Collateral

ECB Amends Eligibility Criteria for Unsecured Bank Bonds

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On October 5, 2016, the European Central Bank (“ECB”) stated that it will be making changes to its collateral framework by revising the collateral eligibility criteria and risk control measures in relation to senior unsecured debt instruments issued by credit institutions or investment firms (unsecured bank bonds or UBBs).

Under the current rules, UBBs will, except for these new changes, become ineligible on January 1, 2017. The ECB’s revisions to its collateral framework are aimed at temporarily maintaining the eligibility of UBBs (including the eligibility of statutorily subordinated UBBs that are not also contractually subordinated), beyond January 1, 2017.

Furthermore, UBBs will also be subject to additional risk control measures to remain eligible. The ECB has decided to reduce, as of January 1, 2017, the usage limit for uncovered bank bonds from 5% to 2.5%. The reduction will not apply where:

  • the value of such assets is equal to or less than €50 million (net of any applicable haircut); or
  • such assets are guaranteed (by a public sector entity that has the right to levy taxes) by way of a guarantee that complies with the provisions of Article 114 of the ECB Guideline on the implementation of the Eurosystem monetary policy framework.

The changes are expected to come into effect from January 1, 2017.

CFTC Final Rule on Protection of Cleared Swaps Customer Contracts and Collateral

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On January 11, pursuant to Section 724(a) of the Dodd-Frank Act, the CFTC adopted a final rule regarding the protection of cleared swaps and collateral belonging to cleared swaps customers of futures commission merchants (FCMs). The CFTC adopted the Legally Segregated Operationally Commingled Model (LSOC Model, or Complete Legal Segregation Model), which provides that: (i) pre-bankruptcy, cleared swaps collateral of all FCM cleared swaps customers may be kept together in one account, but the FCM’s own property must be kept segregated and (ii) post-bankruptcy, the collateral of one cleared swaps customer may not be used to cover the obligations of another cleared swaps customer or the FCM. CFTC Release. CFTC Final Rule.