Public sector purchase programme (PSPP) - Questions & Answers
Last updated: 2 December 2019
Q0.1 What is the monthly purchase amount following the restart of net purchases under the asset purchase programme (APP) for PSPP?
The Governing Council decided to restart net purchases under each constituent programme of the asset purchase programme (APP), i.e. the public sector purchase programme (PSPP), the asset-backed securities purchase programme (ABSPP), the third covered bond purchase programme (CBPP3) and the corporate sector purchase programme (CSPP), at a monthly pace of €20 billion as from 1 November 2019.
The Eurosystem continues to adhere to the principle of market neutrality via smooth and flexible implementation. As during the first net purchase phase between 2015 and 2018, the programme operating in the most liquid market, the PSPP, will act as a buffer to ensure the precise fulfilment of the overall monthly purchase target.
Gross purchases under the PSPP have a reinvestment component and a net purchase component. The reinvestment of principal redemptions will continue to be distributed throughout the year to allow for a regular and balanced market presence. This approach allows for continuity and flexibility and avoids temporary market dominance.
The net purchases will be allocated according to the same principles as during the first net purchase phase between 2015 and 2018.
Q0.2 How do you plan to converge towards the capital key after the restart of net purchases?
PSPP purchases will continue to be guided by the ECB capital key on a stock basis. The ECB capital key provides a straightforward and stable guideline for the composition of purchases across jurisdictions. The Eurosystem will continue to gear its monthly purchase allocation to align a jurisdiction’s share in the stock of PSPP purchases as closely as possible with the respective share of the ECB capital key by the end of the net asset purchases. This gradual adjustment over time gives due consideration to market neutrality and safeguards orderly market functioning.
Q0.3 What is being reinvested in the reinvestment component of purchases under the APP?
Redemptions are reinvested in the jurisdiction in which principal repayments are made. Coupon or interest payments are not reinvested. For redemptions of bonds issued by EU supranational institutions, reinvestments may be conducted across eligible EU supranational issuers.
Q0.4 Do NCBs only buy their own sovereign bonds or can purchases vary?
NCBs continue to buy only their respective sovereign bonds and not those of other jurisdictions. Some NCBs conduct purchases of EU supranational bonds to meet the 10% purchase share for these securities.
Q0.5 Which NCBs buy EU supranational securities?
On 24 October 2019 the Governing Council decided that purchases of marketable debt securities issued by international organisations and multilateral development banks will be conducted by fewer national central banks to simplify implementation and protect market functioning.
The following NCBs conduct purchases of EU supranational bonds to meet the 10% purchase share:
- Eesti Pank
- the Bank of Greece
- the Banco de España
- the Banque de France
- Latvijas Banka
- Národná Banka Slovenska
In addition, the Banque centrale du Luxembourg reinvests its redemptions of EU supranational bonds.
Q0.6 Why are there substantial temporary deviations from the ECB capital key in the monthly net purchases under the PSPP in certain months?
The monthly net purchase figures for individual jurisdictions are primarily driven by the PSPP reinvestment modalities. The reinvestment of principal redemptions in a jurisdiction is distributed over the calendar year to allow for a regular and balanced market presence. This distribution mechanism leads to differences in the timing of reinvestments and redemptions at the level of individual jurisdictions. These differences are also reflected in temporary deviations of monthly net purchases from the ECB capital key, whether these be upward or downward deviations. However, over the course of the calendar year the monthly deviations will to a large extent cancel each other out.
For Germany for example, redemptions were low in November 2019, while substantial reinvestments were conducted for redemptions from other months. The differences in timing of reinvestments and redemptions under the PSPP reinvestment modalities thus resulted in a German share of the November net purchases which exceeds the share implied by the ECB capital key.
The upward deviation for Germany in that month mechanically led to downward deviations from the capital key for the other large jurisdictions. The same mechanism had already led to deviations of a similar magnitude among large jurisdictions during the reinvestment phase in January, April, May and October 2019.
Q0.7: How are you allocating the PSPP monthly net purchases across jurisdictions?
PSPP purchases are guided by the ECB capital key on a stock basis over the life of the programme. In order to implement the allocation, the Eurosystem gears its monthly purchases to align a jurisdiction’s share in the PSPP stock over the medium term as closely as possible with the respective share of the ECB capital key.
Monthly fluctuations largely reflect the variability in the redemption and reinvestment profiles, as well as market liquidity conditions experienced during the purchasing month. They do not therefore necessarily reflect persistent adjustments to an individual jurisdiction’s share in net purchase amounts.
Q1.1 What exactly does the 1 to 30-year maturity restriction mean?
The maturity restriction means that the Eurosystem only buys securities which, at the time of purchase, have a minimum remaining maturity of 1 year (i.e. purchases of securities with a remaining maturity of 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).
