EN 
 
 
OPINION OF THE EUROPEAN CENTRAL BANK 
of 19 December 2008 
at the request of Latvijas Banka 
on draft amendments to the Regulation on the use of Latvijas Banka’s monetary policy 
instruments 
(CON/2008/89) 
 
Introduction and legal basis  
On 8 December 2008 the European Central Bank (ECB)  received a request from Latvijas Banka for an 
opinion on draft amendments to the Regulation on the use of Latvijas Banka’s monetary policy 
instruments (hereinafter the ‘draft amendments’). 
The ECB’s competence to deliver an  opinion is based on Article 105(4) of the Treaty establishing the 
European Community and the fifth indent of Article 2(1) and Article 2(2) of Council Decision 98/415/EC 
of 29 June 1998 on the consultation of the European  Central Bank by national authorities regarding draft 
legislative provisions1, as the draft amendments relate to payment and settlement systems and instruments 
of monetary policy. In accordance with the first senten ce of Article 17.5 of the Rules of Procedure of the 
European Central Bank, the Governing Council has adopted this opinion. 
 1.  Purpose of the draft amendments 
The main objective of the draft amendments is to am end Latvijas Banka’s rules on eligible collateral in 
order to comply with Guideline ECB/2007/2 of 26 April 2007 on a Trans-European Automated Real-time 
Gross settlement Express Transfer system (TARGET2)
2 in relation to Latvijas Banka’s intraday credit 
operations in euro. Under the draft amendments, Latv ijas Banka’s risk control measures are amended to 
further harmonise Latvijas Banka’s monetary policy ope rational framework with that of the Eurosystem. 
In addition, the draft amendments correct the devi ant spelling of the name of the single currency in 
Latvian throughout the text of the Regulation on the use of Latvijas Banka’s monetary policy instruments 
(hereinafter the ‘Regulation’). Finally, due to th e financial turmoil and the downgrading of Latvia’s 
sovereign issuer rating, Latvijas Banka intends to lo wer the minimum issuer and issue rating requirements 
for eligible securities in its credit operations. 
 
                                                 
1  OJ L 189, 3.7.1998, p. 42.  
2  OJ L 237, 8.9.2007, p. 1. 
2 2. General observations 
2.1 Although non-participating Member States retain th eir powers in the field of monetary policy, it is 
nevertheless beneficial for them to gradually ach ieve consistency with Eurosystem standards so 
that credit institutions operating in their territo ries can become acquainted with the requirements 
that will apply once these Member States have adopt ed the euro. Such gradual harmonisation prior 
to the adoption of the euro will contribute to th e smooth integration of the national central bank 
into the Eurosystem. Accordingly, the draft amen dments further align the Latvian framework for 
the use of monetary policy instrument s with that of the Eurosystem.  
2.2 The ECB previously commented on the Regulation and other regulations in the field of monetary 
policy instruments3. In its opinions, the ECB emphasises the need to further align the Latvian 
minimum reserves regime with Eurosystem standa rds and makes the point that Latvian credit 
unions should also be subject to reserve requirements. The ECB notes that all comments previously 
made on the Latvian minimum rese rves regime still remain valid. 
2.3 The ECB welcomes the draft amendments to Latv ijas Banka’s rules on eligible collateral aimed at 
implementing Guideline ECB/2007/2. This opinion is, however, without prejudice to any future 
ECB assessment of the implementation of Guideline ECB/2007/2 by Latvijas Banka. 
 3. Specific observations 3.1 Spelling of the single currency  
The ECB welcomes that paragraph 1.2 of the draf t amendments eliminates the discrepancy between 
the name of the single currency in Latvian in th e Regulation (‘eiro’) and the name of the single 
currency in Latvian as established under Community law (‘euro’). 
3.2 Definition of ‘related undertakings’  
Paragraph 1.1 of the draft amendments defines ‘related undertaking’ as (i) a company in which a 
counterparty, either directly or indirectly, owns 20 % or more of its total capital; (ii) a company, 
which, either directly or indirectly, owns 20 % or  more of the total capital of a counterparty; or 
(iii) a company, in which the company mentioned [i n item ii above], either directly or indirectly, 
owns 20 % or more of its total capital. Although the definition does not literally mirror the ‘close 
link’ definition contained in Guideline E CB/2000/7 of 31 August 2000 on monetary policy 
instruments and procedures of the Eurosystem
4, it is essentially consistent with ECB requirements. 
                                                 
