Instruction No. 11/2013 - Temporary Additional Measures for the Intervention Operations Market (M.O.I.)

INSTRUCTION No. 11/2013 - (BO No. 5, 15.05.2013)

Topics

MARKETS

Money Markets

SUBJECT: Intervention Operations Market (M.O.I.) - Additional temporary measures

On 20 March 2013, the Governing Council of the European Central Bank approved Guideline ECB/2013/4, which amends and replaces Guideline ECB/2012/18, relating to additional temporary measures. It is within the competence of the Bank of Portugal, as the National Central Bank, to apply the Guidelines emanating from the European Central Bank in the domestic order.

Accordingly, the Bank of Portugal, using the competence attributed to it by Articles 14, 15, 16, and 24 of its Organic Law, determines the following:

Instruction No. 7/2012 (BO No. 3, 15-03-2012) is amended as follows:

1. The preamble shall have the following wording:

In accordance with Article 18(1) of the Statutes of the European System of Central Banks and of the European Central Bank (ECB), the national central banks (NCBs) of the Member States whose currency is the euro may conduct credit operations with credit institutions against adequate collateral.

The conditions and requirements established for credit operations are regulated by Bank of Portugal Instruction No. 1/99, of 1 January 1999, which implements at the national level Annex I of Guideline ECB/2011/14, of 20 September 2011, relating to the instruments and procedures of monetary policy of the Eurosystem, published in the Official Journal of the European Union L331, of 14 December 2011, available for consultation at www.ecb.europa.eu/ (Publications / Legal framework / Monetary policy and Operations / Monetary policy instruments).

On 8 December 2011, the Governing Council of the ECB decided to adopt additional measures to promote the granting of credit and liquidity in the money market of the euro area, extending, among others, the criteria for determining the eligibility of assets to be used as collateral in the Eurosystem's monetary policy operations.

These temporary measures were recorded in Decision ECB/2011/25, of 14 December 2011, relating to additional temporary measures concerning Eurosystem refinancing operations and the eligibility of collateral assets, published in the Official Journal of the European Union L-341, of 22 December 2011, which was revoked by Decision ECB/2012/17. The temporary measures were recorded in Guideline ECB/2012/18, of 2 August 2012, relating to additional temporary measures concerning Eurosystem refinancing operations and the eligibility of collateral assets, which amends Guideline ECB/2007/9, which has undergone various amendments.

Given the need to introduce a new amendment to Guideline ECB/2012/18, the European Central Bank (ECB) deemed it appropriate, for reasons of clarity, to reformulate this Guideline, so that all additional temporary measures approved by the ECB are gathered in a single legal document, Guideline ECB/2013/4, of 20 March 2013, which amends and replaces Guideline ECB/2012/18.

The additional temporary measures have been implemented by the Bank of Portugal (BdP) through Instructions No. 1/99 and No. 7/2012. For reasons of uniformity, clarity, and simplicity, the BdP deemed that these measures should henceforth be included in a single Instruction.

In accordance with the rules contained in the aforementioned documentation and in accordance with Bank of Portugal Instruction No. 1/99, the BdP, upon request by the Participating Institution (PI), shall open a credit in favor of said institution, the amount of which shall be limited to the result of the difference between the value attributed by the BdP to the collateral delivered by the PI, according to the valuation rules provided in Instruction No. 1/99 and this Instruction, and the intraday credit amount contracted by the PI plus the use of the contingency liquidity facility under Bank of Portugal Instruction No. 24/2009.

Thus, using the competence attributed to it by Articles 14, 15, 16, and 24 of its Organic Law, approved by Law No. 5/98, of 31 January, the BdP determines the following:

2. Chapter I, which shall henceforth be designated as General Provisions, is renumbered and has the following wording:

I. General Provisions

I.1 Liquidity lending operations are carried out after the provision of adequate collateral by the Participating Institutions, under the terms and conditions defined in Bank of Portugal Instruction No. 1/99, of 1 January 1999.

I.2 Temporarily, additional measures concerning Eurosystem refinancing operations and the eligibility of collateral assets are admitted, under the terms and in accordance with the provisions of this Instruction.

3. Chapter II shall henceforth be designated as Additional Credit Rights, and has the following wording:

II. Additional Credit Rights

Additional credit rights are admitted as collateral assets, being credit claims on third parties held by the PI that do not meet the Eurosystem's eligibility criteria, hereinafter designated as additional credit rights.

Additional credit rights may be pledged individually (individual credit rights) or collectively (collective credit rights, hereinafter designated as credit right portfolios).

