ANNEX I

THE IMPLEMENTATION OF MONETARY POLICY IN THE EURO AREA

General documentation on Eurosystem monetary policy instruments and procedures

February 2005

CONTENTS

Introduction

CHAPTER 1

1. Overview of the monetary policy framework

1.1. The European System of Central Banks

1.2. Objectives of the Eurosystem

1.3. Eurosystem monetary policy instruments

1.3.1. Open market operations

1.3.2. Standing facilities

1.3.3. Minimum reserves

1.4. Counterparties

1.5. Underlying assets

1.6. Modifications to the monetary policy framework

CHAPTER 2

2. Eligible counterparties

2.1. General eligibility criteria

2.2. Selection of counterparties for quick tenders and bilateral operations

2.3. Sanctions in the event of non-compliance with counterparty obligations

2.4. Suspension or exclusion on grounds of prudence

CHAPTER 3

3. Open market operations

3.1. Reverse transactions

3.1.1. General considerations

3.1.2. Main refinancing operations

3.1.3. Longer-term refinancing operations

3.1.4. Fine-tuning reverse operations

3.1.5. Structural reverse operations

3.2. Outright transactions

3.3. Issuance of ECB debt certificates

3.4. Foreign exchange swaps

3.5. Collection of fixed-term deposits

CHAPTER 4

4. Standing facilities

4.1. The marginal lending facility

4.2. The deposit facility

CHAPTER 5

5. Procedures

5.1. Tender procedures

5.1.1. General considerations

5.1.2. Tender operations calendar

5.1.3. Announcement of tender operations

5.1.4. Preparation and submission of bids by counterparties

5.1.5. Tender allotment procedures

5.1.6. Announcement of tender results

5.2. Procedures for bilateral operations

5.3. Settlement procedures

5.3.1. General considerations

5.3.2. Settlement of open market operations

5.3.3. End-of-day procedures

CHAPTER 6

6. Eligible assets

6.1. General considerations

6.2. Tier one assets

6.3. Tier two assets

6.4. Risk control measures

6.4.1. Risk control measures for tier one assets

6.4.2. Risk control measures for tier two assets

6.5. Valuation principles for underlying assets

6.6. Cross-border use of eligible assets

6.6.1. Correspondent central banking model

6.6.2. Links between securities settlement systems

CHAPTER 7

7. Minimum reserves

7.1. General considerations

7.2. Institutions subject to minimum reserve requirements

7.3. Determination of minimum reserves

7.4. Maintenance of reserve holdings

7.5. Reporting, acknowledgement and verification of the reserve base

7.6. Non-compliance with minimum reserve obligations

Annexes

Annex 1 Examples of monetary policy operations and procedures

Annex 2 Glossary

Annex 3 Selection of counterparties for foreign exchange intervention operations and foreign exchange swaps for monetary policy purposes

Annex 4 Reporting framework for the money and banking statistics of the European Central Bank

Annex 5 Eurosystem websites

Annex 6 Procedures and sanctions to be applied in the event of non-compliance with counterparty obligations

List of boxes, charts and tables

Boxes

1. Issuance of ECB debt certificates

2. Foreign exchange swaps

3. Operational steps in tender procedures

4. Allotment of fixed rate tenders

5. Allotment of variable rate tenders in euro

6. Allotment of variable rate foreign exchange swap tenders

7. Further steps towards a single list of collateral

8. Risk control measures

9. Liquidity categories for tier one assets

10. Level of valuation haircuts (%) applied to eligible tier one assets in relation to fixed coupon and zero coupon instruments

11. Level of valuation haircuts (%) applied to eligible tier one inverse floating rate instruments

12. Calculation of margin calls

13. Level of valuation haircuts (%) applied to eligible tier two assets

14. Reserve base and reserve ratios

15. Calculation of the remuneration of holdings of required reserves

Charts

1. Normal time frame for the operational steps in standard tenders

2. Normal time frame for the operational steps in quick tenders

3. The correspondent central banking model

4. Links between securities settlement systems

Tables

1. Eurosystem monetary policy operations

2. Normal trade days for the main and the longer-term refinancing operations

3. Normal settlement dates for Eurosystem open market operations

4. Eligible assets for Eurosystem monetary policy operations

Abbreviations

CCBM correspondent central banking model C.E.T. Central European Time CIs credit institutions CSD central securities depository DVP delivery-versus-payment EC European Community ECB European Central Bank EEA European Economic Area EEC European Economic Community EPM ECB payment mechanism ESCB European System of Central Banks EU European Union FOP free of payment FRN floating-rate note IDC intraday credit ISIN International Securities Identification Number MFI monetary financial institution MMF money market fund MMP money market paper NCB national central bank RoW rest of the world RTGS real-time gross settlement SSS securities settlement system Strip separate trading of interest and principal TARGET Trans-European Automated Real-time Gross settlement Express Transfer system UCITS undertaking for collective investment in transferable securities

Introduction

This document presents the operational framework chosen by the Eurosystem (1) for the single monetary policy in the euro area. The document, which forms part of the Eurosystem's legal framework for monetary policy instruments and procedures, is intended to serve as the “General Documentation” on the monetary policy instruments and procedures of the Eurosystem, and is aimed, in particular, at providing counterparties with the information they need in relation to the Eurosystem's monetary policy framework.

The General Documentation in itself neither confers rights nor imposes obligations on counterparties. The legal relationship between the Eurosystem and its counterparties is established in appropriate contractual or regulatory arrangements.

This document is divided into seven chapters. Chapter 1 gives an overview of the operational framework for the monetary policy of the Eurosystem. In Chapter 2, eligibility criteria for counterparties taking part in Eurosystem monetary policy operations are specified. Chapter 3 describes open market operations, while Chapter 4 presents the standing facilities available to counterparties. Chapter 5 specifies procedures applied in the execution of monetary policy operations. In Chapter 6, the eligibility criteria for underlying assets in monetary policy operations are defined. Chapter 7 presents the Eurosystem's minimum reserve system.

The annexes contain examples of monetary policy operations, a glossary, criteria for the selection of counterparties for Eurosystem foreign exchange intervention operations, a presentation of the reporting framework for the money and banking statistics of the European Central Bank, a list of the Eurosystem websites and a description of the procedures and sanctions to be applied in the event of non-compliance with counterparty obligations.

CHAPTER 1

1. OVERVIEW OF THE MONETARY POLICY FRAMEWORK

1.1. The European System of Central Banks

The European System of Central Banks (ESCB) consists of the European Central Bank (ECB) and the national central banks of the European Union (EU) Member States (2). The activities of the ESCB are carried out in accordance with the Treaty establishing the European Community (Treaty) and the Statute of the European System of Central Banks and of the European Central Bank (Statute of the ESCB). The ESCB is governed by the decision-making bodies of the ECB. In this respect, the Governing Council of the ECB is responsible for the formulation of monetary policy, while the Executive Board is empowered to implement monetary policy according to the decisions made and guidelines laid down by the Governing Council. To the extent deemed possible and appropriate and with a view to ensuring operational efficiency, the ECB has recourse to the national central banks (3) for carrying out the operations which form part of the tasks of the Eurosystem. The Eurosystem's monetary policy operations are executed under uniform terms and conditions in all Member States (4).

1.2. Objectives of the Eurosystem

The primary objective of the Eurosystem is to maintain price stability, as defined in Article 105 of the Treaty. Without prejudice to the primary objective of price stability, the Eurosystem has to support the general economic policies in the European Community. In pursuing its objectives, the Eurosystem has to act in accordance with the principle of an open market economy with free competition, favouring an efficient allocation of resources.

1.3. Eurosystem monetary policy instruments

In order to achieve its objectives, the Eurosystem has at its disposal a set of monetary policy instruments; the Eurosystem conducts open market operations, offers standing facilities and requires credit institutions to hold minimum reserves on accounts with the Eurosystem.

1.3.1. Open market operations

Open market operations play an important role in the monetary policy of the Eurosystem for the purposes of steering interest rates, managing the liquidity situation in the market and signalling the stance of monetary policy. Five types of instruments are available to the Eurosystem for the conduct of open market operations. The most important instrument is the reverse transaction (applicable on the basis of repurchase agreements or collateralised loans). The Eurosystem may also use outright transactions, the issuance of debt certificates, foreign exchange swaps and the collection of fixed-term deposits. Open market operations are initiated by the ECB, which also decides on the instrument to be used and on the terms and conditions for its execution. They can be executed on the basis of standard tenders, quick tenders or bilateral procedures (5). With regard to their aims, regularity and procedures, the Eurosystem's open market operations can be divided into the following four categories (see also Table 1):

— The main refinancing operations are regular liquidity-providing reverse transactions with a weekly frequency and a maturity of normally one week. These operations are executed by the national central banks on the basis of standard tenders. The main refinancing operations play a pivotal role in pursuing the purposes of the Eurosystem's open market operations and provide the bulk of refinancing to the financial sector.

— The longer-term refinancing operations are liquidity-providing reverse transactions with a monthly frequency and a maturity of normally three months. These operations are aimed at providing counterparties with additional longer-term refinancing and are executed by the national central banks on the basis of standard tenders. In these operations, the Eurosystem does not, as a rule, intend to send signals to the market and therefore normally acts as a rate taker.

— Fine-tuning operations are executed on an ad hoc basis with the aim of managing the liquidity situation in the market and steering interest rates, in particular in order to smooth the effects on interest rates caused by unexpected liquidity fluctuations in the market. Fine-tuning operations are primarily executed as reverse transactions, but can also take the form of outright transactions, foreign exchange swaps and the collection of fixed-term deposits. The instruments and procedures applied in the conduct of fine-tuning operations are adapted to the types of transactions and the specific objectives pursued in the operations. Fine-tuning operations are normally executed by the national central banks through quick tenders or bilateral procedures. The Governing Council of the ECB can decide whether, under exceptional circumstances, fine-tuning bilateral operations may be executed by the ECB itself.

