Third covered bond purchase programme (CBPP3) - Questions & answers
Last updated: 28 January 2019 (Q1.8)
Q1.1 What are the maximum and minimum maturities of covered bonds eligible for purchase under the CBPP3?
No maximum or minimum maturity has been defined for the programme.
Q1.2 What is the minimum issuance volume of covered bonds eligible for purchase under the CBPP3?
No minimum issuance volume has been defined for the programme.
Q1.3 How is a covered bond purchased under the CBPP3 treated if it has two or more ratings? Which rating do you use?
If multiple, and possibly conflicting, ECAI assessments are available (i.e. external credit ratings provided by any of the four external credit assessment institutions, or eligible credit rating institutions, namely Standard & Poor’s, Fitch, Moody’s and DBRS), the first-best rule will be applied.
Q1.4 The eligibility criteria for the CBPP3 foresee that only securities accepted for own use can be purchased.
Can you confirm this and also describe the treatment given to multi-cédulas?
In principle, all covered bonds that comply with the eligibility criteria established in Annex I to the Guideline (ECB/2011/14) as amended and that, in addition, fulfil the conditions laid out in the fifth paragraph of Section 18.104.22.168 are eligible. From 1 May 2015, Guideline (ECB/2011/14) has been replaced by Guideline (ECB/2014/60) as amended. The rules for the own-use of covered bonds are now set out in Article 138 of that Guideline.
Concretely, this Article states that the Eurosystem exempts specific debt instruments from the “close links” rule. As such, covered bonds can be “own-used” as collateral by the issuer (or by a closely linked counterparty) if they are CRD/CRR-compliant. The actual or potential inclusion of government-guaranteed bank bonds in a pool of covered bonds pursuant to Article 139(1)(b) of Guideline (ECB/2014/60) does not affect the eligibility of such covered bonds for own-use.
Multi-cédulas are considered eligible for CBPP3 purchases as clarified in the ECB Decision of 15 October 2014 (ECB/2014/40).
Q1.5 Are registered covered bonds (e.g. German Namenspfandbriefe) part of the investable universe?
Namenspfandbriefe are not eligible under the Eurosystem collateral framework, as these instruments do not meet the criterion that a debt instrument must be transferable in book-entry form (Section 22.214.171.124, “Settlement procedures”, of Guideline ECB/2011/14). Instead, the transfer of a Namenspfandbrief usually takes the form of an assignment, as the owner is registered in a separate register.
Q1.6 Does the prohibition of monetary financing, as laid down in Article 123 of the Treaty on the Functioning of the European Union, have to be respected under the CBPP3 in terms of purchases of bonds issued by publicly owned credit institutions?
Purchases made under the CBPP3, which are monetary policy operations and constitute supply of reserves, make no distinction between covered bonds issued by public sector credit institutions and those issued by private sector institutions. This is in line with the provisions of paragraph 2 of Article 123 of the Treaty.
Q1.7 Does the issue share limit of 70% apply only to CBBP3 holdings?
No, the 70% limit applies to the combined holdings of all three of the Eurosystem’s covered bond purchase programmes and the Eurosystem’s investment portfolios.
Q1.8 Why are conditional pass-through covered bonds no longer eligible for purchase?
The Governing Council decided to exclude conditional pass-through covered bonds from purchases under the CBPP3, as of the end of the net purchase phase. The decision reflects their somewhat more complex structure, whereby some pre-defined events may lead to an extension of a bond’s maturity and to a switch in the payment structure.
The decision was taken within the context of the CBPP3 and has no consequences for the eligibility of conditional pass-through covered bonds in the Eurosystem collateral framework.
Q2.1 Why would a bank sell retained covered bonds to the CBPP3 when they can be placed at the ECB for repo purposes?
It is up to individual institutions to manage their own funding sources, including liability structure, maturity breakdown and any decision between the market-placement and retention of bonds.
