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FAQs on TLTRO III operations

Collateral

Q1. What kind of collateral has to be posted for TLTRO III operations? Do the standard conditions governing other Eurosystem open market operations apply? And are there any differences now that the interest rate is negative?

As with the previous TLTRO series, TLTRO III operations are treated as normal liquidity providing reverse transactions, so the usual eligibility requirements for collateral apply.

The amount of collateral pledged must, at all times, cover the entire amount of Eurosystem refinancing provided – both principal and accrued interest. That underlying principle is independent of the sign on the interest rate. Where interest is accrued at a negative rate, that amount should be subtracted from the total amount of outstanding refinancing on a daily basis, just as accrued interest is added in the case of a positive interest rate.

Participation in TLTRO groups

Q2. A counterparty has taken part in the TLTRO II series on an individual basis and still has an outstanding amount from that series. Can that counterparty become a member of a TLTRO III group? What happens to that outstanding amount from the TLTRO II series?

A counterparty that has taken part in TLTRO II operations on an individual basis can become a member of a TLTRO III group. The counterparty’s outstanding amount from the TLTRO II series may be maintained or voluntarily repaid. If maintained, any outstanding amount will be taken into account when calculating the borrowing allowance for the new TLTRO III group.

Q3. What is the deadline for declaring a TLTRO III group?

The deadlines for declaring a TLTRO III group (or a change to a group’s composition) can be found in the official indicative calendar. Each TLTRO III operation has its own separate deadline, with groups required to submit a declaration before participating in a TLTRO III operation for the first time.

Borrowing allowances, bid limits and benchmarks

Q4. Which loans are eligible for TLTRO III operations?

The definition of eligible loans is unchanged from the first and second TLTRO series – with one exception.

In the third series, loans to the non-financial private sector that have been self securitised (i.e. where the asset-backed securities resulting from securitisation are fully retained) may, subject to certain conditions, also be included in the reference outstanding amount that is used to calculate a participant’s borrowing allowance.

Q5. What is the difference between outstanding amounts of eligible loans as at 28 February 2019 and 31 March 2019?

Outstanding amounts of eligible loans as at 28 February 2019 are used for the calculation of the reference outstanding amount, from which the borrowing allowance is derived. The borrowing allowance determines the amount that a participant can borrow under TLTRO III.

Outstanding amounts of eligible loans as at 31 March 2019 are used for the calculation of benchmark net lending and the benchmark outstanding amount – i.e. to determine lending performance.

Q6. How are the borrowing allowance, the bid limit, benchmark net lending and benchmark outstanding amounts calculated? How do changes to a group’s composition affect their calculation?

As in previous TLTRO series, a participant’s borrowing allowance, bid limit, benchmark net lending and benchmark outstanding amount are calculated either on an individual basis or on a group basis.

As of March 2020, the borrowing allowance is equal to 50% of the stock of eligible loans as at 28 February 2019, minus any outstanding amounts borrowed under TLTRO II.

Moreover, since the third TLTRO III operation, the bid limit of 10% of the total borrowing allowance has been removed. Thus, each participant’s bid limit for each TLTRO III operation is its borrowing allowance minus any amounts borrowed under previous TLTRO III operations. For details of the calculation of benchmark net lending and benchmark outstanding amounts, please refer to Annex I to Decision ECB/2019/21.

Please note that Article 4 of Decision ECB/2019/21 also contains provisions governing a situation where a member of a TLTRO II group is not willing to be a member of the corresponding TLTRO III group and decides to participate in TLTRO III operations on an individual basis.

Q7. Is it possible to allot the entire borrowing allowance in just one operation?

Yes, that is possible. The bid limit of 10% of the stock of eligible loans that was originally placed on the amount of funds that can be borrowed in each operation was removed in March 2020.

Q8. Is it true that the TLTRO III borrowing allowance (which is based on outstanding amounts of eligible loans as at 28 February 2019) can be spread over the seven operations by each participant (either an individual participant or the lead institution in a TLTRO III group) as it sees fit?

That is correct. As of the third TLTRO III operation, there are no specific limits on bid amounts per operation, other than the fact that the total amount across all TLTRO III operations cannot exceed the borrowing allowance.

Q9. Do voluntary repayments after September 2019 for the four TLTRO II operations also affect the borrowing allowance for TLTRO III operations?

Yes, the indicative calendar and time frame for each TLTRO III operation will take account of voluntary repayments, with the borrowing allowance for each operation being calculated accordingly.

Q10. Is benchmark net lending for the TLTRO III series calculated on the basis of eligible net lending by the participant in the 12 months to 31 March 2019, or is it based on the difference between the outstanding amounts of eligible loans on 31 March 2018 and 31 March 2019?

