More details on the Eurosystem’s corporate sector purchase programme (CSPP) – Questions & answers
In order to be eligible for purchase under the CSPP, what is the required legal form for otherwise eligible international debt securities? Is there any difference for primary and secondary market purchases?
Admissible forms of international debt securities are specified in Article 66 of Guideline ECB/2014/60 and depend on whether the securities are issued in global bearer or global registered form. As for international debt securities issued in global registered form after 30 September 2010, they must be issued under the new safekeeping structure for international debt instruments. International debt securities issued in global bearer form after 31 December 2006 must be issued in the form of new global notes and are to be deposited with a common safekeeper which has been positively assessed in accordance with the Eurosystem User Assessment Framework. International debt instruments in individual note form issued after 30 September 2010 are not eligible.
International debt securities have to fulfil these requirements regardless of whether they are bought in the primary or in the secondary market.
Can the Eurosystem participate in private placements of CSPP-eligible corporate bonds?
The Eurosystem can participate in the purchase of CSPP-eligible corporate bonds via private placements. The same eligibility requirements apply to private placements and publicly placed bonds. The Eurosystem cannot participate in private placements issued by public undertakings. Market participants involved in private placements can contact the relevant national central bank, which acts as the contact point for the Eurosystem in such situations.
Can you provide some more details on what the Eurosystem considers to be a “bank” for the purposes of the CSPP, and hence an ineligible issuer?
For a debt instrument to be eligible for purchase under the CSPP, the issuer should not be a credit institution or have any parent undertaking (as defined in point (15) of Article 4(1) of the Capital Requirements Regulation) which is a credit institution (as defined in point (14) of Article 2 of Guideline ECB/2014/60).
In addition, the issuer of the debt instruments:
- may not have a parent company which is subject to banking supervision outside the euro area;
- may not be a supervised entity as defined in point (20) of Article 2 of Regulation (EU) No 468/2014 of the European Central Bank (ECB/2014/17) or a member of a supervised group as defined in subpoint (b) of point (21) of Article 2 of Regulation (EU) No 468/2014 (ECB/2014/17), in each case as contained in the list published by the ECB on its website in accordance with Article 49(1) of Regulation (EU) No 468/2014 (ECB/2014/17), and may not be a subsidiary, as defined in point (16) of Article 4(1) of Regulation (EU) No 575/2013, of any of those supervised entities or supervised groups;
- may not be an investment firm within the meaning of point (1) of Article 4(1) of Directive 2014/65/EU of the European Parliament and of the Council.
In practical terms, this means that bonds issued by an entity which is supervised under the Single Supervisory Mechanism, as well as its subsidiaries, are not eligible for purchase under the CSPP. At the same time, in order to ensure a level playing field between euro area and foreign issuers, issuers with a parent company that is subject to banking supervision outside the euro area are also excluded.
Point (iii) means that entities that are comparable to banks in terms of their activities, e.g. the provision of one or more investment services to third parties and/or the performance of one or more investment activities on a professional basis according to the Markets in Financial Instruments Directive (MiFID II), but which are classified as MiFID investment firms from a legal perspective, are not eligible.
Does the ECB publish a list of the bonds it has bought?
Purchasing NCBs publish a list of the individual bonds they hold on a weekly basis without revealing the size of their holdings in each bond. The list will was first published on Monday, 18 July 2016 and has since been updated every Monday. This list is maintained and published in order to maximise the efficiency of the CSPP securities lending programme. Securities lending.
What exactly do you define as a “public undertaking”?
The term “public undertaking” is understood in the sense of Article 8 of Council Regulation (EC) No 3603/93 of 13 December 1993. It defines “public undertaking” as any undertaking over which the State or other regional or local authorities may directly or indirectly exercise a dominant influence by virtue of their ownership of it, their financial participation therein or the rules which govern it. A dominant influence on the part of the public authorities is presumed when these authorities, directly or indirectly in relation to an undertaking: (a) hold the major part of the undertaking’s subscribed capital; (b) control the majority of the votes attaching to shares issued by the undertaking; or (c) can appoint more than half of the members of the undertaking’s administrative, managerial or supervisory body.
The Eurosystem will not publish a specific list of the CSPP-eligible issuers classified as “public undertakings”.
How is “issuer group” defined?
An issuer group is defined as a group of companies that operate as a single economic entity and constitute a single reporting entity for the purposes of presenting consolidated accounts. The issuer group consists of the parent company and all of its direct and indirect subsidiaries.
What does “market capitalisation” mean in the context of the internal benchmark?
The term “market capitalisation”, which is relevant in the context of the internal benchmark, refers to the nominal outstanding amount of eligible bonds issued by the issuer in question as a share of the entire CSPP-eligible universe.
Will the Eurosystem sell its holdings of bonds if they lose eligibility? For example, if they are downgraded and lose investment grade status?
