Instruction No. 12/2020

Instruction No. 12/2020
Official Gazette No. 5/2020 Supplement • 2020/05/18
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Topics
Markets :: Money Markets
Mod. 99999940/T – 01/14
Index
Text of the Instruction
Text of the Instruction
Subject: Implementation of monetary policy – Additional temporary measures On 7 May 2020, the Governing Council of the ECB approved ECB Guideline (EU) 2020/634 amending ECB Guideline ECB/2014/31 on additional temporary measures relating to Eurosystem refinancing operations and the eligibility of collateral assets (ECB/2020/29). Accordingly, in exercise of the powers conferred on it by Articles 12, 15, 16 and 24 of its Organic Law, approved by Law No. 5/98 of 31 January, in its current version, the Bank of Portugal determines the following:
Instruction No. 7/2012 (Official Gazette No. 3, of 15-03-2012), is amended as follows:

1. A new paragraph, VIII, is added, which replaces the current paragraph VIII, establishing the following:
   VIII. Acceptance of certain tradable debt securities and eligible issuers as of 7 April 2020
   VIII.1 The technical terms used in this paragraph have the meaning attributed to them in Instruction No. 3/2015.
   VIII.2 Notwithstanding the provisions of Articles No. 59, paragraph 3, 71 and 82, paragraph 1, letter a), of Instruction No. 3/2015, tradable assets – which are not securitized debt instruments – issued on 7 April 2020 or on a date prior to that, which on 7 April 2020 had a public credit rating of at least one accepted ECAI system that met the Eurosystem’s minimum credit quality requirements, constitute eligible collateral assets for Eurosystem credit operations provided that, after 7 April 2020, they continuously meet the following conditions:

Instruction No. 12/2020 Official Gazette No. 5/2020 Supplement • 2020/05/18 Topics Markets :: Money Markets
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Mod. 99999940/T – 01/14
(i) They have a public credit rating of at least one accepted ECAI system, which meets, at least, level 5 of the credit quality of the Eurosystem’s harmonised rating scale1; and (ii) They continue to meet all other eligibility criteria applicable to tradable assets provided for in Instruction No. 3/2015. It is clarified that the public credit rating referred to in this paragraph on 7 April 2020 is determined by the Eurosystem based on the rules established in Articles No. 82, paragraph 1, letter a), 82, paragraph 2, 83, 84, letters a) and b), 85 and 86 of Instruction No. 3/2015. VIII.3 When the compliance of a tradable asset with the Eurosystem’s minimum credit quality requirements on 7 April 2020 is determined based on a rating of the issuer or a rating of the guarantor carried out by an ECAI of an accepted ECAI system, the tradable asset constitutes an eligible collateral asset for Eurosystem credit operations provided that, after 7 April 2020, it continuously meets the following conditions:
(i) The rating of the issuer carried out by an ECAI or the rating of the guarantor carried out by an ECAI, as applicable, relating to the tradable asset meets, at least, level 5 of the credit quality of the Eurosystem’s harmonised rating scale; and (ii) The tradable asset continues to meet all other eligibility criteria applicable to it provided for in Instruction No. 3/2015. VIII.4 Tradable assets – which are not securitized debt instruments – issued after 7 April 2020, whose issuer or guarantor, as applicable, had on 7 April 2020 a public credit rating of at least one accepted ECAI system that met the Eurosystem’s minimum credit quality requirements, constitute eligible collateral assets for Eurosystem credit operations provided that, after 7 April 2020, they continuously meet the following conditions:
(i) The tradable assets have a public credit rating of at least one accepted ECAI system, which meets, at least, level 5 of the credit quality of the Eurosystem’s harmonised rating scale; and (ii) The tradable assets meet all other eligibility criteria applicable to tradable assets provided for in Instruction No. 3/2015. It is clarified that the public credit rating referred to in letter (i) is determined by the Eurosystem based on the rules established in Articles No. 82, paragraph 1, letter a), 82, paragraph 2, 83, 84, letters a) and b), 85 and 86 of Instruction No. 3/2015.

1 At level 5 of the Eurosystem’s harmonised credit rating scale, the corresponding credit rating is at least “Ba2” from Moody’s and “BB” from Fitch, Standard & Poors or DBRS.

