Central Bank of Tunisia Circular No. 2017-02 to Banks dated March 10, 2017

Tunis, March 10, 2017
Circular to Banks No. 2017-02
Subject: Implementation of Monetary Policy by the Central Bank of Tunisia.
Having regard to Law No. 2016-35 dated April 25, 2016 establishing the statutes of the Central Bank of Tunisia and in particular its Articles 10, 11, 12 and 63; Having regard to Law No. 2016-48 dated July 11, 2016 concerning banks and financial institutions; Having regard to Law No. 2013-30 dated July 30, 2013 concerning Islamic sukuk; Having regard to Law No. 2012-24 dated December 24, 2012 concerning the stock lending agreement; Having regard to Law No. 2000-35 dated March 21, 2000 concerning the dematerialization of securities; Having regard to Law No. 2000-92 dated October 31, 2000 concerning deeds of assignment or pledge of professional claims and the mobilization of related credits; Having regard to Circular No. 91-24 dated December 17, 1991 concerning the division, risk coverage and monitoring of commitments as amended and supplemented by subsequent texts; Having regard to Circular No. 2002-05 dated May 6, 2002 concerning mandatory reserves as amended and supplemented by subsequent texts; Having regard to Circular No. 2005-09 dated July 14, 2005 concerning the organization of the money market as amended and supplemented by subsequent texts; Having regard to Circular No. 2008-06 dated March 10, 2008 of the Central Bank of Tunisia concerning the information center; Having regard to Circular No. 2008-07 dated March 13, 2008 to credit institutions and approved intermediaries concerning the use of the "SED" data exchange system; Having regard to Circular No. 2014-4 dated November 10, 2014 to banks concerning the liquidity ratio;

Having regard to Opinion No. 02/2017 of the Control and Compliance Committee dated March 1, 2017, as provided for in Article 42 of Law No. 2016-35 dated April 25, 2016 establishing the statutes of the Central Bank of Tunisia; Having regard to the deliberation of the Board of Directors of the Central Bank of Tunisia dated March 1, 2017; Preamble The law establishing the statutes of the Central Bank of Tunisia assigns it as its main objective to ensure price stability, and to contribute to financial stability in order to support the State's economic policy in terms of growth and employment. By contributing to healthy, sustained, durable and non-inflationary economic growth, monetary policy favors a high level of employment and supports the competitiveness of the national economy. To achieve its ultimate objective, price stability, the Central Bank of Tunisia uses interest rates as its preferred instrument for conducting monetary policy. Thus, based on its expectations regarding inflation and economic growth, the Central Bank of Tunisia adjusts the level of its policy rate, which directly influences the overnight interbank rate, considered as the operational target of monetary policy. This in turn influences the term structure of interest rates, thereby ultimately affecting the financing conditions for all economic actors.
Article 1: General Provisions
This circular sets out the conditions for implementing the monetary policy of the Central Bank of Tunisia.
The adherence to the implementation conditions as provided for in Annexes II, III and IV of this circular is required for any counterparty to access monetary policy operations. Adherence is confirmed by signing the adherence form set out in Annex I of this circular. The practical procedures and execution methods for monetary policy operations are described in the Operations Manual, set out in Annex II of this circular.

The provision of liquidity by the Central Bank of Tunisia is conditional upon the mobilization in its favor of appropriate guarantees in the form of negotiable and/or non-negotiable assets meeting the eligibility criteria set by the Central Bank of Tunisia. The rules governing the mobilization of negotiable and non-negotiable assets are set out respectively in Annexes III and IV of this circular.
Article 2: Eligible Counterparties
The conditions below aim to allow a broad range of counterparties access to monetary policy operations according to uniform prudential and operational eligibility criteria.
The following qualify as "eligible counterparties" for monetary policy operations: banks within the meaning of Law No. 2016-48 dated July 11, 2016 concerning banks and financial institutions, which cumulatively meet the following conditions:

• They must be financially sound, in accordance with the assessment made by the Central Bank of Tunisia, notably based on capital adequacy and liquidity ratios regularly communicated by banks; and
• They meet the operational criteria set by the Central Bank of Tunisia to ensure effective conduct of its operations and the proper functioning of the money market.
  Article 3: Operational Framework for Implementing Monetary Policy
  The essential object of the operational framework for monetary policy is to steer the overnight interbank interest rate at levels close to the Central Bank of Tunisia's policy rate. This operational framework consists of operations initiated by the Central Bank of Tunisia, standing facilities, and mandatory reserves.