— In addition, the Eurosystem may carry out structural operations through the issuance of debt certificates, reverse transactions and outright transactions. These operations are executed whenever the ECB wishes to adjust the structural position of the Eurosystem vis-à-vis the financial sector (on a regular or non-regular basis). Structural operations in the form of reverse transactions and the issuance of debt instruments are carried out by the national central banks through standard tenders. Structural operations in the form of outright transactions are executed through bilateral procedures.

1.3.2. Standing facilities

Standing facilities are aimed at providing and absorbing overnight liquidity, signal the general stance of monetary policy and bound overnight market interest rates. Two standing facilities are available to eligible counterparties on their own initiative, subject to their fulfilment of certain operational access conditions (see also Table 1):

— Counterparties can use the marginal lending facility to obtain overnight liquidity from the national central banks against eligible assets. Under normal circumstances, there are no credit limits or other restrictions on counterparties' access to the facility apart from the requirement to present sufficient underlying assets. The interest rate on the marginal lending facility normally provides a ceiling for the overnight market interest rate.

— Counterparties can use the deposit facility to make overnight deposits with the national central banks. Under normal circumstances, there are no deposit limits or other restrictions on counterparties' access to the facility. The interest rate on the deposit facility normally provides a floor for the overnight market interest rate.

The standing facilities are administered in a decentralised manner by the national central banks.

1.3.3. Minimum reserves

The Eurosystem's minimum reserve system applies to credit institutions in the euro area and primarily pursues the aims of stabilising money market interest rates and creating (or enlarging) a structural liquidity shortage. The reserve requirement of each institution is determined in relation to elements of its balance sheet. In order to pursue the aim of stabilising interest rates, the Eurosystem's minimum reserve system enables institutions to make use of averaging provisions. Compliance with the reserve requirement is determined on the basis of the institutions' average daily reserve holdings over the maintenance period. Institutions' holdings of required reserves are remunerated at the rate of the Eurosystem's main refinancing operations.

1.4. Counterparties

The Eurosystem's monetary policy framework is formulated with a view to ensuring the participation of a broad range of counterparties. Institutions subject to minimum reserve requirements according to Article 19.1 of the Statute of the ESCB may access the standing facilities and participate in open market operations based on standard tenders. The Eurosystem may select a limited number of counterparties to participate in fine-tuning operations. For outright transactions, no restrictions are placed a priori on the range of counterparties. For foreign exchange swaps conducted for monetary policy purposes, active players in the foreign exchange market are used. The set of counterparties for these operations is limited to those institutions selected for Eurosystem foreign exchange intervention operations which are located in the euro area.

1.5. Underlying assets

Pursuant to Article 18.1 of the Statute of the ESCB, all Eurosystem credit operations (i.e. liquidity-providing operations) have to be based on adequate collateral. The Eurosystem accepts a wide range of assets to underlie its operations. A distinction is made between two categories of eligible assets — “tier one” and “tier two” — essentially for purposes internal to the Eurosystem. However, this distinction will be phased out gradually over coming years to leave the Eurosystem collateral framework with a single list of eligible assets. Tier one currently consists of marketable debt instruments fulfilling uniform euro area-wide eligibility criteria specified by the ECB. Tier two consists of additional assets, marketable and non-marketable, which are of particular importance for national financial markets and banking systems and for which eligibility criteria are established by the national central banks, subject to ECB approval. No distinction is made between the two tiers with regard to the quality of the assets and their eligibility for the various types of Eurosystem monetary policy operations (except that tier two assets are normally not used by the Eurosystem in outright transactions). Eligible assets may be used on a cross-border basis, by means of the correspondent central banking model (CCBM) or through eligible links between EU securities settlement systems (SSSs), to collateralise all types of Eurosystem credit (6). All assets eligible for Eurosystem monetary policy operations can also be used as underlying assets for intraday credit.

1.6. Modifications to the monetary policy framework

The Governing Council of the ECB may, at any time, change the instruments, conditions, criteria and procedures for the execution of Eurosystem monetary policy operations.

TABLE 1

Eurosystem monetary policy operations

Monetary policy operations Types of transactions Maturity Frequency Procedure Provision of liquidity Absorption of liquidity Open market operations Main refinancing operations Reverse transactions — One week Weekly Standard tenders Longer-term refinancing operations Reverse transactions — Three months Monthly Standard tenders Fine-tuning operations — Reverse transactions — Foreign exchange swaps — Reverse transactions — Collection of fixed-term deposits — Foreign exchange swaps Non-standardised Non-regular — Quick tenders — Bilateral procedures Outright purchases Outright sales — Non-regular Bilateral procedures Structural operations Reverse transactions Issuance of debt certificates Standardised/non-standardised Regular and non-regular Standard tenders Outright purchases Outright sales — Non-regular Bilateral procedures Standing facilities Marginal lending facility Reverse transactions — Overnight Access at the discretion of counterparties Deposit facility — Deposits Overnight Access at the discretion of counterparties

CHAPTER 2

2. ELIGIBLE COUNTERPARTIES

2.1. General eligibility criteria

Counterparties for Eurosystem monetary policy operations must fulfil certain eligibility criteria (7). These criteria are defined with a view to giving a broad range of institutions access to Eurosystem monetary policy operations, enhancing equal treatment of institutions across the euro area and ensuring that counterparties fulfil certain operational and prudential requirements:

— Only institutions subject to the Eurosystem's minimum reserve system according to Article 19.1 of the Statute of the ESCB are eligible to be counterparties. Institutions which are exempt from their obligations under the Eurosystem's minimum reserve system (see Section 7.2) are not eligible to be counterparties to Eurosystem standing facilities and open market operations.

— Counterparties must be financially sound. They should be subject to at least one form of harmonised EU/EEA supervision by national authorities (8). However, financially sound institutions subject to non-harmonised national supervision of a comparable standard can also be accepted as counterparties, e.g. branches established in the euro area of institutions that have their head office outside the European Economic Area (EEA).

— Counterparties must fulfil any operational criteria specified in the relevant contractual or regulatory arrangements applied by the respective national central bank (or the ECB), so as to ensure the efficient conduct of Eurosystem monetary policy operations.

These general eligibility criteria are uniform throughout the euro area. Institutions fulfilling the general eligibility criteria may:

— access the Eurosystem's standing facilities; and

— participate in Eurosystem open market operations that are based on standard tenders.

An institution may access the Eurosystem's standing facilities and open market operations based on standard tenders only through the national central bank of the Member State in which it is established. If an institution has establishments (its head office or branches) in more than one Member State, each establishment has access to these operations through the national central bank of the Member State in which it is located, notwithstanding the fact that the bids of an institution may only be submitted by one establishment (either the head office or a designated branch) in each Member State.

2.2. Selection of counterparties for quick tenders and bilateral operations

For outright transactions, no restrictions are placed a priori on the range of counterparties.

For foreign exchange swaps executed for monetary policy purposes, counterparties must be able to conduct large-volume foreign exchange operations efficiently under all market conditions. The range of counterparties to foreign exchange swaps corresponds to the counterparties located in the euro area which are selected for Eurosystem foreign exchange intervention operations. The criteria and procedures applied for the selection of counterparties to foreign exchange intervention operations are presented in Annex 3.

For other operations based on quick tenders and bilateral procedures (fine-tuning reverse transactions and the collection of fixed-term deposits), each national central bank selects a set of counterparties from among the institutions established in its Member State which fulfil the general counterparty eligibility criteria. In this respect, activity in the money market is the prime selection criterion. Other criteria which might be taken into account are, for example, the efficiency of the trading desk and the bidding potential.

In quick tenders and bilateral operations, the national central banks deal exclusively with the counterparties which are included in their respective set of fine-tuning counterparties. If, for operational reasons, a national central bank cannot deal in each operation with all of its fine-tuning counterparties, the selection of counterparties in this Member State will be based on a rotation scheme in order to ensure equitable access.

The Governing Council of the ECB can decide whether, under exceptional circumstances, fine-tuning bilateral operations may be carried out by the ECB itself. If the ECB were to carry out bilateral operations, the selection of counterparties would in such cases be made by the ECB according to a rotation scheme among those counterparties in the euro area which are eligible for quick tenders and bilateral operations in order to ensure equitable access.

2.3. Sanctions in the event of non-compliance with counterparty obligations

The ECB shall impose sanctions, in accordance with Council Regulation (EC) No 2532/98 of 23 November 1998 concerning the powers of the European Central Bank to impose sanctions (9), European Central Bank Regulation (EC) No 2157/1999 of 23 September 1999 on the powers of the European Central Bank to impose sanctions (ECB/1999/4) (10), Council Regulation (EC) No 2531/98 of 23 November 1998 concerning the application of minimum reserves by the European Central Bank (11), as amended, and Regulation (EC) No 1745/2003 of the European Central Bank of 12 September 2003 on the application of minimum reserves (ECB/2003/9) (12), on institutions which do not comply with obligations arising from ECB Regulations and Decisions relating to the application of minimum reserves. The relevant sanctions and the procedural rules for their application are specified in the abovementioned Regulations. In addition, in the case of serious infringements of the minimum reserve requirements, the Eurosystem may suspend counterparties' participation in open market operations.

In accordance with the provisions of the contractual or regulatory arrangements applied by the respective national central bank (or by the ECB), the Eurosystem can and will impose financial penalties on counterparties or suspend counterparties' participation in open market operations if counterparties fail to comply with their obligations under the contractual or regulatory arrangements applied by the national central banks (or by the ECB) as set out below.

