Article 22(4) of the UCITS Directive are normally not eligible for inclusion in the tier two lists. However, the ECB may authorise National Central Banks to include such assets in their tier two lists subject to certain conditions and restrictions;

TABLE 4

Eligible assets for Eurosystem monetary policy operations

>TABLE>

- They must be debt obligations against or equities of (or be guaranteed by) entities which are deemed to be financially sound by the National Central Bank which has included the assets in its tier two list;

- They must be easily accessible to the national central bank which has included the assets in its tier two list;

- They must be located in the euro area (so that realisation is subject to the law of a Member State of the euro area);

- They must be denominated in euro(51);

- They must be issued (or guaranteed) by entities established in the euro area.

Despite their inclusion in the tier two lists, National Central Banks shall not accept as underlying assets debt obligations against or equities of the counterparty, or any other entity with which the counterparty has close links, as defined according to Article 1(26), of Directive 2000/12/EC relating to the taking up and pursuit of the business of credit institutions(52)(53).

Despite their inclusion in the tier two lists, National Central Banks may decide not to accept as underlying assets the following assets:

- Debt instruments falling due for repayment before the maturity date of the monetary policy operation for which they are used as underlying assets(54),

- Debt instruments with an income flow (e.g. a coupon payment) occurring in the period until the maturity date of the monetary policy operation for which they are being used as underlying assets;

- Equities with a payment of any kind (including in specie) or with any other right attached to them which may affect their suitability to be used as underlying assets for the period until the maturity date of the monetary policy operation for which they are being used as underlying assets.

Tier two assets eligible for Eurosystem monetary policy operations may be used in a cross-border context, implying that a counterparty can receive funds from the National Central Bank of the Member State in which the counterparty is established by making use of assets located in another Member State (see Section 6.6).

Tier two assets are eligible for reverse open market transactions and the marginal lending facility. Tier two assets are not normally used in Eurosystem outright transactions.

6.4. Risk control measures

Risk control measures are applied to the assets underlying Eurosystem monetary policy operations in order to protect the Eurosystem against the risk of financial loss if underlying assets have to be realised owing to the default of a counterparty. The risk control measures at the disposal of the Eurosystem are described in Box 7.

BOX 7

Risk control measures

- Initial margins

The Eurosystem applies initial margins in its liquidity-providing reverse transactions. This implies that counterparties need to provide underlying assets with a value at least equal to the liquidity provided by the Eurosystem plus the value of the initial margin.

- Valuation haircuts

The Eurosystem applies "valuation haircuts" in the valuation of underlying assets. This implies that the value of the underlying asset is calculated as the market value of the asset less a certain percentage (haircut).

- Variation margins (marking to market)

The Eurosystem requires a specified margin to be maintained over time on the underlying assets used in its liquidity-providing reverse transactions. This implies that if the value, measured on a regular basis, of the underlying assets falls below a certain level, the National Central Bank will require the counterparty to supply additional assets or cash (i.e. a margin call). Similarly, if the value of the underlying assets, following their revaluation, exceeds a certain level, the central bank returns excess assets or cash to the counterparty. (The calculations relevant for the execution of margin calls are presented in Box 9.)

- Limits in relation to issuers/debtors or guarantors

The Eurosystem may apply limits to the exposure vis-à-vis issuers/debtors or guarantors.

- Additional guarantees

The Eurosystem may require additional guarantees by financially sound entities in order to accept certain assets.

- Exclusion

The Eurosystem may exclude certain assets from use in its monetary policy operations.

6.4.1. Initial margins

The Eurosystem applies initial margins, which correspond to a certain percentage of the amount of liquidity provided which is to be added to the requirement for the value of the underlying assets. Two different initial margins are applied, taking into account the exposure time for the Eurosystem:

- a margin of 1 % for intraday and overnight transactions; and

- a margin of 2 % for transactions with an original maturity of more than one business day.

No initial margins are applied in liquidity-absorbing operations.

6.4.2. Risk control measures for tier one assets

In addition to the initial margins applied to the amount of liquidity provided, the Eurosystem applies specific risk control measures according to the types of underlying assets offered by the counterparty. The appropriate risk control measures for tier one assets are determined by the ECB, taking into consideration differences in the legal systems of the Member States. Risk control measures for tier one assets are broadly harmonised across the euro area(55). The risk control framework for tier one assets includes the following main elements:

- Individual debt instruments are subject to specific "valuation haircuts". The haircuts are applied by deducting a certain percentage from the market value of the underlying asset. The haircuts are differentiated according to the residual maturity and coupon structure of the debt instruments as described in Box 8,

BOX 8

Levels of valuation haircuts applied to eligible tier one assets

Valuation haircuts applied to fixed rate instruments:

0 % for instruments with a residual maturity of up to 1 year

1,5 % for instruments with a residual maturity of more than 1 year and up to 3 years

2 % for instruments with a residual maturity of more than 3 years and up to 7 years

3 % for coupon bonds with a residual maturity of more than 7 years

5 % for zero coupon bonds and strips with a residual maturity of more than 7 years

Valuation haircuts applied to floating rate instruments:

0 % for instruments with post-fixed coupons

For instruments with pre-fixed coupons, the same valuation haircuts are applied as those for fixed rate instruments. However, for such instruments, the valuation haircuts are determined according to the period of time between the last coupon setting and the next coupon resetting.

Valuation haircuts applied to inverse floating rate instruments:

1,5 % for instruments with residual maturity of up to 1 year

4 % for instruments with a residual maturity of more than 1 year and up to 3 years

8 % for instruments with a residual maturity of more than 3 years and up to 7 years

12 % for instruments with a residual maturity of more than 7 years

- No valuation haircuts are applied in liquidity-absorbing operations,

- Depending on both the jurisdiction and national operational systems, National Central Banks allow for the pooling of underlying assets and/or require the earmarking of the assets used in each individual transaction. In pooling systems, the counterparty makes a pool of sufficient underlying assets available to the central bank to cover the related credits received from the central bank, thus implying that individual assets are not linked to specific credit operations. By contrast, in an earmarking system, each credit operation is linked to specific identifiable assets,

- The assets are subject to a daily valuation. On a daily basis, National Central Banks calculate the required value of underlying assets taking into account changes to outstanding credit volumes, the valuation principles outlined in Section 6.5 and the required initial margins and valuation haircuts,

- If, after valuation, the underlying assets do not match the requirements as calculated on that day, symmetric margin calls are performed. In order to reduce the frequency of margin calls, National Central Banks may apply a trigger point. If applied, this trigger point is 1 % of the amount of liquidity provided. Depending on the jurisdiction, National Central Banks may require margin calls either to be effected through the supply of additional assets or by means of cash payments. This implies that if the market value of the underlying assets falls below the lower trigger point, counterparties have to supply additional assets (or cash). Similarly, if the market value of the underlying assets, following their revaluation, were to exceed the upper trigger point, the national central bank would return excess assets (or cash) to the counterparty (see Box 9),

BOX 9

Calculation of initial margins and valuation haircuts

The total amount of eligible assets J (for j = 1 to J; value Cj,t at time t) a counterparty must provide for a set of liquidity-providing operations I (for i = 1 to I; amount Li,t at time t) is determined by the following formula:

>REFERENCE TO A GRAPHIC>

Where:

mi: initial margin applied to operation i:

mi = 1 % for intraday and overnight operations and mi = 2 % for operations with a maturity exceeding one business day;

hj: valuation haircut applied to eligible asset j.

Let τ be the time period between revaluations. The margin call base at time t + τ equals:

>REFERENCE TO A GRAPHIC>

Depending on the operational features of the National Central Banks' collateral management systems, National Central Banks may also take into account interest accrued on liquidity provided in outstanding operations in the calculation of the margin call base.

Margin calls are effected only if the margin call base exceeds a certain trigger point level.

Let k = 1 % denote the trigger. In an earmarking system (I = 1), a margin call is effected when:

>REFERENCE TO A GRAPHIC>

(the counterparty pays the margin call to the National Central Bank); or

>REFERENCE TO A GRAPHIC>

(the National Central Bank pays the margin call to the counterparty).

In a pooling system, the counterparty has to bring more assets into the pool if:

>REFERENCE TO A GRAPHIC>

Conversely, the amount of intraday credit (IDC) available to the counterparty in a pooling system can be expressed as follows:

>REFERENCE TO A GRAPHIC>

(if positive)

In both earmarking and pooling systems, margin calls shall ensure that the relation expressed in (1) above is re-established.

- In pooling systems, by definition, counterparties may substitute underlying assets on a daily basis,

- In earmarking systems, the substitution of underlying assets may be permitted by National Central Banks,

- The ECB may at any time decide to remove individual debt instruments from the list of eligible tier one instruments(56).

6.4.3. Risk control measures for tier two assets

The appropriate risk control measures for tier two assets are compiled by the National Central Bank which has included the asset in its tier two list. The application of risk control measures by National Central Banks is subject to ECB approval. The Eurosystem aims at ensuring non-discriminatory conditions for tier two assets across the euro area when establishing the appropriate risk control measures. Within this framework, the valuation haircuts applied to tier two assets reflect the specific risks associated with these assets and are at least as stringent as the valuation haircuts applied to tier one assets. Tier two assets are classified in four different haircut groups, reflecting differences in their intrinsic characteristics and in their liquidity (see Box 10). The risk control measures are based on interest rate volatility, the level of interest rates, an assumed liquidation horizon and the relevant maturity of the asset.

BOX 10

Levels of valuation haircuts applied to eligible tier two assets

1) Valuation haircuts applied to equities:

The haircut should be based on the maximum two-day adverse price movement of each single asset since 1 January 1987 with a minimum haircut of 20 %

2) Valuation haircuts applied to marketable debt instruments with limited liquidity(57):

1 % for instruments with a residual maturity of up to 1 year

2,5 % for instruments with a residual maturity of more than 1 year and up to 3 years

5 % for instruments with a residual maturity of more than 3 years and up to 7 years

7 % for instruments with a residual maturity of more than 7 years

Add-on haircut applied to tier two inverse floating rate instruments:

1 % for instruments with a residual maturity of up to 1 year

2,5 % for instruments with a residual maturity of more than 1 year and up to 3 years

5 % for instruments with a residual maturity of more than 3 years and up to 7 years

7 % for instruments with a residual maturity of more than 7 years

3) Valuation haircuts applied to debt instruments with restricted liquidity and special features:

2 % for instruments with a residual maturity of up to 1 year

6 % for instruments with a residual maturity of more than 1 year and up to 3 years

13 % for instruments with a residual maturity of more than 3 years and up to 7 years

20 % for instruments with a residual maturity of more than 7 years

4) Valuation haircuts applied to non-marketable debt instruments:

Trade bills:

2 % for instruments with a residual maturity up to 6 months

Bank loans:

10 % residual maturity up to 6 months

20 % residual maturity between 6 months and 2 years

Mortgage-backed promissory notes:

20 %.

1. Equities

2. Marketable debt instruments with limited liquidity

The majority of the tier two assets fall into this category. Although there may be some differences in the degree of liquidity, the assets are similar in general in that they have a small secondary market, prices may not be quoted daily and normal size trades can generate price effects.

3. Debt instruments with restricted liquidity and special features

These are assets which, while enjoying some aspects of marketability, do require extra time to be liquidated in the market. This is the case for assets which are generally non-marketable but which have special features that introduce some marketability, including market auction procedures (if there is a need to liquidate the assets) and a daily price valuation.

4. Non-marketable debt instruments

These instruments are in practice non-marketable and therefore have little or no liquidity.

The inclusion of tier two assets in one of the aforementioned groups is proposed by National Central Banks and is subject to the ECB's approval.

For tier two assets with interest rate resetting features, in which the resetting is made in an unequivocal and clear manner following market standards and subject to the ECB's approval, the relevant maturity is the one given by the resetting maturity regardless of the liquidity group in which it is included.

The National Central Banks apply the same trigger point (if any) for the execution of margin calls for tier two assets as that for tier one assets. In addition, National Central Banks may apply limits to their acceptance of tier two assets, they may require additional guarantees and they may at any time decide to remove individual assets from their tier two lists.

6.5. Valuation principles for underlying assets

When determining the value of underlying assets used in reverse transactions, the Eurosystem applies the following principles:

- For each marketable asset eligible in tier one or tier two, the Eurosystem specifies a single reference market to be used as a price source. This also implies that for assets listed, quoted or traded on more than one market, only one of these markets is used as a price source for the relevant asset,

- For each reference market, the Eurosystem defines the most representative price to be used for the calculation of market values. If more than one price is quoted, the lowest of these prices (normally the bid price) is used,

- The value of marketable assets is calculated on the basis of the most representative price on the business day preceding the valuation date,

- In the absence of a representative price for a particular asset on the business day preceding the valuation date, the last trading price is used. If no trading price is available, the National Central Bank will define a price, taking into account the last price identified for the asset in the reference market,

- The market value of a debt instrument is calculated including accrued interest,

- Depending on differences in national legal systems and operational practices, the treatment of income flows (e.g. coupon payments) related to an asset which are received during the life of a reverse transaction may differ between National Central Banks. If the income flow is transferred to the counterparty, National Central Banks ensure that the relevant operations will still be fully covered by a sufficient amount of underlying assets before the transfer of the income takes place. The National Central Banks aim at ensuring that the economic effect of the treatment of income flows is equivalent to a situation in which the income is transferred to the counterparty on the payment day(58),

- For non-marketable tier two assets, the National Central Bank which has included the assets in its tier two list specifies separate valuation principles.

