Review of the Eurosystem’s Collateral Framework: First step towards a Single List
On 11 June 2003 the Eurosystem launched a public consultation to gather the views of market participants on measures to improve the collateral framework of the Eurosystem. Following the positive response to this initiative, the Governing Council of the ECB has approved in principle the introduction of a “Single List” in the collateral framework of the Eurosystem. The purpose of having a Single List is to enhance the level playing field in the euro area, to further promote equal treatment for counterparties and issuers, and to increase the overall transparency of the collateral framework. The Governing Council has decided that the Single List will be introduced gradually and that, ultimately, it will replace the current two-tier system of eligible collateral.
In the current system, tier one comprises only debt instruments that comply with euro area-wide eligibility criteria; tier two comprises assets that are approved by national central banks and includes debt instruments that do not comply with euro area-wide eligibility criteria, as well as equities and non-marketable assets such as bank loans. The first step towards establishing the Single List will comprise the following two measures:
- the introduction into tier one of a new category of previously ineligible collateral, namely euro-denominated debt instruments issued by entities established in those Group of Ten (G10) countries that are not part of the European Economic Area (EEA);
- changes in the eligibility criteria relating to some marketable debt instruments.
This first step will be implemented by May 2005. In order for the Governing Council’s decision to become fully operational, some more implementation work has to be carried out by the Eurosystem before the date of implementation. Market participants will receive regular updates on the progress achieved in implementing the revised eligibility rules to allow adequate lead-times for the required operational changes.
When the first step has been implemented, most currently eligible marketable debt instruments will continue to be eligible in the Single List. A limited number of currently eligible assets will lose their eligibility status and will be phased out over a period of 36 months.
As a consequence of the changes caused by the introduction of the Single List in the collateral framework, a revision of the eligibility criteria will take place. These changes will be reflected in a revised version of the ECB document entitled “The implementation of monetary policy in the euro area: General Documentation on Eurosystem monetary policy instruments and procedures”, the next version of which is expected to be published around April 2005. More detailed information on the precise changes to the eligibility criteria will be given closer to the enforcement date.
Further measures concerning the eligibility of additional tier two assets in the Single List will require new decisions by the ECB’s Governing Council. Consistency between past and future decisions will be ensured. Details on these decisions will be given in due course.
Changes planned in the first step of the introduction of the single list
Introduction into tier one of euro-denominated debt instruments issued in those G10 countries that are not part of the EEA
In order to be eligible, such assets have to be:
- debt instruments;
- denominated in euro;
- issued by entities established in the G10 countries that are not part of the EEA (currently the United States, Canada, Japan and Switzerland);
- issued in the EEA but settled (i.e. held) in the euro area;
- supported by an adequate legal assessment (e.g. a “legal opinion”) on the applicable legal framework and the rules that would apply to the enforcement of Eurosystem rights deriving from such debt instruments.
Changes in the eligibility criteria relating to some marketable debt instruments
Debt instruments listed or quoted on a regulated market
Regulated markets that are included in the European Commission’s list drawn up in accordance with the Investment Services Directive (ISD), are currently eligible. Compliance with the ISD listing is considered to be a sufficient condition for a market to be safe, transparent and accessible. These markets will continue to be eligible, with no need for any additional assessment.
Debt instruments listed or quoted on a non-regulated market
The Eurosystem has devised three “high-level” principles – safety, transparency and accessibility – that should be used to assess well-functioning markets. On the basis of proposals submitted by the Eurosystem national central banks, a practical assessment of the non-regulated markets has been made by the ECB on a case-by-case basis against the three high-level principles. The eligible markets resulting from this assessment are listed in Table 1. Table 2 lists those non-regulated markets which are currently not deemed to be compliant with the high-level principles.
In the selection process described above, “markets” are selected, not “assets”. However, the way in which a market is organised and functions can change. If a currently eligible market is assessed to be ineligible under the new rules, the market may still be reorganised to ensure compliance with the high-level principles. This means that the list of eligible markets is not “closed”: the Eurosystem intends to reassess the list of non-regulated markets and publish the list of eligible ones at least annually. In addition, assets issued or exchanged in an ineligible market can “migrate” to an eligible market and thus maintain their eligibility status.