Instruction No. 12/2020 Official Gazette No. 5/2020 Supplement • 2020/05/18 Topics Markets :: Money Markets
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Mod. 99999940/T – 01/14
VIII.5 Covered bonds issued after 7 April 2020 under a covered bond programme that, on 7 April 2020, had been subject to a credit assessment by at least one accepted ECAI system that met the Eurosystem’s minimum credit quality requirements, constitute eligible collateral assets for Eurosystem credit operations provided that:
(i) At all times after 7 April 2020, the covered bond programme has a public credit rating of at least one accepted ECAI system, which meets, at least, level 5 of the credit quality of the Eurosystem’s harmonised rating scale, and (ii) The covered bonds meet all other eligibility criteria applicable to them provided for in Instruction No. 3/2015. VIII.6 The tradable assets referred to in Article 87, paragraph 2, of Instruction No. 3/2015 that, on 7 April 2020, did not have a public credit rating from an accepted ECAI system, but that, on 7 April 2020, had an implicit credit assessment, obtained by the Eurosystem in accordance with the rules provided for in Article 87, paragraphs 1 and 2, of Instruction No. 3/2015, that met the Eurosystem’s credit quality requirements, constitute eligible collateral assets for Eurosystem credit operations, regardless of the date of their issuance, provided that, after 7 April 2020, they continuously meet the following conditions:
(i) The issuer or the guarantor, as applicable, of the tradable assets meets, at least, the credit quality requirements corresponding to level 5 of the credit quality of the Eurosystem’s harmonised rating scale; and (ii) The tradable assets meet all other eligibility criteria applicable to them provided for in Instruction No. 3/2015. VIII.7 Notwithstanding the provisions of Articles No. 59, paragraph 3, 71 and 82, paragraph 1, letter b), of Instruction No. 3/2015, securitized debt instruments issued on 7 April 2020 or on a date prior to that which, on 7 April 2020, had at least two public credit ratings, each from a different accepted ECAI system, that met the Eurosystem’s minimum credit quality requirements under Instruction No. 3/2015, constitute eligible collateral assets for Eurosystem credit operations provided that, after 7 April 2020, they continuously meet the following conditions:
(i) They have at least two public credit ratings, each from a different accepted ECAI system, that meet, at least, level 4 of the credit quality of the Eurosystem’s harmonised rating scale2;

2 At level 4 of the Eurosystem’s harmonised credit rating scale, the corresponding credit rating is at least “Ba1” from Moody’s, “BB+” from Fitch or Standard & Poors and “BBH” from DBRS.

Instruction No. 12/2020 Official Gazette No. 5/2020 Supplement • 2020/05/18 Topics Markets :: Money Markets
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Mod. 99999940/T – 01/14
(ii) They continue to meet all other eligibility criteria applicable to securitized debt instruments provided for in Instruction No. 3/2015.
It is clarified that the requirements provided for in paragraphs IV.1 and IV.3 of this Instruction do not apply to the securitized debt instruments referred to in this paragraph.
VIII.8 The securitized debt instruments that, on 7 April 2020, were admitted to the Eurosystem as eligible collateral assets under paragraph IV.1 of this Instruction, remain eligible provided that, after 7 April 2020, they continuously meet the following conditions:
(i) They have two public credit ratings, of at least level 4 of the credit quality of the Eurosystem’s harmonised rating scale, from two accepted ECAI systems; and (ii) They continue to meet all other requirements applicable to them under paragraphs IV.1 (except the rating level), IV.2.1 (ii) and IV.3 of this Instruction. It is clarified that paragraphs IV.2.1 and IV.2.1 (i) and paragraph IV.4 of this Instruction do not apply to the securitized debt instruments referred to in this paragraph. VIII.9 To the extent that they continue to be admitted as eligible collateral assets by the Eurosystem under this paragraph VIII, the tradable assets referred to in paragraphs VIII.2 to VIII.6, including covered bonds, are subject to the haircuts specified in VIII.9 (i). The haircuts are calculated based on the current applicable rating on any date after 7 April 2020, in accordance with the rules relating to the priority of ECAI credit assessments established in Articles 83 to 87 of Instruction No. 3/2015. (i) Haircut levels applied to tradable instruments referred to in VIII.9 of this Instruction. Category I Category II Category III Category IV Credit Quality Residual Maturity (years) (*) Fixed and Variable Coupon Zero Coupon Fixed and Variable Coupon Zero Coupon Fixed and Variable Coupon Zero Coupon Fixed and Variable Coupon Zero Coupon Level 4 [0-1) 6.4 6.4 8 8 12.8 12.8 20 20 [1-3) 9.6 10.4 12 15.2 16 18.4 28 30 [3-5) 11.2 12 16 20 19.2 23.6 33.6 37.2 [5-7) 12.4 13.6 20 24.8 22.4 28.4 36.8 40.4 [7-10) 13.2 14.4 21.6 28.4 24.8 32 40 44.8 [10,∞) 14.4 16.8 23.2 31.6 26.4 34.8 41.6 46.8 Level 5 [0-1) 8 8 12 12 22.4 22.4 24 24

