Agreement of  16 March 2006  between the European Central Bank and the national central banks of the Member States outside the euro area laying down the operating procedures for an exchange rate mechanism in stage three of Economic and Monetary Union
Date: 2006-03-16
Institutions: European Central Bank, Non-euro area Member States: Denmark, Greece, Sweden, United Kingdom
Subjects: EU Member State, European Central Bank, agreement (EU), central bank, exchange rate, third stage of EMU

25.3.2006

EN

Official Journal of the European Union

C 73/21

EUROPEAN CENTRAL BANK

AGREEMENT

of 16 March 2006

between the European Central Bank and the national central banks of the Member States outside
the euro area laying down the operating procedures for an exchange rate mechanism in stage
three of Economic and Monetary Union

(2006/C 73/08)

THE EUROPEAN CENTRAL BANK (ECB) AND THE NATIONAL
CENTRAL BANKS OF THE MEMBER STATES THAT ARE OUTSIDE
THE EURO AREA ON 16 MARCH 2006 (HEREINAFTER THE ‘NON-
EURO AREA NCBs’),

currencies, which would disrupt trade flows between
Member States. Moreover, under Article 124 of the
Treaty establishing the European Community, each
Member State has an obligation to treat its exchange
rate policy as a matter of common interest;

Whereas:

(1)

The Agreement of 1 September 1998 between the Euro-
pean Central Bank and the national central banks of the
Member States outside the euro area laying down the
operating procedures for an exchange rate mechanism in
stage three of Economic and Monetary Union (1) (herein-
after the ‘Agreement of 1 September 1998’) has been
amended three times. The introduction of a new
criterion for counterparties eligible to conduct interven-
tions at the margins directly with the ECB would require
a further amendment of Annex I to the Agreement of 1
September 1998. In the interests of clarity and transpar-
ency therefore, the Agreement of 1 September 1998
should be replaced by a new Agreement.

(2)

The European Council agreed in its Resolution of 16
June 1997 (hereinafter the ‘Resolution’) to set up an
exchange rate mechanism (hereinafter ‘ERM II’) when the
third stage of economic and monetary union began on 1
January 1999.

(3)

Under the terms of the Resolution,

— ERM II replaces the European Monetary System;

— a stable economic environment is necessary for the
good functioning of the single market and for higher
investment, growth and employment, and is there-
fore in the interest of all Member States. The single
market must not be endangered by real exchange
rate misalignments or by excessive nominal exchange
rate fluctuations between the euro and the other EU

(1) OJ C 345, 13.11.1998, p. 6. Agreement as last amended by the
Agreement of 16 September 2004 (OJ C 281, 18.11.2004, p. 3).

— ERM II helps to ensure that non-euro area Member
States participating in ERM II (hereinafter ‘partici-
pating non-euro area Member States’) orient their
policies to stability, foster convergence and thereby
help them in their efforts to adopt the euro;

— participation in ERM II is voluntary for the non-euro
area Member States. Nevertheless, Member States
with a derogation can be expected to join the
mechanism. A Member State which does not partici-
pate from the outset in ERM II may participate at a
later date;

— ERM II functions without prejudice to the primary
objective of the ECB and the non-euro area NCBs to
maintain price stability;

— for the currency of each participating non-euro area
‘participating non-euro
the euro is

Member State (hereinafter
area currency’) a central rate against
defined;

— there is one standard fluctuation band of ± 15 %

around the central rates;

— it should be ensured that any adjustment of central
rates is conducted in a timely fashion so as to avoid
significant misalignments. Thus, all parties to the
mutual agreement on the central rates, including the
ECB, have the right to initiate a confidential proce-
dure aimed at reconsidering central rates;

C 73/22

EN

Official Journal of the European Union

25.3.2006

— intervention at the margins is in principle automatic
and unlimited, with very short-term financing avail-
able. However, the ECB and the non-euro area NCBs
‘participating
participating in ERM II
non-euro area NCBs’) could suspend intervention if
this were to conflict with their primary objective of
price stability. In their decision they would take due
account of all relevant factors and in particular of
the need to maintain stability and the credible func-
tioning of ERM II;

