TARGET2, Eurosystem Collateral Framework & CCBM2 (part I) Nynke Doornbos

1. TARGET2, Eurosystem Collateral Framework & CCBM2 (part I) Nynke Doornbos 4th Conference on Payments and Securities Settlement Systems Ohrid, Republic of Macedonia, 20 June 2011

2. Topics • TARGET2 • Basics Eurosystem collateral framework • Collateral trends • CCBM2

3. Agenda TARGET2 • TARGET • Scope and framework TARGET2 • TARGET2 operational day • Single Shared Platform

4. TARGET • TARGET • Trans-European • Automated • Real-time • Gross settlement • Express • Transfer system

5. European Central Bank NCB-A NCB-B bank A bank B bank C bank D History: the ESCB payment system NCB-A NCB-B Interlinking bank A bank B bank C bank D

6. ECB NCB NCB ILC ILC ILC NCB TARGET Interlinking Network ILC NCB ILC NCB ILC NCB ILC NCB ILC NCB ILC NCB ILC NCB ILC NCB ILC ILC ILC NCB ILC NCB ILC NCB NCB History: TARGET(1) • Expensive • Inflexible • Different pricing • Different products / services • Different standards

7. Swift Net Services Bank B Bank A SSP Interlinking via FIN NCBs Ancillary systems From TARGET to TARGET2

8. TARGET2 Platform • One central platform for NCBs for the real time gross settlement of large value payments • The central TARGET2 platform, called Single Shared Platfom (SSP), was built by 3 NCB´s (3CB): • Bundesbank, Banque de France and Banca d´Italia • The platform offers some mandatory and some optional modules. • Operational as off 19 November 2007 (in 3 groups)

9. TARGET2 in Europe Countries on TARGET2 ---- of which € Other EU-countries

10. Functionalities in T2

11. TARGET2 TARGET2 offers: • High availability • Uniform pricing • Uniform functionality • Harmonisation • Advanced tools for liquidity management • Ready for new countries

12. TARGET2: Operations • All RTGS operations may be processed in TARGET2 • individual operations settled in real-time and in central bank money • no exclusion according to amount or type of operations • Wholesale payments are a main goal for TARGET2 • All types of operations • credit transfers • direct debits (limited usage) • mandated payments • All types of business • payments between market participants • central bank operations • settlement operations of ancillary systems

13. 18:45 19:30 22:00 01:00 06:45 07:00 17:00 18:00 18:45 Calendar day (d-1) Calendar day (d) TARGET business day (d) business day (d+1) 9 3 2 3 4 6 7 8 1 5 1 TARGET2 Operational day

14. TARGET2 Operational day Purpose of the different phases: • Start-of-day (1 & 2) • Night-time processing (3) • Technical maintenance window (4) • Preparation for day trade phase (5) • Day trade phase I (6) • Day trade phase II (7) • End-of-day (8 & 9)

15. Payment interface- FIN Copy - SWIFTNet FIN MT 011 Bank B SSP country Bank A SSP country MT 012 MT 103(+) / 202/204 MT 103(+) / 202 / 204 MT 019 MT 096 MT 097 PM Participant Interface (Y-copy) Booking instruction mandatory Acknowledgement either / or Payment Processing optional

16. SITE A SITE B SITE C SITE D SITE E SITE F Region 3 Region 1 Region 2 payments and accounting services customer related services Single Shared Platform • Centralized solution: single platform, no interlinking • central payments processing: DE, IT (workload distribution between regions) • central datawarehouse and customer services: FR

17. REGION 1 PeriodicRegion Rotation REGION 2 Live Test & Training (T&T) SITE C SITE A P P Asynchronous remote copy Synchronous remote copy Synchronous remote copy SITE B SITE D Hot back-up  Hot back-up S S Single Shared Platform

18. For integrated model: liquidity transfer For interfaced model: real-time settlement SSS SSS Securities accounts Securities accounts NCB environment Other NCB Cash settlement accounts NCB environment RTGS RTGS Ancillary systems settlement

19. Pricing • Objectives: cost recovery, competitiveness and broad access • Pricing of transactions: pricing scheme with a monthly fee (100 euro or 1.250 euro) plus transaction fee between EUR 0.80 and 0.125. • Optional services (e.g. liquidity pooling and services related to ancillary systems) are priced separately

20. Liquidity pooling - Virtual account Credit institution e.g.Bank A1 Credit institution e.g.Bank A2 Credit institution Bank A3 Group account • Virtual balance : balance on (single) accounts + credit lines • Possibility to „use“ this position by each group account holder • Booking on the single accounts (not on the virtual account) • Only intra-day: „levelling“ off at the end of day mandatory

21. Volume and value turnover T2

22. Major large value payment systems in the world

23. Main indicators in 2010-H1

24. Actual volume and value turnover T2

25. Summary • Commercial banks directly benefit of a technically centralized platform (legally it is a decentralized system) • One pool of liquidity, one window for info on all TARGET payments

26. Topics • TARGET2 • Basics Eurosystem collateral framework • Collateral trends • CCBM2

27. The Eurosystem collateral framework: principles decided in 1998 • Protecting the Eurosystem from incurring losses in it's monetary policy operations Collateral

28. The Eurosystem collateral framework: principles decided in 1998 • Volume available collateral is sufficient for effective monetary policy and smooth operation of payment system • +/- EUR 14.000 billion