6.6. Cross-border use of eligible assets

Eurosystem counterparties may use eligible assets on a cross-border basis, i.e. they may obtain funds from the National Central Bank of the Member State in which they are established by making use of assets located in another Member State. Underlying assets may be used on a cross-border basis in the settlement of all types of operations in which the Eurosystem provides liquidity against eligible assets. A mechanism has been developed by the National Central Banks (and by the ECB) to ensure that all eligible assets may be used on a cross-border basis. This is the correspondent central banking model (CCBM), under which National Central Banks act as custodians ("correspondents") for each other (and for the ECB) in respect of assets accepted in their local depository or settlement system. The model may be used for all eligible assets. Specific solutions may be used for non-marketable assets or tier two assets with restricted liquidity and special features which cannot be transferred through an SSS(59). The CCBM may be used to collateralise all kinds of Eurosystem credit operations(60). In addition to the CCBM, eligible links between SSSs can be used for the cross-border transfer of securities(61).

6.6.1. Correspondent central banking model

The correspondent central banking model (CCBM) is illustrated in Chart 3 below.

CHART 3

The correspondent central banking model

>PIC FILE= "L_2000310EN.004201.EPS">

All National Central Banks maintain securities accounts with each other for the purpose of the cross-border use of eligible assets. The precise procedure of the CCBM depends on whether the eligible assets are earmarked for each individual transaction or whether they are held in a pool of underlying assets(62).

- In an earmarking system, as soon as its bid for credit is accepted by the National Central Bank of the Member State in which the counterparty is established (i.e. the "home central bank"), the counterparty instructs (via its own custodian, if necessary) the SSS in the country in which its securities are held to transfer them to the central bank of that country for the account of the home central bank. Once the home central bank has been informed by the correspondent central bank that the collateral has been received, it transfers the funds to the counterparty. Central banks do not advance funds until they are certain that the counterparties' securities have been received by the correspondent central bank. Where necessary to meet settlement deadlines, counterparties may be able to pre-deposit assets with correspondent central banks for the account of their home central bank using the CCBM procedures;

- In a pooling system, the counterparty is at any time able to provide the correspondent central bank with securities for the account of the home central bank. Once the home central bank has been informed by the correspondent central bank that the securities have been received, it will add these securities to the pool account of the counterparty.

The CCBM is available to counterparties from 9 a.m. ECB time (CET) on each Eurosystem business day. A counterparty wishing to make use of the CCBM must advise the National Central Bank from which it wishes to receive credit - its home central bank - before 4 p.m. ECB time (CET). Furthermore, the counterparty must ensure that the collateral in question is delivered to the account of the correspondent central bank at 4.45 p.m. ECB time (CET) at the latest. Instructions or deliveries not respecting these deadlines will only be considered for credit given on the following business day. When the counterparties foresee a need to use the CCBM late in the day, they should, where possible, deliver the assets in advance (i.e. pre-deposit the assets). In exceptional circumstances or when required for monetary policy purposes, the ECB may decide to extend the closing time of the CCBM until the closing time of TARGET.

6.6.2. Cross-border links

In addition to the CCBM, eligible links between EU SSSs can be used for the cross-border transfer of securities.

CHART 4

Links between securities settlement systems

>PIC FILE= "L_2000310EN.004301.EPS">

A link between two SSSs allows a participant in one SSS to hold securities issued in another SSS without being a participant of that other SSS. Before these links can be used to transfer collateral for Eurosystem credit operations, they have to be assessed and approved against the standards for the use of EU SSSs(63)(64).

From a Eurosystem perspective, the CCBM and the cross-border links between EU SSSs fulfil the same role of allowing counterparties to use collateral on a cross-border basis. That is to say, both enable counterparties to use collateral to obtain credit from their home central bank, even if this collateral was issued in an SSS of another country. The CCBM and the cross-border links perform this function in different ways. In the CCBM, the cross-border relationship is between the National Central Banks. They act as custodians for one another. Using the links, the cross-border relationship is between the SSSs. They open omnibus accounts with one another. Assets deposited with a correspondent central bank can only be used to collateralise Eurosystem credit operations. Assets held through a link can be used for Eurosystem credit operations as well as for any other purpose selected by the counterparty. Using cross-border links, the counterparties hold the assets on their own account with their home SSS and have no need for a custodian.

CHAPTER 7

7. MINIMUM RESERVES(65)

7.1. General considerations

The ECB requires credit institutions to hold minimum reserves on accounts with the National Central Banks within the framework of the Eurosystem's minimum reserve system. The legal framework for the Eurosystem's minimum reserve system is laid down in Article 19 of the Statute of the ESCB, the Council Regulation (EC) concerning the application of minimum reserves by the European Central Bank and the ECB Regulation on minimum reserves. The application of the ECB Regulation on minimum reserves ensures that the terms and conditions of the Eurosystem's minimum reserve system are uniform throughout the euro area.

The amount of minimum reserves to be held by each institution is determined in relation to its reserve base. The Eurosystem's minimum reserve system enables counterparties to make use of averaging provisions, implying that compliance with reserve requirements is determined on the basis of the average of the end-of-calendar-day balances on the counterparties' reserve accounts over a one-month maintenance period. Institutions' holdings of required reserves are remunerated at the rate of the Eurosystem's main refinancing operations.

The Eurosystem's minimum reserve system primarily pursues the following monetary functions:

- Stabilisation of money market interest rates

The averaging provision of the Eurosystem's minimum reserve system aims to contribute to the stabilisation of money market interest rates by giving institutions an incentive to smooth the effects of temporary liquidity fluctuations.

- Creation or enlargement of a structural liquidity shortage

The Eurosystem's minimum reserve system contributes to creating or enlarging a structural liquidity shortage. This may be helpful in order to improve the ability of the Eurosystem to operate efficiently as a supplier of liquidity.

In the application of minimum reserves, the ECB is bound to act in pursuance of the objectives of the Eurosystem as defined in Article 105(1) of the Treaty and Article 2 of the Statute of the ESCB, which implies, inter alia, the principle of not inducing significant undesirable delocation or disintermediation.

7.2. Institutions subject to minimum reserves

Pursuant to Article 19.1 of the Statute of the ESCB, the ECB requires credit institutions established in Member States to hold minimum reserves. This implies that branches in the euro area of entities with no registered office in the euro area are also subject to the Eurosystem's minimum reserve system. However, branches located outside the euro area of credit institutions established in the euro area are not subject to the Eurosystem's minimum reserve system.

The ECB may exempt institutions under winding-up or reorganisation from their obligations under the Eurosystem's minimum reserve system. According to the Council Regulation (EC) concerning the application of minimum reserves by the European Central Bank and the ECB Regulation on minimum reserves, the ECB may also exempt classes of other institutions from their obligations under the Eurosystem's minimum reserve system on a nondiscriminatory basis if the purposes of the Eurosystem's minimum reserve system would not be met by imposing them on those particular institutions. In its decision on any such exemption, the ECB takes into account one or more of the following criteria:

- the institution is pursuing special purpose functions,

- the institution is not exercising active banking functions in competition with other credit institutions,

- the institution has all its deposits earmarked for purposes related to regional and/or international development assistance.

The ECB establishes and maintains a list of institutions subject to the Eurosystem's minimum reserve system. The ECB also makes public a list of any institutions exempt from their obligations under the Eurosystem's minimum reserve system for reasons other than their being subject to reorganisation measures(66). Counterparties may rely on these lists in deciding whether their liabilities are owed to another institution that is itself subject to reserve requirements. The lists available to the public on the last Eurosystem business day of each calendar month are valid for the calculation of the reserve base for the subsequent maintenance period.

7.3. Determination of minimum reserves

a) Reserve base and reserve ratios

The reserve base of an institution is defined in relation to elements of its balance sheet. The balance sheet data are reported to the National Central Banks within the general framework of the ECB's money and banking statistics (see Section 7.5)(67). For institutions subject to full reporting requirements, the balance sheet data referring to the end of a given calendar month are used to determine the reserve base for the maintenance period starting during the following calendar month.

The reporting framework for the ECB's money and banking statistics includes the possibility to relieve small institutions of some of the reporting burden. Institutions to which this provision applies only need to report a limited set of balance sheet data on a quarterly basis (as end-of-quarter data) and with a reporting deadline which is longer than that set for larger institutions. For these institutions, the balance sheet data reported for a specific quarter are used to determine, with a lag of one month, the reserve base for the consecutive three one-month reserve maintenance periods.

According to the Council Regulation concerning the application of minimum reserves by the European Central Bank, the ECB is entitled to include liabilities resulting from the acceptance of funds together with liabilities resulting from off-balance-sheet items in the reserve base of institutions. In the Eurosystem's minimum reserve system, only the liability categories "deposits", "debt securities issued" and "money market paper" are actually included in the reserve base (see Box 11).

Liabilities vis-à-vis other institutions included in the list of institutions subject to the Eurosystem's minimum reserve system and liabilities vis-à-vis the ECB and the National Central Banks are not included in the reserve base. In this respect, for the liability categories "debt securities issued" and "money market paper", the issuer needs to be able to prove the actual amount of these instruments held by other institutions subject to the Eurosystem's minimum reserve system in order to be entitled to deduct them from the reserve base. If such proof cannot be presented, issuers may apply standardised deductions of a fixed percentage(68) to each of these balance sheet items.

The reserve ratios are determined by the ECB subject to the maximum limit specified in the Council Regulation (EC) concerning the application of minimum reserves by the European Central Bank. The ECB applies a uniform non-zero reserve ratio to most of the items included in the reserve base. This reserve ratio is specified in the ECB Regulation on minimum reserves. The ECB sets a zero reserve ratio on the following liability categories: "deposits with agreed maturity over 2 years", "deposits redeemable at notice over 2 years", "repos" and "debt securities with an agreed maturity over 2 years" (see Box 11). The ECB may at any time change the reserve ratios. Changes in reserve ratios are announced by the ECB in advance of the first maintenance period for which the change is effective.

BOX 11

Reserve base and reserve ratios

A. Liabilities included in the reserve base and to which the positive reserve ratio is applied

Deposits

- Overnight deposits

- Deposits with agreed maturity up to 2 years

- Deposits redeemable at notice up to 2 years

Debt securities issued

- Debt securities with agreed maturity up to 2 years

Money market paper

- Money market paper

B. Liabilities included in the reserve base and to which a zero reserve ratio is applied

Deposits

- Deposits with agreed maturity over 2 years

- Deposits redeemable at notice over 2 years

- Repos

Debt securities issued

- Debt securities with agreed maturity over 2 years

C. Liabilities excluded from the reserve base

- Liabilities vis-à-vis other institutions subject to the Eurosystem's minimum reserve system

- Liabilities vis-à-vis the ECB and the National Central Banks

b) Calculation of reserve requirements

The reserve requirement of each individual institution is calculated by applying, to the amount of eligible liabilities, the reserve ratios for the corresponding categories of liabilities.

Each institution deducts a uniform lump-sum allowance from its reserve requirement in each Member State in which it has an establishment. The size of the lump-sum allowance is specified in the ECB Regulation on minimum reserves. The granting of such an allowance shall be without prejudice to the legal obligations of institutions subject to the Eurosystem's minimum reserve system(69).

The reserve requirement for each maintenance period is rounded to the nearest euro.

7.4. Maintenance of reserve holdings

a) Maintenance period

The maintenance period is one month, starting on the 24th calendar day of each month and ending on the 23rd calendar day of the following month.

b) Reserve holdings

Each institution must hold its minimum reserves on one or more reserve accounts with the national central bank in the Member State in which it is established. For institutions with more than one establishment in a Member State, the head office is responsible for fulfilling the aggregate minimum reserves of all the domestic establishments of the institution(70). An institution with establishments in more than one Member State is required to hold minimum reserves with the National Central Bank of each Member State in which it has an establishment, in relation to its reserve base in the corresponding Member State.

Institutions' settlement accounts with the National Central Banks may be used as reserve accounts. Reserve holdings held on settlement accounts may be used for intraday settlement purposes. The daily reserve holding of an institution is calculated as the end-of-day balance on its reserve account.

An institution may apply to the National Central Bank in the Member State in which the institution is resident for permission to hold all its minimum reserves indirectly through an intermediary. The possibility of holding minimum reserves through an intermediary is as a rule restricted to institutions which are constituted so that part of the administration (e.g. treasury management) is normally effected by the intermediary (e.g. networks of savings banks and cooperative banks may centralise their reserve holdings). The holding of minimum reserves through an intermediary is subject to the provisions specified in the ECB Regulation on minimum reserves.

c) Remuneration of reserve holdings

Holdings of required reserves are remunerated at the average, over the maintenance period, of the ECB's rate (weighted according to the number of calendar days) on the main refinancing operations, calculated using the formula specified in Box 12. Reserve holdings exceeding the required reserves are not remunerated. The remuneration is paid on the second NCB business day following the end of the maintenance period over which the remuneration was earned.