Q1.2 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 would become eligible for regular PSPP purchases. This decision referred 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. Regional and local bonds are only purchased by the NCBs of the jurisdiction in which the issuing entity is located.
Q1.3 What are the criteria for securities issued by agencies located in the euro area to be eligible for purchase under the PSPP?
The criteria used for recognised agencies in the collateral framework and agencies eligible for the public sector purchase programme (PSPP) have been aligned since the publication of Guideline ECB/2019/11 amending Guideline 2015/510. Since 5 August 2019, the agencies eligible for PSPP are listed in the harmonised list of recognised agencies.
Q1.4 Are STRIPS eligible under the PSPP? Why does the Eurosystem adjust PSPP net purchases for redemptions of coupon STRIPS?
While Separate Trading of Registered Interest and Principal Securities (STRIPS) are eligible for the PSPP in theory, the Eurosystem refrains from buying them in the market for operational reasons. Stripping operations by other bond holders impact the usage of issue limits of PSPP-eligible securities by the Eurosystem. In order to avoid a situation where bond stripping operations by other bond holders may result in a limit being exceeded (which could lead to potential sales by the Eurosystem), the Eurosystem decided in the past to conduct a few counterbalancing stripping operations.
While coupon STRIPS repayments are technically redemptions of securities, they are economically coupon payments. The Eurosystem has chosen the general approach not to reinvest coupon payments and therefore does not reinvest coupon STRIPS (while maturing principal STRIPS are effectively reinvested). Maturing coupon STRIPS are therefore removed from PSPP redemptions as part of the computation of data published on the APP website.
2.1 Allocation of purchases
Q2.1.1 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. Are the weightings 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 capital key guides net purchases under the PSPP on a monthly basis. However, this does not imply that precise achievement of the capital key shares every month, as flexibility on a monthly basis supports the smooth implementation of the programme.
Moreover, the timing of a jurisdiction’s reinvestment of principal redemptions, and the possibility to distribute these reinvestments over time, may affect the jurisdiction’s share in the monthly purchase volume and, inversely, the shares of other jurisdictions.
Redemptions are reinvested in the jurisdiction in which principal repayments are made, while the portfolio allocation across jurisdictions continues to be adjusted with a view to bringing the share of the PSPP portfolio into closer alignment with the respective national central bank’s subscription to the ECB capital key, subject to issue and issuer limits, the principle of market neutrality, and other programme constraints.
Q2.1.2 Does 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 do the NCBs have a degree of flexibility?
The flexibility is granted to NCBs and this flexibility is regularly assessed by the Governing Council, which may adjust the implementation framework in this regard on the basis of the experience gained.
Q2.1.3 How do NCBs allocate purchases between agency, regional and sovereign securities per jurisdiction?
Spreading purchases flexibly across the different asset classes included in the programme helps to preserve market neutrality.
Flexibility in the day-to-day selection of securities to be purchased in a jurisdiction is conducive to preserving market liquidity. The Eurosystem actively incorporates the offers from a broad range of counterparties in the daily bond selection. In addition, significant efforts are undertaken to avoid buying securities that are scarce, as measured by metrics such as relative value indicators, pricing in the repo market and trading volumes.
Q2.1.4 If an NCB purchased EU supranational securities as substitutes to fulfil its share in the ECB capital key in the past, will it continue to do so after the restart of net purchases?
Substitute purchases may be conducted to complement the purchase of marketable debt instruments issued by the government and agencies of a country. In case a need is identified for a given country, the share of substitute purchases may be 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 net purchases.
Q2.1.5 Will the coordination of purchases change after the restart of net purchases? How do you coordinate the purchases between the NCBs?
PSPP purchases are conducted by the entire Eurosystem and the ECB continues to coordinate all asset purchases within the Eurosystem. Net purchases and reinvestments are coordinated in a similar way to purchases under previous phases of the APP.
The ECB does not purchase debt securities issued by EU supranational institutions and does not buy regional and local government bonds. These are only purchased by NCBs.
Q2.1.6 Why was the share of EU supranational bond purchases within the monthly PSPP purchases lowered from 12% to 10% in April 2016?
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 was 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 remained unchanged at 20%.
Q2.1.7 Is there a maturity target for gross purchases?
There is no maturity target for purchases. The purchases are conducted in a flexible manner across all eligible maturities in order to ensure market neutrality.
Q2.1.8 How do 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, flexibility is applied, including to take into account the relative values of bonds and the liquidity of the different maturity segments.
2.2 Purchases below the deposit facility rate (DFR)
Q2.2.1 Will purchases below the DFR continue after the restart of net purchases? What is the precise meaning of the expression “to the extent necessary” when referring to PSPP purchases at yields below the DFR?