The Eurosystem is not required to sell its holdings in the event of a downgrade below the credit quality rating requirement for eligibility.
What information can counterparties reveal to their clients with regard to CSPP purchases?
For the CSPP, counterparties can communicate that the Eurosystem has been buying in the corporate space, the maturity bucket and the sector (e.g. utilities), but not the exact amounts, the issuers of the bonds purchased, the securities involved or the Eurosystem member involved.
With the start of the CSPP, have 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 became instead 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.
Implementation aspects of the PSPP
Who conducts the purchases – the ECB, national central banks or external asset managers?
The CSPP purchases are carried out by six national central banks acting on behalf of the Eurosystem. The ECB coordinates the purchases. The national central banks conducting the purchases are Banco de España, Banca d’Italia, Banque de France, Deutsche Bundesbank, Nationale Bank van België/Banque Nationale de Belgique, and Suomen Pankki/Finlands Bank.
Market segments for bond purchases under the CSPP are allocated to the purchasing NCBs according to the geographical location of the issuer as follows:
|Nationale Bank van België/Banque Nationale de Belgique||BE, CY, GR, LU, MT, PT, NL4, SI and SK|
|Deutsche Bundesbank||DE and NL1|
|Banco de España||ES and NL2|
|Suomen Pankki/Finlands Bank||AT, EE, FI, IE, LT, LV|
|Banque de France||FR|
|Banca d’Italia||IT and NL3|
|1 Includes bonds of issuers with NL as residence country and DE as country of risk
2 Includes bonds of issuers with NL as residence country and ES as country of risk
3 Includes bonds of issuers with NL as residence country and IT as country of risk
4 Includes bonds of issuers with NL as residence country and a country of risk other than DE, ES and IT
Note: The “country of risk” concept is that of the International Organization for Standardization’s country code of the issuer's country of risk. This methodology consists of four factors: management location, country of primary listing, country of revenue and reporting currency of the issuer.
The press release on the CSPP refers to “bonds issued by non-bank corporations”. What exactly does this mean? Are bonds issued by insurers eligible for purchase?
For a debt instrument to be eligible for purchase under the CSPP, the issuer should not be a credit institution or have any parent undertaking (as defined in Article 4(15) of the Capital Requirements Regulation) which is a credit institution (as defined in Article 2(14) of Guideline ECB/2014/60). Insurers that fulfil these criteria are eligible issuers.
The CSPP press release refers to “bonds issued by non-bank corporations established in the euro area”. What criteria does the European Central Bank use to decide whether an issuer is established in the euro area? Can bonds issued by non-euro area companies that have issued debt in the euro area also be purchased?
Bonds issued by issuers incorporated in the euro area are eligible for CSPP purchases.
In practical terms, this means that issuers must be euro area residents, as in the list of marketable assets eligible as collateral for Eurosystem liquidity-providing operations. The location of incorporation of the issuer’s ultimate parent is not taken into consideration in this eligibility criterion. Thus, corporate debt instruments issued by corporations incorporated in the euro area but whose ultimate parent is not established in the euro area are eligible for purchase under the CSPP, provided they fulfil all other eligibility criteria.
Which entities are considered to be an asset management vehicle or a national asset management and divestment fund established to support financial sector restructuring and/or resolution?
According to the eligibility requirements of the CSPP, the issuer of a debt instrument cannot be an asset management vehicle (as defined in the Bank Recovery and Resolution Directive and Single Resolution Mechanism Regulation) or a national asset management and divestment fund.
The latter category presently includes the following entities: Fondo de Reestructuración Ordenada Bancaria (FROB), Sociedad de Gestión de Activos Procedentes de la Reestructuración Bancaria (SAREB), National Asset Management Agency (NAMA), Parvalorem, Parparticipadas, Parups, Propertize, Družba za upravljanje terjatev bank (DUTB), HSH Portfoliomanagement AöR and HSH Finanzfonds AöR.
What are the minimum and maximum maturities of corporate bonds eligible for purchase under the CSPP?
In order to qualify for purchase under the CSPP, debt instruments must have a minimum remaining maturity of six months 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 purchases are possible) at the time they are bought. The upper limit is in line with that applied for the public sector purchase programme (PSPP). The lower limit ensures that bonds issued by small and medium-sized corporations are also part of the universe of eligible debt instruments, while curbing the magnitude of redemptions during the lifetime of the programme.
What is the minimum issuance volume of corporate bonds eligible for purchase?
There is no minimum issuance volume for debt instruments eligible for purchase under the CSPP. This ensures that debt instruments with small issuance volumes (often ones issued by small firms) can also be purchased.
Is there any minimum yield for the bond purchases? Can the Eurosystem buy bonds with negative yields?