(hereinafter

for

— exchange rate policy co-operation may be further
closer
example by
strengthened,
exchange rate links between the euro and the partici-
pating non-euro area currencies, where, and to the
extent
these are appropriate in the light of
progress towards convergence.

allowing

that,

(4)

(5)

(6)

Intervention should be used as a supportive instrument
in conjunction with other policy measures,
including
appropriate monetary and fiscal policies conducive to
economic convergence and exchange rate stability. There
is the possibility of coordinated intramarginal interven-
tion decided by mutual agreement between the ECB and
the respective participating non-euro area NCB,
in
parallel with other
responses,
including the flexible use of interest rates, by the latter.

appropriate policy

Sufficient flexibility needs to be allowed, in particular to
accommodate the varying degrees, paces and strategies
of economic convergence of the non-euro area Member
States.

This Agreement does not preclude the establishment, on
fluctuation bands and
a bilateral basis, of additional
intervention arrangements
between non-euro area
Member States.

HAVE AGREED AS FOLLOWS:

I. CENTRAL RATES AND FLUCTUATION BANDS

Article 1

Bilateral central rates and intervention rates between the
euro and the participating non-euro area currencies

1.1. The parties to this Agreement shall participate in a joint
notification to the market of the bilateral central rates,
and any changes to them, between the participating non-
euro area currencies and the euro as agreed following
the common procedure specified in paragraph 2.3 of the
Resolution.

1.2.

In accordance with the fluctuation bands fixed pursuant
to paragraphs 2.1, 2.3 and 2.4 of the Resolution, the
ECB and each participating non-euro area NCB shall

establish, by common accord, the bilateral upper and
lower rates between the euro and the participating non-
euro area currencies for automatic intervention. The ECB
jointly
and the participating non-euro area NCBs shall
notify the market of these rates, which shall be quoted in
accordance with the convention set forth in Annex I.

II. INTERVENTION

Article 2

General provisions

2.1.

Intervention shall in principle be effected in euro and the
participating non-euro area currencies. The ECB and the
participating non-euro area NCBs shall
inform each
other about all foreign exchange intervention intended to
safeguard the cohesion of ERM II.

2.2. The ECB and the non-euro area NCBs shall inform each
other about all other foreign exchange intervention.

Article 3

Intervention at the margins

3.1.

3.2.

Intervention at the margins shall in principle be auto-
matic and unlimited. However, the ECB and the partici-
pating non-euro area NCBs could suspend automatic
intervention if this were to conflict with their primary
objective of maintaining price stability.

In deciding whether to suspend intervention, the ECB or
a participating non-euro area NCB shall also take due
account of all other relevant factors, including the cred-
ible functioning of ERM II. The ECB and/or the partici-
pating non-euro area NCB concerned shall base any deci-
sion on factual evidence and, in this context, also give
consideration to any conclusion which may have been
reached by other competent bodies. The ECB and/or the
participating non-euro area NCB concerned shall notify,
as long in advance as possible and on a strictly confiden-
tial basis, the other monetary authorities concerned and
the monetary authorities of all other participating non-
euro area Member States of any intention to suspend
intervention.

3.3. A payment after payment procedure shall be applied in
the event of intervention at the margins, as set forth in
Annex I.

Article 4

Coordinated intramarginal intervention

The ECB and participating non-euro area NCBs may agree to
co-ordinated intramarginal intervention.

25.3.2006

EN

Official Journal of the European Union

C 73/23

Article 5

Procedures for intervention and other transactions

5.1.

Prior agreement of the non-euro area NCB issuing the
intervention currency shall be obtained when another
central bank of the European System of Central Banks
former's currency in amounts
intends
exceeding mutually agreed limits in connection with all
non-compulsory intervention, including unilateral intra-
marginal intervention.

to use

the

5.2. A non-euro area NCB shall give immediate notification
to the ECB when it has used the euro in amounts
exceeding mutually agreed limits in connection with all
non-compulsory intervention, including unilateral intra-
marginal intervention.

5.3. Before carrying out transactions other than intervention
which involve at least one non-euro area currency or the
euro and which exceed mutually agreed limits, the party
intending to carry out such transactions shall give prior
notification to the central bank(s) concerned.
In such
cases the central banks concerned shall agree on an
approach which minimises potential problems, including
the possibility of settling the transaction, wholly or in
part, directly between the two central banks.