The credit opened shall be secured by financial pledge, under Decree-Law No. 105/2004, of 8 May, over each of the additional credit rights pledged by the PI in favor of the BdP, whether pledged individually or collectively.

Collective additional credit rights are also subject to the provisions of the Contract for the Granting of Collateral of Additional Collective Credit Rights in the Form of Bank Loans for Monetary Policy Operations and the Contract for the Granting of Collateral of Additional Collective Credit Rights Secured by Mortgage in the Form of Bank Loans for Monetary Policy Operations, annexed to this Instruction, which shall be concluded whenever a PI pledges collective additional credit rights.

It is incumbent upon the BdP to regulate the constitution and mobilization of additional credit rights, by establishing, among others, eligibility requirements and risk control measures, for which purposes prior approval by the ECB has been obtained.

4. The title of point II.2.2 shall have the following wording:

II.2.2 Of the credit right portfolio

Number II.2.2.3 is amended, to have the following wording:

Credit right portfolios must be constituted by credit rights without credit incidents granted to debtors not included in the Bank of Portugal's list of cheque users offering credit risk.

5. Number II.3 is added, which has the following wording:

II.3 Credit rights pledged individually or collectively must be subject to Portuguese law and the exclusive jurisdiction of Portuguese courts. In exceptional situations, the BdP, with prior approval by the Governing Council of the ECB, may accept as collateral credit rights:

II.3.1 Whose eligibility and risk control criteria are established by another NCB; or

II.3.2 Subject to the law of a Member State other than that in which the NCB accepting the credit right is established.

6. Chapter III, Additional Securitised Debt Instruments, is added, which has the following wording:

III. Additional Securitised Debt Instruments

III.1 In addition to the securitised debt instruments eligible under Section 6.2.1 of Annex I of Guideline ECB/2011/14, securitised debt instruments that meet all the eligibility requirements of Guideline ECB/2011/14, except for the credit assessment conditions contained in Section 6.3.2 of Annex I of the aforementioned Guideline, are temporarily eligible as collateral assets, provided that, at the date of issuance and at any subsequent moment, they have been assigned two minimum ratings corresponding to level 3 of the Eurosystem's harmonised credit rating scale 1, and that they meet the following requirements:

III.1.1 The underlying assets of the securitised debt instruments must belong to one of the following categories of assets:
(i) mortgage loans to individuals;
(ii) loans to small and medium-sized enterprises (SMEs); (iii) commercial mortgage loans; (iv) vehicle purchase loans; (v) financial leasing; or (vi) consumer credit.

III.1.2 The underlying assets of the securitised debt instruments cannot be of different categories of assets.

III.1.3 The underlying assets of the securitised debt instruments cannot include loans that:
(i) are in arrears at the time of issuance of the securitised debt instrument; (ii) are in arrears when included in the securitised debt instrument and during its life, for example, through substitution or exchange of underlying assets, or that (iii) are, at any time, structured, syndicated, or 'leveraged'.

III.1.4 The documentation of the operation on the securitised debt instrument must contain provisions regarding the maintenance of debt service.

III.2 The following haircuts apply to securitised debt instruments:
(i) For the assets referred to in III.1.1 that have two minimum credit ratings of "A" 2: 16%; (ii) For the assets referred to in III.1.1 that do not have two minimum credit ratings of "A":
a) If the underlying assets are commercial mortgage loans: 32%; b) For the remaining securitised debt instruments: 26%; (iii) For the assets referred to in III.4: 32%.

III.3 Participating institutions cannot mobilize as collateral assets securitised debt instruments that are eligible under the provisions of III.1 if the participating institution, or any third party with which it has close relationships, offers interest rate coverage with respect to said instruments.

III.4 The BdP may accept, as collateral assets in Eurosystem monetary policy operations, securitised debt instruments whose underlying assets include mortgage loans to individuals or loans to SMEs, or both types of loans, and that do not meet the credit assessment conditions contained in Section 6.3.2 of Annex I of Guideline ECB/2011/14 and the requirements established in III.1.1 to III.1.4 and in III.3, but that meet all other eligibility criteria applicable to securitised debt instruments as established in the aforementioned Guideline and have two minimum ratings corresponding to level 3 of the Eurosystem's harmonised credit rating scale. Such securitised debt instruments are limited to those issued before 20 June 2012.

For the purposes of the provisions in III.:

1 At level 3 of the Eurosystem's harmonised credit rating scale, this corresponds to a credit rating of at least "Baa3" from Moody's, "BBB-" from Fitch or Standard & Poors, and "BBB" from DBRS.
2 A rating of "A" corresponds to a minimum rating of "A3" from Moody's, "A-" from Fitch or Standard & Poors, and "AA" from DBRS.

