Practical information and procedures

Practical information and procedures for pledging and releasing securities and fund units as collateral for loans from Norges Bank.

General rules

Banks applying for loans from Norges Bank must accept the "Terms and conditions for account management, collateralisation and participation in Norges Bank's settlement system (NBO)", sign the "Declaration of collateral – collateral for loans from Norges Bank" and pledge eligible collateral in favour of Norges Bank.

Opening hours

The collateral for loans system follows the opening hours for Norges Bank's settlement system (NBO), i.e. Monday to Friday from 5:30 a.m. to 4:30 p.m. Submission of new collateral loan pledges and release of collateral that can be performed automatically will be carried out during opening hours. Processing of manual orders is described below. See also the NBO operating schedule.

List of approved securities and fund units

Securities approved as collateral for banks' loans. A security will retain its approved status for 6 months after it ceases to be used as collateral. When the new system for collateral for loans was introduced on 25 January 2016, the list contained only approved ISINs used as collateral.

Approval of new securities

Securities (ISIN) and fund units (ISIN) that are not included in the list of approved collateral on Norges Bank's website must be assessed before they can be approved. As a general rule, an assessment will be made when banks have pledged a new ISIN as collateral with VPS, Euroclear or Clearstream. New ISINs can subsequently be approved under the Norges Bank guidelines. Each bank is responsible for ensuring that the securities it pledges as collateral meet the requirements in the guidelines for collateral for loans from Norges Bank. Banks wishing to deposit new Asset-Backed Securities (ABSs) or securities fund units must fill out and submit the application form for approval of new securities and enclose the relevant documentation.

Once securities have been pledged as collateral, Norges Bank will immediately receive a message from the central securities depository and the securities will be checked for eligibility against Norges Bank's collateral for loans system. For securities included on the list of eligible securities, the pledgor's credit limit will be immediately increased. Securities not already included on the list will generate an automatic approval process in the collateral for loans system. If the security is approved, the pledgor's credit limit will be increased shortly thereafter. Some categories of securities, and if indicated by automated checks of ISIN data, will also be processed manually. Each bank is responsible for ensuring that the securities it pledges as collateral comply with Norges Bank's rules for collateralisation. Processing times will vary for securities requiring manual processing. The pledgor bank may also be required to submit further documentation before final approval of a security can be granted. If a new security pledged as collateral is not approved, the bank must release the collateral by submitting an order to this effect. (See procedures under the respective central securities depositories below.)

Registration at central securities depositories

Securities must be registered at the Norwegian Central Securities Depository (VPS), Euroclear Bank (Belgium) or Clearstream Banking (Luxembourg). Banks wishing to pledge securities registered at one of the above foreign CSDs must submit an application to this effect.

Approved countries of issuance

Norges Bank accepts bonds and notes from Norwegian and foreign issuers within the EEA area. In addition, the following countries are approved subject to application:

  • Australia
  • New Zealand
  • US
  • Canada
  • Switzerland
  • Guernsey
  • Jersey
  • Cayman Islands

Approved currencies are listed in the guidelines.

Securities registered as collateral with VPS

Banks may choose their own account operator at VPS. If Norges Bank is chosen as account operator, the VPS account will be pledged in its entirety in favour of Norges Bank. Other account operators must apply procedures for partial pledging of the collateral held at VPS. The account number for partial pledging must be submitted to Norges Bank and registered in Norges Bank's system before the account can be used. For fully automated pledging and release of collateral, Norges Bank must be chosen as account operator (fully pledged account).

Collateral registered with VPS must be denominated in NOK.

Norges Bank's systems are designed for real-time pledging with immediate updating of the pledgor's credit limit. For VPS-registered securities, pledged collateral must be delivered directly between accounts with Norges Bank as account operator or in accordance with VPS procedures for partial delivery. With real-time pledging of already approved ISINs and new ISINs approved in the automatic approval process at Norges Bank, the credit limit will be immediately updated.

Processing times for mutual fund units pledged as collateral with VPS may be longer than for other securities. For mutual fund units pledged in a fully pledged account, credit limits will increase at the earliest the day after the transfer has been made to the account.

