Disclaimer to this note
A Eurosystem workshop entitled "Set-up for auto-collateralisation/client collateralisation in
T2S” was held on 29 November 2013.
A change request (CR429) was discussed there and is under advisement for implementation.
If implemented the main restriction mentioned in this note will be lifted. The Deutsche Bundesbank will keep informing its counterparties on the matter.
Additional information can be found here:
http://www.ecb.europa.eu/paym/t2s/progress/pdf/tg/crg/crg14/04.cr_t2s_0429_sys.pdf?2305
1434755ab3ba2ec16f586639ece4
1
Interaction between cash accounts and securities accounts
in T2S
In order to be able to carry out securities settlement in central bank money in T2S, counterparties (hereinafter referred to as payment banks or PBs) need to have a dedicated cash account (DCA) held at a national central bank (NCB) and a securities account (SAC) held at a
central securities depository (CSD). The credit memorandum balance (CMB) represents the
link between the DCA and SAC and also provides control functions. The purpose of this paper is to inform our payment banks about the rules set by T2S in this regard.
The intended audience is predominantly payment banks that maintain several SACs and
wish to manage their liquidity across the various accounts. The CMB was in principle developed for managing T2S auto-collateralisation 1 and T2S client collateralisation 2. However,
every settlement participant should be aware when planning its account set-up in T2S (DCAs
and SACs) that the rules relating to the CMB will have an effect on this set-up, even if T2S
client/auto-collateralisation is not used.
1.1
Dedicated Cash Account (DCA)
It is possible to apply for a DCA at the Bundesbank. As with the current T2 sub-accounts for
Clearstream settlement, cash clearing for securities transactions in T2S takes place via this
account. For cash pooling reasons, it is expected that most payment banks will only maintain
one DCA. However, it is possible to apply for additional DCAs at any time.
Each DCA used for settling in euro must be linked to a T2-PM account. In the event that T2S
auto-collateralisation is used, the PM account must be owned by the payment bank and
equipped with a credit line from the Bundesbank.
1.2
Securities Account (SAC)
It is possible to apply for an SAC at any T2S CSD. Several such SACs can be used across
several T2S CSDs. The exact conditions attached to applying for an SAC are set by the respective CSD.
1.3
Credit Memorandum Balance (CMB, link between DCA and SAC)
The DCA and SACs must be linked to each other via a credit memorandum balance (CMB),
a control tool which can be used to manage the outflow of liquidity when using one or more
SACs. The way in which this occurs has a significant impact on the payment bank’s internal
account set-up, particularly when securities settlement is conducted for third parties or
across a number of accounts.
1
2
Comparable with the existing CBF/BBk self-collateralisation model.
The payment bank can use this function to provide individual SACs with collateralised liquidity.
A distinction is made between primary and secondary CMBs. Every DCA is automatically
provided with a primary CMB by the Bundesbank. The payment bank is responsible for setting up secondary CMBs, which can be used for client collateralisation for example (see 5.1).
If the payment bank does not have access to the T2S-GUI, the Bundesbank can, to a limited
extent, also set up secondary CMBs on behalf of the customer.
At the payment bank’s request, the Bundesbank can provide intraday credit via a DCA using
the T2S auto-collateralisation facility (see below). As this has to be conducted by the Bundesbank via the primary CMB, T2S has incorporated a number of specifications into the
CMB.
Step 1
Step 2
SAC
•
CSD: sets up SAC
DCA
2
•
BBk: sets up DCA
and primary CMB
•
PB: sets up secondary CMB
Linking is only possible
once the CMBs are in
place. However, it is
not obvious to the CSD
when the CMBs have
been established.
CSD: create link between SAC and DCA
Rules in the CMB
The Bundesbank will provide each DCA with a BIC11 corresponding to the payment bank.
The CSD will provide each SAC with a BIC11. If the SAC has the same BIC8 root as the
DCA, the DCA and SAC must be linked via the primary CMB. Each SAC that has a different
BIC8 root from the DCA must be linked to the DCA via a secondary CMB. The CSD is responsible for installing the link once the CMBs have been set up.
Each BIC can be allocated to a CMB on an individual basis, but it is also possible to allocate
a group of BICs to a CMB.
Each SAC can only be assigned to one DCA by one CBM. All BICs with the same BIC8 root
as that of the DCA must therefore be assigned to the primary CMB.
