More details on the public sector purchase programme (PSPP) - Questions & answers
Last updated 19 January 2017
Q: What is the precise meaning of the expression “to the extent necessary” when referring to PSPP purchases at yields below the deposit facility rate (DFR)?
A: For each jurisdiction, priority will be given to purchases of assets with yields above the DFR. This means that among the jurisdictions with eligible assets with yields below the DFR, some may require purchases at yields below the DFR and others may not, depending on the amount of assets with yields above the DFR available to fulfil the total PSPP volume for the jurisdiction in question. This amount may also change over time, reflecting changes in market interest rates relative to the DFR.
In practice, the following procedure applies. First, the purchase amounts that would arise for each country from the application of the ECB capital key are determined (due to the PSPP programme constraints, this process has resulted since the beginning of the PSPP in a re-allocation of purchases across countries and the use of substitute purchases). Second, the minimum amount of bonds that needs to be purchased at yields below the DFR in order to achieve the required purchase amounts is determined for each jurisdiction. In this way, the approach minimises purchases of bonds with yields below the DFR within each jurisdiction.
This mechanism can be reviewed in the future.
Q: Why are you starting to make purchases at yields below the DFR while you still have other bonds available?
A: The Eurosystem can already estimate with a reasonable degree of certainty the necessary extent of purchases at yields below the DFR on the basis of current market conditions. The need to preserve smooth market functioning calls for distributing evenly over time the necessary amount of purchases at yields below the DFR, rather than abruptly changing the sectors of the yield curve where PSPP purchases take place.
Q: Do purchases at yields below the DFR force losses onto national central banks?
A: Our mandate is to pursue price stability, not to maximise central bank profits. While purchases of bonds with yields below the DFR result in interest expenses, this effect is limited. Moreover, purchases at yields below the DFR will only be made to the extent necessary and generally represent only a small proportion of Eurosystem purchases. The impact of such purchases on the profit and loss account is also limited by the relatively short maturity of such bonds.
Why were 13 new entities added to the list of PSPP-eligible agency issuers in June 2016?
On 3 December 2015, the Governing Council decided that regional and local government issuers should be eligible for the PSPP. This decision, together with the establishment of the corporate sector purchase programme (CSPP), led the Eurosystem to systematically review all public undertakings which comply with the PSPP and the CSPP eligibility criteria and to allocate the issuers to one or the other of the programmes. Only agency issuers which appear on the list of PSPP-eligible agencies published on the ECB’s website are eligible for PSPP purchases. Agency issuers whose debt securities are eligible for PSPP purchases will therefore not be eligible for CSPP purchases.
With the start of the CSPP, will certain PSPP-eligible agency issuers become eligible for the CSPP instead?
Yes. Following the Eurosystem’s systematic review of all public undertakings which comply with the PSPP and the CSPP eligibility criteria, it has allocated public undertakings to one or the other of the two programmes. On the basis of this review, several agency issuers previously eligible for the PSPP will instead be eligible for CSPP purchases. These issuers are: ENEL S.p.A., SNAM S.p.A., Terna S.p.A. - Rete Elettrica Nazionale, Ferrovie dello Stato Italiane S.p.A. and ENMC - Entidade Nacional para o Mercado de Combustíveis E.P.E.
If an NCB is purchasing, or will purchase, substitutes to fulfil its share in the ECB capital key does that mean it will stop buying its own government and agency debt before the end of the programme?
No. Substitute purchases are conducted to complement the purchase of marketable debt instruments issued by the government and agencies. Once such a need is identified for a given country, the share of substitute purchases is calibrated in order to allow the Eurosystem to continue buying eligible marketable debt instruments issued by that country’s government and agencies until the end of the APP.
Will the APP purchases amount to exactly €80 billion every month?