Q2.2 Does the issue share limit of 70% per international securities identification number (ISIN) also apply to “fully retained” issues?
Q3.1 Does the Eurosystem share income and losses generated by the CBPP3?
As a rule, income and losses from decentralised monetary policy operations conducted by the Eurosystem are shared.
Q3.2 Does the Eurosystem apply any specialisation in purchases across jurisdictions and maturities?
For efficiency reasons, the Eurosystem’s internal decisions on the allocation of particular purchases to its members take due account of their specific competencies.
Q4.1 Under the CBPP3, the Eurosystem is able to buy up to 70% of a securities issue per international securities identification number. In the case of the remaining 30%, are these eligible for Eurosystem repo purposes, assuming they meet the covered bond requirement criteria?
If all eligibility criteria are fulfilled, the remaining outstanding amount of the covered bonds can be used as collateral in Eurosystem credit operations.
Q5.1 Why is securities lending of CBPP3 holdings not mandatory for the Eurosystem?
For cost efficiency and operational reasons, securities lending of holdings under CBPP3 is not mandatory for Eurosystem central banks. The establishment and maintenance of securities lending arrangements has a certain cost for the Eurosystem central banks. The total cost depends on a number of factors, such as the lending channel, the lending infrastructure, the number of securities available for lending, the type of collateral accepted and other technical and operational parameters. The overall Eurosystem cost increases if several central banks make the same security available for lending.
Covered bonds purchased under the CBPP3 are often held by several (i.e. more than two) Eurosystem central banks, which is due to the programme-specific allocation of the eligible universe to individual Eurosystem central banks. This is in contrast to the PSPP and CSPP allocation, where each security is held by one or at most two Eurosystem central banks. Moreover, the CBPP3 allocation often results in individual central banks having relatively small holdings, so that the benefit of setting up and maintaining securities lending facilities would not justify the cost. However, even though lending the CBPP3 holdings is not mandatory, the ECB and several other national central banks make their CBPP3 (as well as CBPP and CBPP2) bonds available for lending. Those Eurosystem central banks that do not make their holdings available for lending very rarely receive requests to borrow them. For them, the expected demand would not justify the cost of establishing securities lending facilities. Most importantly, holdings from each covered bond jurisdiction are made available for lending by at least one Eurosystem central bank.
Q5.2 Why does the Eurosystem not publish the ISIN lists of its CBPP3 holdings for securities lending purposes?
The Eurosystem publishes the ISIN lists only for those programmes (PSPP and CSPP) for which the Governing Council has decided to make securities lending mandatory. Thus the Eurosystem does not publish the ISIN lists for its CBPP3 holdings as securities lending is not mandatory for this programme. Counterparties that wish to borrow CBPP3 holdings can contact the ECB or any NCB that makes those bonds available for lending to enquire about the potentially availability of their holdings of particular ISINs.
Q6.1 How are CBPP3 purchases conducted during the reinvestment phase?
The Eurosystem aims to maintain the size of the CBPP3 cumulative net purchases at the level attained at the end of December 2018. During the reinvestment phase the Eurosystem continues to adhere to the principle of market neutrality via smooth and flexible implementation and as a result limited temporary deviations from this level may occur.
Market capitalisation continues to be the guiding principle for reinvestment purchases. Purchases of securities in primary markets continue to be permitted as necessary.
Data on the size of the CBPP3 holdings are published ex post on a weekly basis.
Q6.2 My internal compliance unit asks if the Eurosystem would give permission to say, for example, "We have seen decent buying by the Eurosystem of 5-7 year Dutch covered 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 CBPP3, counterparties could communicate that the Eurosystem had been buying, but not the exact amounts, the securities involved or which Eurosystem member.
Q6.3 Where on the ECB’s website can I find a list of the Eurosystem’s current holdings of covered bonds?
Information on CBPP3 holdings can be found in the section Asset purchase programmes.
Q6.4 Does the Eurosystem act as a “regular” investor when conducting purchases under the CBPP3?