29. The Eurosystem collateral framework: principles decided in 1998 • Volume available collateral is sufficient for effective monetary policy and smooth operation of payment system • +/- EUR 14.000 billion • Collateral Deposited • (+/- EUR 2.000 billion) • and • Collateral Used for Credit Operations • (+/- EUR 700 billion) In NL: +/- EUR 150 billion deposited (7,5%) +/- EUR 42 billion used for credit operations (6%)

30. The Eurosystem collateral framework: principles decided in 1998 • Operations accessible to a broad set of counterparty’s

31. The Eurosystem collateral framework: principles decided in 1998 • Equal treatment of all counterparty’s

32. The Eurosystem collateral framework: principles decided in 1998 • Enhancing operational efficiency and transparency • One framework -> one single list since 2007 • Clear eligibility rules available via public guidelines • Centrally guided reporting at ECB

33. The Eurosystem collateral framework: principles decided in 1998 • In accordance with principle open market economy: free competition -> efficient allocation of resources • Equal treatment of counterparties • No privileged treatment of public sector securities

34. The Eurosystem framework: Basics • All liquidity providing credit operations of the Eurosystem based on adequate collateral (no cash) • Collateral needed for • monetary policy purposes (MRO´s + LTRO´s) • intraday credit (payments purposes) • One collateral-lists for monetary policy purposes and payment system operations and local use • Broad collateral list consisting of marketable and non-marketable assets (broad definitions)

35. Single list of collateral – since 2007 • Drawbacks 2-tiers list (1999-2006): heterogeneity and no transparency • Single list consists of two asset classes: • Marketable assets - listed on regulated markets or certain accepted non-regulated markets • Non-marketable assets - credit claims and Irish non-marketable retail mortgage backed debt instruments, no market criterion • For both asset classes → Eurosystem credit assessment framework (ECAF)

36. Eurosystem Credit Assessment Framework- since 2007 ECAF principles: consistency, accuracy and comparability Credit assessment sources: • ECAI – External Credit Assessment Institutions (Moody’s, Fitch, S&P, DBRS) • ICAS – NCBs in-house credit assessment systems • IRB – counterparties internal ratings-based systems • RT – third-party providers rating tools (Lince, ICAP)

37. ECAF benchmark/threshold • 1999 – 2008: • ´Single A` (A-Fitch and S&P, A3 Moody´s) or • Probability of default (PD) over a one-year horizon of 0.10% - definition default stems from EU Capital Requirements Directive (CRD) • 2008-2010: temporary acceptance lower rating • 2011: new benchmark –> BBB- or PD of 0.40% • Exception: ABS -> 2x AAA

38. Eligible marketable assets

39. Eligible non-marketable assets

40. Risk control measures Eurosystem

41. Valuation principles – daily valuation • Marketable assets • Take representative price source, use market price • Non-availability of marketprice -> calculate theoretical price (based on discounted cash flows) • Two hubs provide theoretical prices, Banque de France for ABS, Deutsche Bundesbank for other complex debt instruments • Non-marketable assets • Theoretical price or outstanding amount (-> higher haircut) • 2012: Central Eurosystem Pricing Hub for prices of marketable assets – 2013 for credit claims

42. Agenda • The Eurosystem collateral framework • Impact of turmoil on financial markets • European collateral trends • Mobilising collateral • CCBM1 → CCBM2

43. Measures taken since 2008 • Monetary operations added with longer maturities and fixed rates and with full allotment • Liquidity provisions in other currencies (US dollars , Swiss francs through Fx swaps), additional swap arrangements (US, CHF, JPY, GBP, SEK) • Temporary relaxation of eligibility criteria – ending ult. 2010 • Foreign collateral prepared in the toolbox (non-EUR collateral) • Higher haircuts and higher rating requirements for ABS, additional requirements (surveillance reports, no ‘financial close links’) • Limits for the use of uncovered bank bonds • Covered bond program (CBPP), 2009-2010, ended • SMP program, ongoing • 2011 – lower rating requirements

44. Recent amendments

45. Conclusions regarding functioning of the collateral framework • The Eurosystem adjusted the collateral framework much less than FED and BoE • Flexibility Eurosystem framework was historical necessity (no homogeneous banking structures) • Liquidation risk increased because of dislocated markets • Concentration risk increased because of own used assets • Framework needs vigilant monitoring and sound information base • Increase in residual financial risks asks for continuous redefinition of risk control framework

46. Agenda • The Eurosystem collateral framework • Impact of turmoil on financial markets • European collateral trends • Collateral management at the Nederlandsche Bank • Mobilising collateral

47. Eligible collateral by asset type

48. Use of collateral for credit operations

49. European evolution of collateral used by asset type (%)

50. Numbers Value (without weekly cash deposits) 2007 2008 2009 2011 2010 Total NL collateral pool Increase 290% between 2007-2010. Decrease as off fall 2010 Improved situation for NL banks… 205.4 2.794 Lehman Brothers bankrupt (15 September 2008) Status Feb-2011: 160 billion 166.5 More numbers = Higher activity level Sub-prime crisis (August / September 2007) 138.9 +290% End grandfathering ABS with 1 rating 1.040 70.7 11 May law FZO: Rise credit claims? 2007 2008 2009 2011 2010