The monthly €80 billion target refers to the average purchase volume between April 2016 and March 2017. The Eurosystem will continue to allow the actual monthly purchase volumes under the APP to reflect seasonal fluctuations in market liquidity. This means that the Eurosystem engages in moderate front- and back-loading of aggregate purchases in months with adequate market liquidity and allows the purchases to fall below the monthly average in periods of relatively low market activity, notably the summer and the immediate run-up to year-end. The front- and back-loading is not tied to a specific calendar but to the Eurosystem’s judgement of market conditions. Additionally, the monthly purchase volumes of the different programmes under the APP (ABSPP, CBPP3, CSPP and PSPP) will remain flexible to take into account prevailing market liquidity and activity at any time.
Why was the share of EU supranational bond purchases within the monthly PSPP purchases decreased from 12% to 10%?
A reduction of the share of purchases of bonds issued by EU supranational institutions supports the continued smooth and market-neutral implementation of the PSPP in view of the outstanding eligible securities and applicable limits under the programme.
As risk sharing within the PSPP applies to purchases of supranational bonds and purchases conducted by the ECB, the reduction in the share of EU supranational bonds will be accompanied by an increase in the share of purchases conducted by the ECB from 8% to 10% of monthly PSPP purchases. The risk-shared part of the PSPP therefore remains unchanged at 20%.
Why have the issuer and issue share limit for EU supranational bonds been increased from 33% to 50%?
Increasing the issuer and issue share limit for EU supranational bonds provides additional flexibility in the implementation of the PSPP.
To which entities do the 50% issuer and issue share limit apply?
The 50% issuer and issue share limit apply to entities listed as “International or supranational institutions located in the euro area” on this page. Note that this list does not include eligible agencies located in the euro area.
Can the Eurosystem sell securities purchased under the APP?
Purchases under the APP are expected to continue for an extended time as the ECB has announced that the purchases under the APP will run until at least December 2017 and principal payments on the securities purchased under the APP will be reinvested as they mature, for as long as necessary. Sales are therefore not expected to be normal practice in the foreseeable future, although there are no formal (e.g. accounting) constraints that would preclude securities from being sold. Exceptional adjustments to holdings of individual securities purchased under the APP may occur, if needed for technical reasons, e.g. to ensure continued compliance within the limit framework.
What does the inclusion of regional and local bonds to the PSPP mean and why was the decision to add them taken?
On 3 December 2015, the Governing Council decided that euro-denominated marketable debt instruments issued by regional and local governments located in the euro area will become eligible for regular PSPP purchases. This decision refers only to those regional and local bonds that meet all other eligibility criteria, in particular the minimum rating requirement as stated in Decision (EU) 2015/774. Purchases of these securities under the PSPP will start as soon as the relevant legal acts are amended. Regional and local bonds will only be purchased by the NCBs of the jurisdiction in which the issuing entity is located.
Expanding the set of securities eligible for PSPP purchases by adding regional and local government bonds will enhance the flexibility of the programme and thereby support the continued smooth implementation of purchases until its end date.
What are the criteria for securities issued by agencies located in the euro area to be eligible for purchase under the PSPP? Why was the list updated on the 2 July 2015?
When the PSPP was announced, the initial list of agencies included 7 entities whose securities were eligible for purchases under the PSPP. The list was first updated on 15 April 2015 and, subsequently, on 2 July 2015, at the discretion of the Governing Council, which, in updating the list of eligible agencies took into account monetary policy as well as risk management considerations.
While the issuers added to the list on 2 July differ from previous agencies in their functional role (12 out of 13 are infrastructure-related issuers), what all agency issuers eligible for purchases under the PSPP have in common is that they are clearly public sector entities, within the meaning of Article 3 of Council Regulation (EC) No 3603/93 (4). These entities are therefore subject to the same prohibition of monetary financing (Article 123 TFEU), which forbids the extension of direct credit to public sector entities or sovereigns.
How can I see how much the Eurosystem has purchased each month under the expanded asset purchase programme (APP)?
