Here’s one that slipped by us on Friday.
The Bank of England quietly changed some of its collateral requirements for UK banks. It wasn’t anything huge — all the assets that are currently eligible for things like the BoE’s open market operations and discount window will remain so — but there are a few changes to the haircuts required by the central bank.
Think of the Bank’s classification system of narrow and wider collateral. Narrow is meant to be super-safe and super-liquid. Wider is still relatively safe, but relatively less so compated with the narrow stuff, so higher haircuts are demanded by the BoE.
Here are the changes as summarised by RBS:
From 1 July 2011, debt issued by supras such as EIB, ADB, EU, IBRD, IFC and NIB will no longer be eligible as narrow collateral in the Bank of England’s open market operations, the operational standing lending facility, and in the Discount Window Facility. However, these securities (issued in Sterling, Euro or USD) will be eligible as wider collateral.
Only Gilts, Sterling T-bills, Bank of England securities, HM Government nonsterling marketable debt, and Sterling, Euro, US dollar and Canadian dollar-denominated securities issued by the governments and central banks of France, Germany, and the Netherlands will qualify as narrow collateral. In addition, government debt from Canada the US will qualify as narrow collateral (before such debt was part of the wider collateral).
Government debt from Australia, Austria, Belgium, Cyprus, Denmark, Finland, Ireland, Italy, Japan, Luxembourg, New Zealand, Norway, Portugal, Slovenia, Spain, Sweden, and Switzerland will [now] qualify as wider collateral as long as it is denominated in the domestic currency of the country or in Sterling, Euro or USD.
The change for supranational paper is getting the most attention in the market, since it means haircuts for the assets will increase (between 2.5 and 7.5 percentage points depending on duration, according to RBS). The move, the BoE says, is part of the long-term review of collateral policy the Bank first started in October 2008. But market participants like RBS still said they were surprised by Friday’s decision.
As a sidenote, we wonder what the BoE move means for the latest supranational debt — that from the European Financial Stability Facility (EFSF).
EFSF bonds may be triple-A rated and guaranteed-debt collected and pooled together from eurozone governments, but they’re classified as supranationals at the European Central Bank.
From Deutsche Bank last month:
Although the bonds issued by both the EFSF and the EU [via the EFSFM] are AAA rated and 0% risk weighted these bonds are issued by supranational entities rather than sovereigns. Consequently, they are not part of the sovereign bond indices and belong to the supranational indices. Further, within the ECB collateral framework they are classified under category II rather than category I and have a higher haircut applied (0.5% to 1.5% additional haircut depending on maturity) if used as collateral for ECB’s refinancing operations.
The Bank of England’s changes will take effect from July.
Related links:
Bank reshuffles accepted collateral for money market ops - Reuters
The phantom securities which haunt the BoE, quantified – FT Alphaville