Decision No. 2020-02 of April 20, 2020 on Additional Temporary Measures Concerning Refinancing Operations of the Banque de France and Eligibility of Collateral

DECISION NO. 2020-02 OF APRIL 20, 2020 ON ADDITIONAL TEMPORARY MEASURES CONCERNING REFINANCING OPERATIONS OF THE BANQUE DE FRANCE AND ELIGIBILITY OF COLLATERAL

THE GOVERNOR OF THE BANQUE DE FRANCE

Having regard to:

• the Treaty on the Functioning of the European Union, and in particular Article 127(1) and Article 127(2), first indent,
• the Statute of the European System of Central Banks and of the European Central Bank (ECB), and in particular Articles 3.1, first indent, 12.1, 14.3 and 18.2 thereof,
• ECB Guideline (EU) 2014/528 of 9 July 2014 on additional temporary measures concerning the refinancing operations of the Eurosystem and the eligibility of collateral and amending Guideline ECB/2007/9 (ECB/2014/31), as amended,
• ECB Guideline (EU) 2015/510 of 19 December 2014 on the implementation of the Eurosystem monetary policy framework (ECB/2014/60), as amended,
• ECB Decision (EU) 2020/515 of 7 April 2020 amending Decision ECB/2014/31 on additional temporary measures concerning the refinancing operations of the Eurosystem and the eligibility of collateral (ECB/2020/21),
• the Monetary Agreement between the European Union and the Principality of Monaco of 26 December 2001, as amended on 29 November 2011,
• the Monetary and Financial Code, and in particular Article L. 142-8 thereof,
• the Governor of the Banque de France Decision No. 2015-01 of 22 April 2015 on the implementation of the monetary policy and intraday credit of the Banque de France, as amended,
• the Governor of the Banque de France Decision No. 2016-07 of 30 December 2016 on additional temporary measures concerning the refinancing operations of the Banque de France and the eligibility of collateral, as amended,

HEREBY DECIDES:

Article 1
Additional measures concerning refinancing operations and eligible collateral

1. The rules applicable to the conduct of the Eurosystem’s monetary policy operations and the eligibility criteria for collateral provided for in this Decision shall apply in conjunction with Decision No. 2015-01 of 22 April 2015 on the implementation of the monetary policy and intraday credit of the Banque de France (hereinafter “Decision No. 2015-01”).

2. In the event of any divergence between this Decision and Decision No. 2015-01, this Decision shall prevail. The Banque de France shall continue to apply all provisions of Decision No. 2015-01 without modification, unless otherwise provided for in this Decision.

3. (Deleted)

Article 2
Option to reduce the amount of longer-term refinancing operations or to terminate them

1. The Eurosystem may decide that, under certain conditions, counterparties may reduce, prior to maturity, the amount of certain longer-term refinancing operations or terminate them (such reductions in amount or terminations are collectively referred to hereinafter as “early repayment”). The announcement of the tender shall specify whether the option to reduce the amount of the operations in question or to terminate them prior to maturity applies or not, and from which date this option may be exercised. This information may also be provided in any other form deemed adequate by the Eurosystem.

2. A counterparty may exercise the option to reduce the amount of longer-term refinancing operations or to terminate them prior to maturity by notifying the Banque de France of the amount it intends to repay under the early repayment procedure, as well as the date on which it intends to make this early repayment, at least one week prior to the date of this early repayment. Unless otherwise specified by the Eurosystem, an early repayment may be made on any day coinciding with a settlement day of a Eurosystem main refinancing operation, provided that the counterparty provides the notification referred to in this paragraph with at least one week’s notice prior to that date.

3. The notification referred to in paragraph 2 shall become binding on the counterparty one week prior to the early repayment date to which it refers. Failure by a counterparty to settle the full or partial amount due under the early repayment procedure at the fixed maturity may result in the imposition of a pecuniary sanction, as provided for in Part Five of Decision No. 2015-01. The provisions of Part Five applicable in the event of non-compliance with the rules relating to tenders shall apply when a counterparty fails to settle the full or partial amount due on the early repayment date referred to in paragraph 2. The imposition of a pecuniary sanction shall be without prejudice to the right of the Banque de France to exercise the remedies provided for in the event of a default event, as provided for in Article 166 of Decision No. 2015-01.

