‘(c)

they must not consist, in whole or in part, actually or potentially, of credit-linked notes or similar claims resulting from the transfer of credit risk by means of credit derivatives or tranches of other asset-backed securities (1). Asset-backed securities issued before 1 March 2009 will be exempted from the requirement of not consisting of tranches of other asset-backed securities until 1 March 2010.

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The Eurosystem limits the use of uncovered bank bonds issued by an issuer or any entity with which the issuer has close links in accordance with the legal requirements set out in Section 6.2.3. Uncovered bank bonds issued by a single issuer or an entity with which the issuer has close links may only be used as collateral by a counterparty to the extent that the value assigned to such collateral by the Eurosystem after the application of haircuts does not exceed 10 % of the total value of the collateral submitted by that counterparty after the haircuts. This limitation does not apply to uncovered bank bonds that are guaranteed by a public sector entity which has the right to levy taxes, or if the value after haircuts of the uncovered bank bonds referred to above does not exceed EUR 50 million. Uncovered bank bonds submitted as collateral to the Eurosystem until 20 January 2009 are not subject to this limitation until 1 March 2010. In case of a merger between two or more issuers of uncovered bank bonds or the establishment of a close link between such issuers, these issuers are treated as one issuer group, in the context of this limitation, only one year after the date of the merger or the establishment of a close link.’;

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Valuation haircuts

The Eurosystem applies “valuation haircuts” in the valuation of underlying assets. This implies that the value of the underlying asset is calculated as the market value of the asset less a certain percentage (haircut).

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Variation margins (marking to market)

The Eurosystem requires the haircut-adjusted market value of the underlying assets used in its liquidity-providing reverse transactions to be maintained over time. This implies that if the value, measured on a regular basis, of the underlying assets falls below a certain level, the national central bank will require the counterparty to supply additional assets or cash (i.e. it will make a margin call). Similarly, if the value of the underlying assets, following their revaluation, exceeds a certain level, the counterparty may retrieve the excess assets or cash. (The calculations relevant for the execution of margin calls are presented in Box 8.)

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Limits in relation to the use of uncovered bank bonds

The Eurosystem applies limits to the use of uncovered bank bonds which are described in Section 6.4.2.

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Initial margins

The Eurosystem may apply initial margins in its liquidity-providing reverse transactions. This would imply that counterparties would need to provide underlying assets with a value at least equal to the liquidity provided by the Eurosystem plus the value of the initial margin.

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Limits in relation to issuers/debtors or guarantors

The Eurosystem may apply additional limits, other than those applied to uncovered bank bonds, to the exposure vis-à-vis issuers/debtors or guarantors. Such limits can also be applied to specific counterparties, in particular if the credit quality of the counterparty appears to exhibit a high correlation with the credit quality of the collateral submitted by the counterparty.

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Additional guarantees

The Eurosystem may require additional guarantees from financially sound entities in order to accept certain assets.

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Exclusion

The Eurosystem may exclude certain assets from use in its monetary policy operations. Such limits may also be applied to specific counterparties, in particular if the credit quality of the counterparty appears to exhibit a high correlation with the credit quality of the collateral submitted by the counterparty.’