Public sector purchase programme (PSPP) - Questions & answers
Last updated: 3 January 2019
Q0.1 How do you plan to converge towards the (new) capital key during the reinvestment period?
Redemptions are reinvested in the jurisdiction they fall due, but with a gradual adjustment made so that the stock of holdings over time is brought closer into line with the ECB capital key, giving due consideration to market neutrality and with a view to safeguarding orderly market functioning. As a result, the new capital key will determine the overall composition of the portfolio over time. As during the net purchase phase, the convergence to the capital key is constrained during the re-investment phase by the availability of securities and the limit framework (e.g. issue share limits, etc.).
Q0.2 What is being reinvested during the reinvestment phase?
The Governing Council decided to maintain the size of its cumulative 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 their respective levels as at the end of December 2018. Limited temporary deviations in the overall size and composition of the APP may occur during the reinvestment phase due to operational reasons.
Redemptions are reinvested in the jurisdiction in which principal repayments are made but 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 banks’ subscription to the ECB capital key. 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.
Q0.3 Are national central banks (NCBs) still allowed to take up to two months to reinvest redemptions or can they take even longer?
Reinvestment of PSPP principal redemptions are generally distributed over the entire year to allow for a regular and balanced market presence.
Q0.4 How long do you expect the reinvestment period to last?
The Governing Council intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when it starts raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.
Q0.5 Do NCBs still only buy their own sovereign bonds or can purchases vary, so that for example the Deutsche Bundesbank could also buy Italian sovereign bonds?
As was the case during the net purchase phase, NCBs continue to buy their respective sovereign bonds and not the ones of other jurisdictions. Some NCBs conduct reinvestments of EU supranational bonds to complement the purchase of marketable debt instruments issued by the government and agencies in their respective jurisdictions.
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 list of PSPP eligible bond issuers is updated when needed following decisions by the Governing Council on proposals that usually come from national central banks. When the PSPP was announced, the initial list of agencies included 7 entities. The list was first updated on 15 April 2015 and has been expanded on several additional occasions. When updating the list of eligible agencies, the Governing Council takes into account monetary policy as well as risk management considerations. Only agency issuers that appear on the list of PSPP-eligible agencies published on the ECB’s website are eligible for PSPP purchases.
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. Were the weightings applied on a monthly basis, with each NCB buying the proportionate amount each month, or did these shares refer to the programme as a whole? How does this change in the reinvestment phase?
During the net purchase phase, the ECB's capital key guided net purchases under the PSPP on a monthly basis. However, this did not imply that a precise achievement of capital key shares was strictly targeted every month, as some flexibility on a monthly basis supported 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 have affected the jurisdiction’s share in the monthly purchase volume as well as inversely that of other jurisdictions.
During the reinvestment phase, 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 banks’ subscription to the ECB capital key.
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?
During the reinvestment phase, the reinvestment of principal redemptions is generally distributed over the entire year to allow for a regular and balanced market presence. This approach allows for greater continuity and flexibility. The Eurosystem continues to adhere to the principle of market neutrality via smooth and flexible implementation.
Q2.1.3 How strictly is the capital key rule followed? How do NCBs allocate purchases between agency, regional and sovereign securities per jurisdiction?
The capital key as amended over time determines the overall composition of the PSPP portfolio. Redemptions are reinvested in the jurisdiction they fall due, but a gradual adjustment is made so that the stock of holdings is brought closer into line with the ECB capital key over time. Any adjustment to the portfolio allocation across jurisdictions is implemented gradually and is calibrated as appropriate to safeguard orderly market conditions, thereby giving due consideration to market neutrality. Sales are not foreseen in order to rebalance the portfolio. As during the net purchase phase, the convergence to capital key is constrained during the reinvestment phase by the availability of securities and the limit framework (e.g. issue share limits, etc.).
The share of purchases in an NCB's home market is mainly determined by redemptions, with NCBs focusing exclusively on their home market. Within this home market, there is some flexibility for the NCBs to choose between purchases of central government securities and securities of regional governments and certain agencies established in the respective jurisdiction.
Q2.1.4 If an NCB purchased substitutes to fulfil its share in the ECB capital key, will it continue to do so in the reinvestment phase?
During the net purchase phase, substitute purchases were conducted to complement the purchase of marketable debt instruments issued by the government and agencies. Once such a need was identified for a given country, the share of substitute purchases was 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. During the reinvestment phase, several NCBs continue to reinvest redemptions in EU supranational bonds.
Q2.1.5 Does the coordination of purchases differ during the reinvestment phase? How do you coordinate the purchases between the NCBs? Do all NCBs purchase supranational bonds or only the NCB of the country in which these supranational institutions are located conduct those purchases?
Purchases during the reinvestment phase are coordinated in a similar way to during the net purchase phase. The ECB continues to coordinate all asset purchases within the Eurosystem. The ECB does not purchase debt securities issued by certain international or supranational institutions located in the euro area. Under a specialisation approach, only a few NCBs buy securities issued by European supranational institutions, but this specialisation is independent of the domicile of these international or supranational institutions.
Q2.1.6 Why was the share of EU supranational bond purchases within the monthly PSPP purchases decreased 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 reinvestments?
There is no maturity target for reinvestments.
Q2.1.8 How do you weight 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, also taking 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 Are purchases below the DFR continuing during the reinvestment phase? 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 during the reinvestment phase.
For each jurisdiction, priority is 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.
Q2.2.3 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 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.
Q2.2.3 Do purchases at yields below the DFR force losses onto 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 What is the volume of APP purchases every month?
Net purchases under the APP ended in December 2018. During the reinvestment phase, APP purchases are determined by redemptions, in line with the Governing Council decision to maintain the size of its cumulative net purchases under each constituent programme of the APP at their respective levels as at the end of December 2018. Furthermore, the reinvestments of principal redemptions are distributed over the year to allow for a regular and balanced market presence.As a rule, PSPP redemptions are reinvested in the jurisdiction in which principal repayments are made, but 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 banks’ subscription to the ECB capital key. This is implemented in a smooth way over an appropriate transition period.
Q2.3.2 How can I see how much the Eurosystem has purchased each month under the expanded asset purchase programme (APP)?
On a monthly basis 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 include the amortisation effect).
Q2.3.3 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.
Q2.3.4 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 such 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 purchases. In the case of the PSPP, these additional purchases would be in the same jurisdiction. This also applies during the reinvestment phase.
Q2.3.5 How are PSPP redemptions reinvested?
The first PSPP redemptions occurred in March 2017 and principal payments on the securities purchased have since been reinvested as they have matured. Principal redemptions on securities purchased under the PSPP have been reinvested by the Eurosystem in a flexible and timely manner in the month they fall due, on a best effort basis, or in the subsequent two months, if warranted by market liquidity conditions. After the end of net asset purchases, reinvestments continue but as a general rule, the reinvestment of principal redemptions is distributed over the entire year to allow for a regular and balanced market presence.
Q2.3.6 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.
Q2.3.7 What is the duration of purchases and how will duration be weighted?
There is no duration target for the programme. This is also the case during the reinvestment phase.
Q2.3.8 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.
Q2.3.9 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 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 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 reflecting 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, Banco de España, Banque de France, Central Bank of Ireland, De Nederlandsche Bank, Deutsche Bundesbank, Nationale Bank van België/Banque Nationale de Belgique, Suomen Pankki and Banka Slovenije.
Q4.3 Will the PSPP securities lending facilities remain in place during the reinvestment phase?
The 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.