III. VERY SHORT-TERM FINANCING FACILITY

Article 6

General provisions

6.1.

For the purpose of intervention in euro and in the parti-
cipating non-euro area currencies,
the ECB and each
participating non-euro area NCB shall open for each
other very short-term credit facilities. The initial maturity
for a very short-term financing operation shall be three
months.

6.2. The financing operations under these facilities shall take
the form of spot sales and purchases of participating
currencies giving rise to corresponding claims and liabil-
ities, denominated in the creditor's currency, between the
ECB and the participating non-euro area NCBs. The value
date of the financing operations shall be identical to the
value date of the intervention in the market. The ECB
shall keep a record of all transactions conducted in the
context of these facilities.

Article 7

Financing of intervention at the margins

7.1. The very short-term financing facility is in principle auto-
matically available and unlimited in amount
for the
purpose of financing intervention in participating curren-
cies at the margins.

7.2. The debtor central bank shall make appropriate use of its
foreign reserve holdings prior to drawing on the facility.

7.3. The ECB and the participating non-euro area NCBs could
suspend further automatic financing if it were to conflict
with their primary objective of maintaining price stabi-
lity. The suspension of further automatic financing will
be subject to the provisions of Article 3.2 of this Agree-
ment.

Article 8

Financing of intramarginal intervention

For the purpose of intramarginal intervention, the very short-
term financing facility may, with the agreement of the central
bank issuing the intervention currency, be made available
subject to the following conditions:

(a) the cumulative amount of such financing made available to
the debtor central bank shall not exceed the latter's ceiling
as laid down in Annex II;

(b) the debtor central bank shall make appropriate use of its
foreign reserve holdings prior to drawing on the facility.

Article 9

Remuneration

9.1. Outstanding very short-term financing balances shall be
remunerated at the representative domestic three-month
money market rate of the creditor's currency prevailing
on the trade date of the initial financing operation or, in
the event of a renewal pursuant to Articles 10 and 11 of
this Agreement, the three-month money market rate of
the creditor's currency prevailing two business days
before the date on which the initial financing operation
to be renewed falls due.

9.2. Accrued interest shall be paid in the creditor's currency
on the date of the initial maturity of the facility, or, if
applicable, on the date of the advance liquidation of a
debtor balance. In the event of a renewal of the facility
pursuant
this Agreement,
interest shall be capitalised at the end of every three-
month period and shall be paid on the date of the final
repayment of the debtor balance.

to Articles 10 and 11 of

9.3.

For the purpose of Article 9.1 of this Agreement, each
participating non-euro area NCB shall notify the ECB of
its representative domestic three-month money market
rate. A representative domestic three-month money
market rate in euro shall be used by the ECB and notified
to the participating non-euro area NCBs.

Article 10

Automatic renewal

At the request of the debtor central bank, the initial maturity
for a financing operation may be extended for a period of three
months.

C 73/24

EN

Official Journal of the European Union

25.3.2006

However:

(a) the initial maturity may only be automatically extended

once for a maximum of three months;

(b) the total amount of indebtedness resulting from application
of this Article may at no time exceed the debtor central
bank's ceiling as laid down for each central bank in Annex
II.

15.2. On a case-by-case basis,

formally agreed fluctuation
bands narrower than the standard one and backed up
in principle by automatic intervention and financing
may be set at the request of the participating non-euro
area Member State concerned, according to the proce-
dure laid down in paragraph 2.4 of the Resolution.

15.3. Other types of closer exchange rate arrangements of an
informal nature may also be established between the
ECB and participating non-euro area NCBs.

Article 11

Renewal by mutual agreement

V. MONITORING THE FUNCTION OF THE SYSTEM

11.1. Any debt exceeding the ceiling laid down in Annex II
may be renewed once for three months subject to the
agreement of the creditor central bank.

11.2. Any debt already renewed automatically for

three
months may be renewed a second time for a further
three months subject to the agreement of the creditor
central bank.

