Guidelines for pledging securities as collateral for loans from Norges Bank

1. Introduction

The terms for pledging securities as collateral for loans in Norges Bank are laid down by Norges Bank pursuant to Section 3 of “Forskrift om bankenes adgang til lån og innskudd i Norges Bank mv.” (Regulation on banks’ borrowing and deposit facilities in Norges Bank etc. FOR 2001-04-25 no 473. Norwegian only).
The guidelines in this circular will apply as from 3 November 2008 and replace the guidelines in Circular no. 5/2 October 2007, no. 3/6 October 2008 and no. 4/13 October 2008. This circular also includes the changes in collateral requirements published in a press release from Norges Bank on 29 October.

It is emphasised that any security may be rejected by Norges Bank.

2. General rules

Agreement on the pledging of financial collateral for loans from Norges Bank
In order to borrow from Norges Bank, a bank must enter into an "Agreement on the pledging of financial collateral for loans from Norges Bank ".

List of approved securities
Approved securities and funds (ISIN) are listed on Norges Bank’s website under Payment systems/Collateral for loans.

Application forms
Banks wishing to deposit securities or fund units that have not already been approved must submit the application form for approval of new securities and enclose documentation. This requirement does not apply to Norwegian government bonds, government paper or Treasury bills deposited in the Norwegian Central Securities Depository. Application forms are available on Norges Bank’s website under Payment systems/Collateral for loans.

Further documentation may be required for applications for approval of unrated and/or unlisted securities issued by Norwegian private enterprises. A separate form has been drawn up for this purpose and shall be used for all new applications to pledge the above securities as collateral. This form shall not be used for securities issued by Norwegian banks or mortgage companies owned by Norwegian banks. 
 
Approved central securities depositories
Norges Bank approves collateral registered in the following securities depositories:

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

Banks wishing to pledge as collateral securities registered in one of the foreign securities depositories must submit an application to this effect.

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

VPS-registered collateral must be denominated in NOK.

Norges Bank’s systems are designed to handle real-time collateralisation with immediate updating of the borrowing facility for VPS-registered collateral. This is contingent on the deposit of collateral by account-to-account transfer with Norges Bank as 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 regarding securities and fund units approved as collateral for loans

Norges Bank accepts bonds and short-term paper from Norwegian and foreign issuers as collateral for loans. Securities issued outside the EEA area may be accepted provided that any request from Norges Bank for legal confirmation that there are no problems related to realising the collateral, for example, has been satisfied. Norges Bank will require that any costs involved in procuring such confirmation be borne by the pledging bank.

Norwegian bond and money market funds may be furnished as collateral provided that they are managed by a management company registered in Norway whose unit holdings are registered with the VPS and that Norges Bank has access to price information from Oslo Børs Informasjon. 

The statutes of these funds must limit investment to bonds and short-term paper that are eligible under the current rules. The funds may nevertheless invest in securities that are not listed on the stock exchange or alternative market place approved by Norges Bank contingent on a binding commitment to list the securities on a stock exchange or alternative market place approved by Norges Bank. The listing shall take place at the latest 14 days after the fund has invested in the securities. The provisions in this paragraph do not apply to Norwegian money market funds, whose statutes limit investment to bonds and short-term paper denominated in NOK.

Credit rating requirements
Securities issued by foreign entities must have a credit rating. Government-guaranteed securities may be exempted from this requirement following an assessment.

Norges Bank accepts credit ratings from Standard & Poor's (S&P) and Moody’s. A satisfactory credit rating from one of these agencies is sufficient.

Credit ratings are not required for covered bonds issued in other countries provided that:

• the cover asset pool comprises claims as stated in Section 2-28, first paragraph of the Financial Institutions Act, and
• loans as stated in Section 2-28, first paragraph, a-c of the Financial Institutions Act are secured on assets located in Norway.

In connection with applications for collateralisation of covered bonds issued by other countries, Norges Bank may require the submission of a prospectus in English and a legal report documenting the bondholder’s rights to the cover asset pool etc.

A plan for obtaining a credit rating shall be attached to the application for collateralisation of unrated covered bonds. This applies to covered bonds issued under Norwegian rules or under other countries’ rules.
 
Listing requirement
Securities issued by foreign private entities are required to be listed on the stock exchange.

Listing on the stock exchange is not required for bonds issued under the rules applying to covered bonds in other countries provided that:

• the cover asset pool comprises claims as stated in Section 2-28, first paragraph of the Financial Institutions Act, and
• loans as stated in Section 2-28, first paragraph, a-c of the Financial Institutions Act are secured on assets located in Norway.

Requirements relating to minimum volume outstanding
Securities in foreign currency issued by private entities must have a minimum volume outstanding equivalent to at least EUR 100 million. A bank may not pledge more than 20 per cent of such a 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.

Unrated and/or unlisted securities that are issued by Norwegian private enterprises may have a residual maturity of up to 5 years. This restriction does not apply to securities issued by Norwegian banks or by mortgage companies owned by Norwegian banks. 

A bank may pledge up to 35 per cent of its total collateral in the form of securities issued by Norwegian banks, including bonds and short-term paper issued by companies of which Norwegian banks indirectly or directly own more than 1/3. 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.

Bonds or short-term paper that the pledging bank or a bank in the same group has issued may not be furnished as collateral. The same applies to bonds and short-term paper that are issued by a company of which the bank or a bank in the same group indirectly or directly owns more than 1/3.

Covered bonds are not included in this quota system. A bank may pledge covered bonds as collateral even if the company that has issued the bonds is part of the same group as the bank.

A bank’s claim on a mortgage company for the agreed payment for a loan portfolio transferred to the mortgage company for issuing covered bonds to the bank is eligible as collateral for loans from Norges Bank until and provided that such claims are subsequently substituted for covered bonds.
 
Norges Bank may reject any security.

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, an additional haircut of 3 percentage points will be applied.

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 foreign currency. However, this does not apply if the fund’s statutes require that it be fully currency hedged. Currency hedging must involve a counterparty with a minimum credit rating of A from S&P or A2 from Moody’s.

Price information on securities registered in a foreign securities depository will be delivered by Interactive Data. If Interactive Data 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, Interactive Data must be able to deliver a synthetic price for the bond if it is to be eligible as collateral.