The benchmark is calculated on the basis of eligible net lending in the period from 1 April 2018 to 31 March 2019. Please refer to Decision ECB/2019/21 for further details.

Interest and lending criteria

Q11. What kind of day-count convention is used to calculate interest rates?

As with other liquidity-providing operations, actual/360 day count convention is used for the calculation of interest rates.

Q12. Which lending criteria are applied?

A new additional lending criterion will be applied to all TLTRO III operations: a threshold of 0% relative to the benchmark over the period from 1 March 2020 to 31 March 2021 (the “special reference period”). If a participant’s net lending over that period does not exceed that threshold, the initial lending criterion with the modified threshold will be assessed instead, looking at whether net lending from 1 April 2019 to 31 March 2021 relative to the benchmark (i) exceeds the threshold of 1.15%, (ii) is between 0% and 1.15%, or (iii) is less than 0%.

Q13. Does the initial threshold of 2.5% still apply?

No, that threshold has been reduced to 1.15%, which will apply to all TLTRO III operations.

Q14. How will the interest rate applied to TLTRO III operations be calculated?

Details of the calculation of interest rates are specified in Decision ECB/2019/21 (as amended by Decision ECB/2020/25), as well as being set out in the ECB press releases published on 12 March and 30 April 2020.

The interest rate will be the average of the rates on main refinancing operations (MROs) over the life of the relevant TLTRO III operation (with the exception of the period from 24 June 2020 to 23 June 2021, when it will be 50 basis points lower than that average).

Subject to participants hitting the lending performance thresholds specified in Decision ECB/2019/21 (as amended by Decision ECB/2020/25), the interest rate could be as low as the average deposit facility rate (DFR) over the life of the relevant TLTRO III operation (with the exception of the period from 24 June 2020 to 23 June 2021, when it could be 50 basis points lower than that average but not higher than -1%).

  • For participants exceeding the new lending threshold of 0% during the period from 1 March 2020 to 31 March 2021 (i.e. participants meeting the “new lending criterion”), the interest rate will be the average DFR over the life of the relevant TLTRO III operation (with the exception of the period from 24 June 2020 to 23 June 2021, when it will be 50 basis points lower than that average but not higher than -1%). The initial modified lending criterion is not considered in this case.
  • For participants that do not meet the new lending criterion, but meet the initial modified lending criterion, the interest rate will be the one derived from the assessment of the initial modified lending criterion (with the exception of the period from 24 June 2020 to 23 June 2021, when it will be the lower of (i) the rate derived from the assessment of the initial modified lending criterion and (ii) the average MRO rate during that period minus 50 basis points).
  • For participants meeting neither the new lending criterion nor the initial modified lending criterion (i.e. participants that do not exceed their benchmark net lending during the period from 1 April 2019 to 31 March 2021), the interest rate will be the average MRO rate over the life of the relevant TLTRO III operation (with the exception of the period from 24 June 2020 to 23 June 2021, when it will be 50 basis points lower than that average).

Examples

Decision tree for interest rates

Further details regarding the calculation of interest rates are set out in Annex I to Decision ECB/2019/21 (as amended by Decision ECB/2020/25).

Q15. If the DFR were to increase in the future, such that the average DFR over the period from 24 June 2020 to 23 June 2021 stood at -0.45%, would an interest rate of -0.95% (i.e. -0.45% minus 50 basis points) be applied to TLTRO III participants meeting the new lending criterion for the period from 24 June 2020 to 23 June 2021?

No, the interest rate would be -1%. If a participant meets the new lending criterion, the interest rate applied over the period from 24 June 2020 to 23 June 2021 cannot be higher than -1%, with the average DFR over the life of the relevant TLTRO III operation applying for the remainder of the life of the operation.

Q16. If the DFR were to fall in the future, such that the average DFR over the period from 24 June 2020 to 23 June 2021 stood at -0.55%, which interest rate would be applied over the period from 24 June 2020 to 23 June 2021 for TLTRO III participants meeting the new lending criterion?

The interest rate applied over the period from 24 June 2020 to 23 June 2021 would be -1.05% (i.e. -0.55% minus 50 basis points), with the average DFR over the life of the relevant TLTRO III operation applying for the remainder of the life of the operation.

Q17. As regards the calculation of final interest rates on operations, will participants with negative eligible net lending between 1 March 2020 and 31 March 2021, but positive net lending between 1 April 2019 and 31 March 2021, qualify for an interest rate on TLTRO III amounts that is lower than the initial rate (e.g. a rate based on the average MRO rate)?

Yes. Where participants do not meet the new lending criterion, but do meet the initial modified lending criterion, the interest rate applied will be the one derived from the application of the initial modified lending criterion (with the exception of the period from 24 June 2020 to 23 June 2021, when it will be the lower of (i) the rate derived from the assessment of the initial modified lending criterion and (ii) the average MRO rate over that period minus 50 basis points).