Example of a set-up in T2S:
BBk
SAC 1
BANKDEFFaaa
CSD A
SAC 2
BANKDEDDaaa
secondary
CMB A
TARGET2
PM account
DCA
BANKDEFF123
primary
CMB
secondary
CMB B
Legend:
BANKDEFF: BIC8 code of the
payment bank’s DCA; in some
cases the BICs of the SACs differ from this.
Bundesbank area of responsibility
CSD area of responsibility
SAC 3
BANKLULLaaa
CSD B
SAC 4
BNKBLULLaaa
SAC 5
BANKDEFFbbb
CSD C
In this example, the payment bank (BIC8 = BANKDEFF) maintains five SACs and one DCA.
The central bank sets up the primary CMB. The SACs in CSD A and CSD C which have the
same BIC8 as the DCA (SAC 1 and SAC 5) are linked to the primary CMB by the respective
CSD.
The payment bank creates two secondary CMBs and states which SAC is linked to which
CMB. In the example, SAC 2 and SAC 3 are linked to the DCA via CMB A while SAC 4 is
linked to it via CMB B. The BIC8 for SACs 2-4 is different from that of the DCA which means
that these SACs have to be linked via a secondary CMB. It does not matter in which T2S
CSD the SACs are held – all that matters is the assigned BIC. It also does not matter which
part of the BIC8 differs from that of the DCA. 3
T2S auto-collateralisation is only possible via a primary CMB. Use of the autocollateralisation facility is also dependent on the following conditions being satisfied:
-
The DCA holder has a PM account at the same central bank with a credit line in
TARGET2
The Bundesbank has activated the DCA and the CSD has activated the SAC(s) to
facilitate T2S auto-collateralisation
2.1
Impact of these rules on liquidity management
All SACs that are linked to the DCA via a primary CMB can access all of the available liquidity in this DCA. If the payment bank also uses the T2S auto-collateralisation facility (see below), the Bundesbank can provide additional liquidity.
The payment bank can apply three limits to each secondary CMB. If the payment bank
makes no use of the client collateralisation facility (see below), only the first limit, ie the external guarantee limit, is of relevance. 4 This limit on the secondary CMB restricts the liquidity
that can be used for securities settlement in the linked SACs without reserving it 5 and can be
applied independently to every secondary CMB. Liquidity can therefore be managed in a targeted manner for each individual SAC or groups of SACs. The limits are set exclusively by
the payment bank and can be changed at any time in the course of the day. The limits can
exceed the volume of available liquidity in the DCA, but in this case cannot be reached.
No such management tool is at hand for the SACs that have the same BIC8 as the DCA (i.e.
are linked via a primary CMB).
Overview:
Primary CMB
Secondary CMB
Set up by
Bundesbank
Payment bank
BIC requirements
BIC8 root of SAC and DCA are
identical
BIC8 root of SAC and DCA
differ
No limit
1 limit
3 limits (when using client
collateralisation)
Limits
3
SAC 1 and SAC 5 can be used for T2S auto-collateralisation. SAC 2 and SAC 3 can be used by Client A (CMB A) and SAC 4
by Client B (CMB B) for T2S client collateralisation. See the respective sections for further details on T2S client and autocollateralisation.
4 For more information on the other two limits, see the section on client collateralisation.
5 T2S features a transaction-based function for reserving liquidity, i.e. it is independent of the problem in question (see T2S
UDFS, version 1.21, page 21ff.
Use
of
T2S
collateralisation
auto-
Collateral requirements
Use
of
T2S
autocollateralisation possible
Use of T2S client collateralisation possible
Collateral requirements as with
T2 intraday credit, ex ante exclusion of collateral with potential close links, use of CCBM
not possible
PB can provide liquidity collateralised or uncollateralised, requirements to be
drawn up by PB
3
Which payment banks need to act?
3.1
Payment banks with only one DCA and one SAC:
Payment banks with only one DCA and one SAC do not need to undertake any additional liquidity management and are therefore not affected by these restrictions. By providing liquidity via TARGET2 or through T2S auto-collateralisation, it is possible to maintain precise control over how much liquidity is used. In this case, it is recommended to have an identical
BIC8 for the DCA and the SAC (option A). If the BIC8s differ (option B), a secondary CMB
has to be set up. Here it should be noted, however, that a secondary CMB can only be set up
technically if the payment bank has at least one SAC with the same BIC8 as that of the DCA.
In this case, additional SACs would also have to be opened. All functions, with the exception
of T2S auto-collateralisation, can continue to be used, but it is not recommended to have a
set-up based on a secondary CMB alone.
Option A:
BBk
TARGET2
PM account
DCA
BANKDEFF123
Primary
CMB
Legend:
BANKDEFF: BIC8 code of the
payment bank’s DCA; BIC of the
DCA and the SAC are identical
→ primary CMB.