This relates to cases of infringement of tender rules (if a counterparty is unable to transfer a sufficient amount of underlying assets to settle the amount of liquidity it has been allotted in a liquidity-providing operation or if it is unable to deliver a sufficient amount of cash to settle the amount it has been allotted in a liquidity-absorbing operation), and of bilateral transaction rules (if a counterparty is unable to deliver a sufficient amount of eligible underlying assets or if it is unable to deliver a sufficient amount of cash to settle the amount agreed in bilateral transactions).

This also applies to cases of non-compliance by a counterparty with the rules for the use of underlying assets (if a counterparty is using assets which are or have become ineligible, or which may not be used by the counterparty, e.g. owing to close links between, or the identity of, issuer/guarantor and counterparty), and to non-compliance with the rules for end-of-day procedures and access conditions for the marginal lending facility (if a counterparty which has a negative balance on the settlement account at the end of the day does not fulfil the access conditions for the marginal lending facility).

In addition, a suspension measure taken vis-à-vis a non-complying counterparty may be applied to branches of the same institution located in other Member States. Where, as an exceptional measure, this is required on account of the seriousness of a case of non-compliance, as evidenced by its frequency or duration, for instance, a counterparty may be suspended from all future monetary policy operations for a certain period of time.

Financial penalties imposed by national central banks in the event of non-compliance in relation to a breach of the rules concerning tender operations, bilateral transactions, underlying assets, end-of-day procedures or the access conditions to the marginal lending facility are calculated at a pre-specified penalty rate (as set out in Annex 6).

2.4. Suspension or exclusion on grounds of prudence

In accordance with the provisions in the contractual or regulatory arrangements applied by the respective national central bank (or by the ECB), the Eurosystem may suspend or exclude counterparties' access to monetary policy instruments on the grounds of prudence.

In addition, a suspension or exclusion of counterparties may be warranted in some of the cases which fall within the notion of the “default” of a counterparty as defined in the contractual or regulatory arrangements applied by the national central banks.

CHAPTER 3

3. OPEN MARKET OPERATIONS

Open market operations play an important role in the Eurosystem's monetary policy, pursuing the aims of steering interest rates, managing the liquidity situation in the market and signalling the stance of monetary policy. With regard to their aims, regularity and procedures, Eurosystem open market operations can be divided into four categories: main refinancing operations, longer-term refinancing operations, fine-tuning operations and structural operations. As for the instruments used, reverse transactions are the main open market instrument of the Eurosystem and can be employed in all four categories of operations, whereas debt certificates may be used for structural absorption operations. In addition, the Eurosystem has three other instruments available for the conduct of fine-tuning operations: outright transactions, foreign exchange swaps and the collection of fixed-term deposits. In the following sections, specific features of the different types of open market instruments used by the Eurosystem are presented in detail.

3.1. Reverse transactions

3.1.1. General considerations

(a) Type of instrument

Reverse transactions refer to operations where the Eurosystem buys or sells eligible assets under repurchase agreements or conducts credit operations against eligible assets as collateral. Reverse transactions are used for main refinancing operations and longer-term refinancing operations. In addition, the Eurosystem can use reverse transactions for structural and fine-tuning operations.

(b) Legal nature

The national central banks may execute reverse transactions either in the form of repurchase agreements (i.e. the ownership of the asset is transferred to the creditor, while the parties agree to reverse the transaction through a re-transfer of the asset to the debtor at a future point in time) or as collateralised loans (i.e. an enforceable security interest is provided over the assets but, assuming fulfilment of the debt obligation, the ownership of the asset is retained by the debtor). Further provisions for reverse transactions based on repurchase agreements are specified in the contractual arrangements applied by the respective national central bank (or the ECB). Arrangements for reverse transactions based on collateralised loans take account of the different procedures and formalities required to enable the establishment and subsequent realisation of a relevant interest in the collateral (e.g. a pledge) which apply in different jurisdictions.

(c) Interest terms

The difference between the purchase price and the repurchase price in a repurchase agreement corresponds to the interest due on the amount of money borrowed or lent over the maturity of the operation, i.e. the repurchase price includes the respective interest to be paid. The interest rate on a reverse transaction in the form of a collateralised loan is determined by applying the specified interest rate on the credit amount over the maturity of the operation. The interest rate applied to Eurosystem reverse open market operations is a simple interest rate based on the day-count convention “actual/360”.

3.1.2. Main refinancing operations

The main refinancing operations are the most important open market operations conducted by the Eurosystem, playing a pivotal role in pursuing the aims of steering interest rates, managing the liquidity situation in the market and signalling the stance of monetary policy. They also provide the bulk of refinancing to the financial sector.

The operational features of the main refinancing operations can be summarised as follows:

— they are liquidity-providing operations;

— they are executed regularly each week (13);

— they normally have a maturity of one week (14);

— they are executed in a decentralised manner by the national central banks;

— they are executed through standard tenders (as specified in Section 5.1);

— all counterparties fulfilling the general eligibility criteria (as specified in Section 2.1) may submit bids for the main refinancing operations; and

— both tier one and tier two assets (as specified in Chapter 6) are eligible as underlying assets for the main refinancing operations.

3.1.3. Longer-term refinancing operations

The Eurosystem also executes regular refinancing operations, normally with a three-month maturity, which are aimed at providing additional longer-term refinancing to the financial sector. These operations represent only a small part of the global refinancing volume. In these operations, the Eurosystem does not, as a rule, intend to send signals to the market and therefore normally acts as a rate taker. Accordingly, longer-term refinancing operations are usually executed in the form of variable rate tenders and, from time to time, the ECB indicates the operation volume to be allotted in forthcoming tenders. Under exceptional circumstances, the Eurosystem may also execute longer-term refinancing operations through fixed rate tenders.

The operational features of the longer-term refinancing operations can be summarised as follows:

— they are liquidity-providing operations;

— they are executed regularly each month (15);

— they normally have a maturity of three months (16);

— they are executed in a decentralised manner by the national central banks;

— they are executed through standard tenders (as specified in Section 5.1);

— all counterparties fulfilling the general eligibility criteria (as specified in Section 2.1) may submit bids for the longer-term refinancing operations; and

— both tier one and tier two assets (as specified in Chapter 6) are eligible as underlying assets for the longer-term refinancing operations.

3.1.4. Fine-tuning reverse operations

The Eurosystem can execute fine-tuning operations in the form of reverse open market transactions. Fine-tuning operations aim to manage the liquidity situation in the market and to steer interest rates, in particular in order to smooth the effects on interest rates caused by unexpected liquidity fluctuations in the market. The potential need for rapid action in the case of unexpected market developments makes it desirable to retain a high degree of flexibility in the choice of procedures and operational features in the conduct of these operations.

The operational features of the fine-tuning reverse operations can be summarised as follows:

— they can take the form of liquidity-providing or liquidity-absorbing operations;

— their frequency is not standardised;

— their maturity is not standardised;

— liquidity-providing fine-tuning reverse transactions are normally executed through quick tenders, although the possibility of using bilateral procedures is not excluded (see Chapter 5);

— liquidity-absorbing fine-tuning reverse transactions are executed, as a rule, through bilateral procedures (as specified in Section 5.2);

— these operations are normally executed in a decentralised manner by the national central banks (the Governing Council of the ECB can decide whether, under exceptional circumstances, bilateral fine-tuning reverse operations may be executed by the ECB);

— the Eurosystem may select, according to the criteria specified in Section 2.2, a limited number of counterparties to participate in fine-tuning reverse operations; and

— both tier one and tier two assets (as specified in Chapter 6) are eligible as underlying assets for fine-tuning reverse operations.

3.1.5. Structural reverse operations

The Eurosystem may execute structural operations in the form of reverse open market transactions aimed at adjusting the structural position of the Eurosystem vis-à-vis the financial sector.

The operational features of these operations can be summarised as follows:

— they are liquidity-providing operations;

— their frequency can be regular or non-regular;

— their maturity is not standardised a priori;

— they are executed through standard tenders (as specified in Section 5.1);

— they are executed in a decentralised manner by the national central banks;

— all counterparties fulfilling the general eligibility criteria (as specified in Section 2.1) may submit bids for structural reverse operations; and

— both tier one and tier two assets (as specified in Chapter 6) are eligible as underlying assets for structural reverse operations.

3.2. Outright transactions

(a) Type of instrument

Outright open market transactions refer to operations where the Eurosystem buys or sells eligible assets outright on the market. Such operations are executed only for structural and fine-tuning purposes.

(b) Legal nature

An outright transaction implies a full transfer of ownership from the seller to the buyer with no connected reverse transfer of ownership. The transactions are executed in accordance with the market conventions for the debt instrument used in the transaction.

(c) Price terms

In the calculation of prices, the Eurosystem acts in accordance with the most widely accepted market convention for the debt instruments used in the transaction.

(d) Other operational features

The operational features of Eurosystem outright transactions can be summarised as follows:

— they can take the form of liquidity-providing (outright purchase) or liquidity-absorbing (outright sale) operations;

— their frequency is not standardised;

— they are executed through bilateral procedures (as specified in Section 5.2);

— they are normally executed in a decentralised manner by the national central banks (the Governing Council of the ECB can decide whether, under exceptional circumstances, fine-tuning outright operations may be executed by the ECB);

— no restrictions are placed a priori on the range of counterparties to outright transactions; and

— only tier one instruments (as specified in Section 6.1) are normally used as underlying assets in outright transactions.

3.3. Issuance of ECB debt certificates

(a) Type of instrument

The ECB may issue debt certificates with the aim of adjusting the structural position of the Eurosystem vis-à-vis the financial sector so as to create (or enlarge) a liquidity shortage in the market.

