SNB collateral, an Irish and BP non-love story | FT Alphaville

SNB collateral, an Irish and BP non-love story

Hat-tip to Lorcan for this — the Swiss National Bank no longer accepts Ireland’s government bonds as eligible collateral in its repo operations.

It’s probably not earth-shaking for holders of Irish government bonds, following earlier margin calls on these assets by LCH.Clearnet last year.

On the other hand, it’s an interesting window into how at least one European central bank is taking care over its collateral, unlike a few others we could mention.

Modifications to the SNB’s collateral baskets over the last year emerge in this little spreadsheet (Excel file). Click illustrative picture to enlarge:

Several other Irish-domiciled assets also became nicht Repo-fähig in late December 2010, around the time Ireland lost its last AA- credit rating. Anglo Irish medium-term notes, Depfa bonds, etc.

The SNB’s eligible collateral criteria require that securities posted for repo have this AA- rating and that their country of domicile also bears the same rating, which seems open and shut. Until you read that the bank can make exceptions for sovereign securities rated below AA-.

Clearly, they decided not to apply this exemption for Ireland. As the criteria also make clear, collateral rules are at the SNB’s discretion:

The SNB decides whether a security should be included in the list of collateral eligible for SNB repos. Enquiries should be addressed  to Department III of the SNB. The SNB may reject securities or withdraw securities previously included in the list without justifying its decision.

And as the SNB’s spokesman pointed out to us:

We cannot give any further comments. Only securities that fulfil stringent requirements with regard to credit rating and liquidity are accepted as collateral by the National Bank.

Plenty of government paper from UK, French, Dutch, and Slovenian sources was also excluded from SNB collateral baskets over the last twelve months, presumably on account of the lack of liquidity among certain issues, rather than Ireland’s winning combination of both that and screaming credit risk.

Of course, it’s not just sovereigns who incurred the wrath of the SNB collateral baskets in 2010. You’d just have to ask BP Capital Markets, which saw three medium-term notes removed in late June 2010:

Which, to be sure, was not a great time for BP in the market.

Related link:
An Irish bank collateral conundrum, ECB edition – FT Alphaville