3  See ECB Opinion CON/2006/49 of 23 October 2006 at the reques t of Latvijas Banka on a draf t regulation for the use of 
Latvijas Banka’s monetary policy in struments and ECB Opinion CON/2007/12 of  30 April 2007 at the request of 
Latvijas Banka on draft amendments to the Regulation on the use of Latvijas Ba nka’s monetary polic y instruments and 
the Regulation on Latvijas Banka’s securities set tlement system. See also ECB Opinion CON/2006/11 of 
23 February 2006 at the request of Latvijas Banka on draft am endments to the Regulation on calculating and fulfilling the 
minimum reserve requirements for banks. 
4  OJ L 310, 11.12.2000, p. 1. 
3 3.3 Prohibition of the use of subordinated debt  
Paragraph 1.9 of the draft amendments contains  a new provision concerning the prohibition of the 
use of subordinated debt as collateral and states that , as regards eligible securities, rights to receive 
their principal and interest payments cannot be s ubordinated to the rights of other debt securities 
holders of the same issuer. This provision is in  line with Guideline ECB/2000/7. It should be noted 
that the ECB has recently taken steps to furthe r expand, on a temporary basis, the collateral 
framework and enhance the provision of liquidi ty. The Eurosystem will add subordinated debt 
instruments when they are protect ed by an acceptable guarantee to the list of assets eligible as 
collateral in its credit operations. This provisi on will remain in force until the end of 2009. 
3.4 Lowering the rating requirements  
Paragraph 1.12 of the draft amendments lowers the minimum issuer and issue rating requirements 
and provides that the credit rating of securities and of the issuer of securities for long-term 
liabilities in lats or foreign currencies must be equa l to or higher than at least one of the following 
ratings: BBB– (Fitch Ratings) , Baa3 (Moody’s Investors Service) , and BBB– (Standard & Poor’s) . 
The ECB notes that this amendment introduces a discrepancy with Guideline ECB/2000/7 which 
provides for a single A credit rating threshold. However, it should be noted that as part of the interim measures taken to further expand the co llateral framework, the E CB lowered the credit 
threshold for marketable and non-marketable as sets from A- to BBB-, with the exception of asset-
backed securities, until the end of 2009
5. 
To the extent that lowering the rating requireme nts is related to the downgrading of Latvia’s 
sovereign issuer rating, the ECB would point to  Article 102 of the Treaty which prohibits NCBs 
from taking measures granting privileged access by the public sector to financial institutions if such 
measures are not based on prudential considerati ons. Furthermore, the rules on mobilisation or 
pledging of debt instruments enacted by the NCBs must not be used as a means of circumventing 
the prohibition on privileged access6. In this respect, lowering rating requirements should normally 
be motivated by the need to adjust  the list of eligible collateral indiscriminately for both private and 
public issuers. The ECB would appreciate that such  intention as regards the proposed measures be 
made clear. 
3.5 Liquidity categories  
The introduction of liquidity category III in pa ragraph 1.16 of the draft amendments, which 
includes other debt securities of credit institutions , and the addition to liquidity category II in 
paragraph 1.15 of the draft amendments of covere d bonds and debt instruments issued by corporate 
issuers is inconsistent with the current cat egorisation set out under Guideline ECB/2000/7. 
According to Guideline ECB/2000/7, only jumbo covered bonds (with a volume of at least 
                                                 
5  Guideline ECB/2008/18 of 21 November 2008 on temporary changes to the rules relating to eligibility collateral. 
6  See Article 3(2) of and recital 10 to Council Regulation (EC) No 3604/93 of 13 December 1993 specifying definitions for 
the application of the prohibition of privileged access referr ed to in Article 104a [now Article 102] of the Treaty 
(OJ L 332, 31.12.1993, p. 4). See also p. 30 of the ECB Convergence Report of December 2006 and p. 25 of the ECB 
Convergence Report of May 2008. 
4 EUR 1 billion, for which at least three market makers provide regular bids and ask quotes) are 
included in category II. Traditional covered bank bo nds and debt instruments issued by corporate 
issuers fall within category III. 
3.6 Additional valuation markdown  
The ECB notes that introducing an additional valu ation markdown of 5 % in case of theoretical 
valuation of Latvijas Banka’s eligible assets in para graph 1.18 of the draft amendments is in line 
with the valuation markdown of 5 % for theo retically priced instruments under Guideline 
ECB/2008/13 of the European Central Bank of  23 October 2008 amending Guideline ECB/2000/7 
on monetary policy instruments and procedures of the Eurosystem7. Guideline ECB/2008/13 
applies from 1 February 2009. 
3.7 Exclusion of covered bonds from the ‘close link’ prohibition  
Paragraph 1.6 of the draft amendments provides that  the prohibition of close links does not apply to 
covered bonds. The exemption of covered bonds in  Guideline ECB/2000/7 only applies to covered 
bank bonds issued in accordance with the criteria  set out in Article 22(4) of Council Directive 
85/611/EEC of 20 December 1985 on the coordina tion of laws, regulations and administrative 
provisions relating to undertakings for collective investment in transfer able securities (UCITS)8, or 
cases in which debt instruments are protected by  specific comparable legal safeguards. The ECB 
understands that in Latvia only the debt inst ruments issued in acco rdance with the Law on 
mortgage bonds would comply with Article 22(4)  of Directive 85/611/EEC and be treated as 
covered bonds. The draft amendments should clarify that only the instruments issued under the Law on mortgage bonds are exempted from  the prohibition of ‘close links’.  
 This opinion will be published on the ECB’s website.    Done at Frankfurt am Main, 19 December 2008. 
 
[signed] 
 
The President of the ECB 
Jean-Claude TRICHET 
                                                 
7  Not yet published in the Official Journal. 
8  OJ L 375, 31.12.1985, p. 3.