(b) Legal nature

The certificates constitute a debt obligation of the ECB vis-à-vis the holder of the certificate. The certificates are issued and held in book-entry form in securities depositories in the euro area. The ECB does not impose any restrictions on the transferability of the certificates. Further provisions related to ECB debt certificates will be contained in the terms and conditions for such certificates.

(c) Interest terms

The certificates are issued at a discount, i.e. they are issued at below the nominal amount and are redeemed at maturity at the nominal amount. The difference between the issue amount and the redemption amount equals the interest accrued on the issue amount, at the agreed interest rate, over the maturity of the certificate. The interest rate applied is a simple interest rate based on the day-count convention “actual/360”. The calculation of the issue amount is shown in Box 1.

BOX 1Issuance of ECB debt certificatesThe issue amount is: where: N = nominal amount of the debt certificate rI = interest rate (as a %) D = maturity of the debt certificate (in days) PT = issue amount of the debt certificate

(d) Other operational features

The operational features of the issuance of ECB debt certificates can be summarised as follows:

— the certificates are issued in order to absorb liquidity from the market;

— the certificates can be issued on a regular or non-regular basis;

— the certificates have a maturity of less than 12 months;

— the certificates are issued through standard tenders (as specified in Section 5.1);

— the certificates are tendered and settled in a decentralised manner by the national central banks; and

— all counterparties fulfilling the general eligibility criteria (as specified in Section 2.1) may submit bids for the subscription of ECB debt certificates.

3.4. Foreign exchange swaps

(a) Type of instrument

Foreign exchange swaps executed for monetary policy purposes consist of simultaneous spot and forward transactions in euro against a foreign currency. They are used for fine-tuning purposes, mainly with the aim of managing the liquidity situation in the market and steering interest rates.

(b) Legal nature

Foreign exchange swaps executed for monetary policy purposes refer to operations where the Eurosystem buys (or sells) euro spot against a foreign currency and, at the same time, sells (or buys) it back in a forward transaction at a specified repurchase date. Further provisions for foreign exchange swaps are specified in the contractual arrangement applied by the respective national central bank (or the ECB).

(c) Currency and exchange rate terms

As a rule, the Eurosystem operates only in widely traded currencies and in accordance with standard market practice. In each foreign exchange swap operation, the Eurosystem and the counterparties agree on the swap points for the transaction. The swap points are the difference between the exchange rate of the forward transaction and the exchange rate of the spot transaction. The swap points of the euro vis-à-vis the foreign currency are quoted according to general market conventions. The exchange rate terms of foreign exchange swaps are specified in Box 2.

BOX 2Foreign exchange swaps S = spot (on the transaction date of the foreign exchange swap) of the exchange rate between the euro (EUR) and a foreign currency ABC FM = forward exchange rate between the euro and a foreign currency ABC on the repurchase date of the swap (M) ΔM = forward points between the euro and ABC on the repurchase date of the swap (M) N(.) = spot amount of currency; N(.)M is the forward amount of currency: or or

(d) Other operational features

The operational features of foreign exchange swaps can be summarised as follows:

— they can take the form of liquidity-providing or liquidity-absorbing operations;

— their frequency is not standardised;

— their maturity is not standardised;

— they are executed through quick tenders or bilateral procedures (see Chapter 5);

— they are normally executed in a decentralised manner by the national central banks (the Governing Council of the ECB can decide whether, under exceptional circumstances, bilateral foreign exchange swaps may be executed by the ECB); and

— the Eurosystem may select, according to the criteria specified in Section 2.2 and Annex 3, a limited number of counterparties to participate in foreign exchange swaps.

3.5. Collection of fixed-term deposits

(a) Type of instrument

The Eurosystem may invite counterparties to place remunerated fixed-term deposits with the national central bank in the Member State in which the counterparty is established. The collection of fixed-term deposits is envisaged only for fine-tuning purposes in order to absorb liquidity in the market.

(b) Legal nature

The deposits accepted from counterparties are for a fixed term and with a fixed rate of interest. No collateral is given by the national central banks in exchange for the deposits.

(c) Interest terms

The interest rate applied to the deposit is a simple interest rate based on the day-count convention “actual/360”. Interest is paid at maturity of the deposit.

(d) Other operational features

The operational features of the collection of fixed-term deposits can be summarised as follows:

— the deposits are collected in order to absorb liquidity;

— the frequency with which deposits are collected is not standardised;

— the maturity of the deposits is not standardised;

— the collection of deposits is normally executed through quick tenders, although the possibility of using bilateral procedures is not excluded (see Chapter 5);

— the collection of deposits is normally executed in a decentralised manner by the national central banks (the Governing Council of the ECB can decide whether, under exceptional circumstances, the bilateral collection of fixed-term deposits (17) may be executed by the ECB); and

— the Eurosystem may select, according to the criteria specified in Section 2.2, a limited number of counterparties for the collection of fixed-term deposits.

CHAPTER 4

4. STANDING FACILITIES

4.1. The marginal lending facility

(a) Type of instrument

Counterparties may use the marginal lending facility to obtain overnight liquidity from national central banks at a pre-specified interest rate against eligible assets (as set out in Chapter 6). The facility is intended to satisfy counterparties' temporary liquidity needs. Under normal circumstances, the interest rate on the facility provides a ceiling for the overnight market interest rate. The terms and conditions of the facility are identical throughout the euro area.

(b) Legal nature

The national central banks may provide liquidity under the marginal lending facility either in the form of overnight repurchase agreements (i.e. the ownership of the asset is transferred to the creditor, while the parties agree to reverse the transaction through a re-transfer of the asset to the debtor on the next business day) or as overnight collateralised loans (i.e. an enforceable security interest is provided over the assets but, assuming fulfilment of the debt obligation, ownership of the asset is retained by the debtor). Further provisions for repurchase agreements are specified in the contractual arrangements applied by the respective national central bank. Arrangements for providing the liquidity in the form of collateralised loans take account of the different procedures and formalities required to enable the establishment and subsequent realisation of a relevant interest in the collateral (a pledge) which apply in different jurisdictions.

(c) Access conditions

Institutions fulfilling the general counterparty eligibility criteria specified in Section 2.1 may access the marginal lending facility. Access to the marginal lending facility is granted through the national central bank in the Member State in which the institution is established. Access to the marginal lending facility is granted only on days when the relevant national real-time gross settlement (RTGS) system and the relevant SSS(s) are operational.

At the end of each business day, counterparties' intraday debit positions on their settlement account with the national central banks are automatically considered to be a request for recourse to the marginal lending facility. The procedures for end-of-day access to the marginal lending facility are specified in Section 5.3.3.

A counterparty may also be granted access to the marginal lending facility by sending a request to the national central bank in the Member State in which the counterparty is established. For the national central bank to process the request on the same day, the request must be received by the national central bank at the latest 30 minutes after the actual closing time of TARGET (18), (19). As a general rule, the closing time for the TARGET system is 6 p.m. ECB time (C.E.T.). The deadline for requesting access to the marginal lending facility is postponed by an additional 30 minutes on the last Eurosystem business day of a reserve maintenance period. In the request, the amount of credit must be stated and, if underlying assets for the transaction have not already been pre-deposited with the national central bank, the underlying assets to be delivered for the transaction must be specified.

Apart from the requirement to present sufficient underlying eligible assets, there is no limit to the amount of funds that can be advanced under the marginal lending facility.

(d) Maturity and interest terms

The maturity of credit extended under the facility is overnight. For counterparties participating directly in TARGET, the credit is repaid on the next day on which the relevant national RTGS system and the relevant SSS(s) are operational, at the time at which those systems open.

The interest rate is announced in advance by the Eurosystem and is calculated as a simple interest rate based on the day-count convention “actual/360”. The ECB may change the interest rate at any time, effective, at the earliest, from the following Eurosystem business day (20). Interest under the facility is payable with the repayment of the credit.

(e) Suspension of the facility

Access to the facility is granted only in accordance with the objectives and general monetary policy considerations of the ECB. The ECB may adapt the conditions of the facility or suspend it at any time

4.2. The deposit facility

(a) Type of instrument

Counterparties can use the deposit facility to make overnight deposits with national central banks. The deposits are remunerated at a pre-specified interest rate. Under normal circumstances, the interest rate on the facility provides a floor for the overnight market interest rate. The terms and conditions of the deposit facility are identical throughout the euro area (21).

(b) Legal nature

The overnight deposits accepted from counterparties are remunerated at a fixed rate of interest. No collateral is given to the counterparty in exchange for the deposits.

(c) Access conditions (22)

Institutions fulfilling the general counterparty eligibility criteria specified in Section 2.1 may access the deposit facility. Access to the deposit facility is granted through the national central bank in the Member State in which the institution is established. Access to the deposit facility is granted only on days when the relevant national RTGS system is open.

To be granted access to the deposit facility, the counterparty must send a request to the national central bank in the Member State in which the counterparty is established. For the national central bank to process the request on the same day, the request must be received by the national central bank at the latest 30 minutes after the actual closing time of TARGET, which is, as a general rule, 6 p.m. ECB time (C.E.T.) (23), (24). The deadline for requesting access to the deposit facility is postponed by an additional 30 minutes on the last Eurosystem business day of a reserve maintenance period. In the request, the amount to be deposited under the facility is to be stated.

There is no limit to the amount a counterparty may deposit under the facility.

(d) Maturity and interest terms

The maturity of deposits under the facility is overnight. For counterparties participating directly in TARGET, deposits held under the facility mature on the next day on which the relevant national RTGS system is operational, at the time at which this system opens.