BOX 12

Calculation of the remuneration of holdings of required reserves

The holding of required reserves is remunerated according to the following formula:

>REFERENCE TO A GRAPHIC>

Where:

Rt= remuneration to be paid on holdings of required reserves for the maintenance period t

Ht= holdings of required reserves for the maintenance period t

nt= number of calendar days in the maintenance period t

i= ith calendar day of the maintenance period t

MRi= marginal interest rate of the most recent main refinancing operation spanning calendar day i

7.5. Reporting and verification of the reserve base

The reserve base items for the application of minimum reserves are calculated by the institutions subject to minimum reserves themselves and are reported to the National Central Banks within the general framework of the ECB's money and banking statistics see Annex 4). Article 5 of ECB Regulation (EC) No 2818/98 (ECB/1998/15) defines procedures for the confirmation and, in exceptional cases, the revision of the reserve base and the reserve requirement of the institution.

For institutions that are allowed to act as intermediaries for indirect reserve holdings of other institutions, special reporting requirements are specified in the ECB Regulation on minimum reserves. The holding of reserves through an intermediary does not change the statistical reporting obligations of institutions holding reserves via an intermediary.

The ECB and the National Central Banks have the right, within the scope of the Council Regulation (EC) concerning the application of minimum reserves by the European Central Bank, to verify the accuracy and quality of collected data.

7.6. Non-compliance with minimum reserve obligations

Non-compliance with the minimum reserve obligations arises if an institution's average end-of-calendar-day balance on its reserve account(s) over the maintenance period is less than its reserve requirement for the corresponding maintenance period.

Where an institution fails to comply with all or part of the reserve requirement, the ECB may, in accordance with the Council Regulation (EC) concerning the application of minimum reserves by the European Central Bank, impose any one of the following sanctions:

- a payment of up to 5 percentage points above the marginal lending rate, applied to the amount of the reserve requirement which the relevant institution failed to provide, or

- a payment of up to two times the marginal lending rate, applied to the amount of the reserve requirement which the relevant institution failed to provide, or

- the requirement for the relevant institution to establish non-interest-bearing deposits with the ECB or the National Central Banks up to three times the amount of the reserve requirement which the relevant institution failed to provide. The maturity of the deposit may not exceed the period during which the institution failed to comply with the reserve requirement.

Where an institution fails to comply with other obligations under ECB Regulations and Decisions related to the Eurosystem's minimum reserve system (e.g. if relevant data are not transmitted in time or are not accurate), the ECB is empowered to impose sanctions in accordance with Regulation (EC) No 2532/98 concerning the powers of the European Central Bank to impose sanctions and the ECB Regulation of 23 September 1999 on the powers of the ECB to impose sanctions (ECB/1999/4). The Executive Board of the ECB may specify and publish the criteria according to which it will apply the sanctions provided for in Article 7(1) of Council Regulation (EC) No 2531/98 on the application of minimum reserves by the ECB(71).

In addition, in the case of serious infringements of the minimum reserve requirements, the Eurosystem may suspend counterparties from participation in open market operations.

(1) The Governing Council of the European Central Bank has agreed to use the term "Eurosystem" as an expression denoting the composition in which the European System of Central Banks performs its basic tasks, i.e. the national central banks of the Member States which have adopted the single currency in accordance with the Treaty establishing the European Community and the European Central Bank.

(2) It should be noted that National Central Banks of Member States which have not adopted the single currency in accordance with the Treaty establishing the European Community (Treaty) retain their powers in the field of monetary policy according to national law and are thus not involved in the conduct of the single monetary policy.

(3) Throughout this document, the term "National Central Banks" refers to the National Central Banks of the Member States which have adopted the single currency in accordance with the Treaty.

(4) Throughout this document, the term "Member State" refers to a Member State which has adopted the single currency in accordance with the Treaty.

(5) The different procedures for the execution of Eurosystem open market operations, i.e. standard tenders, quick tenders and bilateral procedures, are specified in Chapter 5. Standard tenders are executed within a time frame of 24 hours from the tender announcement to the certification of the allotment result. All counterparties fulfilling the general eligibility criteria specified in Section 2.1 may participate in standard tenders. Quick tenders are executed within a time frame of one hour. The Eurosystem may select a limited number of counterparties to participate in quick tenders. The term bilateral procedures refers to any case in which the Eurosystem conducts a transaction with one or a few counterparties without using tender procedures. Bilateral procedures include operations executed through stock exchanges or market agents.

(6) See Sections 6.6.1 and 6.6.2.

(7) For outright transactions, no restrictions are placed a priori on the range of counterparties.

(8) Harmonised supervision of credit institutions is based on the Directive 2000/12/EC of the European Parliament and of the Council of 20 March 2000 relating to the taking up and pursuit of the business of credit institutions, (OJ L 126, 26.5.2000, p. 1).

(9) The main and the longer-term refinancing operations are executed in accordance with the Eurosystem's pre-announced tender operations calendar, which can be found on the ECB's website (www.ecb.int; see also Section 5.1.2); information can also be found on the websites of the National Central Banks (see Annex 5).

(10) The maturity of the main and the longer-term refinancing operations may occasionally vary depending on, inter alia, bank holidays in Member States.

(11) See footnote 8.

(12) See footnote 9.

(13) Fixed-term deposits are held on accounts with the National Central Banks; this would be the case even if such operations were to be executed in a centralised manner by the ECB.

(14) National Central Banks which have their national RTGS system operational when the TARGET Interlinking component is closed shall grant access to the standing facilities. The closing time for access to the standing facilities will then be 30 minutes after the closing time of the relevant national RTGS system.

(15) In some Member States, the National Central Bank (or some of its branches) may not be open for the purpose of conducting monetary policy operations on certain Eurosystem business days due to national or regional bank holidays. In this case, the relevant National Central Bank is responsible for informing the counterparties in advance of the arrangements to be applied for access to the marginal lending facility in relation to the bank holiday.

(16) TARGET closing days are announced on the ECB's website (www.ecb.int); information can also be found on the websites of the National Central Banks (see Annex 5).

(17) Throughout this document, the term "Eurosystem business day" refers to any day on which the ECB and at least one National Central Bank are open for the purpose of conducting Eurosystem monetary policy operations.

(18) Operational differences resulting from the existence of different account structures across the National Central Banks may exist across euro area countries.

(19) Owing to the existence of different account structures across the National Central Banks, the ECB may allow National Central Banks temporarily to apply access conditions which are slightly different from those referred to here. The National Central Banks will provide information on any such deviations from the access conditions described in this document.

(20) In some Member States the National Central Bank (or some of its branches) may not be open for the purpose of conducting Eurosystem monetary policy operations on certain Eurosystem business days owing to national or regional bank holidays. In such cases, the relevant National Central Bank is responsible for informing the counterparties in advance of the arrangements to be made for access to the deposit facility in relation to the bank holiday.

(21) TARGET closing days are announced on the ECB's website (www.ecb.int); information can also be found on the websites of the National Central Banks (see Annex 5).

(22) In fixed rate foreign exchange swap tenders, the ECB fixes the swap points of the operation and the counterparties offer the amount of currency kept as fixed that they wish to sell (and buy back) or buy (and sell back) at that rate.

(23) In variable rate foreign exchange swap tenders, the counterparties bid the amount of the currency kept as fixed and the swap point quotation at which they wish to enter into the operation.

(24) The calendar for the Eurosystem's tender operations can be found on the ECB's website (www.ecb.int); information can also be found on the websites of the National Central Banks (see Annex 5).

(25) Throughout this document, the term "NCB business day" refers to any day on which the National Central Bank of a specific Member State is open for the purpose of conducting Eurosystem monetary policy operations. In some Member States branches of the National Central Bank may be closed on NCB business days owing to local or regional bank holidays. In such cases, the relevant National Central Bank is responsible for informing the counterparties in advance of the arrangements to be made for transactions involving those branches.

(26) In fixed rate foreign exchange swaps, the amount of the currency kept fixed that the counterparty is willing to transact with the Eurosystem is to be stated.

(27) With regard to the issuance of ECB debt certificates, the ECB may decide that bids are to be expressed in the form of a price rather than an interest rate. In such cases, prices shall be quoted as a percentage of the nominal amount.

(28) In variable rate foreign exchange swaps, the amount of the currency kept fixed that the counterparty is willing to transact with the Eurosystem and the respective swap point level are to be stated.

(29) Or to settle in cash in the case of liquidity-absorbing operations.

(30) Swap point quotations are listed in increasing order taking into account the sign of the quotation, which depends on the sign of the interest rate differential between the foreign currency and the euro. If, for the maturity of the swap, the foreign currency interest rate is higher than the corresponding interest rate for the euro, the swap point quotation is positive (euro quoted at premium against the foreign currency). Conversely, if the foreign currency interest rate is lower than the corresponding interest rate for the euro, the swap point quotation is negative (euro quoted at discount against the foreign currency).

(31) The Governing Council of the ECB will decide whether, under exceptional circumstances, fine-tuning bilateral operations may also be executed by the ECB itself.

(32) The description of the standards for the use of eligible securities settlement systems (SSSs) in the euro area and an updated list of the eligible links between these systems can be found on the ECB's website (www.ecb.int).

(33) The deadline for requesting access to the Eurosystem's standing facilities is postponed by an additional 30 minutes on the last Eurosystem business day of a minimum reserve maintenance period.

(34) See also footnote 13 for the cases of National Central Banks having their national RTGS system operational when the TARGET Interlinking component is closed.

(35) Liquidity-absorbing outright and reverse open market operations are also based on underlying assets. For underlying assets used in liquidity-absorbing reverse open market operations, the eligibility criteria are identical to those applied for underlying assets used in liquidity-providing reverse open market operations. However, neither initial margins nor valuation haircuts are applied in liquidity-absorbing operations.

(36) In addition, the ECB may allow the National Central Banks to consider as eligible for intraday credit certain types of assets which are not eligible as underlying assets for Eurosystem monetary policy operations (see footnote 47).

(37) This list is published and updated weekly on the ECB's website (www.ecb.int).

(38) Debt instruments convertible into equity (or with similar characteristics) and debt instruments which afford rights subordinate to the claims of holders of other debt instruments of the issuer are excluded from tier one.

(39) Debt instruments issued by credit institutions which do not comply strictly with the criteria set out in Article 22(4) of the UCITS Directive (Council Directive 88/220/EEC (OJ L 100, 19.4.1988, p. 31) amending Council Directive 85/611/EEC (OJ L 375, 31.12.1985, p. 3)) are accepted in tier one only if each issue as such is awarded a rating (by a rating agency) which indicates, in the view of the Eurosystem, that the debt instrument meets high credit standards.

(40) The description of the standards for the use of eligible SSSs in the euro area and an updated list of the eligible links between these systems can be found on the ECB's website (www.ecb.int).

(41) Expressed as such or in the national denominations of the euro.

(42) The requirement that the issuing entity must be established in the EEA does not apply to international and supra-national institutions.

(43) Directive 93/22/EEC, Council Directive of 10 May 1993 on investment services in the securities field, (OJ L 141, 11 June 1993, p. 27).

(44) Debt instruments issued by credit institutions which do not comply strictly with the criteria set out in Article 22(4) of the UCITS Directive (Directive 88/220/EEC amending Directive 85/611/EEC) are accepted in tier one only if they are listed or quoted on a regulated market as defined according to the Investment Services Directive (Directive 93/22/EEC) and comply with the requirements of the Prospectus Directive (Council Directive 89/298/EEC (OJ L 124, 5.5.1989, p. 8)).

(45) Article 1(26), of Directive 2000/12/EC of the European Parliament and of the Council of 20 March 2000 relating to the taking up and pursuit of the business of credit institutions, reads as follows:

"Close links shall mean a situation in which two or more natural or legal persons are linked by:

(a) participation, which shall mean the ownership, direct or by way of control, of 20 % or more of the voting rights or capital of an undertaking, or

(b) control, which shall mean the relationship between a parent undertaking and a subsidiary, in all the cases referred to in Article 1(1) and (2) of Directive 83/349/EEC, or a similar relationship between any natural or legal person and an undertaking; any subsidiary undertaking of a subsidiary undertaking shall also be considered a subsidiary undertaking of the parent undertaking which is at the head of those undertakings. A situation in which two or more natural or legal persons are permanently linked to one and the same person by a control relationship shall also be regarded as constituting a close link between such persons."

(46) This provision does not apply to (i) close links between the counterparty and the public authorities of EEA countries; (ii) trade bills, for which at least one entity (other than a credit institution) is liable in addition to the counterparty; (iii) debt instruments which comply strictly with the criteria set out in Article 22(4) of the UCITS Directive (Directive 88/220/EEC amending Directive 85/611/EEC); or (iv) cases in which debt instruments are protected by specific legal safeguards comparable to (iii).

(47) If the National Central Banks were to allow the use of instruments with a maturity shorter than the monetary policy operations for which they serve as underlying assets, counterparties would be required to replace such assets at, or prior to, maturity.

(48) In addition to the tier two assets eligible for Eurosystem monetary policy operations, the ECB may authorise National Central Banks to grant intraday credit against debt instruments which are considered eligible for intraday credit by non-participating EU central banks and which are: 1) located in EEA countries outside the euro area; 2) issued by entities established in EEA countries outside the euro area; 3) denominated in EEA currencies (or other widely traded currencies). The ECB's authorisation will be subject to the preservation of operational efficiency and the exercise of appropriate control over the specific legal risks relating to such debt instruments. Within the euro area, these debt instruments may not be used on a cross-border basis (i.e. counterparties may use these debt instruments only for receiving funds directly from the National Central Bank which has been authorised by the ECB to grant intraday credit against these assets).

