European Stability Mechanism
Guideline on the Secondary Market Support Facility

Article 1
Objective
The Secondary Market Support Facility (SMSF), in accordance with article 18 of the ESM Treaty,
aims to support the good functioning of the government debt markets of ESM Members in
exceptional circumstances where the lack of market liquidity threatens financial stability, with a risk
of pushing sovereign interest rates towards unsustainable levels and creating refinancing problems for
the banking system of the ESM Member concerned. An ESM secondary market intervention is
intended to enable market making that would ensure some debt market liquidity and incentivize
investors to further participate in the financing of ESM Members.

Article 2
Eligibility
1. Access to a SMSF is open to an ESM Member under a macro-economic adjustment programme in
which an ESM loan has been granted, as long as it continues to comply with the policy
conditionality attached to the stability support.
2. Access to a SMSF may be open to an ESM Member outside of a macro-economic adjustment
programme, but subject to financial market disruptions, as long as the Member's economic and
financial situation remains sound and on the basis of a global assessment, conducted by the
European Commission in liaison with the ECB, of the following criteria:
(a) Respect of the commitments under the Stability and Growth Pact. An ESM Member under
excessive deficit procedure may still access a SMSF, provided it fully abides by the Council
decisions and recommendations aimed at ensuring a smooth and accelerated correction of its
excessive deficit.
(b) A sustainable general government debt.
(c) Respect of the commitments under the Excessive Imbalances Procedure (EIP). An ESM
Member under EIP may still access a SMSF, provided it is established that the Member
remains committed to and capable of addressing the imbalances identified by the Council.
(d) A track record of access to international capital markets on reasonable terms.
(e) A sustainable external position.
(f) The absence of financial institution solvency problems that would pose systemic threats to the
stability of the euro area banking system or that of its Member States.
(g) The beneficiary ESM Member shall ensure a continuous respect of the eligibility criteria and
adopt where appropriate corrective measures in consultation with the European Commission
and the ECB.

Article 3
Procedure of activation for ESM Members under stability support
1. An ESM Member shall address a request to access the SMSF to the Chairperson of the Board of
Governors. On receipt of such a request, the Board of Governors shall entrust:
(a) The ECB to assess whether there are exceptional market circumstances and whether there is a
risk to the financial stability of the euro area as a whole or of its Member States. The analysis
shall be transmitted to the Board of Directors, unless the ECB has already submitted such
analysis beforehand upon its own initiative.
(b) The European Commission, in liaison with the ECB, to confirm compliance with conditions
attached in the MoU before the ESM Member is able to access the SMSF.
2. On the basis of the request of the ESM Member and the assessments conducted under paragraphs
1(a) and 1(b), the Managing Director shall prepare a proposal for a SMSF consistent with the
aforementioned assessments and taking into account the financial situation of the ESM. The
Board of Governors may then grant, in principle, a SMSF in accordance with Article 13(2) of the
ESM Treaty.
3. The Managing Director of the ESM shall prepare a financial assistance facility agreement (FFA)
in the form of a SMSF, specifying the financial terms and conditions under which the secondary
market purchases are to be conducted, to be adopted by the Board of Governors in accordance
with Article 13(3) of the ESM Treaty.
4. The Managing Director shall sign the financial assistance facility agreement (FFA), subject to
approval by the Board of Directors.

Article 4
Procedure of activation for ESM Members which are not under stability support
1. An ESM Member shall address a request to access a SMSF to the Chairperson of the Board of
Governors. Upon receipt of such a request, the Board of Governors shall entrust:
(a) The ECB to assess whether there are exceptional market circumstances and whether there is a
risk to the financial stability of the euro area as a whole or of its Member States. The analysis
shall be transmitted to the Board of Directors unless the ECB has already submitted such
analysis beforehand upon its own initiative.
(b) The European Commission, in liaison with the ECB, to assess whether public debt is
sustainable and the actual or potential financing needs of the ESM Member concerned
2. On the basis of the request of the ESM Member and the assessments conducted under paragraph
1, the Managing Director shall prepare a proposal for an SMSF consistent with the
aforementioned assessments and taking into account the financial situation of the ESM. On this
basis, the Board of Governors shall decide to grant, in principle, a SMSF in accordance with
Article 13(2) of the ESM Treaty.
3. If a decision is adopted pursuant to paragraph 2, the Board of Governors shall, in accordance with
article 13(3) of the ESM Treaty, entrust:

(a) The European Commission in liaison with the ECB with the task of negotiating, with the ESM
Member concerned, an MoU detailing the policy conditions attached to the SMSF. The MoU
shall be completed within 2 business days and shall specify the actions needed.
(b) The Managing Director of the ESM, with the task of preparing, in parallel, a proposal for a
financial assistance facility agreement (FFA), detailing the financial terms and conditions of
the SMSF, to be adopted by the Board of Governors.
4. The European Commission shall sign the MoU on behalf of the ESM, subject to compliance with
the conditions set out in paragraph 3(a) and approval by the Board of Governors. The Managing
Director of the ESM shall sign the financial assistance facility agreement, subject to approval by
the Board of Directors.
Article 5
Implementation of the SMSF
1.

The Board of Directors shall establish pro-tempore intervention caps for the implementation of
the facility. A technical sub-committee (TSC) shall be established to decide on the means of
implementation of secondary market interventions under the SMSF. Its composition and
operating rules shall be approved by the Board of Directors, acting on a proposal from the
Managing Director. Market sensitive decisions are taken in secrecy.

2.

The ESM Managing Director shall stop implementing secondary market interventions upon a
request of the beneficiary ESM Member.

Article 6
Monitoring and Reporting
1. The European Commission shall monitor, in liaison with the ECB, the compliance by the
beneficiary ESM Member with the policy conditionality specified in the MoU and shall report to
the Board of Directors.
2. The technical sub-committee referred to in Article 5(2) shall report on a monthly basis to the
Board of Directors on the technical implementation of the facility. The Managing Director shall
forward a monthly report to the Board of Governors on the implementation of the SMSF. The
report shall be followed with reassessment of the programme, including a decision of the Board of
Governors on its continuation.
3. Where necessary, the reports described in the paragraph 2 will be made available for the restricted
committees in National Parliaments retaining the secrecy of market sensitive information.
4. The Managing Director of the ESM shall establish an appropriate warning system, in accordance
with Article 13(6) of the ESM Treaty, to ensure that the ESM receives any repayments due by the
ESM Member under the stability support in a timely manner.
5. In case (a) the assessment in paragraph 1 concludes that the beneficiary ESM Member deviates
from its policy conditions or (b) the assessment in paragraph 2 concludes that the SMSF has
become inadequate to contain the financial disturbance, the Board of Directors, acting on a
proposal from the Managing Director, shall reconsider the adequacy of the SMSF.

Article 7
Management of the portfolio of bonds
1. The bonds purchased under a SMSF can be managed in the following manner. They:
(a) Can be sold (i) if the bond market of the beneficiary ESM Member has returned to normal
functioning and if it is unlikely to reduce the capacity of the ESM Member to lodge its
issuances on the primary market, or (ii) to mitigate the risk of realising a loss in relation to its
holdings of securities of the ESM Member concerned, irrespective of a possible decision to
sell them;
(b) Can be held to maturity;
(c) Can be sold back to the beneficiary ESM Member;
(d) Can be used for repos with commercial banks to support the liquidity management of the
ESM.
2. The Managing Director shall propose a portfolio investment options to the Board of Directors
together with the proposal to disburse provided for in Article 3(2) and 4(2).
3. The Managing Director shall implement the agreed portfolio management strategy.
4. The beneficiary ESM Member shall be informed about the implementation of the strategy. It shall
approve the conduct of operations under paragraph 1(a) in case they would create any liability for
the concerned ESM Member, unless the ESM were to face a significant risk of realising a loss in
relation to its holding of securities of the ESM member concerned, irrespective of a possible
decision to sell them.