The interest rate is announced in advance by the Eurosystem and is calculated as a simple interest rate based on the day-count convention “actual/360”. The ECB may change the interest rate at any time, effective, at the earliest, from the following Eurosystem business day. Interest on the deposits is payable on maturity of the deposit.

(e) Suspension of the facility

Access to the facility is granted only in accordance with the objectives and general monetary policy considerations of the ECB. The ECB may adapt the conditions of the facility or suspend it at any time.

CHAPTER 5

5. PROCEDURES

5.1. Tender procedures

5.1.1. General considerations

Eurosystem open market operations are normally executed in the form of tender procedures. The Eurosystem's tender procedures are performed in six operational steps, as specified in Box 3.

The Eurosystem distinguishes between two different types of tender procedures: standard tenders and quick tenders. The procedures for standard and quick tenders are identical except for the time frame and the range of counterparties.

BOX 3Operational steps in tender proceduresStep 1 Tender announcement(a)Announcement by the ECB through public wire services(b)Announcement by the national central banks through national wire services and directly to individual counterparties (if deemed necessary)Step 2 Counterparties' preparation and submission of bids Step 3 Compilation of bids by the Eurosystem Step 4 Tender allotment and announcement of tender results(a)ECB allotment decision(b)Announcement of the allotment resultStep 5 Certification of individual allotment results Step 6 Settlement of the transactions (see Section 5.3)

(a) Standard tenders

For standard tenders, a maximum of 24 hours elapses from the announcement of the tender to the certification of the allotment result (where the time between the submission deadline and the announcement of the allotment result is approximately two hours). Chart 1 gives an overview of the normal time frame for the operational steps for standard tenders. The ECB may decide to adjust the time frame in individual operations, if deemed appropriate.

The main refinancing operations, the longer-term refinancing operations and structural operations (with the exception of outright transactions) are always executed in the form of standard tenders. Counterparties fulfilling the general eligibility criteria specified in Section 2.1 may participate in standard tenders.

(b) Quick tenders

Quick tenders are normally executed within 90 minutes of the announcement of the tender, with certification taking place immediately after the announcement of the allotment result. The normal time frame for the operational steps for quick tenders is specified in Chart 2. The ECB may decide to adjust the time frame in individual operations, if deemed appropriate. Quick tenders are only used for the execution of fine-tuning operations. The Eurosystem may select, according to the criteria and procedures specified in Section 2.2, a limited number of counterparties to participate in quick tenders.

(c) Fixed rate and variable rate tenders

The Eurosystem has the option of conducting either fixed rate (volume) or variable rate (interest) tenders. In a fixed rate tender, the ECB specifies the interest rate in advance and participating counterparties bid the amount of money they want to transact at the fixed interest rate (25). In a variable rate tender, counterparties bid the amounts of money and the interest rates at which they want to enter into transactions with the national central banks (26).

5.1.2. Tender operations calendar

(a) Main and longer-term refinancing operations

The main and the longer-term refinancing operations are executed according to an indicative calendar published by the Eurosystem (27). The calendar is published at least three months before the start of the year for which it is valid. The normal trade days for the main and the longer-term refinancing operations are specified in Table 2. The ECB aims to ensure that counterparties in all Member States can participate in the main and the longer-term refinancing operations. Therefore, when compiling the calendar for these operations, the ECB makes appropriate adjustments to the normal schedule to take into account bank holidays in the individual Member States.

TABLE 2

Normal trade days for the main and the longer-term refinancing operations

Type of operation Normal trade day (T) Main refinancing operations Each Tuesday Longer-term refinancing operations The last Wednesday of each calendar month (28)

(b) Structural operations

Structural operations through standard tenders are not executed according to any pre-specified calendar. However, they are normally conducted and settled only on days which are NCB business days (29) in all Member States.

(c) Fine-tuning operations

Fine-tuning operations are not executed according to any pre-specified calendar. The ECB may decide to conduct fine-tuning operations on any Eurosystem business day. Only national central banks of Member States in which the trade day, the settlement day and the reimbursement day are NCB business days participate in such operations.

5.1.3. Announcement of tender operations

Eurosystem standard tenders are publicly announced by means of wire services. In addition, national central banks may announce the tender operation directly to counterparties without access to wire services. The public tender announcement message normally contains the following information:

— the reference number of the tender operation;

— the date of the tender operation;

— the type of operation (provision or absorption of liquidity and the type of monetary policy instrument to be used);

— the maturity of the operation;

— the type of auction (fixed rate or variable rate tender);

— the method of allotment (“Dutch” or “American” auction, as defined in Section 5.1.5);

— the intended operation volume (normally only in the case of longer-term refinancing operations);

— the fixed tender interest rate/price/swap point (in the case of fixed rate tenders);

— the minimum/maximum accepted interest rate/price/swap point (if applicable);

— the start date and maturity date of the operation (if applicable) or the value date and maturity date of the instrument (in the case of the issuance of debt certificates);

— the currencies involved and the currency, the amount of which is kept fixed (in the case of foreign exchange swaps);

— the reference spot exchange rate to be used for the calculation of bids (in the case of foreign exchange swaps);

— the maximum bid limit (if any);

— the minimum individual allotment amount (if any);

— the minimum allotment ratio (if any);

— the time schedule for the submission of bids;

— the denomination of the certificates (in the case of the issuance of debt certificates); and

— the ISIN code of the issue (in the case of the issuance of debt certificates).

With a view to enhancing transparency in its fine-tuning operations, the Eurosystem normally announces quick tenders publicly in advance. However, under exceptional circumstances, the ECB may decide not to announce quick tenders publicly in advance. The announcement of quick tenders follows the same procedures as those for standard tenders. In a quick tender, regardless of whether it is announced publicly or not, the selected counterparties are contacted directly by the national central banks.

5.1.4. Preparation and submission of bids by counterparties

Counterparties' bids must be in a form that follows the pro forma example provided by the national central banks for the relevant operation. The bids must be submitted to the national central bank of a Member State in which the institution has an establishment (head office or branch). The bids of an institution may only be submitted by one establishment (either the head office or a designated branch) in each Member State.

In fixed rate tenders, counterparties must state in their bids the amount of money that they are willing to transact with the national central banks (30).

In variable rate tenders, counterparties may submit bids for up to ten different interest rate/price/swap point levels. In each bid, they must state the amount of money that they are willing to transact with the national central banks and the respective interest rate (31), (32). The interest rates bid must be expressed as multiples of 0,01 percentage point. In the case of a variable rate foreign exchange swap tender, the swap points must be quoted according to standard market conventions and bids must be expressed as multiples of 0,01 swap point.

For the main refinancing operations, the minimum bid amount is EUR 1 000 000. Bids exceeding this amount must be expressed as multiples of EUR 100 000. The same minimum bid and multiple amounts are applied in fine-tuning and structural operations. The minimum bid amount is applied to each individual interest rate/price/swap point level.

For the longer-term refinancing operations, each national central bank defines a minimum bid amount in the range from EUR 10 000 to EUR 1 000 000. Bids exceeding the defined minimum bid amount must be expressed as multiples of EUR 10 000. The minimum bid amount is applied to each individual interest rate level.

The ECB may impose a maximum bid limit in order to prevent disproportionately large bids. Any such maximum bid limit is always specified in the public tender announcement message.

Counterparties are expected always to be in a position to cover the amounts allotted to them by a sufficient amount of eligible underlying assets (33). The contractual or regulatory arrangements applied by the respective national central bank allow the imposition of penalties if a counterparty is unable to transfer a sufficient amount of underlying assets or cash to settle the amount it has been allotted in a tender operation.

Bids are revocable up to the tender submission deadline. Bids submitted after the deadline specified in the tender announcement message are invalid. Respect of the deadline is judged by the national central banks. The national central banks discard all the bids of a counterparty if the aggregate amount bid exceeds any maximum bid limit established by the ECB. The national central banks also discard any bid which is below the minimum bid amount or which is below any minimum or above any maximum accepted interest rate/price/swap point. Furthermore, the national central banks may discard bids which are incomplete or which do not follow the pro forma example. If a bid is discarded, the respective national central bank informs the counterparty about its decision prior to the tender allotment.

5.1.5. Tender allotment procedures

(a) Fixed rate tender operations

In the allotment of a fixed rate tender, the bids received from counterparties are added together. If the aggregate amount bid exceeds the total amount of liquidity to be allotted, the submitted bids will be satisfied pro rata, according to the ratio of the amount to be allotted to the aggregate amount bid (see Box 4). The amount allotted to each counterparty is rounded to the nearest euro. However, the ECB may decide to allot a minimum amount/ratio to each bidder in fixed rate tenders.

BOX 4Allotment of fixed rate tendersThe percentage of allotment is: The amount allotted to the ith counterparty is: where:A= total amount allottedn= total number of counterpartiesa i = bid amount of the ith counterpartyall%= percentage of allotmentall i = total amount allotted to the ith counterparty

(b) Variable rate tenders in euro

In the allotment of liquidity-providing variable rate tenders in euro, bids are listed in diminishing order of offered interest rates. Bids with the highest interest rate levels are satisfied first and subsequently bids with successively lower interest rates are accepted until the total liquidity to be allotted is exhausted. If, at the lowest interest rate level accepted (i.e. the marginal interest rate), the aggregate amount bid exceeds the remaining amount to be allotted, the remaining amount is allocated pro rata among the bids according to the ratio of the remaining amount to be allotted to the total amount bid at the marginal interest rate (see Box 5). The amount allotted to each counterparty is rounded to the nearest euro.