(49) These lists are published and updated weekly on the ECB's website (www.ecb.int). For non-marketable tier two assets and debt instruments with restricted liquidity and special features, National Central Banks may decide not to disclose information on individual issues, issuers/debtors or guarantors in the publication of their national tier two lists, but shall offer alternative information to ensure that counterparties throughout the euro area can easily ascertain the eligibility of a specific asset.

(50) Directive 93/22/EEC, Council Directive of 10 May 1993 on investment services in the securities field.

(51) Expressed as such or in the national denominations of the euro.

(52) See footnote 44.

(53) This provision does not apply to (i) close links between the counterparty and the public authorities of EEA countries; (ii) trade bills, for which at least one entity (other than a credit institution) is liable in addition to the counterparty; (iii) debt instruments which comply strictly with the criteria set out in Article 22(4) of the UCITS Directive (Directive 88/220/EEC amending Directive 85/611/EEC); or (iv) cases in which debt instruments are protected by specific legal safeguards comparable to (iii).

(54) If the National Central Banks were to allow the use of instruments with a maturity shorter than the monetary policy operations for which they serve as underlying assets, counterparties would be required to replace such assets at, or prior to, maturity.

(55) Owing to operational differences across Member States in respect of the procedures for counterparties' delivery of underlying assets to the National Central Banks (in the form of a pool of collateral pledged with the National Central Bank or as repurchase agreements based on individual assets specified for each transaction), minor differences may occur with regard to the timing of the valuation and other operational features of the margin framework.

(56) If, at the time of exclusion from the tier one list, a debt instrument is being used in a Eurosystem credit operation, it will have to be removed within 20 business days calculated from the time of exclusion from the list.

(57) It is recalled that, although debt instruments issued by credit institutions which do not comply strictly with the criteria set out in Article 22(4) of the UCITS Directive are normally not eligible for inclusion in tier two lists, the ECB may authorise National Central Banks to include such assets in their tier two lists subject to certain conditions and restrictions. For such instruments, a 10 % add-on to the tier two haircut is applied.

(58) National Central Banks may decide not to accept as underlying assets in reverse transactions debt instruments with an income flow (e.g. a coupon payment) or equities with a payment of any kind (or with any other right attached to them which may affect their suitability as underlying assets) occurring in the period until the maturity date of the monetary policy operation (see Sections 6.2 and 6.3).

(59) Details are provided in the "CCBM brochure" published on the ECB's website (www.ecb.int).

(60) The ECB may authorise National Central Banks to grant intraday credit against certain types of "foreign" debt instruments (see footnote 47). However, within the euro area, such debt instruments may not be used on a cross-border basis.

(61) Eligible assets may be used through an account of a central bank in an SSS located in a country other than that of the central bank in question if the Eurosystem has approved the use of such account. As of August 2000, the Central Bank of Ireland has been authorised to open such an account in Euroclear. This account can be used for all eligible assets held in Euroclear, i.e. including eligible assets transferred to Euroclear through eligible links.

(62) See Section 6.4.1 and the "CCBM brochure" for further explanations.

(63) The updated list of eligible links can be found on the ECB's website (www.ecb.int).

(64) See the "Standards for the use of EU securities settlement systems in ESCB credit operations", January 1998.

(65) The relevant legal framework for the ECB to apply minimum reserves is to be found in Regulations (EC) No 2531/98 and (EC) No 2818/98 on the application of minimum reserves (ECB/1998/15). The content of this chapter is provided only for information purposes.

(66) The lists are available to the public on the ECB's website (www.ecb.int).

(67) The reporting framework for the ECB's money and banking statistics is presented in Annex 4.

(68) See ECB Regulation (EC) No 2819/98 (ECB/1998/15) on the application of minimum reserves. Further information relating to the standardised deduction ratio can be found on the ECB's website (www.ecb.int). Information can also be found on the websites of the National Central Banks (see Annex 5).

(69) For institutions allowed to report statistical data as a group on a consolidated basis according to the provisions of the reporting framework for the ECB's money and banking statistics (see Annex 4), only one such allowance will be granted to the group as a whole, unless the institutions provide data on the reserve base and reserve holdings in a sufficiently detailed manner to enable the Eurosystem to verify their accuracy and quality and to determine the respective reserve requirement of each individual institution included in the group.

(70) If an institution has no head office in a Member State in which it is established, it has to designate a principal branch which would then be responsible for fulfilling the aggregate minimum reserves of all the establishments of the institution in the relevant Member State.

(71) Such criteria were published in a notice in the Official Journal of the European Communities on 11 February 2000 entitled "Notice of the European Central Bank on the imposition of sanctions for breaches of the obligation to hold minimum reserves".

ANNEXES

Annex I

Examples of monetary policy operations and procedures

List of examples

1. Liquidity-providing reverse transaction by fixed rate tender

2. Liquidity-providing reverse transaction by variable rate tender

3. Issuance of ECB debt certificates by variable rate tender

4. Liquidity-absorbing foreign exchange swap by variable rate tender

5. Liquidity-providing foreign exchange swap by variable rate tender

6. Risk control measures

EXAMPLE 1

Liquidity-providing reverse transaction by fixed rate tender

The ECB decides to provide liquidity to the market by means of a reverse transaction organised with a fixed rate tender procedure.

>TABLE>

The ECB decides to allot a total of EUR 105 million.

The percentage of allotment is:

>REFERENCE TO A GRAPHIC>

>TABLE>

EXAMPLE 2

Liquidity-providing reverse transaction by variable rate tender

The ECB decides to provide liquidity to the market by means of a reverse transaction organised with a variable rate tender procedure.

>TABLE>

The ECB decides to allot EUR 94 million, implying a marginal interest rate of 3,05 %.

All bids above 3,05 % (for a cumulative amount of EUR 80 million) are fully satisfied. At 3,05 % the percentage of allotment is:

>REFERENCE TO A GRAPHIC>

The allotment to Bank 1 at the marginal interest rate is, for example:

>REFERENCE TO A GRAPHIC>

The total allotment to Bank 1 is:

>REFERENCE TO A GRAPHIC>

>TABLE>

If the allotment procedure follows a single rate (Dutch) auction, the interest rate applied to the amounts allotted to the counterparties is 3,05 %.

If the allotment procedure follows a multiple rate (American) auction, no unique interest rate is applied to the amounts allotted to the counterparties; for example, Bank 1 receives EUR 5 million at 3,07 %, EUR 5 million at 3,06 % and EUR 4 million at 3,05 %.

EXAMPLE 3

Issuance of ECB debt certificates by variable rate tender

The ECB decides to absorb liquidity from the market by issuing debt certificates using a variable rate tender procedure.

>TABLE>

The ECB decides to allot a nominal amount of EUR 124,5 million, implying a marginal interest rate of 3,05 %.

All bids below 3.05 % (for a cumulative amount of EUR 65 million) are fully satisfied. At 3.05 % the percentage of allotment is:

>REFERENCE TO A GRAPHIC>

The allotment to Bank 1 at the marginal interest rate is, for example:

>REFERENCE TO A GRAPHIC>

The total allotment to Bank 1 is:

>REFERENCE TO A GRAPHIC>

>TABLE>

EXAMPLE 4

Liquidity-absorbing foreign exchange swap by variable rate tender

The ECB decides to absorb liquidity from the market by executing a foreign exchange swap on the EUR/USD rate by means of a variable rate tender procedure. (Note: The euro is traded at a premium in this example.)

>TABLE>

The ECB decides to allot EUR 158 million, implying 6,63 marginal swap points. All bids above 6.63 (for a cumulative amount of EUR 65 million) are fully satisfied. At 6.63 the percentage of allotment is:

>REFERENCE TO A GRAPHIC>

The allotment to Bank 1 at the marginal swap points is, for example:

>REFERENCE TO A GRAPHIC>

The total allotment to Bank 1 is:

>REFERENCE TO A GRAPHIC>

>TABLE>

The ECB fixes the spot EUR/USD exchange rate for the operation at 1,1300.

If the allotment procedure follows a single rate (Dutch) auction, at the start date of the operation the Eurosystem buys EUR 158000000 and sells USD 178540000. At the maturity date of the operation, the Eurosystem sells EUR 158000000 and buys USD 178644754 (the forward exchange rate is1,130663 = 1,1300 + 0,000663.)

>TABLE>

EXAMPLE 5

Liquidity-providing foreign exchange swap by variable rate tender

The ECB decides to provide liquidity to the market by executing a foreign exchange swap on the EUR/USD rate by means of a variable rate tender procedure. (Note: The euro is traded at a premium in this example.)

>TABLE>

The ECB decides to allot EUR 197 million, implying 6,4 marginal swap points. All bids below 6,54 (for a cumulative amount of EUR 195 million) are fully satisfied. At 6,54 the percentage of allotment is:

>REFERENCE TO A GRAPHIC>

The allotment to Bank 1 at the marginal swap points is, for example:

>REFERENCE TO A GRAPHIC>

The total allotment to Bank 1 is:

>REFERENCE TO A GRAPHIC>

>TABLE>

The ECB fixes the spot EUR/USD exchange rate for the operation at 1,1300.

If the allotment procedure follows a single rate (Dutch) auction, at the start date of the operation the Eurosystem sells EUR 197000000and buys USD 222610000. At the maturity date of the operation, the Eurosystem buys EUR 197000000 and sells USD 222738838 (the forward exchange rate is 1,130654 = 1,1300 + 0,000654).

>TABLE>

EXAMPLE 6

Risk control measures

This example illustrates the risk control framework applied to underlying assets used in the Eurosystem's liquidity-providing operations(1). The example is based on the assumption that a counterparty participates in the following Eurosystem monetary policy operations:

- A main refinancing operation starting on 28 June 2000 and ending on 12 July 2000 where the counterparty is allotted EUR 50 million;

- A longer-term operation starting on 29 June 2000 and ending on 28 September 2000 where the counterparty is allotted EUR 45 million;

- A main refinancing operation starting on 5 July 2000 and ending on 19 July 2000 where the counterparty is allotted EUR 10 million.

The characteristics of the underlying tier one assets used by the counterparty to cover these operations are specified in Table 1 below.

Table 1. Underlying tier one assets used in the transactions

>TABLE>

>TABLE>

Earmarking system

First, it is assumed that the transactions are carried out with a National Central Bank using a system where underlying assets are earmarked for each transaction. In earmarking systems, the valuation of underlying assets is carried out on a daily basis. The risk control framework can then be described as follows (see also Table 2 below):

1. For each of the transactions entered into by the counterparty, an initial margin of 2 % is applied since the maturity of the operations exceeds one business day.

2. On 28 June 2000 the counterparty enters into a repurchase transaction with the National Central Bank, which purchases Bond A for EUR 50 million. Bond A is a fixed coupon bond maturing on 26 August 2002. It thus has a residual maturity of two years, therefore requiring a valuation haircut of 1,5 %. The market price of Bond A on its reference market on that day is 102,63 %, which includes the accrued interest on the coupon. The counterparty is required to provide an amount of Bond A which, after deduction of the 1,5 % valuation haircut, exceeds EUR 51 million (corresponding to the allotted amount of EUR 50 million plus the initial margin of 2 %). The counterparty therefore delivers Bond A for a nominal amount of EUR 50,5 million, the adjusted market value of which is EUR 51050728 on that day.

3. On 29 June 2000 the counterparty enters into a repurchase transaction with the National Central Bank, which purchases EUR 21,5 million of Bond A (market price 101,98 %, valuation haircut 1,5 %) and EUR 25 million of Asset B (market price 98,35 %). Asset B is a floating rate note (FRN) with yearly prefixed coupon payments, to which a 0 % valuation haircut is applied. The adjusted market value of Bond A and FRN B on that day is EUR 46184315, thus exceeding the required amount of EUR 45900000 (EUR 45 million plus the initial margin of 2 %).

On 30 June 2000 the underlying assets are revalued: the market price of Bond A is 100,57 % and the market price of FRN B is 97,95 %. Accrued interest amounts to EUR 11,806 on the main refinancing operation initiated on 28 June 2000 and EUR 5,625 on the longer-term refinancing operation initiated on 29 June 2000. As a result, the adjusted market value of Bond A in the first transaction falls to below the transaction's margined amount (liquidity provided plus accrued interest plus initial margin) by approximately EUR 1 million. The counterparty delivers EUR 1 million of Bond A in nominal value terms, which, after deducting a 1,5 % haircut from the market value based on a price of 100,57 %, restores sufficient collateral coverage(2). No margin call is needed on the second transaction because the adjusted market value of the underlying assets used in this transaction EUR (45785712), although slightly below the margined amount (EUR 45905738), does not fall below the trigger level (the margined amount minus 1 %) of EUR 45455681(3).

4. During 3 and 4 July 2000 the underlying assets are revalued, without resulting in any margin call for the transactions entered into on 28 and 29 June 2000. On 4 July 2000 accrued interest amounts to EUR 35417 and EUR 28125.

5. On 5 July 2000 the counterparty enters into a repurchase transaction with the National Central Bank, which purchases EUR 10 million of Bond C. Bond C is a zero coupon bond with a market value of 55,125 % on that day. The counterparty delivers EUR 19,5 million of Bond C in nominal value terms. The zero coupon bond has a residual maturity of around ten years and therefore requires a valuation haircut of 5 %.

Pooling system

Second, it is assumed that the transactions are carried out with a National Central Bank using a pooling system. Assets included in the pool of assets used by the counterparty are not earmarked for specific transactions.