The Eurosystem purchases covered bonds at prevailing market prices or, in the case of retained bonds, at prices that take into appropriate consideration all embedded risks.
Q6.5 Banks in some countries do not issue covered bonds and do not own asset-backed securities. How does the Eurosystem help those banks if they do not own securities that the Eurosystem is willing to purchase?
Even if the market is small/non-existent at the moment, the mere fact that the Eurosystem is willing to buy asset-backed securities and covered bonds could encourage banks from these jurisdictions to issue such instruments.
Q6.6 The CBPP3 will crowd-out private sector investors, unless the new supply of eligible bonds rises substantially. Along this line, the covered bond market has no structural deficiencies and is thus clearly not in need of yet another ECB purchase programme. Why have you nevertheless decided to buy covered bonds?
Covered bonds have some features that are important from a monetary policy perspective.
First, the link that is established on the issuing bank’s balance sheet between the covered bond, on the one hand, and the loans that back the covered bond, on the other, is reasonably tight. As the prices for covered bonds increase, we expect banks to respond by originating more covered bonds and thus more loans to collateralise them.
Second, outright interventions in this market will complement other purchases by reinforcing the portfolio rebalancing channels of monetary policy transmission and generating positive spillovers into other markets and securities. This will further ease funding and credit conditions.
Third, taken together, the Eurosystem’s non-conventional measures should be seen as complementary to one another, strengthening the combined impact on liquidity and the economy.
Finally, purchases take due account of market functioning.
Q6.7 Why did you switch from a daily publication of covered bond purchases to a weekly one?
The ECB decided to harmonise publication practices regarding the different monetary policy portfolios. In particular, for the covered bond purchase programmes and the Asset-Backed Securities Purchase Programme, it was decided to adopt the publication practices already in place for the Securities Markets Programme to ensure greater consistency. The weekly publication of the settled amounts is in line with the medium-term objectives of the programmes and is consistent with the weekly release of the Eurosystem financial statement.
Q6.8 Could the Eurosystem have preferred creditor status for the CBPP3?
There is no legal basis on which the ECB could either claim or enforce preferred creditor status in the event of a default on covered bonds it has purchased under the CBPP3. That said, covered bonds qualify as senior secured debt, which is explicitly exempt, under Article 38(1)(b) of the Bank Recovery and Resolution Directive, from any bail-in measure in the event of bank resolution.
Q6.9 There have been an increasing number of consent solicitations in the covered bond market with issuers asking investors to approve changes to the terms of outstanding bonds or specific programme details. Given the Eurosystem’s large presence in the covered bond market, has it adopted any general stance towards consent solicitations?
The Eurosystem has noted the increasing number of consent solicitations in the euro area covered bond market and has continued to thoroughly examine the merits of each individual case in developing a consistent approach towards such consent solicitations.
The Eurosystem will normally aim to adopt a neutral approach towards consent solicitations thereby facilitating a market-based decision on the changes proposed. Furthermore, the Eurosystem is of the view that improvements could be made to two features of the consent solicitation process:
- The Eurosystem has reservations about the practice of only paying the consent solicitation fee to those bondholders who vote in favour of the proposal. Such an approach is viewed as inadequate. Rather, the Eurosystem is of the view that any such fee should be paid to all bondholders when changes are approved, to compensate all bondholders for the impact of those changes.
- Efforts to make the consent solicitation process more transparent (for example, more precise data on voter participation) should be considered.
Q6.10 Can the Eurosystem participate in private placements of CBPP3 eligible covered bonds?
Yes, the Eurosystem can participate in the purchase of CBPP3 eligible covered bonds via private placement. Similarly to public placements and purchases in the secondary market and as outlined in the CBPP3 Technical Annex 2, the Eurosystem will apply an issue share limit of 70% per ISIN. Market participants involved in the private placement can contact the relevant national central bank which acts as the contact point for the Eurosystem.