BOX 5Allotment of variable rate tenders in euro(the example refers to bids quoted in the form of interest rates)The percentage of allotment at the marginal interest rate is: The allotment to the ith counterparty at the marginal interest rate is: The total amount allotted to the ith counterparty is: where:A= total amount allottedr s = sth interest rate bid by the counterpartiesn= total number of counterpartiesa(r s ) i = amount bid at the sth interest rate (r s ) by the ith counterpartya(r s )= total amount bid at the sth interest rate (r s ) r m = marginal interest rate: for a liquidity-providing tender for a liquidity-absorbing tenderr m-1= interest rate before the marginal interest rate (last interest rate at which bids are completely satisfied): for a liquidity-providing tender for a liquidity-absorbing tenderall%(r m )= percentage of allotment at the marginal interest rateall%(r s ) i = allotment to the ith counterparty at the sth interest rateall i = total amount allotted to the ith counterparty

In the allotment of liquidity-absorbing variable rate tenders (which may be used for the issuance of debt certificates and the collection of fixed-term deposits), bids are listed in increasing order of offered interest rates (or diminishing order of offered prices). Bids with the lowest interest rate (highest price) levels are satisfied first and subsequently bids with successively higher interest rates (lower price bids) are accepted until the total liquidity to be absorbed is exhausted. If, at the highest interest rate (lowest price) level accepted (i.e. the marginal interest rate/price), the aggregate bid amount exceeds the remaining amount to be allotted, the remaining amount is allocated pro rata among the bids according to the ratio of the remaining amount to be allotted to the total bid amount at the marginal interest rate/price (see Box 5). For the issuance of debt certificates, the amount allotted to each counterparty is rounded to the nearest multiple of the denomination of the debt certificates. For other liquidity-absorbing operations, the amount allotted to each counterparty is rounded to the nearest euro.

The ECB may decide to allot a minimum amount to each successful bidder in variable rate tenders.

(c) Variable rate foreign exchange swap tenders

In the allotment of liquidity-providing variable rate foreign exchange swap tenders, bids are listed in increasing order of swap point quotations (34). The bids with the lowest swap point quotations are satisfied first and subsequently successively higher swap point quotations are accepted until the total amount of the fixed currency to be allotted is exhausted. If, at the highest swap point quotation accepted (i.e. the marginal swap point quotation), the aggregate amount bid exceeds the remaining amount to be allotted, the remaining amount is allocated pro rata among the bids according to the ratio of the remaining amount to be allotted to the total amount bid at the marginal swap point quotation (see Box 6). The amount allotted to each counterparty is rounded to the nearest euro.

BOX 6Allotment of variable rate foreign exchange swap tendersThe percentage of allotment at the marginal swap point quotation is: The allotment to the ith counterparty at the marginal swap point quotation is: The total amount allotted to the ith counterparty is: where:A= total amount allottedΔ s = sth swap point quotation bid by the counterpartiesn= total number of counterpartiesa(Δ s ) i = amount bid at the sth swap point quotation (Δ s ) by the ith counterpartya(Δ s )= total amount bid at the sth swap point quotation (Δ s ) Δ m = marginal swap point quotation: for a liquidity-providing foreign exchange swap for a liquidity-absorbing foreign exchange swapΔ m-1= swap point quotation before the marginal swap point quotation (last swap point quotation at which bids are completely satisfied): for a liquidity-providing foreign exchange swap for a liquidity-absorbing foreign exchange swapall%(Δ m )= percentage of allotment at the marginal swap point quotationall(Δ s ) i = allotment to the ith counterparty at the sth swap point quotationall i = total amount allotted to the ith counterparty

In the allotment of liquidity-absorbing variable rate foreign exchange swap tenders, bids are listed in diminishing order of offered swap point quotations. The bids with the highest swap point quotations are satisfied first and subsequently successively lower swap point quotations are accepted until the total amount of the fixed currency to be absorbed is exhausted. If, at the lowest swap point quotation accepted (i.e. the marginal swap point quotation), the aggregate amount bid exceeds the remaining amount to be allotted, the remaining amount is allocated pro rata among the bids according to the ratio of the remaining amount to be allotted to the total amount bid at the marginal swap point quotation (see Box 6). The amount allotted to each counterparty is rounded to the nearest euro.

(d) Type of auction

For variable rate tenders, the Eurosystem may apply either single rate or multiple rate auction procedures. In a single rate auction (Dutch auction), the allotment interest rate/price/swap point applied for all satisfied bids is equal to the marginal interest rate/price/swap point (i.e. that at which the total allotment is exhausted). In a multiple rate auction (American auction), the allotment interest rate/price/swap point is equal to the interest rate/price/swap point offered for each individual bid.

5.1.6. Announcement of tender results

The results of standard and quick tenders are announced publicly by means of wire services. In addition, national central banks may announce the allotment result directly to counterparties without access to wire services. The public tender result message normally contains the following information:

— the reference number of the tender operation;

— the date of the tender operation;

— the type of operation;

— the maturity of the operation;

— the total amount bid by Eurosystem counterparties;

— the number of bidders;

— the currencies involved (in the case of foreign exchange swaps);

— the total amount allotted;

— the percentage of allotment (in the case of fixed rate tenders);

— the spot exchange rate (in the case of foreign exchange swaps);

— the marginal interest rate/price/swap point accepted and the percentage of allotment at the marginal interest rate/price/swap point (in the case of variable rate tenders);

— the minimum bid rate, maximum bid rate and weighted average allotment rate (in the case of multiple rate auctions);

— the start date and maturity date of the operation (if applicable) or the value date and maturity date of the instrument (in the case of the issuance of debt certificates);

— the minimum individual allotment amount (if any);

— the minimum allotment ratio (if any);

— the denomination of the certificates (in the case of the issuance of debt certificates); and

— the ISIN code of the issue (in the case of the issuance of debt certificates).

The national central banks will directly certify the individual allotment result to successful counterparties.

5.2. Procedures for bilateral operations

(a) General considerations

The national central banks may execute operations on the basis of bilateral procedures (35). These procedures may be used for fine-tuning open market operations and structural outright operations. They are defined in a broad sense as any procedures where the Eurosystem conducts a transaction with one or a few counterparties without a tender. In this respect, two different types of bilateral procedures can be distinguished: operations where counterparties are contacted directly by the Eurosystem, and operations executed through stock exchanges and market agents.

(b) Direct contact with counterparties

In this procedure, the national central banks directly contact one or a few domestic counterparties, which are selected according to the criteria specified in Section 2.2. According to the precise instructions given by the ECB, the national central banks decide whether to enter into a deal with the counterparties. The transactions are settled through the national central banks.

If the Governing Council of the ECB were to decide that, under exceptional circumstances, bilateral operations could also be executed by the ECB itself (or by one or a few national central banks acting as the operating arm of the ECB), the procedures for such operations would be adapted accordingly. In this case, the ECB (or the national central bank(s) acting as the operating arm of the ECB) would directly contact one or a few counterparties in the euro area, selected according to the criteria specified in Section 2.2. The ECB (or the national central bank(s) acting as the operating arm of the ECB) would decide whether to enter into a deal with the counterparties. The transactions would nevertheless be settled in a decentralised manner through the national central banks.

Bilateral operations through direct contact with counterparties can be applied for reverse transactions, outright transactions, foreign exchange swaps and the collection of fixed-term deposits.

(c) Operations executed through stock exchanges and market agents

The national central banks can execute outright transactions through stock exchanges and market agents. For these operations, the range of counterparties is not restricted a priori and the procedures are adapted to the market conventions for the debt instruments transacted. The Governing Council of the ECB will decide whether, under exceptional circumstances, the ECB itself (or one or a few national central banks acting as the operating arm of the ECB) may execute fine-tuning outright operations through stock exchanges and market agents.

(d) Announcement of bilateral operations

Bilateral operations are normally not announced publicly in advance. In addition, the ECB may decide not to announce the results of bilateral operations publicly.

(e) Operating days

The ECB may decide to conduct fine-tuning bilateral operations on any Eurosystem business day. Only national central banks of Member States where the trade day, the settlement day and the reimbursement day are NCB business days participate in such operations.

Outright bilateral operations for structural purposes are normally only conducted and settled on days which are NCB business days in all Member States.

5.3. Settlement procedures

5.3.1. General considerations

Money transactions relating to the use of Eurosystem standing facilities or to participation in open market operations are settled on the counterparties' accounts with the national central banks (or on the accounts of settlement banks participating in the TARGET system). Money transactions are settled only after (or at the moment of) the final transfer of the assets underlying the operation. This implies that underlying assets need either to have been pre-deposited in a safe custody account at the national central banks or to be settled with said national central banks on an intraday delivery-versus-payment basis. The transfer of underlying assets is executed via the counterparties' securities settlement accounts with SSSs fulfilling the ECB's minimum standards (36). Counterparties without a safe custody account with a national central bank or a securities settlement account with an SSS fulfilling the ECB's minimum standards may settle the transactions of underlying assets through the securities settlement account or the safe custody account of a correspondent credit institution.

Further provisions related to the settlement procedures are defined in the contractual arrangements applied by the national central banks (or the ECB) for the specific monetary policy instruments. The settlement procedures may differ slightly between national central banks owing to differences in national law and operational practices.

5.3.2. Settlement of open market operations

Open market operations based on standard tenders (i.e. main refinancing operations, longer-term refinancing operations and structural operations) are normally settled on the first day following the trade day on which all relevant national RTGS systems and all relevant SSSs are open. As a matter of principle, the Eurosystem aims to settle the transactions related to its open market operations at the same time in all Member States with all counterparties that have provided sufficient underlying assets. However, owing to operational constraints and the technical features of SSSs, the timing within the day of the settlement of open market operations may differ across the euro area. The time of settlement of the main and the longer-term refinancing operations normally coincides with the time of reimbursement of a previous operation of corresponding maturity.