Moreover, participants that do not meet either lending criterion will also be able to borrow at an interest rate that is lower than the average MRO rate during that special interest rate period, with the maximum interest rate during that period being the average MRO rate over that period minus 50 basis points.

Q18. Is there still a progressive interest rate incentive, or are TLTRO III interest rates now always binary (i.e. either less favourable or more favourable)? If there is a progressive interest rate incentive, what is the lower bound?

Yes, there are still instances where the interest rate decision is not binary. That will be the case where counterparties do not hit the new lending threshold. In that case, the initial modified lending criterion applies, which remains progressive. The lowest achievable interest rate in that instance is the average DFR over the life of the operation.

Q19. Will the new pricing also be applied retroactively to the first three TLTRO III operations, which were allotted prior to the announcement of the amended methodology for the calculation of interest rates?

Yes, the new pricing will be applied to all TLTRO III operations, including those allotted before the announcement of the new pricing.

Q20. How and when will TLTRO III participants be repaid if the final interest rate applicable to a TLTRO III operation is below the average MRO rate over the life of that operation (especially if it is a negative interest rate)?

Article 5 of Decision ECB/2019/21 states that information on interest rates will be communicated to participants in September 2021, in accordance with the indicative calendar published on the ECB’s website, and the final interest rate for each operation will be communicated to participants before (but close to) the relevant maturity date.

Interest will be settled in arrears on the maturity of each TLTRO III operation or on early repayment. If the applicable interest rate is negative, counterparties can either repay the outstanding borrowing amount minus interest, or they can repay the outstanding borrowing amount and receive the interest at the same time, depending on the set-up at the relevant national central bank (NCB).

Q21. When will NCBs inform counterparties about the final interest rate and data relating to its calculation?

NCBs cannot communicate the final interest rate for an operation until they know the average MRO rate and the average DFR over the life of that operation, or until a voluntary early repayment is made as of September 2021.

Q22. Will new loans that are granted after 31 March 2019 with a maturity date before 31 March 2021 contribute to the achievement of the “discount” on the interest rate?

No. Those loans will have a neutral impact on eligible net lending under the initial lending criterion, as they will be accounted for both as gross lending and as repayments during the second reference period (1 April 2019 to 31 March 2021); see also Annex II to Decision ECB/2019/21. They may (negatively) affect the new lending criterion if they are granted before 1 March 2020 and mature between 1 March 2020 and 31 March 2021.

Q23. Will new loans granted after 31 March 2021 contribute to the achievement of the “discount” on the interest rate?

No, as they will contribute to neither the initial lending criterion (1 April 2019 to 31 March 2021) nor the new lending criterion (1 March 2020 to 31 March 2021).

Q24. Will the “discount” on the interest rate be calculated in a way that takes account of banks that are in the process of deleveraging?

Yes. There are two ways of calculating benchmark net lending: one for banks with zero or positive eligible net lending in the period from 1 April 2018 to 31 March 2019, and another for banks with negative eligible net lending in that period. That benchmark is taken into account for both the initial lending criterion and the new lending criterion.

Q25. Does the lending threshold of 0% apply only to the period from 1 March 2020 to 31 March 2021, or the whole of the period from 1 April 2019 to 31 March 2021?

It only applies to the special reference period – i.e. the period from 1 March 2020 to 31 March 2021. However, the initial modified lending criterion applies to the whole of the period from 1 April 2019 to 31 March 2021.

Q26. As regards the new lending threshold, will a negative benchmark continue to be used for counterparties that are in the process of deleveraging?

Yes, the calculation of benchmarks remains unchanged. The time period used for the calculation of the benchmark is the period from 1 April 2018 to 1 March 2019, for both the initial modified lending threshold and the new lending threshold.

Early repayment

Q27. Is voluntary early repayment possible under TLTRO III?

Yes. Article 5a of Decision ECB/2019/21 (as amended by Decision ECB/2020/13) provides that, as of September 2021, participants will, on a quarterly basis, have the option of terminating or reducing the amount of a TLTRO III operation before maturity, provided that at least one year has passed since the settlement date of the TLTRO III operation in question.

Q28. Can an institution participating in TLTRO III operations voluntarily repay only a fraction of its outstanding amount under TLTRO II? Can an institution spread the repayment of outstanding amounts over time?

Outstanding amounts under TLTRO II can be repaid in part or in full on any of the dates that are listed in the indicative calendar posted on the ECB’s website. Counterparties can use each and any of these dates.

Q29. May a counterparty voluntarily repay some outstanding amounts under TLTRO II and roll the repaid amount over into TLTRO III?