(i) the term "mortgage loans to individuals" includes, in addition to mortgage-backed housing loans, also non-mortgage housing loans, if, in case of default, the collateral can be activated and collected immediately. Such collateral may be provided under different contractual forms, including insurance policies, provided they are provided by a public sector entity or financial institution subject to public supervision. The credit assessment of the guarantor for this purpose must comply with level 3 of credit quality on the Eurosystem's harmonised rating scale throughout the duration of the operation; (ii) by "small enterprise" and "medium enterprise" is meant any entity that, regardless of its legal form, carries out an economic activity and whose turnover, individually or, if integrated into a group, for the group as a whole, is less than 50 million euros. (iii) "loan in arrears" includes loans where the payment of capital or interest is delayed by 90 days or more and the debtor is in a situation of "default", within the meaning of point 44 of Annex VII of Directive 2006/48/EC of the European Parliament and of the Council, of 14 June 2006, on the taking up and pursuit of the business of credit institutions, or when there are justified doubts that its payment will be fully effected; (iv) "structured loan" refers to a structure involving subordinated credit rights; (v) "syndicated loan" refers to a loan granted by a group of lenders gathered in a financial syndicate; (vi) "leveraged loan" refers to a loan granted to a company that already presents a high level of indebtedness, as happens with the financing of takeover operations and acquisition of majority voting capital (buy out), cases in which the loan is used to purchase the share capital of a company that is also the borrower of the loan; (vii) "provisions regarding the maintenance of debt service" refers to provisions in the legal documentation of a securitised debt instrument that ensure that default by the entity providing services related to the management of the transaction (servicer) will not imply the cessation of debt service and that provide for the cases in which a substitute shall be appointed for this purpose, as well as an action plan outlining the operational measures to be taken when the servicer's substitute is appointed and how the administration of the loans is transferred.

7. Chapter IV, with the title Covered Bonds Guaranteed by a Member State, is added, with the following wording:

IV. Covered Bonds Guaranteed by a Member State

IV.1 The BdP, with prior information to be sent to the ECB, may decide not to accept as collateral assets in Eurosystem credit operations eligible unsecured covered bonds that:

IV.1.1 Do not meet the minimum requirements of high credit standards of the Eurosystem.

IV.1.2 Are issued by the participating institution that uses them or by entities with which it has close relationships.

IV.1.3 Are fully guaranteed by a Member State; (i) whose credit assessment does not correspond to the Eurosystem's reference standards for establishing minimum requirements of high credit standards applicable to issuers and guarantors of tradable assets contained in Sections 6.3.1 and 6.3.2 of Annex I of Guideline ECB/2011/14, and (ii) that, in the opinion of the Governing Council of the ECB, is complying with the European Union/International Monetary Fund program.

IV.2 Participating institutions cannot present as collateral assets in Eurosystem credit operations unsecured covered bonds, issued by themselves or by entities with which they have close relationships, and guaranteed by a public sector entity of the EEA that has the right to levy taxes, beyond the nominal value of the bonds that they have already mobilized as collateral assets as of 3 July 2012.

IV.2.1 If participating institutions do not comply with the provisions of IV.2, the provisions of Instruction No. 1/99, Chapter VII, Defaults, Section VII.7, shall apply.

IV.3 In exceptional circumstances, the Governing Council of the ECB may decide to grant temporary derogations from the requirement established in IV.2.1 for a maximum period of 3 years. The request for derogation must be accompanied by a financing plan of the respective institution indicating how the own use of unsecured covered bonds issued by a government used by the respective participating institution should be gradually discontinued, within a maximum period of three years from the date of approval of the derogation. Any derogation granted since 3 July 2012 will continue to apply until it must be reviewed.

8. Chapter V, Tradable Assets Denominated in Pounds Sterling, Yens, or United States Dollars, is added, which has the following wording:

V. Tradable Assets Denominated in Pounds Sterling, Yens, or United States Dollars

V.1 The following are eligible: tradable assets denominated in pounds sterling, yens, or United States dollars, that:

• Are issued and held or settled in the euro area;
• The issuer is established in the European Economic Area; and
• Meet all other eligibility criteria included in Section 6.2.1 of Annex I of Guideline ECB/2011/14.

V.2 The following additional haircuts apply to these tradable assets:

• An additional haircut of 16% on assets denominated in pounds sterling or United States dollars; and
• An additional haircut of 26% on assets denominated in yens.

V.3 Tradable debt instruments that have coupons associated with a single money market interest rate in their denomination currency, or to an inflation index that does not contain discrete ranges, range accrual, ratchet coupons, or other similar complex structures for their respective country, are also eligible as collateral for Eurosystem monetary policy operations.