The same sequence of transactions is used in this example as in the above example illustrating an earmarking system. The main difference is that, at revaluation dates, the adjusted market value of all the assets in the pool has to cover the margined amount of all of the counterparty's outstanding operations with the National Central Bank. As a result, the margin call occurring on 30 June 2000 is slightly higher (EUR 1106035) than was required in the earmarking system, owing to the trigger effect on the transaction entered into on 29 June 2000. The counterparty delivers EUR 1,15 million of Bond A in nominal value terms, which, after deducting a 1,5 % haircut from the market value based on a price of 100,57 %, restores sufficient collateral coverage. Moreover, on 12 July 2000, when the main refinancing operation entered into on 28 June 2000 ends, the counterparty may keep the assets on its pledge account and thus automatically benefit from a capacity to borrow again within the limits of the trigger points on an intraday basis or overnight (with an initial margin of 1 % applied to these transactions). The risk control framework in the pooling system is described in Table 3.

Table 2. Earmarking system

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>TABLE>

Table 3. Pooling system

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(1) The example is based on the assumption that in the calculation of the need for a margin call, accrued interest on the liquidity provided is taken into account and a trigger point of 1 % of the liquidity provided is applied.

(2) National Central Banks may perform margin calls in cash rather than securities.

(3) If a margin had to be paid to the counterparty by the National Central Bank in relation to the second transaction, such a margin may, in certain cases, be netted out with the margin paid to the national central bank by the counterparty in relation to the first transaction. As a result, there would only be one margin settlement.

Annex 2

Glossary

Actual/360: the day-count convention applied for the calculation of interest on a credit, implying that the interest is calculated over the actual number of calendar days over which the credit is extended, on the basis of a 360-day year. This day-count convention is applied in Eurosystem monetary policy operations.

American auction: see multiple rate auction.

Averaging provision: a provision allowing counterparties to fulfil their reserve requirements on the basis of their average reserve holdings over the maintenance period. The averaging provision contributes to the stabilisation of money market interest rates by giving institutions an incentive to smooth the effects of temporary liquidity fluctuations. The Eurosystem's minimum reserve system allows for averaging.

Bilateral procedure: a procedure whereby the central bank deals directly with only one or a few counterparties, without making use of tender procedures. Bilateral procedures include operations executed through stock exchanges or market agents.

Book-entry system: an accounting system that permits the transfer of claims (e.g. securities and other financial assets) without the physical movement of paper documents or certificates. See also dematerialisation.

Central securities depository (CSD): a facility for holding securities which enables securities transactions to be processed by book entry. Physical securities may be immobilised by the depository or securities may be dematerialised (i.e. so that they exist only as electronic records). In addition to safe keeping, a CSD may incorporate comparison, clearing and settlement functions.

Close links: Article 1(No 26), of Directive 2000/12/EC of the European Parliament and of the Council of 20 March 2000 relating to the taking up and pursuit of the business of credit institutions states that "Close links shall mean a situation in which two or more natural or legal persons are linked by: (a) participation, which shall mean the ownership, direct or by way of control, of 20 % or more of the voting rights or capital of an undertaking, or (b) control, which shall mean the relationship between a parent undertaking and a subsidiary, in all the cases referred to in Article 1(1) and (2) of Council Directive 83/349/EEC (OJ L 193, 18.7.1983, p. 1), or a similar relationship between any natural or legal person and an undertaking; any subsidiary undertaking of a subsidiary undertaking shall also be considered a subsidiary undertaking of the parent undertaking which is at the head of those undertakings. A situation in which two or more natural or legal persons are permanently linked to one and the same person by a control relationship shall also be regarded as constituting a close link between such persons".

Collection of fixed-term deposits: a monetary policy instrument that may be used by the Eurosystem for fine-tuning purposes where the Eurosystem offers remuneration on counterparties' fixed-term deposits on accounts with the National Central Banks in order to absorb liquidity from the market.

Correspondent banking: an arrangement under which one bank provides payment and other services to another bank. Payments through correspondents are often executed through reciprocal accounts (socalled nostro and loro accounts), to which standing credit lines may be attached. Correspondent banking services are primarily provided across international boundaries.

Correspondent central banking model (CCBM): a model established by the ESCB with the aim of enabling counterparties to use underlying assets in a cross-border context. In the CCBM, National Central Banks act as custodians for each other. This implies that each National Central Bank has a securities account in its securities administration for each of the other National Central Banks (and for the ECB). The Eurosystem may apply specific solutions for the cross-border use of nonmarketable assets.

Counterparty: the opposite party in a financial transaction (e.g. in a transaction with the central bank).

Credit institution: refers in this document to an institution covered by the definition contained in Article 1(1) of Directive 2000/12/EC of the European Parliament and of the Council of 20 March 2000 relating to the taking up and pursuit of the business of credit institutions, i.e. "an undertaking whose business is to receive deposits or other repayable funds from the public and to grant credit for its own account".

Custodian: an institution that undertakes the safe keeping and administration of securities and other financial assets on behalf of others.

Day-count convention: the convention regulating the number of days included in the calculation of interest on credits. The Eurosystem applies the day-count convention actual/360 in its monetary policy operations.

Delivery versus payment (DVP) system: a mechanism in an exchange-for-value settlement system that ensures that the final transfer of an asset occurs if and only if the final transfer of another (other) asset(s) occurs.

Dematerialisation: the elimination of physical certificates or documents of title which represent ownership of financial assets so that the financial assets exist only as accounting records.

Deposit facility: a standing facility of the Eurosystem which counterparties may use to make overnight deposits remunerated at a pre-specified interest rate.

Depository: an agent with the primary role of recording securities either physically or electronically and keeping records of the ownership of the securities.

Dutch auction: see single rate auction.

Earmarking system: a system for central banks' collateral management where liquidity is provided against assets earmarked for each individual transaction.

ECB time: the time at the place in which the ECB is located.

EEA (European Economic Area) countries: the EU Member States and Iceland, Liechtenstein and Norway.

End-of-day: the time of the business day (after the TARGET system has closed) at which the payments processed in the TARGET system are finalised for the day.

Equity price risk: the risk of loss due to movements in equity prices. The Eurosystem is exposed to equity price risk in its monetary policy operations to the extent that equities are considered to be eligible as tier two assets.

Euro area: the area covering those EU Member States which have adopted the euro as their single currency in accordance with the Treaty.

European System of Central Banks (ESCB): refers to the European Central Bank (ECB) and the National Central Banks of the EU Member States. (It should be noted that national central banks of Member States which have not adopted the single currency in accordance with the Treaty retain their powers in the field of monetary policy according to national law and are thus not involved in the conduct of the monetary policy of the Eurosystem.)

Eurosystem: the National Central Banks of the Member States which have adopted the single currency in accordance with the Treaty and the ECB.

Eurosystem business day: any day on which the ECB and at least one National Central Bank are open for the purpose of conducting Eurosystem monetary policy operations.

Final transfer: an irrevocable and unconditional transfer which effects a discharge of the obligation to make the transfer.

Fine-tuning operation: a non-regular open market operation executed by the Eurosystem mainly in order to deal with unexpected liquidity fluctuations in the market.

Fixed rate instrument: a financial instrument for which the coupon is fixed throughout the life of the instrument.

Fixed rate tender: a tender procedure where the interest rate is specified in advance by the central bank and participating counterparties bid the amount of money they want to transact at the fixed interest rate.

Floating rate instrument: a financial instrument for which the coupon is periodically reset relative to a reference index to reflect changes in short or medium-term market interest rates. Floating rate instruments have either pre-fixed coupons or post-fixed coupons.

Foreign exchange swap: simultaneous spot and forward transactions of one currency against another. The Eurosystem executes open market monetary policy operations in the form of foreign exchange swaps where the National Central Banks (or the ECB) buy (or sell) euro spot against a foreign currency and at the same time sell (or buy) it back forward.

Haircut: see valuation haircut.

Initial margin: a risk control measure applied in reverse transactions implying that the collateral required for a transaction is equal to the credit extended to the counterparty plus the value of the initial margin. The Eurosystem applies initial margins differentiated according to the Eurosystem's exposure time to the counterparty for a given transaction.

International Securities Identification Number (ISIN): an international identification code assigned to securities issued in financial markets.

Intraday credit: the credit extended and reimbursed within a period of less than one business day. The ESCB extends intraday credit (based on underlying assets) to eligible counterparties for payment systems purposes.

Inverse floating rate instrument: a structured note security where the rate of interest paid to the noteholder varies inversely with changes in a certain reference interest rate.

Issuer: the entity which is obligated on a security or other financial instrument.

Link: a link consists of all the procedures and arrangements between two securities settlement systems (SSSs) for the transfer of securities between the two involved SSSs through a book-entry process.

Longer-term refinancing operation: a regular open market operation executed by the Eurosystem in the form of a reverse transaction. Longer-term refinancing operations are executed through monthly standard tenders and have a maturity of three months.

Lump-sum allowance: a fixed amount which an institution deducts in the calculation of its reserve requirement in the Eurosystem's minimum reserve system.

Main refinancing operation: a regular open market operation executed by the Eurosystem in the form of a reverse transaction. Main refinancing operations are conducted through weekly standard tenders and have a maturity of two weeks.

Maintenance period: the period over which compliance with reserve requirements is calculated. The maintenance period for Eurosystem minimum reserves would be one month, starting on a fixed day of each month (e.g. the maintenance period may start on the 24th calendar day of each month and end on the 23rd calendar day of the following month).

Margin call: a procedure related to the application of variation margins, implying that if the value, as regularly measured, of the underlying assets falls below a certain level, central banks may require counterparties to supply additional assets (or cash). Similarly, if the value of the underlying assets, following their revaluation, were to exceed the amount owed by the counterparties plus the variation margin, the central bank returns excess assets (or cash) to the counterparty.

Marginal interest rate: the interest rate at which the total tender allotment is exhausted.

Marginal lending facility: a standing facility of the Eurosystem which counterparties may use to receive overnight credit against a pre-specified interest rate.

Marginal swap point quotation: the swap point quotation at which the total tender allotment is exhausted.

Marking to market: see variation margin.

Maturity date: the date on which a monetary policy operation expires. In the case of a repurchase agreement or swap, the maturity date corresponds to the repurchase date.

Maximum bid limit: the limit on the largest acceptable bid from an individual counterparty in a tender operation. The Eurosystem may impose maximum bid limits in order to avoid disproportionately large bids from individual counterparties.

Maximum bid rate: the upper limit to the interest rate at which counterparties may submit bids in variable rate tenders. Bids at a rate above a maximum bid rate announced by the ECB are discarded.

Member State: refers in this document to an EU Member State which has adopted the single currency in accordance with the Treaty.

Minimum allotment amount: the lower limit, expressed in percentage terms, of the ratio of bids at the marginal interest rate to be allotted in a tender operation. The Eurosystem may decide to apply a minimum ratio in its tender operations.

Minimum allotment ratio: the lower limit, expressed in percentage terms, of the ratio of bids at the marginal interest rate to be allotted in a tender operation. The Eurosystem may decide to apply a minimum ratio in its tender operations.

Minimum bid rate: the lower limit to the interest rates at which counterparties may submit bids in variable rate tenders. Bids at a rate below a minimum bid rate announced by the ECB are discarded.

Monetary Financial Institution (MFI): a credit institution or other financial institution, the business of which is to receive deposits and/or close substitutes for deposits from the public and which, for its own account (at least in economic terms), grants credit and/or makes investments in securities.

Multiple rate auction (American auction): an auction at which the allotment interest rate (or price/swap point) equals the interest rate offered in each individual bid.

National Central Bank (NCB): refers in this document to a central bank of an EU Member State which has adopted the single currency in accordance with the Treaty.

NCB business day: any day on which the National Central Bank of a specific Member State is open for the purpose of conducting Eurosystem monetary policy operations. In some Member States branches of the National Central Bank may be closed on NCB business days owing to local or regional bank holidays. In such cases, the relevant National Central Bank is responsible for informing the counterparties in advance of the arrangements to be made for transactions involving those branches.

Open market operation: an operation executed on the initiative of the central bank in the financial markets involving one of the following transactions: 1) buying or selling assets outright (spot or forward); 2) buying or selling assets under a repurchase agreement; 3) lending or borrowing against underlying assets as collateral; 4) the issuance of central bank debt certificates; or 5) the collection of deposits.

Outright transaction: a transaction where the central bank buys or sells assets outright in the market (spot or forward).

Pooling system: a system for central banks' collateral management where the counterparties provide a pool of assets to serve as collateral in their transactions with the central bank. By contrast with an earmarking system, the underlying assets are not earmarked for individual transactions in a pooling system.

Post-fixed coupon: a coupon on floating rate instruments which is determined on the basis of the values taken by the reference index at a certain date (certain dates) during the coupon accrual period.

Pre-fixed coupon: a coupon on floating rate instruments which is determined on the basis of the values taken by the reference index at a certain date (certain dates) before the start of the coupon accrual period.

Purchase date: the date on which the sale of purchased assets by the seller to the buyer becomes effective.

Purchase price: the price at which purchased assets are sold or are to be sold to the buyer by the seller.

Quick tender: the tender procedure used by the Eurosystem for fine-tuning operations when it is deemed desirable to have a rapid impact on the liquidity situation in the market. Quick tenders are executed within a time frame of one hour and are restricted to a limited set of counterparties.