The Governing Council decided that the combined monthly purchases under the expanded asset purchase programme will amount to €80 billion until March 2017 (from March 2015 until March 2016 this figure was €60 billion, from April 2017 onwards the monthly purchases will again be €60 billion). This amount refers to the monthly net purchases of marketable debt instruments under the PSPP, the ABSPP and the CBPP3.
On a monthly basis the ECB publishes both the monthly net purchases and the total holdings for the ABSPP, CBPP3 and PSPP, allowing the public to see the amounts purchased under each constituent programme of the APP.
Net purchases under the APP are calculated at book value and do not include the amortisation, which may decrease (or increase) the value of the holdings over time. The amortisation occurs on a quarterly basis and emerges from an accounting principle that implies that securities purchased at prices below face value have to be revalued upwards over time towards maturity, while securities purchased at prices above face value will be revalued downwards over time. The amortisation does not alter the liquidity injected into the banking system through the purchases under the APP.
Figures included in the tables on the public website, along with the historical time series available in csv files, include the net purchases, quarter-end amortisation adjustments when applicable, and the value of the holdings (which include the amortisation effect).
Will the Governing Council decide each month on the exact composition of the asset purchases to be made and instruct the national central banks (NCBs) to carry out these purchases, or will the NCBs have a degree of flexibility?
The Eurosystem will follow an internal benchmark when coordinating its purchases, with some flexibility for the NCBs to purchase their shares within the universe of eligible instruments. The need for flexibility and the leeway granted to NCBs will be assessed by the Governing Council, which may adjust the implementation framework in this regard on the basis of the experience gained.
How strictly will the capital key rule be followed? Could the Bundesbank, for instance, buy more agency securities and fewer Bunds for a while?
The share of purchases in an NCB's home market is determined by the ECB's capital key, with NCBs focusing exclusively on their home market. Within this home market, there will be some flexibility for the NCBs to choose between purchases of central government securities and securities of certain agencies established in the respective jurisdiction.
When the programme was announced, the ECB said that the purchases would be divided between countries on the basis of the ECB's capital key. Will the weightings need to be applied on a monthly basis, with each NCB buying the proportionate amount each month, or do these shares refer to the programme as a whole?
The ECB's capital key will guide purchases on a monthly basis. However, this does not imply that a precise achievement of capital key shares will be strictly targeted every month, as some flexibility on a monthly basis will support the smooth implementation of the programme.
How high are the issue share limit and the issuer limit? Do the limits include bonds purchased under the Securities Markets Programme and under the Eurosystem's own (i.e. non-monetary policy) portfolios? Regarding the issuer limit, is the denominator the whole debt or just the debt with a maturity of 2 to 30 years?
At the start of the PSPP, the issue share limit was set at 25%, to be reviewed after six months (Article5(1) of the decision of 4 March 2015 states that “the limit will initially be set at 25%, for the first six months of purchases and subsequently reviewed by the Governing Council”).
On 3 September 2015, the Governing Council decided to increase it to 33%, subject to a case-by-case verification that it would not create a situation whereby the Eurosystem would have a blocking minority for the purposes of collective action clauses in which case the issue share limit would remain at 25%.
The issue limit refers to the maximum share of a single PSPP-eligible security that the Eurosystem is prepared to hold.
The issuer limit refers to the maximum share of an issuer’s outstanding securities that the ECB is prepared to buy. The issuer limit of 33% is a means to safeguard market functioning and price formation as well as to mitigate the risk of the ECB becoming a dominant creditor of euro area governments. To this end, the 33% limit is applied to the universe of eligible assets in the 2 to 30-year range of residual maturity.
Both limits also cover existing Eurosystem holdings of PSPP-eligible bonds in the context of the Securities Markets Programme and any other portfolios owned by Eurosystem central banks.
Are the issue and issuer limits based on nominal or market value?
These limits will be based on nominal values.