V.4 With approval by the Governing Council of the ECB, the ECB may publish on its website (www.ecb.europa.eu), in addition to those referred to in V.3, a list of other foreign currency reference interest rates that are accepted.

V.5 The provisions III, IV, V, and 0 of this Instruction apply only to tradable assets denominated in foreign currency.

9. Chapter VI, Tradable Debt Instruments Issued or Fully Guaranteed by Central Governments of Member States Subject to a European Union/International Monetary Fund Program, is added, which has the following wording:

VI. Tradable Debt Instruments Issued or Fully Guaranteed by Central Governments of Member States Subject to a European Union/International Monetary Fund Program

VI.1 The Eurosystem's minimum credit quality requirements, contained in Section 6.3.2 of Annex I of Guideline ECB/2011/14, are suspended, and the Eurosystem's credit quality limit is not applicable to tradable debt instruments issued or fully guaranteed by central governments of Member States subject to a European Union/International Monetary Fund program, unless the Governing Council of the ECB decides that the respective Member State does not comply with the financial support conditionality and/or the macroeconomic program.

VI.2 Tradable debt instruments issued or fully guaranteed by the government of the Hellenic Republic are subject to the following haircuts:

Maturity Band
Haircuts for fixed and variable rate debt instruments Haircuts for zero coupon debt instruments

Greek State Bonds
0-1 15.0 15.0
1-3 33.0 35.5
3-5 45.0 48.5
5-7 54.0 58.5
7-10 56.0 62.0

10 57.0 71.0

Covered Bonds Guaranteed by the Greek State and Bonds of Non-Financial Companies Guaranteed by the Greek State 0-1 23.0 23.0 1-3 42.5 45.0 3-5 55.5 59.0 5-7 64.5 69.5 7-10 67.0 72.5 >10 67.5 81.0

10. Chapter VII, Early Repayment of Operations, is added, which has the following wording:

VII. Early Repayment of Operations

VII.1 The Eurosystem may decide that, under certain conditions, participating institutions may reduce the value of certain long-term refinancing operations or terminate these operations before their maturity (such reduction in value or termination is also collectively referred to as "early repayment"). The auction announcement shall specify whether the option to reduce the value or terminate these operations before their maturity is applicable, as well as the date from which this option may be exercised. This information may alternatively be provided in another format considered appropriate by the Eurosystem.

VII.2 Participating institutions may exercise the option to reduce the value of certain long-term refinancing operations or terminate them before their respective maturity, by notifying the Bank of Portugal of the value they intend to repay under the early repayment procedure, indicating the date on which they intend to effect such repayment at least one week in advance relative to the early repayment date. Unless otherwise indicated by the Eurosystem, early repayment may be effected on any day coinciding with the settlement date of a main Eurosystem refinancing operation, provided that the participating institution effects the notification referred to in this number at least one week in advance relative to that date.

VII.3 The notification referred to in VII.2 becomes binding for the participating institution one week before the date scheduled for early repayment. Failure by the participating institution to settle, in whole or in part, the amount due under the early repayment procedure on the date that has been determined may also result in the imposition of a pecuniary sanction, under the terms and in accordance with the provisions of Instruction No. 1/99, Chapter VII, Defaults, VII.1, letter m), VII.6, and VII.10.

11. Chapter VIII, Final Provisions, is added, which has the following wording:

VIII. Final Provisions

VIII.1 The rules for carrying out liquidity lending operations and the eligibility criteria for collateral assets established in this Instruction are applicable in conjunction with the provisions of Bank of Portugal Instruction No. 1/99. In case of divergence between this Instruction and the provisions of Instruction No. 1/99, the former shall prevail.

VIII.2 For the purposes of applying numbers IV and VI of this Instruction, Ireland, the Hellenic Republic, and the Portuguese Republic are considered as Member States of the euro area subject to a European Union/International Monetary Fund program.

VIII.3 The eligibility criteria and operational requirements established in Bank of Portugal Instruction No. 1/99, which are not expressly regulated in this Instruction, apply subsidiarily to additional credit rights.

VIII.4 Numbers IV, V.3, V.4, V.5, and VI of this Instruction shall produce their effects from 3 May 2013.

VIII.5 Number IV is applicable until 28 February 2015.

VIII.6 This Instruction is addressed to credit institutions.

12. This Instruction enters into force on 3 May 2013 and is republished in its entirety, being available at www.bportugal.pt, Legislation and Standards, SIBAP-Bank of Portugal Instruction System.