Article 12

Advance repayment

Any debtor balance recorded in accordance with Articles 6, 10
and 11 of
this Agreement may be settled at any time in
advance at the request of the debtor central bank.

Article 13

Netting-out of mutual claims and liabilities

Mutual claims and liabilities between the ECB and a partici-
pating non-euro area NCB arising from the operations provided
for in Articles 6 to 12 of this Agreement may be netted out
against each other by mutual agreement between the two
parties involved.

Article 14

Means of settlement

14.1. When a financing operation falls due or in the event of
advance repayment, settlement shall
in principle be
carried out by means of holdings in the creditor's
currency.

14.2. This provision shall be without prejudice to other
forms of settlement agreed between creditor and debtor
central banks.

Article 16

Tasks of the General Council of the ECB

16.1. The General Council of the ECB shall monitor the func-
tioning of ERM II and serve as the forum for monetary
and exchange rate policy coordination as well as for the
administration of
intervention and financing
mechanism specified in this Agreement. It shall closely
monitor, on a permanent basis, the sustainability of
bilateral exchange rate relations between each partici-
pating non-euro area currency and the euro.

the

16.2. The General Council of

the ECB shall periodically
review the operation of this Agreement in the light of
experience gained.

Article 17

Reconsideration of central rates and participation in
narrower fluctuation bands

17.1. All parties to the mutual agreement reached pursuant
to paragraph 2.3 of the Resolution, including the ECB,
shall have the right to initiate a confidential procedure
aimed at reconsidering central rates.

17.2.

formally agreed fluctuation bands
In the event of
narrower than the standard one, all parties to the joint
decision made pursuant to paragraph 2.4 of the Resolu-
tion, including the ECB, shall have the right to initiate a
confidential re-examination of the appropriateness of
the respective currency's participation in the narrower
band.

VI. NON-PARTICIPATION

Article 18

Applicability

IV. CLOSER EXCHANGE RATE COOPERATION

Article 15

The provisions of Article 1, 2.1, 3, 4, 6 to 15 and 17 of this
Agreement shall not apply to non-euro area NCBs which do
not participate in ERM II.

Closer exchange rate cooperation

Article 19

15.1. The exchange rate policy cooperation between partici-
pating non-euro area NCBs and the ECB may be further
in particular, closer exchange rate links
strengthened;
may be agreed on a case-by-case basis at the initiative
of the interested participating non-euro area Member
State.

Cooperation in the concertation

Non-euro area NCBs not participating in ERM II shall cooperate
with the ECB and the participating non-euro area NCBs in the
concertation and/or the other exchanges of information neces-
sary for the proper functioning of ERM II.

25.3.2006

EN

Official Journal of the European Union

C 73/25

VII. FINAL PROVISIONS

Article 20

Final provisions

20.1. This Agreement shall enter into force on 1 April 2006.

20.2. The Agreement of 1 September 1998 is repealed with effect from 1 April 2006. References to the

repealed Agreement shall be construed as references to this Agreement.

20.3. This Agreement shall be drawn up in English and duly signed by the parties. The ECB, which is
required to retain the original Agreement, shall send a certified copy thereof to each euro area and
non-euro area NCB. The Agreement shall be translated into all other official Community languages
and be published in the C series of the Official Journal of the European Union.

Done at Frankfurt am Main, on 16 March 2006.

For and on behalf of

The European Central Bank

For and on behalf of

Magyar Nemzeti Bank

For and on behalf of

Česká národní banka

For and on behalf of

Central Bank of Malta

For and on behalf of

Danmarks Nationalbank

For and on behalf of

Narodowy Bank Polski

For and on behalf of

Eesti Pank

For and on behalf of

Banka Slovenije

For and on behalf of

Central Bank of Cyprus

For and on behalf of

Národná banka Slovenska

For and on behalf of

Latvijas Banka

For and on behalf of

Sveriges Riksbank

For and on behalf of

Lietuvos bankas

For and on behalf of

The Bank of England

C 73/26

EN

Official Journal of the European Union

25.3.2006

ANNEX I

QUOTATION CONVENTION FOR CURRENCIES PARTICIPATING IN ERM II AND THE PAYMENT AFTER
PAYMENT PROCEDURE IN THE EVENT OF INTERVENTION AT THE MARGINS

A. Quotation convention

For all the currencies of the non-euro area Member States participating in ERM II, the exchange rate for the bilateral
central rate vis-à-vis the euro shall be quoted using the euro as the base currency. The exchange rate shall be expressed
as the value of E1 using six significant digits for all currencies.

