19.4.2023
EN
Official Journal of the European Union
L 104/35
EARMARKING SYSTEM
First, it is assumed that the transactions are carried out with a national central bank (NCB) using a system where underlying assets are earmarked for each transaction.
The valuation of assets mobilised as collateral is carried out on a daily basis.
The risk control framework can then be described as follows (see also Table 2 below):
1.
On 21 September 2022, the counterparty enters into a collateralised lending transaction with the NCB, which receives EUR 50,6 million of Asset A. Asset A is a covered bond with a fixed coupon maturing on 21 December 2026 and allocated to credit quality step 1-2.
It thus has a residual maturity of four years, therefore requiring a valuation haircut of 2,5 %.
The market price of Asset A on its reference market on that day is 101,61 %, which includes the accrued interest on the coupon.
The counterparty is required to provide an amount of Asset A, which, after deduction of the 2,5 % valuation haircut, exceeds the allotted amount of EUR 50 million.
The counterparty therefore delivers Asset A for a nominal amount of EUR 50,6 million, the haircut-adjusted market value of which is EUR 50 129 294 on that day.
2.
On 22 September 2022, the counterparty enters into a repurchase transaction with the NCB, which purchases EUR 21 million of Asset A (market price 101,21 %, valuation haircut 2,5 %) and EUR 25 million of Asset B (market price 98,62 %).
Asset B is a central government bond with variable rate coupon payments and allocated to credit quality step 1-2, to which a 1,5 % valuation haircut is applied.
The haircut-adjusted market value of Asset A and Asset B on that day is EUR 45 007 923, thus exceeding the required amount of EUR 45 000 000.
3.
On 22 September 2022, the assets underlying the main refinancing operation initiated on 21 September 2022 are revalued.
With a market price of 101,21 %, the haircut-adjusted market value of Asset A is still within the lower and upper trigger amounts.
The collateral that was mobilised initially is consequently considered to cater for both the initial amount of liquidity provided and the accrued interest amounting to EUR 1 736.
4.
On 23 September 2022, the underlying assets are revalued: the market price of Asset A is 99,50 % and the market price of Asset B is 97,95 %.
Accrued interest amounts to EUR 3 472 on the main refinancing operation initiated on 21 September 2022 and EUR 1 563 on the longer-term refinancing operation initiated on 22 September 2022.
As a result, the haircut-adjusted market value of Asset A in the first transaction falls below the transaction’s amount to be covered, i.e. the liquidity provided plus the accrued interest, by EUR 915 147, but also below the lower trigger level of EUR 49 753 455.
The counterparty delivers EUR 950 000 of Asset A in nominal value terms, which, after deducting a 2,5 % haircut from the market value based on a price of 99,50 %, restores sufficient collateral coverage.
NCBs may perform margin calls in cash rather than securities.
A margin call is also needed on the second transaction since the haircut-adjusted market value of the underlying assets used in this transaction (EUR 44 492 813) is below the lower trigger level (EUR 44 776 555).
The counterparty therefore provides EUR 550 000 of Asset B with an haircut-adjusted market value of EUR 530 644.
5.
On 26 September 2022, the underlying assets are revalued, without resulting in any margin call for the transactions entered on 21 and 22 September 2022.
On 27 September 2022, the revaluation of assets underlying the long-term refinancing operation initiated on 22 September 2022 reveals that the haircut-adjusted market value of the assets provided exceeds the upper trigger level and leads to the NCB returning EUR 300 000 of Asset B in nominal value to the counterparty.
If a margin had to be paid to the counterparty by the NCB in relation to the second transaction, such a margin could, in certain cases, be netted out with the margin paid to the NCB by the counterparty in relation to the first transaction.
As a result, there would only be one margin settlement.
6.
On 28 September 2022, the counterparty repays the liquidity provided under the main refinancing operation initiated on 21 September 2022, including the accrued interest of EUR 12 153.
The NCB returns EUR 51 550 000 of Asset A in nominal value.