Repo operation: a liquidity-providing reverse transaction based on a repurchase agreement.

Repurchase agreement: an arrangement whereby an asset is sold while the seller simultaneously obtains the right and obligation to repurchase it at a specific price on a future date or on demand. Such an agreement is similar to collateralised borrowing, with the exception that ownership of the securities is not retained by the seller. The Eurosystem uses repurchase agreements with a fixed maturity in its reverse transactions.

Repurchase date: the date on which the buyer is obliged to sell back assets to the seller in relation to a transaction under a repurchase agreement.

Repurchase price: the price at which the buyer is obliged to sell back assets to the seller in relation to a transaction under a repurchase agreement. The repurchase price equals the sum of the purchase price and the price differential corresponding to the interest on the extended liquidity over the maturity of the operation.

Reserve account: an account with the National Central Bank on which a counterparty's reserve holdings are maintained. The counterparties' settlement accounts with the National Central Banks may be used as reserve accounts.

Reserve base: the sum of the eligible balance sheet items (in particular liabilities) which constitute the basis for calculating the reserve requirement of an institution.

Reserve holdings: counterparties' holdings on their reserve accounts which serve to fulfil reserve requirements.

Reserve ratio: the ratio defined by the central bank for each category of eligible balance sheet items included in the reserve base. The ratios are used to calculate reserve requirements.

Reserve requirement: the requirement for institutions to hold minimum reserves with the central bank. In the Eurosystem's minimum reserve system, the reserve requirement of an institution is calculated by multiplying the reserve ratio for each category of items in the reserve base with the amount of those items in the institution's balance sheet. In addition, institutions are allowed to deduct a lump-sum allowance from their reserve requirement.

Reverse transaction: an operation whereby the National Central Bank buys or sells assets under a repurchase agreement or conducts credit operations against collateral.

RTGS (real-time gross settlement) system: a settlement system in which processing and settlement take place on an order-by-order basis (without netting) in real time (continuously). See also TARGET system.

Safe custody account: a securities account managed by the central bank on which credit institutions can place securities deemed suitable to back central bank operations.

Settlement account: an account held by a direct participant in the national RTGS system with the central bank for the purpose of processing payments.

Settlement date: the date on which a transaction is settled. The settlement might take place on the same day as the trade (same-day settlement) or can occur one or several days after the trade (the settlement date is specified as the trade date (T) + the settlement lag).

Single rate auction (Dutch auction): an auction at which the allotment interest rate (or price/swap point) applied for all satisfied bids is equal to the marginal interest rate.

Solvency risk: the risk of loss due to the failure (bankruptcy) of an issuer of a financial asset or due to the insolvency of the counterparty.

Standard tender: a tender procedure used by the Eurosystem in its regular open market operations. Standard tenders are carried out within a time frame of 24 hours. All counterparties fulfilling the general eligibility criteria are entitled to submit bids in standard tenders.

Standardised deduction: the fixed percentage of the outstanding amount of debt securities with an agreed maturity up to two years and of money market paper which can be deducted from the reserve base by the issuers which cannot present evidence that such outstanding amount is held by other institutions subject to the minimum reserve system of the Eurosystem, by the ECB or by a National Central Bank.

Standing facility: a central bank facility available to counterparties at their own initiative. The Eurosystem offers two overnight standing facilities: the marginal lending facility and the deposit facility.

Start date: the date on which the first leg of a monetary policy operation is settled. The start date corresponds to the purchase date for operations based on repurchase agreements and foreign exchange swaps.

Strip (separate trading of interest and principal): a zero coupon bond created in order to trade separately the claims on particular cash flows of a security and the principal of the same instrument.

Structural operation: an open market operation executed by the Eurosystem mainly in order to adjust the structural liquidity position of the financial sector vis-à-vis the Eurosystem.

Swap point: the difference between the exchange rate of the forward transaction and the exchange rate of the spot transaction in a foreign exchange swap.

TARGET (Trans-European Automated Real-time Gross settlement Express Transfer) system: a payment system consisting of one RTGS (real-time gross settlement) system in each of the Member States participating in the euro area at the start of Stage Three of Economic and Monetary Union. The national RTGS systems will be interconnected via the Interlinking mechanism so as to enable same-day cross-border transfers throughout the euro area. RTGS systems of non-euro area EU Member States may also be connected to TARGET, provided that they are able to process euro.

Tender procedure: a procedure in which the central bank provides liquidity to or withdraws liquidity from the market on the basis of bids submitted by counterparties in competition with each other. The most competitive bids are satisfied with priority until the total amount of liquidity to be provided or withdrawn by the central bank is exhausted.

Tier one asset: a marketable asset fulfilling certain uniform euro area-wide eligibility criteria specified by the ECB. Among these criteria are the requirements that it must be denominated in euro, be issued (or guaranteed) by entities located in EEA countries, and be located in a National Central Bank or CSD of the euro area.

Tier two asset: a marketable or non-marketable asset for which specific eligibility criteria are established by the Ntional Cntral Banks, subject to ECB approval.

Trade date (T): the date on which a trade (i.e. an agreement on a financial transaction between two counterparties) is struck. The trade date might coincide with the settlement date for the transaction (same-day settlement) or precede the settlement date by a specified number of business days (the settlement date is specified as T + the settlement lag).

Treaty: the Treaty establishing the European Community (or EC Treaty). It comprises the original EEC Treaty (Treaties of Rome) as amended.

Trigger point: a pre-specified level of the value of the liquidity provided at which a margin call is executed.

Valuation date: the date on which the assets underlying credit operations are valued.

Valuation haircut: a risk control measure applied to underlying assets used in reverse transactions, implying that the central bank calculates the value of underlying assets as the market value of the asset reduced by a certain percentage (haircut). The Eurosystem applies valuation haircuts reflecting features of the specific assets, such as the residual maturity.

Variable rate tender: a tender procedure whereby the counterparties bid both the amount of money they want to transact with the central bank and the interest rate at which they want to enter into the transaction.

Variation margin (or marking to market): the Eurosystem requires that a specified margin be maintained over time on the underlying assets used in its liquidity-providing reverse transactions. This implies that if the regularly measured market value of the underlying assets falls below a certain level, counterparties have to supply additional assets (or cash). Similarly, if the market value of the underlying assets, following their revaluation, were to exceed the amount owed by a counterparty plus the variation margin, the central bank would return excess assets (or cash) to the counterparty.

Volume tender: see fixed rate tender.

Zero coupon bond: a security paying only one cash flow during its life. For the purpose of this document, zero coupon bonds include securities issued at a discount and securities which deliver a single coupon at maturity. A strip is a special type of zero coupon bond.

Annex 3

Selection of counterparties for foreign exchange intervention operations and foreign exchange swaps for monetary policy purposes

The selection of counterparties for foreign exchange intervention operations and foreign exchange swaps for monetary policy purposes will follow a uniform approach irrespective of the chosen organisational set-up for the Eurosystem's external operations. Such a policy will not entail a substantial departure from existing market standards, as it will be derived by harmonising the National Central Banks' current best practices. The selection of counterparties to Eurosystem foreign exchange intervention operations will be based, primarily, on two sets of criteria.

The first set of criteria is inspired by the principle of prudence. A first prudential criterion is creditworthiness, which will be assessed using a combination of different methods (e.g. using credit ratings available from commercial agencies and the in-house analysis of capital and other business ratios); a second criterion is that the Eurosystem will require all its potential foreign exchange intervention counterparties to be subject to supervision by a recognised supervisor; and, as a third criterion, all the Eurosystem's foreign exchange intervention counterparties will need to follow high ethical standards and have a good reputation.

Once the minimum prudence requirement is fulfilled, the second set of criteria inspired by efficiency considerations will be applied. A first efficiency criterion relates to competitive pricing behaviour and the counterparty's ability to handle large volumes, even in turbulent market conditions. The quality and coverage of information provided by counterparties feature among other efficiency criteria.

The pool of potential foreign exchange intervention counterparties will be sufficiently large and diverse to guarantee the necessary flexibility when implementing intervention operations. It will enable the Eurosystem to choose from among different intervention channels. In order to be able to intervene efficiently in different geographical locations and time zones, the Eurosystem will be able to use counterparties in any international financial centre. However, in practice, it is likely that a substantial share of the counterparties will be located in the euro area. For foreign exchange swaps executed for monetary policy purposes, only counterparties located in the euro area will be used.

The National Central Banks may apply limit-based systems in order to control credit exposures vis-à-vis individual counterparties in foreign exchange swaps conducted for monetary policy purposes.

Annex 4

The reporting framework for the money and banking statistics of the European Central Bank(1)

1. Introduction

Council Regulation (EC) No 2533/98 of 23 November 1998 concerning the collection of statistical information by the ECB (OJ L 318, 27.11.1998, p. 8) defines the natural and legal persons which are subject to reporting requirements (the socalled reference reporting population), the confidentiality regime and the appropriate provisions for enforcement in accordance with Article 5(4) of the Statute of the European System of Central Banks and of the European Central Bank (the "Statute"). Furthermore, it entitles the ECB to use its regulatory power.

- to specify the actual reporting population;

- to define the ECB's statistical reporting requirements and impose them on the actual reporting population of participating Member States;

- to specify the conditions under which the ECB and the national central banks (NCBs) may exercise the right to verify or to carry out the compulsory collection of statistical information.

2. General considerations

The purpose of Regulation (EC) No 2819/98 of the European Central Bank of 1 December 1998 concerning the consolidated balance sheet of the monetary financial institutions sector (ECB/1998/16) is to enable the ECB and, in accordance with Article 5(2) of the Statute, NCBs - which carry out the work to the extent possible - to collect the statistical material required for the fulfilment of the tasks of the European System of Central Banks (ESCB) and, in particular, its task to define and implement the monetary policy of the Community in accordance with Article 105(2), first indent, of the Treaty establishing the European Community (the "Treaty"). The statistical information collected in accordance with ECB Regulation No ECB/1998/16 is used to establish the consolidated balance sheet of the MFI sector, the principal aim of which is to provide the ECB with a comprehensive statistical picture of monetary developments covering the aggregated financial assets and liabilities of MFIs located in the participating Member States, which are viewed as one economic territory.

For statistical purposes the ECB's reporting requirements in the context of the consolidated balance sheet of the MFI sector are based on three main considerations.

First, the ECB must receive comparable, reliable and up-to-date statistical information which is collected under comparable terms and conditions throughout the euro area. Although the data are collected in a decentralised way by NCBs in accordance with Article 5(1) and 5(2) of the Statute and, as far as necessary, in combination with further statistical requirements for Community or national purposes, a sufficient degree of harmonisation and compliance with minimum reporting standards is required in view of the need to establish a reliable statistical basis for the definition and conduct of the single monetary policy.

Second, the reporting obligations set out in ECB Regulation (EC) No 2819/98 (ECB/1998/16) must observe the principles of transparency and legal certainty. The reason for this is that ECB Regulation (EC) No 2819/98 (ECB/1998/16) is binding in its entirety and directly applicable throughout the euro area. It imposes obligations directly on natural and legal persons on which the ECB may impose sanctions whenever the ECB's reporting requirements are not fulfilled (see Article 7 of Regulation (EC) No 2533/98). The reporting obligations are therefore clearly defined and any discretion exercised by the ECB when verifying or compulsorily collecting statistical information follows identifiable principles.

Third, the ECB must minimise the reporting burden involved (see Article 3(a) of Council Regulation (EC) No 2533/98). Therefore, the statistical material collected by NCBs under Regulation (EC) No 2819/98 (ECB/1998/16) is also used to calculate the reserve base in accordance with the Regulation (EC) No 2818/98 of the European Central Bank of 1 December 1998 on the application of minimum reserves (ECB/1998/15).

The Articles of ECB Regulation (EC) No 2819/98 (ECB/1998/16) restrict themselves to defining, in general terms, the actual reporting population, its reporting obligations and the principles according to which the ECB and the NCBs normally exercise their competence to verify or compulsorily collect statistical information. The details of the statistical information to be reported in order to fulfil the ECB's statistical reporting requirements and the minimum standards to be followed are specified in Annexes I to IV to ECB Regulation (EC) No 2819/98 (ECB/1998/16).

3. Actual reporting population; List of MFIs for statistical purposes

Monetary Financial Institutions comprise resident credit institutions as defined in Community law, and all other resident financial institutions whose business is to receive deposits and/or close substitutes for deposits from entities other than MFIs, and, for their own account (at least in economic terms), to grant credits and/or to make investments in securities. The ECB establishes and maintains a list of institutions in accordance with this definition and following the classification principles specified in Annex I to ECB Regulation (EC) No 2819/98 (ECB/1998/16). The competence to establish and maintain this List of Monetary Financial Institutions for statistical purposes pertains to the Executive Board of the ECB. The population of MFIs resident in the euro area constitutes the actual reporting population.

NCBs are entitled to grant derogations to small MFIs if the MFIs which contribute to the monthly consolidated balance sheet account for at least 95 % of the total MFI balance sheet in each participating Member State. These derogations enable NCBs to apply the method of "cutting off the tail".

4. Statistical reporting obligations

To establish the consolidated balance sheet, the actual resident reporting population must report statistical information related to their balance sheet on a monthly basis. Further information is required on a quarterly basis. The statistical information to be reported is further specified in Annex I to ECB Regulation (EC) No 2819/98 (ECB/1998/16).