The Eurosystem aims to settle open market operations based on quick tenders and bilateral procedures on the trade day. However, the Eurosystem may, for operational reasons, occasionally apply other settlement dates for these operations, in particular for outright transactions (for fine-tuning as well as structural purposes) and foreign exchange swaps (see Table 3).

TABLE 3

Normal settlement dates for Eurosystem open market operations (37)

Monetary policy instrument Settlement date for operations based on standard tenders Settlement date for operations based on quick tenders or bilateral procedures Reverse transactions T+1 (38) T Outright transactions — According to market convention for the underlying assets Issuance of debt certificates T+1 — Foreign exchange swaps — T, T+1 or T+2 Collection of fixed-term deposits — T

5.3.3. End-of-day procedures

The end-of-day procedures are specified in documentation related to the national RTGS systems and the TARGET system. As a general rule, the closing time for the TARGET system is 6 p.m. ECB time (C.E.T.). No further payment orders are accepted for processing in the national RTGS systems after the closing time, although remaining payment orders accepted before the closing time are still processed. Counterparties' requests for access to the marginal lending facility or to the deposit facility must be submitted to the respective national central bank at the latest 30 minutes after the actual closing time of the TARGET system (39).

Any negative balances on the settlement accounts (in the national RTGS systems) of eligible counterparties remaining after the finalisation of the end-of-day control procedures are automatically considered to be a request for recourse to the marginal lending facility (see Section 4.1).

CHAPTER 6

6. ELIGIBLE ASSETS

6.1. General considerations

Article 18.1 of the Statute of the ESCB allows the ECB and the national central banks to transact in financial markets by buying and selling underlying assets outright or under repurchase agreements and requires all Eurosystem credit operations to be based on adequate collateral. Consequently, all Eurosystem liquidity-providing operations are based on underlying assets provided by the counterparties either in the form of the transfer of ownership of assets (in the case of outright transactions or repurchase agreements) or in the form of a pledge granted over relevant assets (in the case of collateralised loans) (40).

With the aims of protecting the Eurosystem from incurring losses in its monetary policy operations, ensuring the equal treatment of counterparties and enhancing operational efficiency, underlying assets have to fulfil certain criteria in order to be eligible for Eurosystem monetary policy operations.

At the beginning of Economic and Monetary Union, due attention had to be paid to existing differences in financial structure across Member States. A distinction was therefore made, essentially for purposes internal to the Eurosystem, between two categories of assets eligible for Eurosystem monetary policy operations. These two categories are referred to as “tier one” and “tier two” respectively:

— tier one consists of marketable debt instruments fulfilling uniform euro area-wide eligibility criteria specified by the ECB; and

— tier two consists of additional assets, marketable and non-marketable, which are of particular importance to national financial markets and banking systems and for which eligibility criteria are established by the national central banks, subject to the minimum eligibility criteria established by the ECB. The specific eligibility criteria for tier two applied by the respective national central banks are subject to approval by the ECB.

No distinction is made between the two tiers with regard to the quality of the assets and their eligibility for the various types of Eurosystem monetary policy operations (except for the fact that tier two assets are not normally used by the Eurosystem in outright transactions). The assets eligible for Eurosystem monetary policy operations can also be used as underlying assets for intraday credit.

Tier one and tier two assets are subject to the risk control measures set out in Section 6.4. Eurosystem counterparties may use eligible assets on a cross-border basis, i.e. they may obtain funds from the national central bank of the Member State in which they are established by making use of assets located in another Member State (see Section 6.6).

The Eurosystem is currently working towards introducing a single list of collateral eligible for Eurosystem credit operations (hereinafter referred to as the “single list”). The single list will be introduced gradually and will eventually replace the current two-tier system of eligible collateral. Most categories of assets currently eligible as tier two assets will be eligible in the single list. The few tier two assets that do not qualify under the eligibility criteria for the single list will be phased out gradually.

The first step towards establishing the single list included:

(a) introducing a new category of previously ineligible collateral in tier one, namely euro-denominated debt instruments issued by entities established in those Group of Ten (G10) countries that are not part of the European Economic Area (EEA);

(b) refining the standards that non-regulated markets have to comply with to be acceptable for the Eurosystem; and

(c) withdrawing equities from the tier two lists of countries that currently deem them eligible.

The forementioned changes became applicable immediately and are outlined in Sections 6.2 and 6.3. However, as they are expected to imply some modifications to the list of eligible collateral, rules for the phasing out of assets from this list have been devised. Debt instruments listed, quoted or traded on non-regulated markets, which have been assessed as not being acceptable, will continue to remain eligible until May 2007.

Further changes to implement the single list will follow at a later stage (see Box 7)

BOX 7Further steps towards a single list of collateralAs a second step towards a single list, the Governing Council of the ECB has approved in principle the inclusion in the single list of bank loans from all euro area countries, as well as non-marketable retail mortgage-backed debt instruments, of which currently only Irish mortgage-backed promissory notes are eligible as collateral. The exact modalities for, and the timing of, the eligibility of bank loans are being finalised and will be announced in due course, once all implementation issues have been resolved.Consistency of past and future decisions on the collateral framework by the Governing Council will be assured.

6.2. Tier one assets

The ECB establishes and maintains a list of tier one assets. This list is available to the public (41).

Debt certificates issued by the ECB are listed as tier one assets. Debt certificates issued by the national central banks prior to the adoption of the euro in their respective Member State are also included in the tier one list.

The following eligibility criteria are applied to other tier one assets (see also Table 4):

— They must be debt instruments having: (a) a fixed, unconditional principal amount; and (b) a coupon that cannot result in a negative cash flow. In addition, the coupon should be one of the following: (i) a zero coupon; (ii) a fixed rate coupon; or (iii) a floating rate coupon linked to an interest rate reference. The coupon may be linked to a change in the rating of the issuer itself. Furthermore, inflation-indexed bonds are also eligible. These features must be maintained until the redemption of the obligation (42).

— They must meet high credit standards. In the assessment of the credit standard of debt instruments, the ECB takes into account, inter alia, available ratings by market agencies, guarantees provided by financially sound guarantors (43), as well as certain institutional criteria which would ensure particularly high protection of the instrument holders (44).

— They must be transferable in book-entry form.

— They must be deposited/registered (issued) in the EEA with a central bank or with a central securities depository (CSD) which fulfils the minimum standards established by the ECB. They must be held (settled) in the euro area through an account with the Eurosystem or with an SSS which fulfils the standards established by the ECB (so that perfection and realisation are subject to the law of a euro area country). If the CSD where the asset is issued and the SSS where it is held are not identical, then the two institutions have to be connected by a link approved by the ECB (45).

— They must be denominated in euro (46).

— They must be issued (or, alternatively, guaranteed) by entities established in the EEA (47). The debt instruments may also be issued by entities established in non-EEA G-10 countries (48). In the latter case, the debt instruments can only be considered eligible if the Eurosystem ascertains that its rights would be protected in an appropriate manner, as determined by the Eurosystem, under the laws of the respective non-EEA G-10 country. For this purpose, a legal opinion in a form and with substance acceptable to the Eurosystem will have to be submitted before the assets can be considered eligible.

— They must be listed or quoted on a regulated market as defined in Directive 2004/39/EC of the European Parliament and of the Council (49), on markets in financial instruments or listed, quoted or traded on certain non-regulated markets as specified by the ECB (50). The assessment of non-regulated markets by the Eurosystem is based on three principles — safety, transparency and accessibility (51). Furthermore, market liquidity may be taken into account by the ECB when determining the eligibility of individual debt instruments.

In spite of their inclusion in the tier one list, a counterparty may not submit as underlying assets any debt instruments issued or guaranteed by that counterparty, or by any other entity with which the counterparty has close links (52), (53), (54).

In spite of their inclusion in the tier one list, national central banks may decide not to accept the following instruments as underlying assets:

— debt instruments falling due for repayment before the maturity date of the monetary policy operation for which they are being used as underlying assets (55); and

— debt instruments with an income flow (e.g. a coupon payment) occurring in the period up to the maturity date of the monetary policy operation for which they are being used as underlying assets.

All tier one assets must be usable in a cross-border context in the whole euro area. This implies that all Eurosystem counterparties must be able to use such assets either through links with their domestic SSSs or through other eligible arrangements to receive credit from the national central bank of the Member State in which the counterparty is established (see Section 6.6).

Tier one assets are eligible for all monetary policy operations which are based on underlying assets, i.e. reverse and outright open market transactions and the marginal lending facility.

6.3. Tier two assets

In addition to debt instruments fulfilling the eligibility criteria for tier one, national central banks may consider, as eligible other assets, tier two assets which are of particular importance to their national financial markets and banking systems. Eligibility criteria for tier two assets are established by the national central banks in accordance with the minimum eligibility criteria stated below. The specific national eligibility criteria for tier two assets are subject to approval by the ECB. The national central banks establish and maintain national lists of eligible tier two assets. These lists are available to the public (56).