Purchases of eligible debt instruments with a negative yield to maturity are permissible as long as the yield to maturity is above the deposit facility rate at the time of purchase. On 19 January 2017, the Governing Council decided that purchases of assets with a yield to maturity below the deposit facility rate are only permissible under the PSPP, confirming that no such purchases are foreseen for the CBPP3, ABSPP and CSPP.
Are there any limits on CSPP holdings per issue or per issuer group?
In analogy to the existing private sector purchase programmes, the Eurosystem applies a maximum issue share limit of 70% per international security identification number (ISIN) on the basis of the outstanding amount.
Lower issue share limits apply in specific cases, for example for securities issued by public undertakings, which are dealt with in a manner consistent with their treatment under the PSPP. In relation to public undertakings, the Eurosystem is bound by the monetary financing prohibition in Article 123 of the Treaty on the Functioning of the European Union (TFEU).
The Eurosystem applies additional limits per issuer group, following a pre-defined benchmark, to ensure a diversified allocation of purchases across issuers while allowing for sufficient leeway to build up the portfolio.
Is the Eurosystem also able to buy in the primary market?
Yes, purchases in both primary and secondary markets take place under the CSPP. However, for debt instruments issued by public undertakings, no primary market purchases take place as such purchases are forbidden owing to the prohibition on monetary financing laid down in Article 123 of the TFEU.
How do you treat a corporate bond if it has two or more ratings? Which rating applies?
In accordance with the practice followed under its collateral framework, the Eurosystem considers only credit assessments provided for the issue, issuer or guarantor by credit rating agencies (i.e. external credit assessment institutions (ECAIs)) which are eligible under the Eurosystem credit assessment framework (ECAF).
The use of these ratings is outlined in articles 83 and 84 of Guideline ECB/2014/60 – Article 84 specifies that an issue rating has priority over issuer or guarantor ratings. In general, the first-best rating must have a minimum credit assessment of credit quality step 3 (currently equivalent to an ECAI rating of BBB-/Baa3/BBBL) under the ECAF. Guarantor ratings are considered only in cases where the guarantee complies with the requirements set out in Part Four of Guideline ECB/2014/60.
Will the Eurosystem reinvest/rollover maturing bonds?
In line with the other APP programmes, principal payments on the securities purchased under the CSPP will be reinvested as they mature, for as long as necessary.
In what way, if any, are car manufacturing companies eligible for CSPP purchases, given that many of them have “internal banks”?
As long as no parent of the issuer of the debt instrument is a bank, the issuer will fulfil the non-bank criterion. If the issuer has a subsidiary that is a bank, the issuer will not be excluded under this criterion. Consequently, the Eurosystem can buy such an issuer’s corporate bonds if all other eligibility criteria are met.
What are the risks of the programme and are there any plans to mitigate them? Will the Eurosystem be monitoring the creditworthiness of the companies behind its bond purchases?
As on any diversified portfolio of credit instruments, risks from the deterioration of issuers’ credit quality or from defaults of issuers cannot be totally excluded. At the same time, risks of the programme are contained in particular by (i) setting minimum credit quality criteria at the time of purchase, (ii) ensuring diversification through issuer group limits defined relative to a neutral benchmark, and (iii) by implementing appropriate due diligence procedures and credit risk mitigation measures on an ongoing basis (for example, as with the third covered bond purchase programme (CBPP3)). The Eurosystem may also apply additional risk management measures as deemed necessary.
How many corporate bonds will be purchased each month?
The CSPP contributes to the APP’s total monthly purchase volume. Similar to other asset purchase programmes (PSPP, CBPP3 and ABSPP), the purchase targets are not published ex ante. This allows the monthly purchase volumes to remain flexible to take into account prevailing market liquidity and activity at any time. However, data on actual holdings are published ex post on a weekly basis.
Will income and losses be shared within the Eurosystem?
In general, income and losses from decentralised monetary policy operations conducted by the Eurosystem are shared. The CSPP is subject to a full income and loss sharing regime.
How can you find out more about the Eurosystem’s corporate bond holdings?
Details on CSPP-related holdings are published on our website on a weekly and monthly basis (the monthly data includes a breakdown of primary and secondary market purchases). This information is made available in the context of the APP, so one can gain an insight into other Eurosystem purchases.
Does the Eurosystem apply any measures to mitigate potential negative effects on secondary market liquidity?
When implementing the CSPP, the Eurosystem is mindful of the potential impact of its purchases on market liquidity. Its participation in primary market purchases aim at striking a balance between the objective of the programme and the need to ensure continued market functioning. Similarly, when buying in the secondary market, it considers, inter alia, the scarcity of specific debt instruments and general market conditions, i.e. with a certain degree of flexibility to also take into account seasonal differences. Furthermore, the benchmark applied for purchases reflects proportionally all eligible outstanding issues. This also implies that market capitalisation provides a weighting for each of the different jurisdictions of issuance within the benchmark. Finally, CSPP holdings are also available for securities lending by the relevant national central banks.