Guidelines for pledging securities as collateral for loans in Norges Bank

1. Introduction

Norges Bank stipulates more detailed terms for pledging securities as collateral for loans in Norges Bank pursuant to Section 3 of the “Regulation on banks’ access to loans and deposits in Norges Bank etc.” (FOR 2001-04-25 no. 473).

On 24 October 2005, Norges Bank introduced new rules for banks’ pledging of collateral for loans from Norges Bank. In connection with the introduction of the new rules, a transitional period of two years was stipulated for securities (ISIN) that were already deposited, but that did not satisfy the new rules (see Norges Bank’s Circular no. 7 of 19 October 2005). From 1 November 2007, the following requirements also apply to securities already being held as collateral by Norges Bank:

• Requirement of a minimum volume outstanding of NOK 300 million for securities (ISIN) issued in NOK by banks and bank-owned mortgage companies.
• Requirement of a minimum credit rating of BBB- from Standard & Poor’s (S&P) or Baa3 from Moody’s for Norwegian enterprises and corporate bonds.
• Requirement of listing on a stock exchange or other market place that has been approved by Norges Bank for securities registered in the Norwegian Central Securities Depository (VPS).
• Requirement of a minimum volume outstanding equivalent to EUR 100 million for securities denominated in a foreign currency.

With effect from 1 November 2007, Norges Bank will also make some adjustments to the rules for banks’ collateral:

• Securities denominated in Australian and New Zealand dollars are accepted as collateral.
• Units in securities funds will not be given a haircut for currency risk if the fund has been fully currency hedged pursuant to its statutes.
• For securities in funds, the requirement of listing on a stock exchange or other approved market place is changed to a requirement of such a listing or binding commitment to carry out such a listing. The listing shall take place 14 days at the latest after the fund has invested in the securities.

A list of eligible securities and the application form for approval of new securities is available on Norges Bank’s website (LINK).

The circular will apply as from 1 November 2007 and replaces Circular no. 7 of 19 October 2005.

2. General rules
Agreement relating to the provision of financial collateral for loans from Norges Bank
In order to borrow from Norges Bank, a bank must have entered into an “Agreement on the pledging of financial collateral for loans from Norges Bank”.

Approved securities depositories
Norges Bank approves collateral registered in the following securities depositories:

• The Norwegian Central Securities Depository (VPS)
• Swedish Securities Depository
• VP (Danish Securities Depository)
• Euroclear in Belgium
• Clearstream Banking in Luxembourg

Banks wishing to pledge securities registered in one of the foreign securities depositories as collateral must make a special application.

Collateral registered in the VPS
Banks may choose the registrar themselves. If Norges Bank is to be the registrar, the entire VPS account is pledged as collateral in favour of Norges Bank, while other registrars must apply procedures for partial collateralisation in VPS.

Collateral registered in the VPS must be denominated in NOK.

Norges Bank’s systems are designed to handle real-time collateralisation with immediate updating of the borrowing facility for collateral registered in the VPS. This is contingent on collateralisation being effected from account to account with Norges Bank as the registrar or in accordance with the procedure for partial collateralisation. Government or government-guaranteed debt instruments and securities (ISIN) that are or have been pledged as collateral in favour of Norges Bank in the preceding six months are eligible for such real-time collateralisation

3. Requirements applying to securities and fund units that are eligible as collateral for loans
Norges Bank accepts bonds, notes and short-term paper from Norwegian and foreign issuers as collateral for loans. Securities issued outside the EEA may be accepted provided that any need Norges Bank might have for legal confirmation that there are no problems associated with realising the collateral, for example, has been satisfied. Norges Bank will require that any costs associated with procuring such a confirmation be borne by the pledging bank.

Norwegian bond and money market funds are eligible as collateral provided that they are managed by a management company registered in Norway whose unit holdings are registered with the VPS. Pursuant to the their statutes, the funds must be confined to investments in bonds, notes and short-term paper that are eligible under the current rules. The funds may nevertheless invest in securities that are not listed on a stock exchange or alternative market place approved by Norges Bank. For such securities there must be a binding promise of listing on a stock exchange or alternative market place approved by Norges Bank. The listing shall take place 14 days at the latest after the fund has invested in the securities.

Securities (ISIN) and fund units (ISIN) that are not on the list of eligible collateral on Norges Bank’s website must be further evaluated before they can be approved. Banks seeking to pledge such securities and fund units must submit a special application form [NBBBA31] with annex. The requirement does not apply to Norwegian government bonds, Treasury bills or notes pledged as collateral in the VPS. The application form and the list of eligible securities are available on Norges Bank’s website.