Tier two assets have to fulfil the following minimum eligibility criteria (see also Table 4):

— They can be debt instruments (marketable or non-marketable) having: (a) a fixed, unconditional principal amount; and (b) a coupon that cannot result in a negative cash flow. In addition, the coupon should be one of the following: (i) a zero coupon; (ii) a fixed rate coupon; or (iii) a floating rate coupon linked to an interest rate reference. The coupon may be linked to a change in the rating of the issuer itself. Furthermore, inflation-indexed bonds are also eligible. These features must be maintained until the redemption of the obligation. TABLE 4 Eligible assets for Eurosystem monetary policy operations Criteria Tier one Tier two Type of asset — ECB debt certificates — Other marketable debt instruments (57), (58) — Marketable debt instruments (57) — Non-marketable debt instruments (57) Settlement procedures Instruments must be centrally deposited in book-entry form with national central banks or an SSS fulfilling the ECB's minimum standards Assets must be easily accessible to the national central bank which has included them in its tier two list Type of issuer — Central banks — Public sector — Private sector (59) — International and supranational institutions — Public sector — Private sector (60) Credit standard The asset must be deemed of high credit quality by the ECB (which could include an eligible guarantee of an EEA guarantor which is deemed financially sound by the ECB) The asset must be deemed of high credit quality by the national central bank which has included it in its tier two list (which could include an eligible guarantee of a euro area guarantor which is deemed financially sound by the national central bank which has included the asset in its tier two list) Place of establishment of the issuer EEA and non-EEA G10 countries (61) Euro area Place of establishment of the guarantor EEA Euro area Location of asset — Place of issue: EEA — Place of settlement: euro area (62) Euro area (62) Currency Euro (63) Euro (63) Cross-border use Yes Yes

— They must be debt obligations against (or be guaranteed by) (64) entities which are deemed to be financially sound by the national central bank which has included the assets in its tier two list. They must be easily accessible to the national central bank which has included the assets in its tier two list.

— They must be located in the euro area (so that perfection and realisation are subject to the law of a euro area country).

— They must be denominated in euro (65).

— They must be issued (or, alternatively, guaranteed) by entities established in the euro area.

In spite of their inclusion in the tier two lists, a counterparty may not submit as underlying assets any debt obligations against that counterparty, or any other entity with which the counterparty has close links (66), (67), (68).

In spite of their inclusion in the tier two lists, national central banks may decide not to accept the following assets as underlying assets:

— debt instruments falling due for repayment before the maturity date of the monetary policy operation for which they are used as underlying assets (69); or

— debt instruments with an income flow (e.g. a coupon payment) occurring in the period up to the maturity date of the monetary policy operation for which they are being used as underlying assets.

All tier two assets must be usable in a cross-border context in the whole euro area. This implies that all Eurosystem counterparties must be able to use such assets either through links with their domestic SSS or through other eligible arrangements to receive funds from the national central bank of the Member State in which the counterparty is established (see Section 6.6).

Tier two assets are eligible for reverse open market transactions and the marginal lending facility. They are not normally used in Eurosystem outright transactions.

6.4. Risk control measures

Risk control measures are applied to the assets underlying Eurosystem monetary policy operations in order to protect the Eurosystem against the risk of financial loss if underlying assets have to be realised owing to the default of a counterparty. The risk control measures at the disposal of the Eurosystem are described in Box 8.

BOX 8Risk control measuresThe Eurosystem currently applies the following risk control measures: — Valuation haircuts The Eurosystem applies “valuation haircuts” in the valuation of underlying assets. This implies that the value of the underlying asset is calculated as the market value of the asset less a certain percentage (haircut). — Variation margins (marking to market) The Eurosystem requires the haircut-adjusted market value of the underlying assets used in its liquidity-providing reverse transactions to be maintained over time. This implies that if the value, measured on a regular basis, of the underlying assets falls below a certain level, the national central bank will require the counterparty to supply additional assets or cash (i.e. a margin call). Similarly, if the value of the underlying assets, following their revaluation, exceeds a certain level, the counterparty may retrieve the excess assets or cash. (The calculations relevant for the execution of margin calls are presented in Box 12.) The following risk control measures are currently not applied by the Eurosystem: — Initial margins The Eurosystem may apply initial margins in its liquidity-providing reverse transactions. This would imply that counterparties would need to provide underlying assets with a value at least equal to the liquidity provided by the Eurosystem plus the value of the initial margin. — Limits in relation to issuers/debtors or guarantors The Eurosystem may apply limits to the exposure vis-à-vis issuers/debtors or guarantors. — Additional guarantees The Eurosystem may require additional guarantees from financially sound entities in order to accept certain assets. — Exclusion The Eurosystem may exclude certain assets from use in its monetary policy operations.

6.4.1. Risk control measures for tier one assets

The Eurosystem applies specific risk control measures according to the types of underlying assets offered by the counterparty. The appropriate risk control measures for tier one assets are determined by the ECB. Risk control measures for tier one assets are broadly harmonised across the euro area (70). The risk control framework for tier one assets includes the following main elements:

— Eligible tier one assets are allocated to one of four categories of decreasing liquidity, based on issuer classification and asset type. The allocation of eligible assets to the four liquidity categories is described in Box 9. BOX 9 Liquidity categories for tier one assets (71) Category I Category II Category III Category IV Central government debt instruments Local and regional government debt instruments Traditional Pfandbrief-style debt instruments Asset-backed securities (72) Debt instruments issued by central banks (73) Jumbo Pfandbrief-style debt instruments (74) Credit institution debt instruments Agency debt instruments (75) Debt instruments issued by corporate and other issuers (75) Supranational debt instruments

— Individual debt instruments are subject to specific “valuation haircuts”. The haircuts are applied by deducting a certain percentage from the market value of the underlying asset. The haircuts differ according to the residual maturity and coupon structure of the debt instruments as described in Boxes 10 and 11. BOX 10Level of valuation haircuts (%) applied to eligible tier one assets in relation to fixed coupon and zero coupon instruments Liquidity categories Category I Category II Category III Category IV Residual maturity (years) fixed coupon zero coupon fixed coupon zero coupon fixed coupon zero coupon fixed coupon zero coupon 0–1 0,5 0,5 1 1 1,5 1,5 2 2 1–3 1,5 1,5 2,5 2,5 3 3 3,5 3,5 3–5 2,5 3 3,5 4 4,5 5 5,5 6 5–7 3 3,5 4,5 5 5,5 6 6,5 7 7–10 4 4,5 5,5 6,5 6,5 8 8 10 > 10 5,5 8,5 7,5 12 9 15 12 18

— The valuation haircuts applied to all tier one fixed coupon and zero coupon instruments are described in Box 10 (76).

— The valuation haircuts applied to all tier one inverse floating rate instruments are the same for all liquidity classes and are described in Box 11. BOX 11Level of valuation haircuts (%) applied to eligible tier one inverse floating rate instruments Residual maturity (years) Inverse floaters coupon 0–1 2 1–3 7 3–5 10 5–7 12 7–10 17 > 10 25

— The haircut applied to debt instruments with variable rate coupons (77) is that applied to the zero-to-one-year maturity bucket of fixed coupon instruments in the liquidity category to which the instrument is assigned.

— The risk control measures applied to a debt instrument with more than one type of coupon payment depend only on the coupon payments during the remaining life of the instrument. The valuation haircut applied to such an instrument is set equal to the highest of the haircuts applicable to debt instruments with the same residual maturity, and coupon payments of any one of the types occurring in the remaining life of the instrument are considered.

— No valuation haircuts are applied in liquidity-absorbing operations.

— Depending on both the jurisdiction and national operational systems, national central banks allow for the pooling of underlying assets and/or require the earmarking of the assets used in each individual transaction. In pooling systems, the counterparty makes a pool of sufficient underlying assets available to the central bank to cover the related credits received from the central bank, thus implying that individual assets are not linked to specific credit operations. By contrast, in an earmarking system, each credit operation is linked to specific identifiable assets.

— The assets are subject to daily valuation. On a daily basis, national central banks calculate the required value of underlying assets taking into account changes in outstanding credit volumes, the valuation principles outlined in Section 6.5 and the required valuation haircuts.

— If, after valuation, the underlying assets do not match the requirements as calculated on that day, symmetric margin calls are performed. In order to reduce the frequency of margin calls, national central banks may apply a trigger point. If applied, this trigger point is 0,5 % of the amount of liquidity provided. Depending on the jurisdiction, national central banks may require margin calls to be effected either through the supply of additional assets or by means of cash payments. This implies that if the market value of the underlying assets falls below the lower trigger point, counterparties have to supply additional assets (or cash). Similarly, if the market value of the underlying assets, following their revaluation, were to exceed the upper trigger point, the national central bank would return the excess assets (or cash) to the counterparty (see Box 12). BOX 12Calculation of margin callsThe total amount of eligible assets J (for j = 1 to J; value Cj,t at time t) a counterparty must provide for a set of liquidity-providing operations I (for i = 1 to I; amount Li,t at time t) is determined by the following formula: where:hj is the valuation haircut applied to eligible asset j.If τ is the time period between revaluations, the margin call base at time t+τ equals: Depending on the operational features of the national central banks' collateral management systems, national central banks may also take into account interest accrued on liquidity provided in outstanding operations in the calculation of the margin call base.Margin calls are effected only if the margin call base exceeds a certain trigger point level.Let k = 0,5 % denote the trigger. In an earmarking system (I=1), a margin call is effected when: (the counterparty pays the margin call to the national central bank); or (the national central bank pays the margin call to the counterparty).In a pooling system, the counterparty has to bring more assets into the pool if: Conversely, the amount of intraday credit (IDC) available to the counterparty in a pooling system can be expressed as follows: (if positive)In both earmarking and pooling systems, margin calls ensure that the relation expressed in (1) above is re-established.

— In pooling systems counterparties may substitute underlying assets on a daily basis.

— In earmarking systems the substitution of underlying assets may be permitted by national central banks.

— The ECB may at any time decide to remove individual debt instruments from the list of eligible tier one instruments (78).

6.4.2. Risk control measures for tier two assets

The appropriate risk control measures for tier two assets are compiled by the national central bank which has included the asset in its tier two list. The application of risk control measures by national central banks is subject to ECB approval. The Eurosystem aims to ensure non-discriminatory conditions for tier two assets across the euro area when establishing the appropriate risk control measures. Within this framework, the valuation haircuts applied to tier two as