Instruction No. 12/2020 Official Gazette No. 5/2020 Supplement • 2020/05/18 Topics Markets :: Money Markets
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Mod. 99999940/T – 01/14
(*) i.e., [0-1) residual maturity less than one year, [1-3) residual maturity equal to or greater than one year and less than three years, etc.
VIII.10 To the extent that they continue to be admitted as eligible collateral assets by the Eurosystem under this paragraph VIII, the securitized debt instruments referred to in VIII.7 and VIII.8 are subject to the haircuts specified in VIII.10 (i). The haircuts are calculated based on the current applicable rating on any date after 7 April 2020, in accordance with the rules relating to the priority of ECAI credit assessments established in Articles 83 to 87 of Instruction No. 3/2015. (i) Haircut levels applied to eligible securitized debt instruments under the provisions of VIII.10 of this Instruction. Credit Quality Weighted Average Life Haircut Level 3 0-1 4.8 1-3 7.2 3-5 10.4 5-7 12.0 7-10 14.4

10 24.0
Level 4
0-1 11.2
1-3 15.2
3-5 18.0
5-7 24.8
7-10 30.4
10 43.2

• i.e., 0-1 residual maturity/weighted average life less than one year, 1-3 residual maturity/weighted average life equal to or greater than one year and less than three years, etc.
  VIII.11 In addition to the haircuts provided for in VIII.9 and VIII.10, the following additional haircuts apply:
  (i) Securitised debt instruments, covered bonds and unsecured debt instruments issued by credit institutions that are theoretically valued, in accordance with the rules contained in Article No. 129 of Instruction No. 3/2015, are subject to an additional haircut in the form of an additional valuation reduction of 4%; (ii) Covered bonds for own use are subject to an additional haircut of i) 6.4% on the value of debt instruments with credit quality levels 1 and 2, and ii) 9.6% on the value of debt instruments with credit quality levels 3, 4 and 5; (iii) For the purposes of letter (ii), “own use” means the presentation or use, by a counterparty, of covered bonds issued or guaranteed by the counterparty itself or by any other entity with which it has “close links”, within the meaning of Article No. 133 of Instruction No. 3/2015; (iv) If the additional haircut referred to in letter (ii) cannot be applied with respect to the collateral management system of a NCB, a collateral management service provider (triparty agent) or TARGET2-Securities, for autocolateralisation, the additional haircut must be applied in such systems or platform to the value of the entire issuance of covered bonds that may be subject to own use. VIII.12 It is clarified that the provisions of this paragraph VIII are independent and are not taken into account for the purposes of assessing eligibility for outright purchases under the Public Sector Purchase Programme (PSPP)3, the third Covered Bond Purchase Programme (CBPP3)4, the Asset-Backed Securities Purchase Programme (ABSPP)5, the Corporate Sector Purchase Programme (CSPP)6, and the Pandemic Emergency Purchase Programme (PEPP)7.

2. The remaining paragraphs are renumbered accordingly.
3. This Instruction enters into force on 18 May 2020.
4. This Instruction is republished in its entirety, being available at
   https://www.bportugal.pt/instrucao/72012

3 Decision (EU) 2020/188 of the European Central Bank of 3 February 2020 on a programme for purchases of public sector assets in secondary markets (recast) (ECB/2020/9) (OJ L 39 of 12.2.2020, p. 12). 4Decision (EU) 2020/187 of the European Central Bank of 3 February 2020 on the implementation of the third Covered Bond Purchase Programme (ECB/2020/8) (OJ L 39 of 12.2.2020, p. 6). 5 Decision (EU) 2015/5 of the European Central Bank of 19 November 2014 on the implementation of the Asset-Backed Securities Purchase Programme (ECB/2014/45) (OJ L 1 of 6.1.2015, p. 4.). 6 Decision (EU) 2016/948 of the European Central Bank of 1 June 2016 on the implementation of the Corporate Sector Purchase Programme (ECB/2016/16) (OJ L 157 of 15.6.2016, p. 28.). 7 Decision (EU) 2020/440 of the European Central Bank of 24 March 2020 on a temporary Pandemic Emergency Purchase Programme (ECB/2020/17) (OJ L 91 of 25.3.2020, p. 1).