Alongside the Draghi presser, the ECB moments ago the terms and conditions of its Q€, or as the ECB calls it, the "public sector purchase programme (PSPP)" Here are the full details and the Q&A.
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Implementation aspects of the public sector purchase programme (PSPP)
In the context of the Eurosystem's expanded asset purchase programme announced on 22 January 2015, which consists of combined monthly purchases of EUR 60 bn in public and private sector securities, purchases under the public sector purchase programme (PSPP) of marketable debt instruments issued by euro area central governments, certain agencies located in the euro area or certain international or supranational institutions (referred to in legal texts as "international organisations and multilateral development banks") located in the euro area will start on 9 March 2015 (for more information, see also the Q&A on the public sector purchase programme).
In its implementation of the PSPP, the Eurosystem intends to conduct purchases in a gradual and broad-based manner, aiming to achieve market neutrality in order to avoid interfering with the market price formation mechanism.
In principle, purchases of nominal marketable debt instruments at a negative yield to maturity are permissible as long as the yield is above the deposit facility rate.
If the purchasable volume of marketable debt instruments issued by the central government and agencies is insufficient in the respective jurisdiction to accommodate the corresponding share of purchases under the ECB's capital key, substitute purchases are foreseen.
If these substitute purchases comprise marketable debt instruments issued by international or supranational institutions located in the euro area, such purchases will be subsumed under the 12% allocation for these securities in the PSPP. The remaining purchases of marketable debt instruments issued by international or supranational institutions located in the euro area will be conducted on behalf of the Eurosystem by the Banco de España and the Banque de France.
International and supranational institutions and agencies
The initial list of international or supranational institutions located in the euro area and of agencies located in the euro area whose securities are eligible for the PSPP is as follows:
International or supranational institutions located in the euro area
- Council of Europe Development Bank
- European Atomic Energy Community
- European Financial Stability Facility
- European Stability Mechanism
- European Investment Bank
- European Union
- Nordic Investment Bank
Agencies located in the euro area
- Caisse d'amortissement de la dette sociale (CADES)
- Union Nationale Interprofessionnelle pour l'Emploi dans l'Industrie et le Commerce (UNEDIC)
- Instituto de Credito Oficial
- Kreditanstalt fuer Wiederaufbau
- Landeskreditbank Baden-Württemberg Foerderbank
- Landwirtschaftliche Rentenbank
This initial list may be amended following the Governing Council meeting on 15 April 2015 on the basis of monetary policy considerations and duly reflecting risk management issues.
The marketable debt instruments purchased under the PSPP will be made available for securities lending. This will be implemented in a decentralised manner, mirroring the organisation of the PSPP.
The Eurosystem will start to gradually lend securities using the channels for securities lending available under its existing infrastructure, including so-called fails mitigation programmes by international central securities depositories, agency lending and bilateral securities lending. The Eurosystem aims to develop these existing formats in the near future.
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And the Q&A:
Q&A on the public sector purchase programme (PSPP)
Will the Governing Council decide each month on the exact composition of the asset purchases to be made and instruct the national central banks (NCBs) to carry out these purchases, or will the NCBs have a degree of flexibility?
The Eurosystem will follow an internal benchmark when coordinating its purchases, with some flexibility for the NCBs to purchase their shares within the universe of eligible instruments. The need for flexibility and the leeway granted to NCBs will be assessed by the Governing Council, which may adjust the implementation framework in this regard on the basis of the experience gained.
How strictly will the capital key rule be followed? Could the Bundesbank, for instance, buy more agency securities and fewer Bunds for a while?
The share of purchases in an NCB's home market is determined by the ECB's capital key, with NCBs focusing exclusively on their home market. Within this home market, there will be some flexibility for the NCBs to choose between purchases of central government securities and securities of certain agencies established in the respective jurisdiction.
When the programme was announced, the ECB said that the purchases would be divided between countries on the basis of the ECB's capital key. Will the weightings need to be applied on a monthly basis, with each NCB buying the proportionate amount each month, or do these shares refer to the programme as a whole?