What is meant by "other counterparties used by the Eurosystem for the investment of its euro-denominated portfolios"?
The purchases will be conducted by the ECB and the NCBs with eligible counterparties, including counterparties they trade with in the context of their own investment activities in euro-denominated securities. The portfolio managers of the ECB and the NCBs will be in bilateral contact with their eligible counterparties before purchases begin.
How will you coordinate the purchases between the NCBs? Will all NCBs purchase supranational bonds or will only the NCB of the country in which these supranational institutions are located conduct those purchases?
The ECB will coordinate all asset purchases within the Eurosystem. The ECB will not purchase debt securities issued by certain international or supranational institutions located in the euro area. Under a specialisation approach, only a few NCBs will buy securities issued by European supranational institutions, but this specialisation will be independent of the domicile of these international or supranational institutions.
Will the Eurosystem be able to buy in the primary market? Will a distinction be made, in terms of primary market purchases, between government and supranational bonds?
There will be no primary market purchases under the PSPP, regardless of the type of security, as such purchases are not allowed under Article 123 of the Treaty on the Functioning of the European Union.
How will you weigh different maturity buckets for your purchases?
The intention is to be market-neutral. The Eurosystem wants to create as little distortion as possible. At the same time, this will not be a strict target and flexibility will be applied, also taking into account the relative values of bonds and the liquidity of the different maturity segments.
How is the remaining weighted average maturity (WAM) of PSPP holdings calculated? What affects the remaining WAM of individual NCB’s PSPP portfolios?
The remaining weighted average maturity (WAM) of PSPP holdings is calculated on a monthly basis and is published along with both the monthly net purchases and the total holdings for the ABSPP, CBPP3 and PSPP. The remaining WAM is calculated by weighting the current nominal outstanding amounts of PSPP holdings by the remaining maturity of these respective holdings.
When assessing the remaining WAM of Eurosystem holdings relative to a market measure, deviations could reflect inter alia the 2 to 30 year maturity range of purchases, the issue share limits taking into account holdings in other Eurosystem portfolios as well as the availability and liquidity conditions in the market during the implementation period.
What is the duration of purchases and how will duration be weighted?
There is no duration target for the programme.
How will you decide on the maturity breakdown of the purchases? By current outstanding amounts or by new issuance?
Purchases will in principle be weighted by nominal outstanding amounts, with eligible remaining maturities at the time of purchase ranging from 2 to 30 years, also taking into account the issue and issuer limits as well as potential distortions in certain maturity buckets.
What exactly does the 2 to 30-year maturity restriction mean?
The maturity restriction means that the Eurosystem will only buy securities which, at the time of purchase, have a minimum remaining maturity of 2 years (i.e. purchases of securities with a remaining maturity of 1 year and 364 days are NOT possible) and a maximum remaining maturity of less than 31 years (i.e. purchases of securities with a remaining maturity of 30 years and 364 days are possible).
My internal compliance unit asks what kind of information on the Eurosystems's PSPP transactions the Eurosystem would give us permission to disclose to third parties? E.g. would a statement such as the following be acceptable: "We have seen decent buying by the Eurosystem of 5-7 year Italian government bonds in bigger clips, which tightened spreads by 2 basis points." (We would never state which Eurosystem member, always using the more general term "Eurosystem".)
In this specific case we would agree that, for the PSPP, counterparties could indeed communicate to third parties that the Eurosystem had been buying in a certain market and maturity bucket. However, our counterparties shall not disclose the amounts transacted, the individual securities involved, or which Eurosystem member was buying. Particular care has to be taken for issuers with relatively few outstanding issues, where substantially broader maturity ranges have to be chosen.
As regards PSPP securities lending against cash collateral, how is the overall limit of €50bn allocated across the Eurosystem?
The limit is allocated in proportion to the PSPP holdings of the Eurosystem central banks that will make use of the possibility to accept cash collateral.