To request automatic processing at Norges Bank when releasing collateral held by VPS, banks must follow the procedure "Electronic request for release" in VPS Investor Services. A bank wishing to send an electronic request for release of collateral from the VPS must have enquiry access to the collateral account. Norges Bank can assign enquiry access to all fully pledged accounts pledged in favour of Norges Bank and partially pledged accounts where the account is operated by the bank itself. Requests for enquiry access, including the account number and the registration number of the bank, should be sent to SIL2@norges-bank.no.

Collateral registered with Euroclear Bank

Collateral is pledged and released by the bank pledging securities on the pledge account, by submitting an instruction to transfer to/from the collateral account with Euroclear. The instruction must be "free of payment" and it must be to/from an account in Euroclear that the bank has given to Norges Bank as a standard "normal" account in Euroclear. Norges Bank will receive a SWIFT message from Euroclear to validate and match the instruction to Euroclear. For instructions to release the collateral the following day or at a later date, the "settlement date" field should be used to indicate when the transaction should be conducted. Banks using an agent (indirect account) should take into account that there may be a delay before the instruction reaches Euroclear.

Instructions for release of cash proceeds from redemptions and maturities should be sent to Norges Bank using SWIFT message MT599.

Collateral registered with Clearstream Banking

Collateral is pledged by transferring the security to the collateral account with Clearstream. Norges Bank will receive a confirmation of settlement via a SWIFT message from Clearstream. Requests for release of collateral held by a bank in Clearstream, on the other hand, must be sent from the bank to Norges Bank by a specified SWIFT message as previously agreed. For instructions to release the collateral at a later date, both the trade date and the settlement date fields should be used to indicate the date of execution.

Manual release

If the bank does not have the facilities to send electronic instructions for release, the release may be conducted manually at Norges Bank, but processing times must be expected to be longer. SWIFT MT599 should be used if possible. Instructions by email or fax with test keys may be used if the bank has collateral partially held by VPS and the account is not operated by the bank itself, or in the event of a system failure. Norges Bank urges banks to send a request for manual release as early as possible, indicating the transaction date. Electronic release of collateral partially held by VPS also involves manual operations to release the collateral in the VPS systems. A request for the release of collateral that requires manual operations must be received by Norges Bank by 12 noon to ensure same-day execution.

Payment at maturity and on withdrawal of securities registered with VPS

Banks that have pledged securities registered with VPS must specify the account number to which payments related to interest, maturities and withdrawals are to be made. The settlement amount will be credited to the bank's account with Norges Bank on the due date.

Write-down of loan value day before maturity

Loan values of securities pledged as collateral are written down when Norges Bank's settlement system starts up on the day before maturity or withdrawal. If the bank has insufficient funds to meet its obligations, including deposits, cash settlements will be held back. Banks are responsible for ensuring that bonds and notes are not pledged at such time. Breaches of this provision are subject to a fine as specified in the current price list.

Calculation of loan value and choice of market price

The loan value of a security is established on the basis of a "market value" × exchange rate × (minus 1 haircut). In selecting a market price, quoted prices are assigned a priority and a period of validity. Norges Bank may receive the following quoted prices for one ISIN.

Type of price Validity  Priority
Trading price delivered by VPS 21 days 1
Trading price from Interactive Data 21 days 1
Synthetic price from Interactive Data 21 days 1
Calculated price for ISIN in NOK from Norges Bank's collateral for loans system   2
Price set as nominal price with deduction of extra haircut   3

 When selecting a price, the lowest of the priority-1 prices is selected first. If there is only one valid priority-1 price, priority-2 prices will be included in the selection of the lowest price. Priority-3 prices will only be included if there are no other alternatives.

Norges Bank usually receives "clean prices", which are recalculated into "dirty prices", i.e. including accrued interest before payment. An ISIN will be quoted at its "clean price" one day before and on the coupon date. This may also be the case in other periods if Norges Bank has not received sufficient information from financial information providers to calculate accrued interest before payment.

Calculation of theoretical price

The system calculates a theoretical price based on the estimated net present value of the cash flow over the lifetime of the loan. Norges Bank uses benchmark rates that correspond to the interest rate sensitivity and maturity of the bond. As individual benchmark rates for each ISIN are not used, the price takes limited account of the security's credit or liquidity risk. If the information on payment amounts, coupons or other static data is insufficient, the calculation may fail and a calculated price will then be set based on the redemption price at maturity with a deduction of 5 percent.

 

Published 27 January 2016 09:56
Edited 29 February 2016 15:59