The ECB's capital key will guide purchases on a monthly basis. However, this does not imply that a precise achievement of capital key shares will be strictly targeted every month, as some flexibility on a monthly basis will support the smooth implementation of the programme.
How can the ECB purchase 33% of an issuer's outstanding securities if it is allowed to buy only 25% of each issue? Do the 25% and 33% limits include bonds purchased under the Securities Markets Programme and under the Eurosystem's own (i.e. non-monetary policy) portfolios? Regarding the issuer limit, is the denominator the whole debt or just the debt with a maturity of 2 to 30 years?
An issue share limit of 25% needed to be applied in order to avoid obtaining a blocking minority in the event of a debt restructuring involving collective action clauses. This issue limit thus also covers existing Eurosystem holdings of sovereign bonds in the context of the Securities Markets Programme (under which the 25% issue share limit was not applied at the time of purchase) and any other portfolios owned by Eurosystem central banks.
Likewise, the issuer limit of 33% is a means to safeguard market functioning and price formation as well as to mitigate the risk of the ECB becoming a dominant creditor of euro area governments. To this end, the 33% limit is applied to the universe of eligible assets in the 2 to 30-year range of residual maturity. The 33% issuer limit applies to the combined holdings of bonds under all purchase programmes.
Are the issue and issuer limits based on nominal or market value?
These limits will be based on nominal values.
What is meant by "other counterparties used by the Eurosystem for the investment of its euro-denominated portfolios"?
The purchases will be conducted by the ECB and the NCBs with their existing counterparties, including counterparties they trade with in the context of their own investment activities in euro-denominated securities. The portfolio managers of the ECB and the NCBs will be in bilateral contact with their eligible counterparties before purchases begin.
How will you coordinate the purchases between the NCBs? Will all NCBs purchase supranational bonds or will only the NCB of the country in which these supranational institutions are located conduct those purchases?
The ECB will coordinate all asset purchases within the Eurosystem. The ECB will not purchase debt securities issued by certain international or supranational institutions located in the euro area. Under a specialisation approach, only a few NCBs will buy securities issued by European supranational institutions, but this specialisation will be independent of the domicile of these international or supranational institutions.
Will the Eurosystem be able to buy in the primary market? Will a distinction be made, in terms of primary market purchases, between government and supranational bonds?
There will be no primary market purchases under the PSPP, regardless of the type of security, as such purchases are not allowed under Article 123 of the Treaty on the Functioning of the European Union.
How will you weigh different maturity buckets for your purchases?
The intention is to be market-neutral. The Eurosystem wants to create as little distortion as possible. At the same time, this will not be a strict target and flexibility will be applied, also taking into account the relative values of bonds and the liquidity of the different maturity segments.
What is the duration of purchases and how will duration be weighted?
There is no duration target for the programme.
How will you decide on the maturity breakdown of the purchases? By current outstanding amounts or by new issuance?
Purchases will in principle be weighted by nominal outstanding amounts, with eligible remaining maturities at the time of purchase ranging from 2 to 30 years, also taking into account the issue and issuer limits as well as potential distortions in certain maturity buckets.
What exactly does the 2 to 30-year maturity restriction mean?
The maturity restriction means that the Eurosystem will only buy securities which, at the time of purchase, have a minimum remaining maturity of 2 years (i.e. purchases of securities with a remaining maturity of 1 year and 364 days are NOT possible) and a maximum remaining maturity of less than 31 years (i.e. purchases of securities with a remaining maturity of 30 years and 364 days are possible).
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But the simplest summary all of the above:
*ECB SAYS EIB, EU, ESM, EFSM, NFL, NAACP, NRA, USDA, CBS, KKK, IRA, UDA, MPLA, KGB, CIA, TCBY, 3M, KFC, BMW, HSBC ELIGIBLE FOR QE PURCHASES— Rudolf E. Havenstein (@RudyHavenstein) March 5, 2015