The next generation of Collateral Management - Initial Consultation

On 8 March 2007, the Governing Council decided to review the current Eurosystem collateral management handling procedures, in particular, the Correspondent Central Banking Model (CCBM). It decided to develop a single platform, allowing the Eurosystem to manage collateral for both domestic and cross-border operations, based on existing systems such as that of the Nationale Bank van België/Banque Nationale de Belgique and De Nederlandsche Bank. Work will be conducted in parallel with the TARGET2-Securities (T2S) project in order to exploit all possible synergies and avoid any overlap.

As already announced in the press release of 8 March 2007, market participants are invited to contribute to the definition of the user requirements for this new arrangement, which will be called the Collateral Central Bank Management (CCBM2).

The current CCBM has been the main instrument for the cross-border provision of collateral for Eurosystem credit operations since the start of Economic and Monetary Union in 1999. It has contributed significantly to the smooth implementation of the single monetary policy and the soundness and efficiency of payment systems. Despite these achievements, the CCBM appears to have a number of shortcomings, mainly linked to the fact that it was designed as an interim solution pending the emergence of private sector market initiatives, which to date have not materialised. The main concerns relate to the non-homogeneous degree of automation between the central banks, the incompatibility of CCBM arrangements with domestic procedures and the lack of standardisation (repo, pool, earmarking, pledge, margining, procedures, cut-off times, communication protocols used at domestic level, messaging and pre-depositing), which prevent global players from having a centralised collateral management. However, as not all the aforementioned shortcomings fall within the remit of central banks, they cannot all be addressed by CCBM2.

The basic objective of CCBM2 is to increase the efficiency of the Eurosystem’s internal systems for collateral management, addressing to the extent possible the identified drawbacks by optimising the cost of mobilising collateral and enhancing liquidity management. The scope of CCBM2 goes beyond that of the current CCBM and will establish efficient methods for delivering and accepting both securities and credit claims at domestic and cross-border levels with a harmonised level of service based on SWIFT communication protocols. This standardised procedure will facilitate the interaction of counterparties acting as collateral providers with the Eurosystem, particularly for those active in more than one country of the euro area.

The CCBM2 will be implemented in line with the following principles.

Principle 1: The CCBM2 will provide central banks with an IT platform for the management of eligible collateral used for Eurosystem credit operations, while complying with the principle of decentralisation of access to credit.

The CCBM2 will provide a service to central banks in that it will rationalise their internal organisation when handling collateral in credit operations. CCBM2 will be based on existing systems such as that of the Nationale Bank van België/Banque Nationale de Belgique and De Nederlandsche Bank.

Principle 2: The CCBM2 will be fully compatible with TARGET2 and T2S, in particular, with the communication interfaces and the settlement procedures used by T2S for the delivery of the securities.

There will be a common communication tool with standardised interfaces and harmonised messaging protocols, allowing all participants, i.e. central banks and counterparties, to monitor the flow of messages in real time. In proposing the CCBM2 project, which is a medium-term project, it is recognised that initiatives undertaken to remove the Giovannini Barrier 1 (harmonisation of communication protocols) should result in an increased level of harmonisation in terms of communication standards. Furthermore, the CCBM2 will rely on a communication interface with the future market infrastructure consisting of TARGET2 and, subsequently, T2S.

Principle 3: The scope of CCBM2 will cover both the domestic and cross-border use of collateral, as well as different collateralisation techniques (such as pool pledge and repo), depending on the practices of each central bank.

CCBM2 will perform central bank functions related to the management of instructions regarding the domestic and cross-border delivery of collateral (automatic creation and sending of instructions; follow-up to settlement cycle until the final settlement status is reached).

Principle 4: The CCBM2 will handle all eligible collateral (both securities and non-marketable debt instruments).

The CCBM2 will perform central bank functions related to the custody of securities (keeping records of mobilised securities according to local securities accounting rules; processing of all corporate actions according to local practices; supporting tax services) ultimately held at the local Central Securities Depository (CSD). The work currently being undertaken (by the European Central Securities Depositories Association and European Credit Sector Association) for the removal of the Giovannini barrier 3 related to the processing of corporate actions should benefit CCBM2 as it will handle collateral and related corporate actions from all eligible Securities Settlement Systems (SSSs) in the Eurosystem.

In addition, CCBM2 will also incorporate a function for facilitating the use of credit claims as collateral.

Principle 5: The CCBM2 will process instructions in real time on a straight-through-processing (STP) basis permitting the delivery of collateral to generate the release of related credit in TARGET2 on a real-time basis.

The CCBM2 will process collateral transactions in real-time STP and allow for the speeding up of credit provision, whether in the provision of intraday credit in TARGET2, marginal lending facilities or settlement of reverse transactions.

Principle 6: The CCBM2 will be able to take collateral through all eligible SSSs and eligible related linkages between them.

Links between SSSs in various countries have been established for some time. Insofar as the ECB’s Governing Council has deemed such links eligible for use in Eurosystem credit operations, they represent a valid alternative to the current CCBM. They will continue to be an alternative for the cross-border transfer of collateral once the CCBM2 has been implemented.

Since the users of the CCBM2 will comprise the Eurosystem central banks and their counterparties, the Eurosystem is now consulting its counterparties and other interested parties, especially the CSDs, in order to obtain input regarding the user requirements for this project. Respondents are invited to communicate their suggestions and to raise any queries they might have at this stage of the project, as well as to address the following questions:

• In general, with regard to the current collateral management handling procedures, what are the main imperfections that should be addressed and the main advantages that should be retained in the next generation of Eurosystem collateral management?
• Do the CCBM2 principles as formulated above address your needs for improving the current Eurosystem collateral handling procedures (in particular, for the cross-border use of collateral through the CCBM)?
• What enhancements should the CCBM2 be able to achieve in comparison with the current CCBM beyond the principles expressed above?
• Apart from the components internal to the Eurosystem, what types of feature should be covered by the CCBM2 user requirements, from your perspective?
• Do you have specific technical requirements that should be considered in the user requirements of CCBM2 (such as type of technical access; monitoring functions; opening hours/days; customer support requirements)?
• Are you aware of planned market initiatives that might have an impact on the design and the business case for the CCBM2 as outlined in the principles mentioned above?
• How do you wish to conduct dialogue with the Eurosystem on the project in the future? For instance, the Eurosystem intends to continue consulting the market on an elaborated version of the user requirements. Would this level of interaction be appropriate? Do you think it could take place through the relevant market consultation groups at national and Eurosystem levels, or would you like to suggest another level of interaction (e.g. a contact group at Eurosystem level)?

Comments are invited from all interested parties by 27 June 2007.

Any comments received will be made public on the internet, unless it is clearly indicated that the author does not consent to such publication. Comments should be sent in English or in the relevant official Community language to the ECB at the following address:

European Central Bank
Secretariat Division Kaiserstrasse 29 D-60311 Frankfurt am Main Germany Fax: +49 69 1344 6170 E-mail: ecb.secretariat@ecb.int

or to the respective national central bank of the Eurosystem.