Bundesbank area of responsibility
CSD area of responsibility
Liquidity management via TARGET2 and/or through T2S auto-collateralisation
SAC 1
BANKDEFF123
CSD A
Option B:
BBk
TARGET2
PM account
Primary
CMB
DCA
BANKDEFF123
Secondary
CMB A
SAC 1
BANKLULLaaa
CSD A
Legend:
BANKDEFF: BIC8 code of the
payment bank’s DCA; BIC of the
DCA and the SAC differ → secondary CMB
SAC 2
BANKDEFFaaa
Bundesbank area of responsibility
CSD area of responsibility
Use of all functions possible, except T2S auto-collateralisation
3.2
Payment banks with only one DCA and several SACs:
Payment banks with one DCA and several SACs must consider whether they wish to restrict
the use of liquidity to specific SACs and check whether the BIC8 is compatible with the desired set-up (via a primary or secondary CMB). If the use of liquidity is unrestricted for all
SACs, it should be taken into account that only those SACs that are linked via a primary
CMB (i.e. have the same BIC8 as the DCA) are eligible for T2S auto-collateralisation. However, for SACs that are linked via a secondary CMB, the limit can be set at such a level that,
with the exception of T2S auto-collateralisation, there is no significant difference in the way
the different SACs can be used.
BBk
SAC 1
BANKDEFFaaa
CSD A
SAC 2
BANKDEDDaaa
secondary
TARGET2
PM account
DCA
BANKDEFF123
Primary
CMB
CMB A
secondary
CMB B
Legend:
BANKDEFF: BIC8 code of the
payment bank‘s DCA; the SAC
BICs differ in part.
Bundesbank area of responsibility
CSD area of responsibility
SAC 3
BANKLULLaaa
SAC 4
BNKBLULLaaa
SAC 5
BANKDEFFbbb
CSD B
CSD C
SACs 2-4 can be linked to the DCA via up to three secondary CMBs. Each of these CMBs can be allocated its own limit. These SACs can also be used for T2S client collateralisation. T2S autocollateralisation is possible using SAC 1 and SAC 5.
3.3
Payment banks with several DCAs and multiple SACs:
Payment banks with several DCAs and multiple SACs must consider precisely which of the
SAC BICs are identical to those of the respective DCAs and develop an appropriate set-up.
A second DCA with a different BIC8 (Example B), including new primary and secondary
CMBs, can be set up in the same way as the first DCA. This opens the door to further set-up
options. Cash pooling in T2S is not possible in this way, however.
Example A:
BBk
TARGET2
PM account
DCA
BANKDEFF123
SAC 1
BANKDEFFaaa
Primary
CMB
secondary
CMB A
CSD A
SAC 2
BANKDEDDaaa
SAC 3
BANKLULLaaa
CSD B
TARGET2
PM account
DCA
BANKDEFF456
Legend:
BANKDEFF: BIC8 code of the
payment bank’s DCA; the SAC
BICs differ in part.
Primary
CMB
secondary
CMB B
SAC 4
BNKBLULLaaa
SAC 5
BANKDEFFbbb
Bundesbank area of responsibility
CSD area of responsibility
The BIC8 of the DCAs is identical. In each case, the corresponding SACs can be linked to the DCAs via
the primary CMB. SACs can be linked to both DCAs (SAC 3). Cash pooling in T2S is restricted in this example.
CSD C
Example B:
BBk
TARGET2
PM account
DCA
BANKDEFF123
SAC 1
BANKDEFFaaa
Primary
CMB
secondary
CMB A
CSD A
SAC 2
BANKDEDDaaa
SAC 3
BANKLULLaaa
CSD B
TARGET2
PM account
DCA
BANKDEDD123
Primary
CMB
Legend:
BANKDEFF: BIC8 code of the
payment bank‘s DCA; the SAC
BICs differ in part.
secondary
CMB B
SAC 4
BNKBLULLaaa
SAC 5
BANKDEFFbbb
CSD C
Bundesbank area of responsibility
CSD area of responsibility
The DCA BIC8s differ. Both BIC8s must be allocated to the payment bank. In this example, SAC 1 and
SAC 5 can be linked via the primary CMB to the first DCA and/or via the secondary CMB to the second
DCA.
4
Possible courses of action
The Bundesbank and the CSDs have a limited influence over the BICs for the DCAs and
SACs in T2S. If the payment bank has a different BIC8 at its disposal from the one provided
by the Bundesbank/CSDs, this BIC can be used to set up the DCAs or SACs. This means
that, if absolutely essential, a BIC8 can be changed in order to make a link via a primary or
corresponding secondary CMB possible.
