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ECB eligible collateral: Revised haircut schedule published

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Krischer David
David Krischer

Senior Consultant

New York

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06 August 2010

As expected, the European Central Bank (ECB) has published its revised collateral haircut schedule. The revised schedule will take effect from 1 January 2011.

In keeping with previous statements, the schedule provides for the application of significantly higher haircuts in respect of (non-ABS) securities rated BBB+ to BBB- and makes certain other changes to the current haircut framework. Given the continuing importance of the ECB's operations to market liquidity, the revised haircut schedule is likely to be of interest to a wide range of market participants.

New haircut schedule for assets rated BBB+ to BBB-

By way of background, in late 2008, the ECB relaxed its minimum required rating level of A- to BBB- for all debt instruments (other than ABS, which is subject to separate rating requirements). While the adjustment was made on a temporary basis and was originally scheduled to fall away at the end of 2009, it was extended due to continuing market instability. In April 2010, as part of its then evolving response to rising concerns related to sovereign credit stress and the corresponding impact on EU banks, the ECB announced that the measure would remain in place "beyond the end of 2010", subject to the adoption of a revised graded haircut schedule to provide for more developed risk mitigation.

As noted above, the revised collateral haircut schedule provides for significantly higher haircuts in respect of securities rated BBB+ to BBB-. In most cases, the haircuts to be applied are several times higher than those applied under the current framework. For example, whereas a UCITS Directive-compliant covered bond rated between BBB+ and BBB- and with a maturity of five to seven years would currently be subject to a haircut of 5.5%, under the revised schedule the same covered bond will be subject to a haircut of 28% (and subject to a valuation markdown of 5% if it is necessary to value the bond based on a theoretical valuation; see below for details).

Other key changes to note

The revised haircut schedule also makes certain other changes to the current framework. Key changes to note include:

  • adjusted (higher) haircuts in respect of certain securities rated AAA to A- (e.g. the base haircut for ABS will go from 12% to 16% and the base haircut for a UCITS Directive-compliant covered bond with a maturity of five to seven years will go from 5.5% to 6.5%);
  • all non-Jumbo covered bonds will be regarded as category III marketable assets, including structured covered bonds (which have been regarded as category IV assets in general to date – and subject to higher haircuts as a result);
  • the additional valuation mark-down of 5% currently applied (in addition to the base haircut) to theoretically valued asset-backed securities will be extended to theoretically valued bank bonds (including both covered bank bonds/category III marketable assets and uncovered bank bonds/category IV marketable assets).