Purchases of securities with a yield to maturity below the interest rate on the ECB’s deposit facility continue to be undertaken to the extent necessary after the restart of net purchases.
For each jurisdiction, priority is given to purchases of assets with yields above the DFR. This means that some jurisdictions with eligible assets with yields below the DFR 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 in a re-allocation of purchases across countries and the use of substitute purchases since the beginning of the PSPP). 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.
Q2.2.2 Why do you make purchases at yields below the DFR while you still have other bonds available?
The Eurosystem can estimate, with a reasonable degree of certainty, the necessary extent of purchases at yields below the DFR on the basis of market conditions. The need to preserve smooth market functioning calls for the necessary amount of purchases at yields below the DFR to be distributed over time, rather than abruptly changing the sectors of the yield curve where PSPP purchases take place.
Q2.2.3 Do purchases at yields below the DFR impose losses on national central banks?
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 are only 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.
2.3 Other general implementation issues
Q2.3.1 How can I see how much the Eurosystem has purchased each month under the expanded asset purchase programme (APP)?
Each month the ECB publishes both the monthly net purchases and the total holdings for the ABSPP, CBPP3, CSPP 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 increase (or decrease) 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 includes the amortisation effect).
Q2.3.2 Does the Eurosystem buy government, agency or supranational bonds in the primary market?
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.
Q2.3.3 Can the Eurosystem sell securities purchased under the APP?
Sales of securities purchased under the APP are not expected to occur regularly, although there are no formal (e.g. accounting) constraints that would preclude securities from being sold. Indeed, adjustments to holdings of individual securities purchased under the APP may occur from time to time if needed for technical reasons (e.g. to ensure continued compliance within the limit framework). Such sales would be offset by additional gross purchases. In the case of the PSPP, these additional purchases are in the same jurisdiction.
Q2.3.4 How are PSPP redemptions reinvested?
Redemptions are reinvested in the jurisdiction in which principal repayments are made. The reinvestment is distributed over the entire year to allow for a regular and balanced market presence and to avoid temporary market dominance. This approach has been followed since January 2019 and will apply after the restart of net purchases.
EU supranational securities are reinvested in the month they fall due on a best effort basis, or in the surrounding two months if warranted by market liquidity conditions.The first PSPP redemptions occurred in March 2017 and principal payments on the securities purchased were reinvested as they matured. Between March 2017 and December 2018, principal redemptions on securities purchased under the PSPP were reinvested by the Eurosystem in a flexible and timely manner in the month they fell due, on a best effort basis, or in the subsequent two months if warranted by market liquidity conditions.
Q2.3.5 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 alongside the monthly net purchases and the total holdings for the ABSPP, CBPP3, CSPP 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, among other things, the 1 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.
Q2.3.6 What is the duration of purchases and how will duration be weighted?
There is no duration target for the programme.
Q2.3.7 What is meant by “other counterparties used by the Eurosystem for the investment of its euro-denominated portfolios”?
The purchases are conducted by the ECB and the NCBs with eligible counterparties, including counterparties with whom the Eurosystem trades in the context of non-monetary policy investment activities.
Q2.3.8 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.
Q3.1 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 1 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 this 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 share 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 1 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.
Q3.2 Are the issue share and issuer limits based on nominal or market value?
These limits are based on nominal values.
Q3.3 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.
Q3.4 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.
Q4.1 As regards PSPP securities lending against cash collateral, how is the overall limit set?
When the Eurosystem started to accept cash as collateral in December 2016, the Governing Council of the ECB decided on a limit of €50 billion, taking into account the expected usage of cash as collateral and its effect on excess liquidity. In March 2018 the limit was increased to €75 billion, among other things to reflect the increase in the stock of acquired assets since December 2016.
Q4.2 How is the limit of €75 billion allocated across the Eurosystem?
The limit is allocated in proportion to the PSPP holdings of the Eurosystem central banks that make use of the possibility to accept cash as collateral, while allowing for some flexibility across jurisdictions if needed.The following Eurosystem members accept cash as collateral in their securities lending: the ECB, the Nationale Bank van België/Banque Nationale de Belgique, the Deutsche Bundesbank, the Central Bank of Ireland, the Banco de España, the Banque de France, the Banca d’Italia, De Nederlandsche Bank, Banka Slovenije and Suomen Pankki – Finlands Bank.
Q4.3 Will the PSPP securities lending facilities remain in place after the restart of net purchases?
ECB Decision 2015/10 on a secondary market public sector asset purchase programme states that the Eurosystem makes securities purchased under PSPP available for lending, with a view to ensuring the effectiveness of the PSPP. This includes securities purchased during the reinvestment period and after the restart of net purchases.