TITLE I: OPERATIONS INITIATED BY THE CENTRAL BANK OF TUNISIA
Article 4: Definition of Operations Initiated by the Central Bank of Tunisia
Operations initiated by the Central Bank of Tunisia are carried out for the purpose of steering the overnight interbank interest rate, managing banking liquidity, and indicating monetary policy orientation. The Central Bank of Tunisia decides on their execution conditions and the instruments to be used.
Article 5: Categories of Operations Initiated by the Central Bank of Tunisia
Operations initiated by the Central Bank of Tunisia consist of four categories of operations defined as follows:

• Main refinancing operations: These constitute the primary tool for providing liquidity by the Central Bank of Tunisia. They play a key role in steering interest rates and signaling monetary policy orientation. The minimum interest rate applied to main refinancing operations is the Central Bank of Tunisia's policy rate. This is set by the Board of Directors of the Central Bank of Tunisia coherently with the final objective of price stability.
• Longer-term refinancing operations: These aim to provide additional liquidity for maturities longer than those of the main refinancing operations.
• Fine-tuning operations: These are carried out on an ad hoc basis to correct the effect of unexpected fluctuations in banking liquidity on interest rates. They have a duration shorter than that of the main refinancing operations.
• Structural operations: These aim to manage a situation of persistent liquidity deficit or surplus.
  Article 6: Instruments for Executing Operations Initiated by the Central Bank of Tunisia
  Main refinancing operations and longer-term refinancing operations are exclusively carried out using temporary transfer operations in the form of secured loans or repurchase agreements as defined in Article 2 of the Operations Manual for monetary policy set out in Annex II of this circular.

Fine-tuning operations may be carried out using temporary transfer operations, foreign exchange swaps for monetary policy purposes, or uncollateralized liquidity take-up.
Structural operations may be carried out using outright purchases or sales of negotiable public or private assets, including Islamic sukuk, foreign exchange swaps for monetary policy purposes, uncollateralized liquidity take-up, or the issuance of Central Bank of Tunisia debt certificates. TITLE II: STANDING FACILITIES
Article 7: Definition of Standing Facilities
Eligible counterparties may avail themselves, at their own initiative, to the standing facilities of the Central Bank of Tunisia.
Standing facilities comprise the marginal lending facility and the deposit facility, intended respectively to provide and withdraw liquidity on an overnight basis.
The rates applied to standing facilities form a corridor within which overnight interbank rates fluctuate, with the marginal lending facility rate as the ceiling and the deposit facility rate as the floor. The Central Bank of Tunisia may, at any time, modify the conditions of standing facilities or suspend them. The Board of Directors of the Central Bank of Tunisia regularly decides on the interest rates applicable to standing facilities and their effective date.
Article 8: Marginal Lending Facility
Eligible counterparties may use the marginal lending facility to obtain overnight liquidity from the Central Bank of Tunisia, through a temporary transfer operation in the form of a secured loan or repurchase agreement, at a predetermined interest rate using eligible assets as collateral.
Article 9: Deposit Facility
Eligible counterparties may use the deposit facility to make overnight deposits with the Central Bank of Tunisia at a predetermined interest rate. The Central Bank of Tunisia provides no guarantee in exchange for deposits made by eligible counterparties.

TITLE III: MANDATORY RESERVES
Article 10: Definition of Mandatory Reserves
Banks are subject to the obligation to establish mandatory reserves in the form of deposits with the Central Bank of Tunisia.
The mandatory reserve system essentially aims to stabilize money market rates through the averaging mechanism and to create or strengthen the demand for central bank money, thereby enabling the Central Bank of Tunisia to intervene effectively as a liquidity regulator.
Article 11: Calculation of Mandatory Reserves
The amount of the mandatory reserve is determined by applying to the base constituted by Tunisian Dinar deposits, the rate grid set out in Annex II.3 of the Operations Manual for monetary policy set out in Annex II of this circular.
Article 12: Period for Establishing Mandatory Reserves
The period for establishing the mandatory reserve for a given month extends from the first to the last day of the following month. The elements entering the base for the mandatory reserve are extracted from the monthly accounting statement of the relevant month.
Article 13: Verification of Compliance with Mandatory Reserves
The mandatory reserve is constituted by the credit balances, for the establishment period, of the current account opened on the books of the Central Bank of Tunisia.
For holidays during the period, the balance to be considered is that of the preceding business day.
The daily average balance of each bank's current account must be at least equal to the amount required for the mandatory reserve.
Article 14: Remuneration of Mandatory Reserves
The Central Bank of Tunisia may decide to remunerate the mandatory reserves of its counterparties, in part or in full, at a rate it deems appropriate.