As the changes to the rules for eligible markets are expected to imply a (limited) withdrawal of assets from the list of eligible collateral, rules for phasing assets out of this list have been devised. To allow counterparties sufficient time to adjust their balance sheet structure and find alternative eligible collateral, a phasing-out period of 36 months is foreseen, starting from the date of publication of this press release. The phasing-in/out will consist of three stages:
- the decision on the principle has been announced to market participants today, together with the preliminary list of markets which will be eligible under the new criteria (see Table 1); non-regulated markets to be phased out (see Table 2) will continue to remain eligible until May 2007;
- in May 2005 a final list of eligible markets will be published, and the first step of the Single List enforced; markets listed in the final list will be eligible immediately for the Single List;
- in May 2007 the phasing-out period will end and assets exchanged on markets that do not comply with the Single List criteria will become ineligible.
Table 1. Preliminary list of non-regulated markets deemed compliant with the high-level principles and thus eligible for the Single List
|Location of market||Name of market|
|Belgium||The OTC market for Belgian Treasury Bills|
|Germany||The regulated unofficial Market ("Freiverkehr") of a German exchange|
|The MTS German market for Bu-Bills|
|France||Government securities markets (Bons du Trésor: BTF/BTAN)|
|French commercial paper market (billets de trésorerie)|
|French Medium-Term Notes market (BMTN)|
|Netherlands||The OTC money market for Dutch Treasury Certificates|
|Finland||The money market for treasury bills (Finnish Treasury Bill Programme)|
Table 2. Preliminary list of non-regulated markets not deemed compliant with the high-level principles for the Single List and to be phased out of the list of eligible markets
|Location of market||Name of market|
|Germany||The OTC Bu-Bills market|
|The OTC market for CP|
|Italy||The OTC market for debt securities issued by Italian local authorities|
|Netherlands||The OTC money market for CP and CD|
|The OTC MTN market|
|Finland||The OTC market for CP and Bank CD|
Debt instruments issued by credit institutions
Currently, some specific restrictions are imposed on the eligibility of uncovered debt instruments issued by credit institutions. A simplified set of restrictions will continue to be imposed under the Single List. The criterion which requires uncovered debt instruments issued by credit institutions to be listed or quoted on a regulated market as defined in the ISD will be retained under the Single List. The criterion that each issue should have an issue or programme rating will be relaxed.
This simplified set of restrictions will enter into force when the first step of the Single List has been implemented (May 2005). As the changes to the eligibility criteria applying to these assets are not expected to make any currently eligible assets ineligible, no phasing-out rules will be necessary.
Marketable debt instruments not complying with the tier one criterion on the financial soundness of the issuer
Currently, some marketable debt instruments are included in tier two because the assessment of the financial soundness of the issuer is carried out using methods other than those foreseen for tier one assets. Such assets will remain in tier two at least until the Eurosystem’s overall credit assessment framework to be applied to the Single List of collateral has been finalised (this is planned as a later step in the introduction of the Single List). No phasing-out rules for these assets are therefore required at the moment.
Further information on the practical implementation of the first step of the Single List will be provided to market participants closer to the date of enforcement of the measures.
 Council Directive 93/22/EEC of 10 May 1993 on investment services in the securities field. It should be noted that a revised Directive is being adopted but has not yet been implemented; this new Directive will be referred to as the Directive on Financial Instruments Markets (FIM).
 The list of ISD-compliant markets is published on the European Commission’s website: http://europa.eu.int/comm/internal_market/en/finances/mobil/isd/index.htm
 “Safety”, “transparency” and “accessibility” are defined by the Eurosystem exclusively in view of the performance of the Eurosystem’s collateral management function. The selection process is not aimed at assessing the intrinsic quality of the various markets. The contents of the principles are as follows: Safety is taken to mean certainty with regard to transactions; in particular, certainty on the validity and enforceability of transactions.Transparency is taken to mean unimpeded access to information on: the market’s rules of procedures and operation; the assets’ financial features; the price formation mechanism; the relevant prices and quantities (quotes, interest rates, trading volumes, outstanding amounts, etc.).Accessibility refers to the Eurosystem’s ability to take part in and have access to the market. A market is accessible for collateral management purposes if its rules of procedures and operation allow the Eurosystem to obtain information from it and obtain liquidity from it when needed for these purposes.
 Given the short-term maturity of the assets to be phased out, counterparties will be allowed to deposit new assets related to the phased-out markets in the national tier two lists until May 2007.
 Section 6.2 of the “General Documentation” states that tier one assets must fulfil “…high credit standards. In the assessment of the credit standard of debt instruments, the ECB takes into account, inter alia, available ratings by market agencies, guarantees provided by financially sound guarantors, as well as certain institutional criteria which would ensure particularly high protection of the instrument holders…”.