The relevant statistical data are collected by the NCBs, which must define the reporting procedures to be followed. ECB Regulation (EC) No 2819/98 (ECB/1998/16) does not prevent NCBs from collecting, from the actual reporting population, the statistical information necessary to fulfil the statistical requirements of the ECB as part of a broader statistical reporting framework which the NCBs establish under their own responsibility in accordance with Community or national law or established practice and which serves other statistical purposes. However, this is without prejudice to the fulfilment of the statistical requirements set out in ECB Regulation (EC) No 2819/98 (ECB/1998/16). In specific cases, the ECB may rely on statistical information collected for such purposes to fulfil its requirements.

The consequence of a derogation being granted by an NCB as defined above is that the small MFIs concerned are subject to reduced reporting obligations (implying, inter alia, only quarterly reporting) which are compulsory in the context of minimum reserves and are specified in Annex II to ECB Regulation (EC) No 2819/98 (ECB/1998/16). Requirements for those small MFIs that are not credit institutions are set out in Annex III to ECB Regulation (EC) No 2819/98 (ECB/1998/16). However, MFIs which have been granted a derogation have the option of fulfilling the full reporting requirements.

5. Use of statistical information under the ECB Regulation on minimum reserves

To minimise the reporting burden and to avoid any duplication in the collection of statistical information, the statistical information related to the balance sheet reported by MFIs under ECB Regulation (EC) No 2819/98 (ECB/1998/16) is also used to calculate the reserve base under ECB Regulation (EC) No 2818/98 (ECB/1998/15).

Indeed, for statistical purposes, the reporting agents have to report data to their respective NCBs in accordance with the framework of Table 1 below, which is included in Annex I to ECB Regulation (EC) No 2819/98 (ECB/1998/16). Within Table 1, the boxes marked with an "*" are used by the reporting institutions to calculate their reserve base (see Box 11 in Chapter 7 of the present "General documentation").

In order to make a correct calculation of the reserve base to which a positive reserve ratio is applied, a detailed breakdown is required for deposits with an agreed maturity of over two years, for deposits redeemable at notice of over two years and for repo liabilities of credit institutions vis-à-vis the ("domestic" and "other MUMS") "MFIs", "CIs subject to minimum reserves, ECB and NCBs" and "Central government" sectors, and vis-à-vis the Rest of the World (RoW).

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Furthermore, depending on the national collection systems and without prejudice to full compliance with the definitions and classification principles of the MFI balance sheet set out in ECB Regulation (EC) No 2819/98 (ECB/1998/16), credit institutions subject to reserve requirements may alternatively report the data necessary to calculate the reserve base, except those on negotiable instruments, in accordance with the table below, provided that no bold printed positions of the previous table are affected.

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Annex II to ECB Regulation (EC) No 2819/98 (ECB/1998/16) contains specific and transitional provisions and provisions on mergers involving credit institutions in respect of the application of the minimum reserve system.

Annex II to ECB Regulation (EC) No 2819/98 (ECB/1998/16) includes, in particular, a reporting scheme for credit institutions in the "tail". Credit institutions in the "tail" have to report, as a minimum, quarterly data necessary to calculate the reserve base in accordance with Table 1A below. These institutions ensure that the reporting according to Table 1A is fully consistent with the definitions and classifications applicable in Table 1. The "tail" institutions' reserve base data for three (one-month) reserve maintenance periods is based on end-of-quarter data collected by the NCBs with a deadline of 28 working days following the end of the quarter to which they relate.

Annex II to ECB Regulation (EC) No 2819/98 (ECB/1998/16) also includes provisions on reporting on a consolidated basis. On receiving authorisation from the European Central Bank (ECB), credit institutions subject to minimum reserves may carry out consolidated statistical reporting for a group of credit institutions subject to minimum reserves within a single national territory, provided that all the institutions concerned have renounced the benefit of any lump-sum allowance from the reserve requirement. The benefit of the lump-sum allowance remains, however, for the group as a whole. All the institutions concerned are included separately in the ECB's List of Monetary Financial Institutions (MFIs).

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Annex II to ECB Regulation (EC) No 2819/98 (ECB/1998/16) also includes provisions to be applied in the case of mergers involving credit institutions. In this annex, the terms "merger", "merging institutions" and "acquiring institution" have the meaning determined in ECB Regulation (EC) No 2818/98 (ECB/1998/15). For the maintenance period within which a merger takes effect, the reserve requirements of the acquiring institution are calculated and have to be fulfilled as set out in Article 13 of ECB Regulation (EC) No 2818/98 (ECB/1998/15). For the consecutive reserve maintenance periods, the reserve requirements of the acquiring institution are calculated on the basis of a reserve base and of statistical information in accordance with specific rules (see the table in the Appendix to Annex II to ECB Regulation (EC) No 2819/98 (ECB/1998/16)), if applicable. Otherwise, the normal rules for the reporting of statistical information and the calculation of reserve requirements, as set out in Article 3 of ECB Regulation (EC) No 2818/98 (ECB/1998/15), apply. Moreover, the relevant NCB may authorise the acquiring institution to fulfil its obligation to report statistical information through temporary procedures. This derogation from normal reporting procedures must be limited to the minimum time possible and, in any case, should not exceed six months after the merger has taken effect. This derogation is without prejudice to the obligation for the acquiring institution to fulfil its reporting obligations in accordance with ECB Regulation (EC) No 2819/98 (ECB/1998/16) and, if applicable, its obligation to assume the reporting obligations of merging institutions. The acquiring institution has the obligation to inform the relevant NCB, once the intention to merge has become public and in good time before the merger takes effect, of the procedures that it intends to implement to fulfil its statistical reporting obligations relating to the determination of reserve requirements.

6. Verification and compulsory collection

The ECB itself and the NCBs normally exercise the competence to verify and compulsorily collect statistical information whenever minimum standards for transmission, accuracy, conceptual compliance and revisions are not fulfilled. These minimum standards are set out in Annex 4 to ECB Regulation (EC) No 2819/98 (ECB/1998/16).

7. Non-participating Member States

As a regulation under Article 34(1) of the Statute does not confer any rights or impose any obligations on Member States with a derogation (Article 43(1) of the Statute) and on Denmark (Article 2 of the Protocol on certain provisions relating to Denmark) and is not applicable to the United Kingdom (Article 8 of the Protocol on certain provisions relating to the United Kingdom of Great Britain and Northern Ireland), ECB Regulation (EC) No 2819/98 (ECB/1998/16) is applicable only in the participating Member States.

However, Article 5 of the Statute concerning the competence of the ECB and the NCBs in the field of statistics and Council Regulation (EC) No 2533/98 are applicable in all Member States. This also implies, together with Article 10 (ex Article 5) of the Treaty, an obligation on the non-participating Member States to design and implement at the national level all the measures that they consider appropriate in order to carry out the collection of statistical information needed to fulfil the ECB's statistical reporting requirements and the timely preparations in the field of statistics in order for them to become participating Member States. This obligation has been made explicit in Article 4 and Recital No 17 of Council Regulation (EC) No 2533/98. For reasons of transparency this special obligation is recalled in the recitals of ECB Regulation (EC) No 2819/98 (ECB/1998/16).

(1) The content of this annex is provided for information purposes only. The relevant legal acts for the reporting of money and banking statistics are Council Regulation (EC) No 2533/98 of 23 November 1998 concerning the collection of statistical information by the ECB and Regulation (EC) No 2819/98 of the European Central Bank of 1 December 1998 concerning the consolidated balance sheet of the monetary financial institutions sector (ECB/1998/16).

Annex 5

The Eurosystem websites

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Annex 6

Procedures and sanctions to be applied in the event of non-compliance with counterparty obligations

1. Financial penalties

In the event of an infringement by a counterparty of tender rules(1), of bilateral transaction rules(2), of the rules for the use of underlying assets(3), or of end-of-day procedures and access conditions for the marginal lending facility(4), the Eurosystem shall apply financial penalties as follows:

(i) For infringements of rules related to tender operations, bilateral transactions and the use of underlying assets, for the first and the second infringements that occur within a 12-month period a financial penalty shall be applied to each infringement. The financial penalties that can be applied shall be computed at the marginal lending rate plus 2,5 percentage points.

- For infringements of rules related to tender operations and bilateral transactions, the financial penalties shall be calculated on the basis of the amount of collateral or cash which the counterparty could not settle and multiplied by the coefficient 7/360.

- For infringements of rules related to the use of underlying assets, the financial penalties shall be calculated on the basis of the amount of ineligible assets (1) provided by the counterparty to a National Central Bank or the ECB or (2) not removed by the counterparty after a grace period of 20 working days following an event after which the eligible assets become ineligible and multiplied by the coefficient 1/360.

ii) The first time the rules for end-of-day procedures or for access to the marginal lending facility are infringed, the financial penalties that can be applied shall be computed at 5 percentage points. In the event of repeated infringements the penalty interest rate shall be increased by a further 2,5 percentage points each time this occurs within a 12-month period, calculated on the basis of the amount of the unauthorised access to the marginal lending facility(5).

2. Non-financial penalties

The Eurosystem shall suspend a counterparty for infringements of rules related to tender operations and bilateral transactions, and of rules for underlying assets as set out below:

a) Suspension after infringements of rules related to tender operations and bilateral transactions

If a third infringement of the same type occurs within a 12-month period, the Eurosystem shall suspend counterparties from the subsequent open market operation(s) of the same type and executed under the same procedures to be initiated during a certain period in addition to a financial penalty calculated in accordance with the rules outlined in Section 1. The suspension shall be applied in accordance with the following scale:

(i) if the amount of non-delivered collateral or cash is up to 40 % of the total collateral or cash to be delivered on the occasion of the third infringement, a suspension of one month shall be applied;

(ii) if the amount of non-delivered collateral or cash is between 40 % and 80 % of the total collateral or cash to be delivered on the occasion of the third infringement, a suspension of two months shall be applied;

(iii) if the amount of non-delivered collateral or cash is between 80 % and 100 % of the total collateral or cash to be delivered on the occasion of the third infringement, a suspension of three months shall be applied.

These financial penalties and suspension measures shall also apply, without prejudice to sub-section c) below, to any other successive infringement during each 12-month period.

b) Suspension after infringements of rules for underlying assets

If a third infringement occurs within a 12-month period, the Eurosystem shall suspend the counterparty from the subsequent open market operation in addition to a financial penalty calculated in accordance with Section 1 above.

These financial penalties and suspension measures shall also apply, without prejudice to sub-section c) below, to any other successive infringement during each 12-month period.

c) Suspension from access to all future monetary policy operations for a certain period in exceptional cases

In exceptional cases where required on account of the seriousness of the case(s) of non-compliance, and taking into account in particular the amounts involved, the frequency or the duration of the cases of non-compliance, consideration could be given, in addition to a financial penalty calculated in accordance with Section 1 above, to the suspension of a counterparty from access to all future monetary policy operations for a period of three months.

d) Institutions located in other Member States

The Eurosystem may also decide whether the suspension measure proposed to be taken vis-à-vis the non-compliant counterparty should also apply to branches of the same institution located in other Member States.

(1) This applies if a counterparty is not able to transfer a sufficient amount of underlying assets to settle the amount of liquidity it has been allotted in a liquidity-providing operation or if it is not able to deliver a sufficient amount of cash to settle the amount it has been allotted in a liquidity-absorbing operation.

(2) This applies if a counterparty is not able to deliver a sufficient amount of eligible underlying assets or if it is not able to deliver a sufficient amount of cash to settle the amount agreed in bilateral transactions.

(3) This applies if a counterparty is using assets that are or have become ineligible to secure an outstanding credit..

(4) This applies if a counterparty has a negative balance on the settlement account at the end of the day and does not fulfil the access conditions for the marginal lending facility.

(5) Financial penalties for cases of non-compliance with the rules for the use of assets which are considered eligible only for intraday credit purposes are only foreseen within the TARGET legal framework. Such cases of non-compliance are not covered by this Guideline.

ANNEX II

ADDITIONAL MINIMUM COMMON FEATURES

I. Additional minimum common features applicable to all arrangements for monetary policy operations

1. The relevant contractual or regulatory arrangements applied by the NCB should ensure that its standard terms or conditions will be applicable to monetary policy operations.

2. The relevant contractual or regulatory arrangements applied by the NCB should ensure that the NCBs are able to implement any amendment to the monetary policy framework without undue delay. Provision should be made for the notice of such changes to be communicated, with certainty as to the moment at which they take legal effect, to counterparties.

3. The relevant contractual or regulatory arrangements applied by the NCB should stipulate that all payments relating to monetary policy operations (other than foreign currency payments in foreign exchange swap agreements) should be in euro.

4. If it is necessary to constitute all transactions under the agreement as a single contractual arrangement and/or to constitute the agreement as a master agreement in order to allow effective close-out and termination netting, such provision should be included.

5. The relevant contractual or regulatory arrangements applied by the NCB should ensure that, in the relationship between the NCB and Counterparties, appropriate and unambiguous rules relating to the use of forms (including the confirmation of terms of transactions), data carriers and means and specifics of communication will be in place.