The same convention shall be applied for quoting the upper and lower intervention rates vis-à-vis the euro of the curren-
cies of the non-euro area Member States participating in ERM II. The intervention rates shall be determined by adding or
subtracting the agreed bandwidth, expressed as a percentage, to or from the bilateral central rates. The resulting rates
shall be rounded to six significant digits.

B. Payment after payment procedure

A payment after payment procedure shall be applied by both the ECB and the euro area NCBs in the event of interven-
tion at the margins. The non-euro area NCBs participating in ERM II shall apply the payment after payment procedure
when acting as correspondents of the euro area NCBs and the ECB in accordance with this Annex; the non-euro area
NCBs participating in ERM II may, at their discretion, adopt the same payment after payment procedure when settling
intervention at the margins that such NCBs have carried out on their own behalf.

(i) General principles

— The payment after payment procedure shall be applied when intervention at the margins in ERM II takes place

between the euro and the currencies of the non-euro area Member States participating in ERM II.

— To be eligible for intervention at the margins in ERM II, counterparties shall be required to keep an account with
the NCB concerned. Counterparties shall also be required to maintain SWIFT addresses and/or to exchange
authenticated telex keys with the NCB concerned or with the ECB.

— Counterparties eligible for intervention at the margins in ERM II may also conduct such intervention directly
with the ECB, provided that they also have the status of eligible counterparties for executing foreign exchange
transactions with the ECB pursuant to Guideline ECB/2000/1 of 3 February 2000 on the management of the
foreign reserve assets of the European Central Bank by the national central banks and the legal documentation
for operations involving the foreign reserve assets of the European Central Bank (1).

— The non-euro area NCBs participating in ERM II shall act as the correspondents of the euro area NCBs and the

ECB.

— When intervention at the margins takes place, the NCB concerned or the ECB shall release its payment for a
given transaction only after receiving confirmation from its correspondent that the amount due has been credited
to its account. Counterparties shall be required to pay in due time so as to enable the NCBs and the ECB to fulfil
their respective payment obligations. Consequently, counterparties shall be required to pay before a predefined
deadline.

(ii) Deadline for the receipt of funds from counterparties

Counterparties shall pay intervention amounts at the latest by 1 p.m. ECB (CET) time on value date.

(1) OJ L 207, 17.8.2000, p. 24. Guideline as last amended by Guideline ECB/2005/15 (OJ L 345, 28.12.2005, p. 33).

25.3.2006

EN

Official Journal of the European Union

C 73/27

CEILINGS ON ACCESS TO THE VERY SHORT-TERM FINANCING FACILITY REFERRED TO IN ARTICLES 8,
10 AND 11 OF THE CENTRAL BANK AGREEMENT

ANNEX II

with effect from 1 May 2004
(in millions of EUR)

Central banks party to this Agreement

Ceilings (1)

Česká národní banka

Danmarks Nationalbank

Eesti Pank

Central Bank of Cyprus

Latvijas Banka

Lietuvos bankas

Magyar Nemzeti Bank

Central Bank of Malta

Narodowy Bank Polski

Banka Slovenije

Národná banka Slovenska

Sveriges Riksbank

Bank of England

European Central Bank

700

730

300

290

340

390

680

270

1 830

350

470

990

4 660

nil

(1) The amounts indicated are notional for central banks which do not participate in ERM II.

Euro area NCBs

Ceilings

Nationale Bank van België/Banque Nationale de Belgique

Deutsche Bundesbank

Bank of Greece

Banco de España

Banque de France

Central Bank and Financial Services Authority of Ireland

Banca d'Italia

Banque centrale du Luxembourg

De Nederlandsche Bank

Oesterreichische Nationalbank

Banco de Portugal

Suomen Pankki

nil

nil

nil

nil

nil

nil

nil

nil

nil

nil

nil

nil