Credit rating requirements
Bonds, notes and short-term paper issued by Norwegian private entities are subject to credit rating requirements. Bonds, notes and short-term paper issued by Norwegian banks and mortgage companies owned by Norwegian banks are exempt from this credit rating requirement. The exemption does not apply to covered bonds.

Securities issued by foreign entities are subject to credit rating requirements. Government-guaranteed securities may be exempted from this requirement following an evaluation.

Norges Bank accepts credit ratings from S&P and Moody’s. A satisfactory credit rating from one of these agencies is sufficient. Securities issued by foreign entities are subject to credit rating requirements, while for securities issued by Norwegian entities a credit rating of the issuer is sufficient.

Listing requirements
Securities issued by private entities are subject to listing requirements.

• Securities pledged in the VPS must be listed on a stock exchange or other market place approved by Norges Bank.
• Securities pledged as collateral in another securities depository approved by Norges Bank must be listed on a stock exchange.

The listing requirement does not apply to notes that have a satisfactory credit rating.

Requirements relating to minimum volume outstanding
Securities issued by private entities are subject to requirements relating to minimum volume outstanding:

• Securities in NOK must have a minimum volume outstanding of NOK 300 million.
• Securities in a foreign currency must have a minimum volume outstanding equivalent to EUR 100 million.
• If a security is denominated in a foreign currency, a bank may not pledge more than 20 per cent of the loan’s (ISIN) outstanding volume to Norges Bank.

Denomination requirement
Securities shall be denominated in NOK, SEK, DEK, EUR, USD, GBP, JPY, AUD, NZD or CHF.

Restrictions
Only the upper tranche of bonds issued by special purpose vehicles (ABSs and CDOs) are eligible as collateral. Securities that are directly or indirectly linked to credit derivatives and zero-coupon bonds with a residual maturity of more than 7 years are not eligible as collateral. Nor will instruments such as convertible bonds, inflation-linked bonds, inverse floating rate bonds, FRN Caps or subordinated loans be eligible.

A bank may pledge up to 35 per cent of its total collateral in the form of securities issued by Norwegian banks. The same quota includes bonds, notes and short-term paper issued by companies where Norwegian banks indirectly or directly own more than 1/3, and Norwegian VPS registered bond and money market funds which according to their statutes may invest in bonds that are included in the quota arrangement. The share is to be calculated on the basis of the nominal value of the pledged securities. Norwegian subsidiaries of foreign banks are regarded as Norwegian banks, while Norwegian branches of foreign banks are regarded as foreign banks.

A bank may not pledge bonds or notes as collateral which the bank itself or a bank in the same group has issued. The same applies to bonds, notes and short-term paper that are issued by companies of which the bank or a bank in the same group indirectly or directly owns more than 1/3.

Covered bonds are not subject to this quota arrangement. A bank may pledge covered bonds as collateral even if the entity that has issued the bonds is part of the same group as the bank.

Norges Bank may refuse to accept any debt instrument.

4. Value of pledged securities
As a general rule, Norges Bank will base the loan value of a security on the security’s market value. The market value is given a haircut according to the rates in the table below. For debt instruments denominated in a currency other than NOK the haircut is increased by a further 3 percentage points.

Price information on securities registered in foreign securities depositories will be delivered by Financial Times Interactive Data (FTID). If FTID cannot deliver price information for a floating-rate bond, the nominal value will be used and the bond will be given an additional haircut depending on the bond’s rating. The additional haircut is:

• 2 per cent for a rating of AAA from S&P or Aaa from Moody’s
• 4 per cent for a rating of AA+, AA or AA- from S&P or Aa1, Aa2 or Aa3 from Moody’s
• 6 per cent for a rating of A+ or A from S&P or A1 or A2 from Moody’s

For a bond that is pledged as collateral in a foreign securities depository and that does not feature a floating rate, FTID must be able to deliver synthetic prices for a bond if it is to be eligible as collateral.

Footnotes

1 In the case of funds, duration will be used to determine the haircut instead of the period to the next interest rate adjustment. A currency risk haircut will be made for funds that invest in bonds in a foreign currency. However, this does not apply if the fund’s statutes require that it be fully currency hedged. Currency hedging must be in relation to a counterparty with a credit rating of a minimum of A from S&P or A2 from Moody’s.