Article 3
Admission of certain asset-backed securities

1. In addition to asset-backed securities eligible under Part Four of Decision No. 2015-01, asset-backed securities that do not meet the credit rating requirements set out in Chapter 2 of Title II of Part Four of Decision No. 2015-01, but otherwise meet all other eligibility criteria applicable to asset-backed securities under Decision No. 2015-01, shall be eligible assets admitted as collateral for the Eurosystem’s monetary policy operations, provided they have at least two ratings of at least “BBB”1 assigned by any accepted External Credit Assessment Institution (ECAI). They shall also meet all of the following requirements:

a) the assets generating the cash flows to which the securities are backed belong to one of the following asset categories:
i) mortgage loans; ii) loans to small and medium-sized enterprises (SMEs); iii) (Deleted); iv) auto loans; v) financial leasing; vi) consumer credit; vii) credit card receivables.

b) there is no mixing of assets from different categories within the assets generating the cash flows;

c) the assets generating the cash flows to which the securities are backed do not contain loans that:
i) are non-performing at the time of issuance of the asset-backed securities; ii) become non-performing when included in the asset-backed securities during the life of the securities, for example upon substitution or replacement of the assets generating the cash flows; iii) at any time, are structured, syndicated, or leveraged loans;

d) the documentation concerning the asset-backed securities transaction provides for provisions regarding the continuity of collection.

1 A “BBB” rating corresponds to a rating of at least “Baa3” according to Moody’s, “BBB-” according to Fitch or Standard & Poor’s, or a rating of “BBBL” according to DBRS.

2. Asset-backed securities referred to in paragraph 1 that do not benefit from at least two public ratings of at least level 2 credit quality in the Eurosystem’s harmonised rating scale in accordance with Article 82(1)(b) of Decision No. 2015-01 shall be subject to a haircut depending on their weighted average life, as specified in Annex II bis.

2 bis. The weighted average life of the senior tranche of an asset-backed security is estimated as the anticipated weighted average residual maturity until the repayment of this tranche. Regarding retained securitisation positions, the calculation of the weighted average life assumes that the issuer’s call options will not be exercised.”

3. (Deleted)

4. A counterparty may not provide as collateral asset-backed securities eligible under paragraph 1 if the counterparty, or any third party with which it has close links, acts as a provider of interest rate risk hedging in relation to the asset-backed securities.

5. The Banque de France may accept as collateral for the Eurosystem’s monetary policy operations asset-backed securities, the underlying assets of which comprise either mortgage loans or SME loans, or both, and which do not meet the credit rating requirements set out in Part Four, Title II, Chapter 2 of Decision No. 2015-01 nor the requirements set out in paragraph 1, points (a) to (d), and paragraph 4, but which otherwise meet all eligibility criteria applicable to asset-backed securities under Decision No. 2015-01 and have at least two public ratings of at least level 3 credit quality in the Eurosystem’s harmonised rating scale. Only asset-backed securities issued before 20 June 2012 are concerned, and these shall be subject to a haircut depending on their weighted average life, as specified in Annex II bis.

6. (Deleted)

7. For the purposes of this Article, the following definitions shall apply:

a) “mortgage loan”, in addition to loans backed by mortgage loans, residential real estate loans secured (without a mortgage claim) where the security gives rise to a prompt payment upon default. These securities may be provided in different contractual configurations, including insurance contracts, provided they are granted by a public sector entity or a financial institution subject to public control. The credit assessment of the guarantor for the purposes of this guarantee must correspond to level 3 credit quality in the Eurosystem’s harmonised rating scale, for the life of the operation;

b) “small enterprise” and “medium enterprise”, any entity carrying out an economic activity, regardless of the legal status of this entity, when the turnover declared for the entity, or when the entity is part of a consolidated group, for the consolidated group, is less than 50 million euros;

c) “non-performing loans”, loans where the repayment of interest or principal is overdue by more than 90 days or more and where the debtor is in default, as defined in Article 178 of Regulation (EU) No 575/2013 of the European Parliament and of the Council, or loans for which there are good reasons to doubt that they will be repaid in full;

d) “structured loan”: a structure involving subordinated private claims;

e) “syndicated loan”: a loan granted by a group of lenders grouped within a banking syndicate;

f) “leveraged loan”: a loan granted to a company already having a considerable level of indebtedness, for example to finance a buyout or takeover, which is used to acquire the capital of a company that is also a debtor of the loan;

