Circular Letter No. 1/2005/DMR: Monetary Markets - Amendment to Instruction No. 1/99 — BDP — PT

Banco de Portugal
Circular Letter No. 1/2005/DMR, of 12-05-2005
SUBJECT: MONETARY MARKETS - AMENDMENT TO INSTRUCTION NO. 1/99 Notice is hereby given of the amendments introduced to Instruction No. 1/99 (BNBP No. 1, of 15-01-1999), which will be applied from May 30, 2005.

The full text of Instruction No. 1/99, with the modifications introduced therein, is attached.
In order to comply with the provisions of point IV.1. of Instruction No. 1/99, for the continuation of participation in the Intervention Operations Market (MOI), the institutions participating in this market must send the attached letter, duly signed, to Banco de Portugal by May 25, 2005.
Amending Instruction No. 16/2005, which will be published in due course in the Bulletin of Banco de Portugal Regulations, has the following wording:
SUBJECT: Intervention Operations Market (MOI)
Banco de Portugal, in the exercise of the powers conferred upon it by articles 14, 15, 16 and 24 of its Organic Law, approved by Law No. 5/98, of January 31, determines the following:

The following wording is given to numbers I.2., I.9., V.1.1.4., VI.1.3., VI.1.3.1., VI.1.3.2., VI.1.5., VI.1.6. and VI.2.2.2. of Instruction No. 1/99, published in BNBP No. 1, of 15.01.99:
I.2. Communications for MOI operations are normally established through a data communication network managed by the BP, or by telephone, with the former using the Market Electronic Transfer System (SITEME), regulated by Instruction No. 47/98, access to which is made through the BPnet portal, regulated by Instruction No. 30/2002. I.9. Business day means in this Instruction and its annexes:
BCN Business Day: any day on which that BCN is open to carry out Eurosystem monetary policy operations.
Eurosystem Business Day: any day on which the ECB and at least one BCN are open to carry out Eurosystem monetary policy operations. Eurosystem business days correspond to the days on which TARGET is operational.
V.1.1.4. Rapid auctions are normally executed within a 90-minute period, counted from the auction announcement, with the certification of placement results occurring immediately after the announcement of those results. VI.1.3. When carrying out monetary policy operations, participating institutions may not deliver to the BP or use assets that have been excluded from any of the Lists, those that are or become debt obligations assumed or guaranteed by the participating institution itself, including situations where there is identity between that institution and the issuer or guarantor or by any other entity with which that institution has or comes to have close relationships, in accordance with the definition included in VI.1.3.4. Whenever the use of assets that can no longer be used by the participating institution due to identity relationships or close relationships is verified, the institution shall immediately notify the BP of this fact, and these assets shall be valued at zero from the next valuation date, and an additional margin call may be applied. The assets in question must be removed from collateral as quickly as possible. VI.1.3.1. This provision does not apply to close relationships between participating institutions and public authorities of EEA countries (including cases where a public authority acts as guarantor of an issuer). VI.1.3.2. Cases where such debt instruments strictly comply with the criteria established in Article 22 (4) of Council Directive 85/611/EEC, of December 20, 1985, as amended, or are protected by equivalent specific legal guarantees, are excluded from the definition of close relationships. VI.1.5. The ECB establishes and maintains daily updated the list of assets included in List 1, from which these assets may be excluded at any time. List 2 is established and daily updated by the BCNs. BCNs may, at any time, decide to exclude assets from their Lists 2. Lists 1 and 2 are available for public consultation at http://www.ecb.int or http://www.bportugal.pt (on the latter page, only assets proposed by the BP are available). VI.1.6. The BP may decide not to accept the following as underlying assets in monetary policy operations, despite their inclusion in Lists 1 or 2:
a) Debt instruments that must be repaid before the maturity date of the operation in question; b) Debt instruments for which, during the term of the operation, there is an exercise of income rights or other nature, namely coupon payment. c) Debt instruments issued by entities established in the United States, Canada, Japan or Switzerland, for which coupon payment is due during the term of the operation or within 30 days following the delivery date of these instruments. VI.2.2.2. The valuation margins applicable to assets included in List 2 are as follows:
1) Tradable debt instruments with limited liquidity
With Fixed Rate Coupon:

2%, for residual maturity up to 1 year;
3.5%, for residual maturity over 1 year and up to 3 years;
5.5%, for residual maturity over 3 years and up to 5 years;
6.5%, for residual maturity over 5 years and up to 7 years;
8%, for residual maturity over 7 years and up to 10 years;
12%, for residual maturity over 10 years.
With Zero Coupon:
2%, for residual maturity up to 1 year;
3.5%, for residual maturity over 1 year and up to 3 years;
6%, for residual maturity over 3 years and up to 5 years;
7%, for residual maturity over 5 years and up to 7 years;
10%, for residual maturity over 7 years and up to 10 years;
18%, for residual maturity over 10 years.
2) Instruments with scarce liquidity and special characteristics
With Fixed Rate Coupon:
4%, for residual maturity up to 1 year;
8%, for residual maturity over 1 year and up to 3 years;
15%, for residual maturity over 3 years and up to 5 years;
17%, for residual maturity over 5 years and up to 7 years;
22%, for residual maturity over 7 years and up to 10 years;
24%, for residual maturity over 10 years.
With Zero Coupon:
4%, for residual maturity up to 1 year;
8%, for residual maturity over 1 year and up to 3 years;
16%, for residual maturity over 3 years and up to 5 years;
18%, for residual maturity over 5 years and up to 7 years;
23%, for residual maturity over 7 years and up to 10 years;
25%, for residual maturity over 10 years.
3) Non-tradable debt instruments
Bills:
4% for residual maturity up to 6 months.
Bank loans:
12% for residual maturity up to 6 months;
22% for residual maturity over 6 months and up to 2 years.
Promissory notes with mortgage guarantee:
22% for residual maturity up to 2 years.

Numbers VI.1.3.4., VI.1.6.1. and VI.2.2.1.3.1. are added to Instruction No. 1/99 with the following wording:
VI.1.3.4. A close relationship means any situation in which the participating institution is linked to an issuer of debt instruments by virtue of:

the participating institution holding 20% or more of the issuer's capital; or one or more companies in which the participating institution holds the majority of the capital holding 20% or more of the issuer's capital; or the participating institution and one or more companies in which the participating institution holds the majority of the capital jointly holding 20% or more of the issuer's capital; or
the issuer holding 20% or more of the participating institution's capital; or one or more companies in which the issuer holds the majority of the capital jointly holding 20% or more of the participating institution's capital; or the issuer and one or more companies in which the issuer holds the majority of the capital jointly holding 20% or more of the participating institution's capital; or
a third party simultaneously holding the majority of the participating institution's capital and the majority of the issuer's capital, directly or indirectly, in this case through one or more companies in which the said third party holds the majority of the capital.
VI.1.6.1. Debt instruments issued by entities established in the United States, Canada, Japan or Switzerland that are being used as collateral assets in any operation must be replaced by participating institutions one month before the respective coupon payment. The BP is not responsible for any payments, deductions or tax withholdings, nor for providing information related to debt instruments that may remain in the BP's possession because the participating institution has not replaced them. VI.2.2.1.3.1. For this purpose, a coupon payment is treated as a variable rate coupon payment if the coupon is linked to a reference interest rate and if the reset period corresponding to this coupon does not exceed one year. Coupon payments for which the reset period exceeds one year are treated as fixed rate payments, so the relevant maturity for the valuation margin corresponds to the residual maturity of the debt instrument.

Instruction No. 1/99, with the wording given to it by this Instruction, is fully republished in the annex with the necessary corrections resulting from the modifications introduced therein.
Parts I and II of the current Annex remain unchanged.
The provisions of this Instruction enter into force immediately, applying from May 30, 2005.
The addressees of this Instruction are credit institutions.
Attached: Instruction No. 1/99 with the amendments introduced by Instruction No. 16/20051 Acceptance letter for signature and return to BP by 25-05-2005 1 Published in this Official Bulletin, in grey paper, and, in electronic format (SIBAP) Manual. __________________________________________________________________________________ Sent to:
Banks, Central Mutual Agricultural Credit Bank, Montepio Geral Savings Bank, Caixa Geral de Depósitos, Mutual Agricultural Credit Banks, Savings Banks, Electronic Money Institutions, Financial Credit Institutions, Factoring Companies, Mutual Guarantee Societies, Investment Companies, Financial Leasing Companies and Financial Companies for Credit Acquisitions. To Banco de Portugal Markets and Reserve Management Department Rua Francisco Ribeiro, 2 1150-165 LISBOA Subject: Participation in the Intervention Operations Market (MOI) In accordance with and for the purposes of the provisions of point IV.1. of Banco de Portugal Instruction No. 1/99 (BNBP No. 1, of 15-01-99) relating to the Intervention Operations Market (MOI), as amended by Instruction No. 16/2005, F________________________________________________________________________________ (__________________________________ ) and F___________________________________________ ___________________________________ ( ___________________________________________ ), representing ________________________________________________________________ legal entity no.________________________, with registered office in ________________________________ _______________________________________________________, hereinafter referred to as Participating Institution, with powers to subscribe this document, declare that they know and accept the rules to be complied with by the Participating Institution they represent, resulting from their participation in the single monetary market, namely those relating to sanctions for the violation of these rules, in particular those contained in Instruction No. 1/99, relating to the Intervention Operations Market (MOI), and especially those contained in its Chapter VII and in Parts I and II of the Annex relating to non-compliance and those governing compensation, which may take place under the terms and conditions provided for in that Instruction, namely in cases where the Participating Institution becomes subject to any recovery, restructuring or other similar measures, or is declared bankrupt, so that such compensation, under the terms and for the purposes provided for in Decree-Law No. 70/97, of April 3, is enforceable against the bankrupt estate and its creditors. ________________, _____of _________________ of ______ Signatures: __________________________________ ___________________________________

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