TITLE IV: ELIGIBLE ASSETS
Article 15: Definition of Eligible Assets
To protect the balance sheet of the Central Bank of Tunisia against credit risk, refinancing operations are carried out based on appropriate security.
To this end, the Central Bank of Tunisia accepts as collateral for refinancing operations, negotiable assets including public and private debt securities, and non-negotiable assets representing banking claims on enterprises and individuals, in accordance with the criteria established under this circular.
Article 16: Eligibility Criteria for Negotiable Assets
Negotiable assets admitted as collateral for refinancing operations must meet the following eligibility criteria:

• be debt instruments negotiable on the financial and/or money market. They must be admitted to operations of a central securities depository, namely Tunisia Clearing;

• be issued either by the Tunisian State or by a resident entity of public or private law with its registered office in Tunisia;

• be denominated in Tunisian Dinar;

• have a simple coupon structure, i.e., zero-coupon, fixed-rate or variable-rate coupon indexed to a market rate. In all cases, the coupon structure must not lead to negative cash flows;

• exhibit high credit quality in accordance with the selection criteria established by the Central Bank of Tunisia.
  The Central Bank establishes a list of eligible negotiable assets, consultable on the CAER system.
  Article 17: Eligibility Criteria for Non-Negotiable Assets
  Non-negotiable assets admitted as collateral for refinancing operations must meet the following eligibility criteria:

• be banking claims denominated in Tunisian Dinar and representing commitments by a debtor vis-à-vis an eligible counterparty. Commitments by signature and those charged to external credit lines or budget funds are not considered eligible assets;

• the debtors of eligible banking claims must be resident non-financial enterprises, public sector entities, as well as resident individuals;

• be represented by a predetermined repayment schedule, i.e., the amortization amount, in principal and interest, is calculated based on a predetermined schedule;

• be declared at the Central Bank of Tunisia's Central Registry of Eligible Assets for Refinancing (CAER);

• be of high credit quality defined by the absence of default and a classification indicating good debtor solvency, i.e., current assets (class 0), with reference to the circular concerning the division, risk coverage and monitoring of commitments.
  The Central Bank establishes a list of eligible non-negotiable assets, consultable on the CAER system.
  Article 18: Mobilization of Eligible Assets
  The mobilization of negotiable assets is carried out in accordance with the contractual provisions of the tripartite agreement signed between the Central Bank of Tunisia, the counterparty and Tunisia Clearing (cf. Annex III). The mobilization of banking claims is effected by their submission as collateral, in accordance with the contractual provisions of the bilateral agreement signed between the Central Bank of Tunisia and the counterparty (cf. Annex IV). Said submission as collateral is carried out via the automated application of the Central Bank of Tunisia's Central Registry of Eligible Assets for Refinancing (CAER), in the form of electronic files.
  Article 19: Evaluation of Eligible Assets and Risk Control Measures
  The Central Bank of Tunisia determines the value of assets serving as collateral for operations it carries out with eligible counterparties.

For any negotiable asset traded on a market, the market price used is that of the business day preceding the valuation date. In the absence of a representative market price, the Central Bank of Tunisia determines a theoretical price in accordance with commonly accepted methods for evaluating financial assets. For banking claims, and in the absence of a rating system, the value used for these assets corresponds to their outstanding amount at a specified date. The value of the assets, reduced by any haircuts established by the Central Bank of Tunisia, must constantly be greater than or equal to the total principal amount of operations plus accrued interest. The Central Bank of Tunisia reserves the right to apply haircuts, proceed to margin calls, require additional guarantees, exclude certain eligible assets, or apply limits on risks vis-à-vis issuers, debtors, or guarantors.
Article 20: Repeal
All prior provisions contrary to or duplicating this circular are hereby repealed, and in particular those:

• of Title III of Circular No. 2005-09 dated July 14, 2005 concerning the organization of the money market, as amended and supplemented by subsequent texts; and
• of Circular No. 2002-05 dated May 6, 2002 concerning mandatory reserves, as amended and supplemented by subsequent texts.
  Article 21: Entry into Force
  This circular enters into force as of April 3, 2017.
  THE GOVERNOR
  CHEDLY AYARI

ANNEXES
ANNEX I: Adherence Form to the Implementation Conditions of Monetary Policy
ANNEX II: Operations Manual for Monetary Policy
ANNEX III: Tripartite Agreement on the Mobilization of Negotiable Assets
ANNEX IV: Agreement on the Mobilization of Non-Negotiable Assets