g) “provisions regarding the continuity of collection”: provisions contained in the legal documentation of an asset-backed security that relate either to the substitute servicer or to the assistance in the appointment of a substitute servicer (in the absence of provisions concerning a substitute servicer). In the case of provisions concerning assistance in the appointment of a substitute servicer, an assistant to the appointment of a substitute servicer must be appointed and charged with finding a competent substitute servicer within 60 days following a triggering event to ensure that the payment and collection of the asset-backed security are carried out on time. These provisions also mention the triggering events for the replacement of the servicer and the appointment of a substitute servicer, which may be linked to a change in rating or be based on another criterion, such as the non-performance of obligations by the current servicer. In the case of provisions concerning a substitute servicer, the latter has no close links with the servicer. In the case of provisions concerning assistance in the appointment of a substitute servicer, there is no simultaneous close link between the servicer, the assistant to the appointment of a substitute servicer, and the issuer’s account bank.”;

h) “close links”: close links within the meaning of Article 138(2) of Decision No. 2015-01;

i) “retained securitisation positions”: asset-backed securities used to more than 75% of the nominal outstanding amount by a counterparty that is the originator of the underlying loans or by entities closely linked to the originator.”

Article 4
Admission of certain other private claims (“additional private claims”)

1. The Banque de France accepts as collateral for the Eurosystem’s monetary policy operations private claims that do not meet the Eurosystem’s eligibility criteria (“additional private claims”), according to the rules set out in this Decision.

Article 4 (BDF 1)
Eligibility criteria for additional private claims

1. The additional private claims eligible for refinancing operations with the Banque de France are as follows:

a) Loans to companies that meet the following criteria:
i) Loans to non-financial corporations within the meaning of Regulation (EU) No 549/2013 that meet all other eligibility criteria provided for by Decision No. 2015-01, are not in default, and fall into one of the following categories:
a. Loans in euros or US dollars (USD) whose credit quality, defined by a credit assessment, corresponds to a maximum one-year probability of default of 1.5% according to an internal rating system authorised by the competent supervisory authority or to the obtaining of at least a Banque de France (FIBEN) rating of 4. The residual maturity of these loans is greater than one month. Furthermore, the residual maturity of loans concerning debtors whose one-year probability of default is greater than 1% and less than or equal to 1.5% (EQC 5) must be less than or equal to 30 years; b. Export loans insured or guaranteed by Bpifrance Assurance Export, for the portion only insured or guaranteed by the latter. The loans are denominated in euros or US dollars (USD). ii) Loans to companies relating to operating lease transactions without purchase option, which are not in default, and which meet all eligibility criteria provided for by Decision No. 2015-01.

These additional private claims are governed by French or German law. However, subject to prior approval by the ECB Governing Council, the Banque de France may also accept that these loans be governed by the law of another Eurosystem State, provided that a valid legal opinion guaranteeing legal certainty deemed sufficient by the Banque de France is provided.

b) Residential mortgage loans and auto loans that meet the following criteria:
i) Residential mortgage loans that have the following characteristics and meet all other eligibility criteria applicable to private claims provided for by Decision No. 2015-01, natural persons and legal entities mentioned in point b below being able, in this context, provided they respect the other criteria applicable to them, to be considered as eligible debtors or guarantors within the meaning of Decision No. 2015-01:
a. They are secured by a mortgage or a real security conferring equivalent guarantee or an eligible guarantee within the meaning of Article 3 of this Decision, on which the Banque de France has full recourse in the event of realization of its guarantee; b. The debtor is a natural or legal person who acquired the real estate for non-professional purposes;
c. The debtor is a resident of France;
d. The loan contract is governed by French law; e. The residual maturity of the loan is greater than one month; f. The loan debtor is not listed in the file of repayment incidents for consumer credit (FICP) at the time of selection of the claim and throughout the duration of its mobilization, due to a payment incident on this loan or concerning another credit transaction concluded or not with the counterparty; g. These loans are submitted in bulk as loan portfolios within the meaning of paragraph 2 of this Article; h. The loan debtor is subject to a credit assessment by an internal rating system (“IRB”) which is authorised by the competent supervisory authority;
i. The probability of default of the loan portfolio is less than or equal to 1.5% over one year (EQC 5 in the Eurosystem’s harmonised rating scale). The probability of default (PD) is understood as the probability that losses recorded on the portfolio (before haircuts) until the maturity of the loans exceed the haircuts applied;
j. The probabilities of default (PD) and loss given default (“LGD”) are provided regularly; and k. Data per underlying loan are transmitted in accordance with the requirements provided for in Article 4 (BDF2). ii) Auto loans granted to individuals, which have the following characteristics and meet all other eligibility criteria applicable to private claims provided for by Decision No. 2015-01, individuals being able, in this context, provided they respect the other criteria applicable to them, to be considered as eligible debtors or guarantors within the meaning of Decision No. 2015-01:
a. They have a residual maturity greater than or equal to one month; b. They have an initial maturity less than or equal to six years;
c. For each loan, the one-year probability of default of the debtor, attributed by an internal rating system authorised by the competent supervisory authority, is less than or equal to 1%;
d. The loan debtor has no history of non-payment and is not listed in the file of repayment incidents for consumer credit (FICP); e. The debtor’s residence is in the euro area; f. The law applicable to the contract is French law or the law of a Member State of the euro area, subject to the assessment of the Banque de France and the ECB Governing Council, in particular regarding the validity and enforceability of the assignment of claims under French law; g. When secured, the Banque de France has full recourse on this security in the event of realization of its guarantee; h. These loans are submitted as loan portfolios within the meaning of paragraph 2 of this Article;
i. The probability of default of the loan portfolio is less than or equal to 1.5% over one year (EQC 5 in the Eurosystem’s harmonised rating scale). The probability of default (PD) is understood as the probability that losses recorded on the portfolio (before haircuts) until the maturity of the loans exceed the haircuts applied;
j. The probabilities of default (PD) and loss given default (“LGD”) are provided regularly; and k. Data per underlying loan are transmitted in accordance with the requirements provided for in Article 4 (BDF2).