Yes, as early repayments under TLTRO II will always have the same settlement date as TLTRO III operations. As indicated in Article 4(2) of Decision ECB/2019/21, each participant’s borrowing allowance will equal 50% of its total reference outstanding amount, minus any amount that was previously borrowed by that TLTRO III participant under TLTRO II and is still outstanding on the settlement date of the TLTRO III operation in question.

Two weeks before the settlement date, counterparties will indicate whether they are going to participate in the early repayment of TLTRO II operations. The relevant NCB will then communicate the bid limit for the TLTRO III operation in question, taking into account the TLTRO II repayment.

Reporting requirements

Q30. What does the new reporting format look like?

Reporting by counterparties follows the format and technical specifications set by the relevant NCB. Reporting Template B is used for the calculation of benchmark net lending and assessment of the lending performance threshold. It needs to be completed for (i) the period from 1 April 2018 to 31 March 2019 (first reference period) for the calculation of benchmark net lending and (ii) the period from 1 April 2019 to 31 March 2021 (second reference period) for the assessment of the initial modified lending threshold (1.15%). In addition, if a counterparty would like to benefit from the additional discount announced by the ECB’s Governing Council on 12 March and 30 April 2020, it also needs to complete this template for the period from 1 March 2020 to 31 March 2021 (the “special reference period”) in order to allow the assessment of the new lending threshold of 0%.

In order to allow self-securitised loans to be taken into account in the reference outstanding amount (which is the sum of outstanding amounts of eligible loans and outstanding amounts of self-securitised eligible loans as at 28 February 2019), a new template (Reporting Template A) was introduced by Decision ECB/2019/21 in order to account for the optional inclusion of self securitised loans in the reference outstanding amount via supplementary items.

Q31. What are the reporting obligations of an institution participating in the TLTRO III series?

Article 6 of Decision ECB/2019/21 provides that participants are required to submit two sets of data to the relevant NCB:

  1. the reference outstanding amount for the purposes of establishing the participant’s borrowing allowance and bid limits, and data relating to the first reference period for the purposes of establishing the participant’s benchmarks (hereinafter referred to as the “first report”); and
  2. data relating to the second reference period for the purposes of determining the applicable interest rates (hereinafter referred to as the “second report”). Data relating to the special reference period are provided on a voluntary basis and will also contribute to determining the applicable interest rates.

Participants are expected to submit accurate and complete data in accordance with the TLTRO III calendar published on the ECB’s website. For details of the required evaluation of data by an external auditor, please see Article 6(6) of Decision ECB/2019/21. Any corrections to those reports in the event of changes to a group’s composition or a corporate reorganisation should be communicated to the relevant NCB under the conditions specified in Article 6.

Additionally, any corrections to those reports where a participant notices an error should be communicated to the relevant NCB without delay in accordance with Article 7.

External auditing

Q32. How will the data reported by institutions participating in TLTRO III operations be audited?

Article 6 of Decision ECB/2019/21 states that the quality of the data contained in the two reports which a participant must submit to the relevant NCB for the purposes of establishing its borrowing allowance, benchmark and interest rate must be evaluated by an external auditor. Article 6 also spells out the various elements that the auditor’s evaluation should contain.

In light of the deadlines set out in the indicative TLTRO III calendar published on the ECB’s website, the external auditor may evaluate the data in the first report, along with other aspects, as part of its audit of the participant’s annual financial statements. The results of that first evaluation must be submitted by the deadlines specified in the indicative TLTRO III calendar. Please note the difference in deadlines depending on whether a participant participates in the first three TLTRO III operations (deadline of 7 January 2021) or only participates as of the fourth TLTRO III operation (deadline of 16 July 2021).

The results of the external auditor’s evaluation of the second report must be submitted together with the second report by 17 August 2021. Specific deadlines are envisaged for auditors’ evaluation of additional items relating to the inclusion of self-securitised loans.

Q33. Will any exceptions be made when it comes to submission of the first and second audit evaluations?

No. The results of those audits must be submitted by the deadlines set out in the indicative TLTRO III calendar published on the ECB’s website. If the auditor’s evaluation of data relating to the special reference period is not submitted on time, the participant still has the right to receive the discount derived from the assessment of the initial modified lending criterion.

Q34. If a counterparty submits the reporting template but ultimately decides not to participate in any TLTRO III operations, does it still have to submit the auditor’s evaluation?

No. An auditor’s evaluation is only necessary if the counterparty participates in an operation.

Q35. If a counterparty’s net lending does not meet the initial modified lending criterion, is it necessary to submit an auditor’s evaluation of the second report?

No. An auditor’s evaluation will only be necessary if the counterparty has exceeded its benchmark outstanding amount of eligible loans. The second report still has to be provided, though; otherwise, penalties will be imposed (see Article 7(1)(c) of Decision ECB/2019/21).