Responsibility for changing an SAC’s BIC8 lies exclusively with the CSDs. It is therefore recommended, particularly for SACs held with foreign CSDs, that contact is established at an
early stage. The Bundesbank cannot guarantee that every T2S CSD will be able to offer a
change of BIC8 in T2S. 6
6
Changes to an SAC’s BIC8 also alter the connectivity, delivery routes and T2S accounts. Further details can be obtained from
the relevant CSD.
5
T2S auto-collateralisation
T2S auto-collateralisation is a method for obtaining intraday credit directly in T2S. Liquidity is
only generated this way in case of urgent need. The same collateral requirements apply as
for regular T2 intraday credit, only collateral with potential close links are not permitted. In
addition, no CCBM is available for T2S auto-collateralisation. Therefore, without a Eurosystem-approved link, it is not possible to use securities held in an non-domestic CSD 7. The securities will only be pledged, i.e. booked to Bundesbank accounts, at the moment in which
the liquidity is generated. The securities must either be in the process of being purchased
(creating the liquidity need in T2S) or already in the possession of the respective payment
bank. As T2 intraday credit is unlimited, T2S auto-collateralisation credit will also in principle
be unlimited. T2S auto-collateralisation credit must be returned to T2S at the end of the day.
Only securities that are settled via SACs connected to the DCA through a primary CMB can
be pledged to the Bundesbank. Therefore, only those SACs that have the same BIC8 as the
DCA can be used for T2S auto-collateralisation. This is particularly of relevance if, for example, the SACs of overseas branches are also to be used for pledging collateral to the Bundesbank, since these SACs typically have a different BIC8. The payment bank has additional
management options with which securities can in principle be pledged to the Bundesbank.
Payment banks that do not wish to make use of T2S auto-collateralisation, but do wish to use
the T2S liquidity management function, are constrained in terms of set-up by the same BIC8
restrictions.
5.1
T2S client collateralisation
T2S client collateralisation follows a similar procedure to that of T2S auto-collateralisation. It
also provides liquidity for settling transactions in return for collateral. While in T2S autocollateralisation liquidity is provided to the payment bank by the Bundesbank, with T2S client
collateralisation it is the payment bank that provides liquidity to its clients. Each secondary
CMB linking an SAC or groups of SACs to the DCA is a separate client (see footnote 3, "Example of a set-up in T2S”). Clients may be other banks, the payment bank’s own subsidiaries
or other entities for which securities settlement is conducted.
7
CBF has already announced that it will open an approved link to every CSD in T2S, so that this does not place a restriction on
securities.
With the first limit (external guarantee limit), already described above, liquidity is provided for
the client on an uncollateralised basis. If the client for which the liquidity is being provided for
securities settlement is another bank, it may be of interest to the payment bank to provide liquidity only on a collateralised basis. In this event, the second limit (client collateralisation
limit) is applied. If the client needs liquidity, securities from the client’s SAC are booked in
one of the payment bank's SACs, as defined in the CMB. In return, the payment bank provides liquidity which can be used for settlement in the client's SACs. Liquidity can only be
provided up to the amount that is available in the DCA (DCA balance + possible T2S autocollateralisation). The payment bank must agree with its clients the time frame during which
the collateralised credit must be returned. T2S and the Bundesbank do not stipulate any requirements in this regard.
In addition, the payment bank can set the accounts up in such a way so that the securities
accepted generate liquidity in the DCA via T2S auto-collateralisation. In this case, the payment bank must have full authorisation to be able to pledge the securities to the Bundesbank.
The third limit (unsecured credit limit) can be set in addition in order to provide unsecured liquidity to the client once the client collateralisation limit has been reached. The three limits
can be set independently of each other and are reached one after the other. In other words,
only when the first unsecured limit has been reached is the second collateralised limit used.
In case this is zero, or is exceeded, the third limit is used. It is up to the payment bank to decide where to set the limits.
In order to be able to use T2S client collateralisation, the payment bank must define which
securities it will accept in T2S and provide prices. If more than a very small number of ISINs
are to be accepted, this procedure requires a direct A2A and U2A connection to T2S as well
as an application which provides and maintains these data in T2S. It is therefore recommended to use T2S client collateralisation only if the take-up rate is expected to be correspondingly high. In most cases, it should be sufficient to apply the first uncollateralised limit
and forego client collateralisation.