2. For the purposes of this Decision, a set of additional private claims is considered as a loan portfolio if:
   a) the category of assets to which the additional private claims belong is homogeneous; and b) the Herfindahl-Hirschman Index (HHI) is less than or equal to 1%. The HHI is defined according to the formula HHI = ∑ Si^2 from i=1 to n, where Si is the ratio between the outstanding amount of loan i and the outstanding amount of the portfolio (of n loans).

Article 4 (BDF2)
Requirements regarding the obligation to provide information per underlying loan

1. Data per underlying loan relating to residential mortgage loan portfolios and auto loan portfolios (commonly referred to hereinafter as “loan portfolios”) are transmitted electronically in the data per underlying loan reference framework according to the formalism and periodicity specified by the Banque de France.

These data are not accessible to the public.

2. For the purposes of this Article, the options “ND” have the meaning defined in Annex VIII of the Governor of the Banque de France Decision No. 2015-01.

3. Among the mandatory fields, no field of the data per underlying loan contains values “ND1”, “ND 2”, “ND 3” or “ND 4” for an individual operation.

Article 4 (BDF3)
Risk control measures applicable to additional private claims

1. Regarding loans to companies whose one-year probability of default is between 0.40% and 1%, the following haircut grid applies:

Residual Maturity | Haircut Rate
1 month – 1 year | 28%
1-3 years | 38.4%
3-5 years | 41.6%
5-7 years | 44%
7-10 years | 45.6%

10 years | 48%

Regarding loans to companies whose one-year probability of default is between 1% and 1.5%, the following haircut grid applies:

Residual Maturity | Haircut Rate
1 month – 1 year | 40%
1-3 years | 48%
3-5 years | 51.2%
5-7 years | 52.8%
7-10 years | 54.4%
10-30 years | 56%

An additional haircut of 16% is applied to loans to companies denominated in US dollars (USD).

2. Regarding the portfolios of residential mortgage loans and portfolios of auto loans referred to in Article 4 (BDF1) 1. b), the applicable haircut rate for this category of loan portfolio corresponds to the haircut rate as defined below:

Minimum Portfolio Haircut = 0.8 x (∑ (Outstanding Amount_i / ∑ Outstanding Amount_i) * PD_i_stressed * LGD_i_adjusted) + 10%

This formula applies taking into account the following:
a) The stressed probability of default factor for loan i in a portfolio of n loans is obtained using table 1 or 2, appropriate to the type of portfolio, appearing in Annex BDF. It is defined by the non-stressed one-year probabilities of default of the debtor and the residual maturity of the corresponding loan. b) The adjusted loss given default factor (or “LGD”) for loan i in a portfolio of n productive loans is obtained using table 3 appearing in Annex BDF. It is defined by the unadjusted LGD factor of the loan and the residual maturity of the corresponding loan.

The resulting haircut, rounded down to the nearest whole percentage, cannot be less than 16% and applies to the total outstanding amount of the claims included in the portfolio.

The Banque de France updates these minimum haircuts at least every month and when it observes that a modification...