6. The relevant contractual or regulatory arrangements applied by the NCB at least should provide events of default which are not materially different from the following:

(a) a decision is made by a competent judicial or other authority to implement in relation to the Counterparty a procedure for the winding-up of the Counterparty or the appointment of a liquidator or analogous officer over the Counterparty or any other analogous procedure; or

(b) a decision is made by a competent judicial or other authority to implement in relation to the Counterparty a reorganisation measure or other analogous procedure intended to safeguard or restore the financial situation of the Counterparty and to avoid the making of a decision of the kind referred to in (a); or

(c) a declaration by the Counterparty in writing of its inability to pay all or any part of its debts or to meet its obligations arising in relation to monetary policy transactions, or a voluntary general agreement or arrangement entered into by it with its creditors, or if the Counterparty is, or is deemed to be, insolvent or is deemed to be unable to pay its debts; or

(d) procedural steps preliminary to a decision being taken under (a) or (b); or

(e) any representation or other pre-contractual statement made by the Counterparty or which is implied to have been made by the Counterparty under applicable provisions of law is incorrect or untrue; or

(f) the Counterparty's authorisation to conduct activities under either Directive 2000/12/EC relating to the taking up and pursuit of the business of credit institutions (as subsequently amended) or under Directive 93/22/EEC on investment services in the securities field (as subsequently amended), as implemented in the relevant Member State of the Eurosystem respectively, is suspended or revoked; or

(g) the Counterparty is suspended or expelled from membership of any payment system or arrangement through which payments under monetary policy transactions are made or (except for foreign exchange swap transactions) is suspended or expelled from membership of any securities settlement system used for the settlement of Eurosystem monetary policy transactions; or

(h) measures such as are referred to in Article 22 of Directive 2000/12/EC relating to the taking up and pursuit of the business of credit institutions (as subsequently amended) are taken against the Counterparty; or

(i) (in relation to reverse transactions) the Counterparty fails to comply with provisions concerning risk control measures; or

(j) (in relation to repurchase transactions) the Counterparty fails to pay the purchase price or the repurchase price or fails to deliver purchased or repurchased assets; or (in relation to collateralised loans) the Counterparty fails to deliver assets or reimburse the credit on the respectively applicable dates for such payments and deliveries; or

(k) (in relation to foreign exchange swap transactions and fixed-term deposits) the Counterparty fails to pay the euro amount or (in relation to foreign exchange swap transactions) fails to pay foreign currency amounts on the applicable dates for such payments; or

(l) the occurrence of an event of default (not materially different from those defined in this clause) in relation to the Counterparty under an agreement concluded for the purposes of the management of the foreign reserves or own funds of any member of the Eurosystem; or

(m) the Counterparty fails to provide relevant information thus causing severe consequences for the NCB concerned; or

(n) the Counterparty fails to perform any other of its obligations under arrangements for reverse transactions and foreign exchange swap transactions and (if capable of remedy) does not remedy such failure within a maximum of 30 days in the case of collateralised transactions and a maximum of 10 days for foreign exchange swap transactions after notice is given by the NCB requiring it to do so; or

(o) an event of default occurs in relation to the Counterparty in any agreement with any other member of the Eurosystem entered into for the purpose of effecting monetary policy operations in respect of which that other member of the Eurosystem has exercised its right to close out any transaction under such agreement by reason of the event of default.

Event (a) must be automatic; events (b) and (c) may be automatic; events (d) to (o) cannot be automatic and must be discretionary (that is, perfected only upon service of a notice of default). Such notice of default may provide a "grace period" of up to a maximum of three business days to rectify the event in question. For events of default that are discretionary, the provisions as to the exercise of such discretion should provide certainty as to the effect of such exercise.

7. The relevant contractual or regulatory arrangements applied by the NCB should ensure that if an event of default occurs, the NCB is entitled to exercise the following remedies: suspension of the Counterparty from access to open market operations; terminating all outstanding agreements and transactions; or demanding accelerated performance of claims that have not yet matured or are contingent. In addition, the NCB may be entitled to exercise the following remedies: using deposits of the Counterparty placed with the NCB to set off claims against that Counterparty; suspending the performance of obligations against the Counterparty until the claim on the Counterparty has been satisfied; claiming default interest; or claiming an indemnity for any losses sustained as a consequence of a default by the Counterparty. In addition, the relevant contractual or regulatory arrangements applied by the NCB should ensure that if an event of default occurs, such NCB shall be in a legal position to realise all assets provided as collateral without undue delay and in such a way as to entitle the NCB to realise value for the credit provided, if the Counterparty does not settle its negative balance promptly.

8. The relevant contractual or regulatory arrangements applied by the NCB should ensure that NCBs could obtain any relevant information from Counterparties in relation to the Eurosystem's monetary policy operations.

9. The relevant contractual or regulatory arrangements applied by the NCB should provide for all notices or other communications to be in written and/or electronic form. The relevant contractual or regulatory arrangements applied by the NCB should provide certainty as to how notices or other communications should be given, and when they take effect. Any period after which they take effect should not be so long as to alter the economic effect of the arrangements taken as a whole. In particular, confirmation should be delivered promptly and checked promptly.

10. The relevant contractual or regulatory arrangements applied by the NCB should provide that the rights and obligations of the Counterparty are not to be assigned, charged or otherwise dealt with by the Counterparty without the prior written consent of the NCB.

11. The relevant contractual or regulatory arrangements applied by the NCB should provide that only the NCB and the identified Counterparty have rights and obligations arising under the transaction (but allowing for the relationships between NCBs (and/or the ECB) arising out of the cross-border use of eligible assets and also as necessary for operations effected with counterparties acting through a networking institution).

12. The relevant contractual arrangements applied by the NCB should stipulate that the governing law for the relevant contractual or regulatory arrangements applied by the NCB and for all transactions under such arrangements should (except where the cross-border use of eligible assets requires otherwise) be that of the Member State where the NCB is situated, and the place of dispute resolution should, without prejudice to the competence of the Court of Justice of the European Communities, be the official courts of that Member State.

13. Deposit arrangements should specify that settlement (both the taking-in and the paying-out) of fixed-term deposits takes place on the days specified in the ECB's announcement of the deposit operation.

II. Additional minimum common features for reverse transactions

Features common to all reverse transactions

14. The date of the reverse leg of the transaction should be fixed at the time of entering into each transaction.

15. The relevant contractual or regulatory arrangements applied by the NCB should define "business day" to be, in relation to an obligation to make a payment, any day on which all relevant parts of Target are operational to effect such a payment and, in relation to an obligation to deliver assets, any day on which the securities settlement systems through which delivery is to be made are open for business in the place where delivery of the relevant securities is to be effected.

16. The mechanisms for changing non-euro amounts into euro should specify that the rate to be used is the ECB daily euro foreign exchange reference rate or, if not available, the spot rate of exchange indicated by the ECB on the business day before the day on which the conversion is to be made for the sale by it of euro against a purchase by it of the other currency.

Features exclusive to repurchase transactions

17. There should be a sale of eligible assets against euro cash, together with a simultaneous agreement to sell back against euro cash equivalent assets at a specified time.

18. The obligation to sell back equivalent assets should define such equivalence to be assets of the same issuer, forming part of the same issue (irrespective of the date of issue) and being of identical type, nominal value, amount and description as those assets to which such comparison is made. If the assets in respect of which the comparison is made have been converted or redenominated or a call has been made thereon, the definition of equivalence must be modified to mean in the case of conversion those into which the assets have converted, in the case of a call being made on assets equivalent assets to the paid-up assets, provided that the seller has paid to the buyer a sum equal to the value of the call, and in the case of redenominated assets equivalent assets to those into which the original assets have been redenominated with, as necessary, a sum of money equal to any difference in value between the assets before and after their redenomination.

19. The events of default entitling the NCB to terminate and close out all outstanding transactions should not be materially different from the provisions set out in point 6.

20. The relevant contractual or regulatory arrangements applied by the NCB should contain provisions in relation to netting which are aimed at achieving economic effects equivalent to those set out below.

(a) Upon the occurrence of an event of default, the repurchase date for each transaction shall be deemed immediately to occur and, subject to the following provisions, any equivalent margin assets shall be immediately deliverable (and so that performance of respective obligations of the parties with regard to the delivery of assets and the payment of the repurchase price for any repurchased assets shall be effected only in accordance with the provision of (b) below) or, alternatively, the repurchase transaction will be terminated.

(b) (i) The default market values of the repurchased assets and any equivalent margin assets to be transferred and the repurchase price to be paid by each party shall be established by the NCB for all transactions as at the repurchase date; and

(ii) on the basis of the sums so established, a calculation shall be made by the NCB (as at the repurchase date) of what is due from each party to the other and the sums due from one party shall be set off against the sums due to the other and only the net balance shall be payable by the party having the claim thereby valued at the lower amount and such net balance shall be due and payable on the next day on which all relevant parts of Target are operational to effect a payment. For the purposes of this calculation, any sums not denominated in euro shall be converted into euro on the relevant date at the rate calculated in accordance with point 16.

c) "Default market value" means, with regard to any assets on any date:

(i) the market value of such assets at the default valuation time calculated on the basis of the most representative price on the business day preceding the valuation date; or

(ii) in the absence of a representative price for a particular asset on the business day preceding the valuation date, the last trading price is used. If no trading price is available, the NCB will define a price, taking into account the last price identified for the asset in the reference market; or

(iii) in the case of assets for which no market value exists, any other reasonable method of valuation; or

(iv) if the NCB has sold before the default valuation time the assets or equivalent assets at the market price, the net proceeds of sale, after deducting all reasonable costs, fees and expenses incurred in connection with such sale, such calculation being made and amounts determined by the NCB.

21. If the relevant contractual or regulatory arrangements applied by the NCB include any provision for the substitution of collateral, the arrangements should ensure that compliance with the requisite risk control measures is maintained.

22. If the relevant contractual or regulatory arrangements applied by the NCB include any provision for margins to be paid (or returned) in cash, provision should be made that any further obligation to return (or provide) margins should first be satisfied by the use of cash up to the same amount (together with any interest attributed to it).

Features exclusive to collateralised loan arrangements

23. The assets provided under a collateralised loan arrangement (e.g. a pledge) must be legally realisable without there being prior claims over the assets concerned. It should not be possible for third parties (including the liquidating authority in the case of insolvency) to intervene and successfully claim the assets pledged (in the absence of fraud), or any rights attached to them.

24. The NCB should be in a legal position to realise the economic value of assets pledged in the context of a liquidity-providing operation in pre-specified circumstances not materially different from those set out in point 6 and these should also reflect the circumstances in which the NCB can treat the Counterparty as being in default under repurchase arrangements.

25. Collateralised loan arrangements should allow for the possibility of operations which are entered into on an intraday basis to be extended to overnight operations.

III. Additional minimum common features for foreign exchange swap arrangements

26. Each transaction should be constituted as a simultaneous spot and forward sale and purchase of euro against one foreign currency.

27. The relevant contractual or regulatory arrangements applied by the NCB should include a provision as to the timing and mechanics of the transfer of payments. The date of the forward sale/purchase should be fixed at the time of entering into each transaction.

28. The relevant contractual or regulatory arrangements applied by the NCB should define the foreign currency, spot rate, forward rate, transfer date and retransfer date in accordance with the following:

(a) "foreign currency" shall be any lawful currency other than the euro;

(b) "spot rate" means, in relation to a specific transaction, the rate (as calculated in accordance with point 16) applied to convert the euro amount into such amount in the foreign currency relevant for that transaction as one party shall be obliged to transfer to the other at the transfer date against payment of the euro amount and which rate shall be set out in the confirmation;

(c) "forward rate" means the rate calculated in accordance with point 16 and applied to convert the euro amount into such amount in the foreign currency as one party shall be obliged to transfer to the other at the retransfer date against payment of the euro amount, which rate shall be as set out in the confirmation and defined in the relevant contractual or regulatory arrangements applied by the NCB;

(d) "retransfer foreign currency amount" means such amount of foreign currency as is required to purchase the euro amount as at the retransfer date;

(e) "transfer date" means with regard to any transaction, the date (and, where appropriate, the time on that date) when the transfer of the euro amount by one party to the other is to become effective which for the avoidance of doubt shall be the date (and, where appropriate, the time on that date) when the parties have agreed that settlement of a transfer of the euro amount shall occur;

(f) "retransfer date" means, with regard to any transaction, the date (and, where appropriate, the time on that date) when one party is to retransfer the euro amount to the other.

29. The relevant contractual or regulatory arrangements applied by the NCB should provide that certain events (as to which, see point 30) should lead to a closing-out of all outstanding transactions and must provide for the way in which such a closing-out (including termination netting) would take place.

30. The events of default entitling the NCB to terminate and close out all outstanding transactions should not be materially different from the provisions set out in point 6.

31. The relevant contractual or regulatory arrangements applied by the NCB should contain provisions in relation to netting which are aimed at achieving economic effects equivalent to those as set out below.

(a) If an event of default has occurred, each transaction shall be deemed to have terminated and the replacement values of the euro and the retransfer foreign currency amounts shall be established by the NCB on the basis that such replacement values shall be the amounts that would be necessary to preserve for the NCB the economic equivalent of any payments that would otherwise have been required; and

(b) On the basis of the sums so established, a calculation shall be made by the NCB (as at the retransfer date) of what is due from each party to the other and the sums due from one party shall be converted in accordance with point 16, where necessary, into euro and set off against the sums due to the other and only the net balance shall be payable by the party having the claim thereby valued at the lower amount and such net balance shall be due and payable on the next day on which all relevant parts of Target are operational to effect such a payment.