ANNEX I TO CIRCULAR NO. 2017-02 TO BANKS DATED MARCH 10, 2017
"ADHERENCE FORM TO THE IMPLEMENTATION CONDITIONS OF MONETARY POLICY OPERATIONS OF THE CENTRAL BANK OF TUNISIA" (To be returned to the Central Bank of Tunisia in duplicate) (To be completed in block letters) Name of the counterparty:
Full address:
The ……………………………………………………………., hereby accepts without reservation all conditions stipulated in Annexes 2, 3 and 4 of Circular No. 2017-02 to banks dated March 10, 2017 concerning the implementation of monetary policy by the Central Bank of Tunisia. By signing this adherence form, the ………………………………………. authorizes the Central Bank of Tunisia to unilaterally modify the implementation conditions of its monetary policy set by the annexes of the aforementioned circular. The modifications will be communicated to the counterparty by any means leaving a written record and will take effect after a period of fifteen (15) business days from the communication date. This period may be shortened by the Central Bank of Tunisia in case of justified urgency. The new conditions will be published on the website of the Central Bank of Tunisia. For the aforementioned counterparty For the Central Bank of Tunisia Date

ANNEX II TO CIRCULAR NO. 2017-02 TO BANKS DATED MARCH 10, 2017
"OPERATIONS MANUAL FOR MONETARY POLICY"

SUMMARY
FIRST PART – OBJECT, SCOPE AND DEFINITIONS
SECOND PART – MONETARY POLICY OPERATIONS, INSTRUMENTS AND PROCEDURES TITLE I – OPERATIONS INITIATED BY THE CENTRAL BANK
Chapter 1 – Overview of operations initiated by the Central Bank
Chapter 2 – Categories of operations initiated by the Central Bank
Chapter 3 – Instruments for operations initiated by the Central Bank
TITLE II – STANDING FACILITIES
Chapter 1 – The marginal lending facility
Chapter 2 – The deposit facility
TITLE III – PROCEDURES APPLICABLE TO MONETARY POLICY OPERATIONS
Chapter 1 – Call tender procedures and bilateral procedures applicable to operations initiated by the Central Bank
Section 1 – Call tender procedures
Section 2 – Operational steps of call tender procedures
Section 3 – Bilateral procedures applicable to operations initiated by the Central Bank
Chapter 2 – Settlement procedures applicable to monetary policy operations
TITLE IV – MANDATORY RESERVES
THIRD PART – ELIGIBLE ASSETS
FOURTH PART – MEASURES TAKEN IN CASE OF COUNTERPARTY DEFAULT OBLIGATIONS FIFTH PART – DISCRETIONARY MEASURES SIXTH PART – FINAL PROVISIONS ANNEXES
ANNEX II.1 – Announcement of call tender operations
ANNEX II.2– Announcement of call tender results
ANNEX II.3 – Model declaration of mandatory reserve
ANNEX II.4 – Penalty regime and suspension imposed by the Central Bank in accordance with the fourth part
ANNEX II.5 – Example of monetary policy operations and procedures

FIRST PART
OBJECT, SCOPE AND DEFINITIONS
Article 1
Object and Scope

1. This Operations Manual for Monetary Policy sets out the practical implementation modalities of the monetary policy of the Central Bank of Tunisia (hereinafter referred to as the Central Bank), as defined by Chapter 1 of Title 2 of the Law establishing the Statutes of the Central Bank. The scope of this Manual does not include measures relating to the exercise of the Central Bank's powers outside monetary policy: in particular, it does not include measures relating to the supervision of payment systems and means, such as intra-day credits (Chapter 3 of Title 2 of the Law establishing the Statutes of the Central Bank), to financial stability, such as financial assistance (Chapter 4 of Title 2 of the Law establishing the Statutes of the Central Bank), and to exchange rate policy and reserve management (Chapter 5 of Title 2 of the Law establishing the Statutes of the Central Bank).
2. The Central Bank takes all appropriate measures to implement its monetary policy operations in accordance with the principles, tools, instruments, conditions, criteria and procedures set out in this Manual.
3. The Central Bank reserves the right to request and obtain from counterparties any relevant information necessary for fulfilling its missions and achieving its objectives within the framework of monetary policy operations. This right is without prejudice to any other specific existing right of the Central Bank to request information relating to monetary policy operations.
   Article 2
   Definitions

1. "Repurchase Agreement", a contract by which an eligible asset is transferred to a buyer without the seller retaining ownership, while the latter simultaneously obtains the right and obligation to repurchase an equivalent asset at a determined price on a future date or on demand;
2. "Eligible Assets", negotiable or non-negotiable assets on a market that meet the eligibility criteria set by the Central Bank to be admitted as collateral for its monetary policy operations.
3. "Multiple-rate auction (American-style auction)", an auction in which the applied interest rate, price or repo/swap rate is equal to the interest rate, price or repo/