Collateral for loans

How often is the list of pledged/approved securities updated on Norges Bank’s website?
The list is updated twice a day, at 6am and again at approximately 3pm.
Must everyone complete an application form?
The application form must be completed when a bank wishes to pledge a security (ISIN) that is not on the list of pledged/approved securities.
An application must also be completed for all securities that are registered in foreign securities depositories because the transitional rules do not apply to new collateral in foreign securities depositories.
How long does the application process take?
This will depend on the number of new securities that are being evaluated at the time, whether FTID (Financial Times Interactive Data) can quickly provide satisfactory data, whether the application form has been filled out correctly, whether the necessary information is attached to the application and on the staffing situation at Norges Bank.
How should the values in the list of pledged/approved securities be interpreted?
The loan factor shows the borrowing facility as a percentage of the security’s nominal value.
The loan factor is calculated as follows:
Loan factor = Market price X Exchange rate X (1 - haircut) The borrowing facility is calculated as follows:
The borrowing facility in NOK = Nominal value X (Loan factor/100)
Which alternative market places have been approved?
The Alternative Bond Market (ABM) on the Oslo Stock Exchange has been approved as an alternative market place for listing securities which may be pledged as collateral for loans.
Which prices does Norges Bank use?
The loan value of a security is established on the basis of the security’s market value.
The market value of securities pledged as collateral in VPS is calculated on the basis of prices on Oslo Børs or on prices calculated by Norges Bank. Norges Bank selects the lowest of these prices. However, if the prices from Oslo Børs are more than 21 days old, the calculated prices are used regardless.
Norges Bank receives quoted and synthetic prices from Financial Times Interactive Data (FTID) for pledged securities in foreign securities depositories. Norges Bank uses the lowest of these prices if both prices are available.
If FTID is unable to provide a price for a security with floating rates, Norges Bank will use nominal value with a haircut to calculate the loan value. This haircut is included in the loan factor which is listed on Norges Bank’s internet pages on collateral for loans.
In order for pledged, fixed-rate securities in a foreign securities depository to be approved as collateral for a loan, FTID must be able to supply synthetic prices for the bond.
How are the prices calculated?
Norges Bank’s calculation of the bond’s value is based on the present value of all future payments. Thus, Norges Bank calculates a so-called “dirty price" which includes accrued interest. In the market, the bond is quoted at the “clean price”. This price is lower than the “dirty price” because the accrued interest is not included. Norges Bank does not take credit risk into account when calculating prices.
The prices calculated by Norges Bank are referred to as “calculated prices”. The prices calculated by FTID are referred to as “synthetic prices”. When FTID calculates synthetic prices, they take the issuers’ credit risk into account.
Why does Norges Bank require the existence of synthetic prices for foreign fixed-rate bonds?
Since there may be periods when a security is not traded, the market value of a fixed-rate bond may differ considerably from the bond’s nominal value. This implies that the most recent market price does not necessarily provide satisfactory information about the bond’s market value. A synthetic price allows you to calculate approximate market value for a fixed-rate bond and it makes it possible for Norges Bank to accept such a bond as loan collateral.
How does Norges Bank find prices for bonds that are registered abroad?
See “Which prices does Norges Bank use?”
Can bonds with options be pledged as collateral for a loan?
Only ordinary bonds and notes may are approved as collateral. As a rule, Norges Bank will classify securities with call and put options as ordinary securities, but the bonds may have other features which disqualify them. Call and/or put options alone will normally not disqualify a bond as collateral.
Why does the bond have a price that is equivalent to 100?
Banks’ borrowing facilities at Norges Bank are calculated on the basis of the market value of the pledged securities. When a bond has a call option, the option price will serve as a ceiling for the value that Norges Bank uses when calculating the bank’s borrowing facility.
Why does Norges Bank sometimes refuse to accept bonds with good liquidity and a high credit rating?
In some cases, Norges Bank must refuse bonds for technical reasons. One example is a bond for which Norges Bank is unable to secure adequate price information. Some bonds may be refused because excessive resources are required to evaluate the bond’s features. This is the case, for example, with synthetic CDOs.
Why does a bond have a higher haircut than indicated by the new regulations?
A bond may have been pledged as collateral before the new regulations entered into force. Operational limitations have prevented Norges Bank from automatically reducing the haircuts. If a bank believes that it has pledged a security which should have a lower haircut than the one being applied, the bank may send an application to Norges Bank requesting that the security is pledged as collateral in accordance with the new regulations.
Why do Norges Bank’s calculated prices differ from market prices and the prices calculated by the banks?
This is due primarily to two factors:
1. Norges Bank’s calculation of the bond’s value is based on the present value of all future payments. This results in a so-called “dirty price” which includes accrued interest. In the market, the bond is quoted at the “clean price”. This price is lower than the “dirty price” because the accrued interest is not included.
2. Norges Bank does not take credit risk into account when calculating prices.
Can units in funds that use foreign-exchange and interest-rate derivatives in their fund management be pledged as security for loans?
The use of derivatives in securities funds is subject to a regulation on securities funds’ derivatives transactions. According to the regulation, the articles of association must indicate which derivatives the fund uses and whether the use of derivatives increases, reduces or has no effect on risk in the fund. The regulation also requires that foreign exchange derivatives may only be used to hedge foreign exchange risk. Assets in a fund that is linked to derivatives may be approved as collateral if the derivatives are used solely to reduce risk and/or to contribute to more effective fund management.
Is it possible to pledge units in funds that can invest in securities issued by Norwegian banks?
Units of this kind may be approved as collateral but the funds should meet the requirements for risk diversification in Section 4-8 of the Act on securities funds. (http://www.ub.uio.no/ujur/ulov/english.html)
Can securities that are part of repurchase agreements be used as collateral for loans from Norges Bank?
Securities that are part of repurchase agreements may be used as collateral for loans from Norges Bank if the securities otherwise meet the collateral requirements. When securities are pledged as collateral, they may not be used in connection with repurchase agreements.
In which countries can securities that are to be pledged as collateral in favour of Norges Bank be issued?
In addition to securities that are issued in the EEA, securities issued in Australia, Canada, the Cayman Islands, Guernsey, Jersey and the US are also approved.
What is the deadline for requesting the release of collateral?
A request to release collateral must be received by Norges Bank no later than 12 noon if the collateral is to be released on the same day.
In what way should a request for the release of collateral be sent?
A request for the release of collateral may be sent via the VPS system as a SWIFT message, fax, email or letter. Fax and email require the use of a test key. Letters must be signed in accordance with the bank’s list of signatures. Banks should where possible submit requests via VPS or SWIFT (MT599).