1. Introduction

Norges Bank stipulates more detailed terms for pledging securities and fund units as collateral for loans in Norges Bank pursuant to Section 9 of Regulation No. 240 of 25 February 2009 relating to banks’ access to loans and deposits in Norges Bank etc.(FOR 2009-02-25-240).

The guidelines in this circular will apply with effect from 15 February 2012 and supersede the guidelines in Circular 6/23 November 2010.

The guidelines have been amended in accordance with decisions of the Executive Board of 3 February 2010 and of 25 January 2012.

2. General rules

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”.

List of approved securities and fund units
Approved securities (ISIN) and fund units (ISIN) are listed on Norges Bank's website under Financial Stability/Collateral for bank's loans.

Application forms
Securities (ISIN) and fund units (ISIN) not found on the list of approved collateral on Norges Bank's website must be assessed before they can be approved. Banks wishing to deposit such securities or fund units must submit the application form for approval of new securities and enclose documentation. Application forms are available on Norges Bank's website under Financial Stability/Collateral for bank's loans.

The application requirement does not apply to Norwegian government bonds, government paper or treasury bills registered in the Norwegian Central Securities Depository (VPS).

Approved securities depositories
Norges Bank approves collateral registered in the following central securities depositories (CSDs):

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

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

Collateral registered in the VPS
Banks may choose the registrar themselves. If Norges Bank is chosen 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 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 in the VPS. Government or government-guaranteed debt instruments and securities (ISIN) and fund units (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.

Payment on maturity and redemption of securities registered in the VPS
Banks that have pledged securities registered in the VPS as collateral in favour of Norges Bank must state the account number that is to be used for payment on maturity or redemption.

The banks’ borrowing facility with Norges Bank is written down when Norges Bank’s settlement system starts up on the day before maturity or redemption. It is the responsibility of the banks to ensure that bonds, notes and short-term paper are not pledged at such time. Breaches of this provision are subject to a fine of NOK 10 000. If the bank also has insufficient funds in the form of deposits, the cash settlement will be retained. The settlement amount will be credited to the bank’s account with Norges Bank on the due date.

Procedures and deadlines for the release of securities pledged as collateral
Banks are urged to submit requests for the release of collateral as early as possible, indicating the transaction date. 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. Requests sent the previous day or earlier will be completed on the transaction date by the securities settlement deadline VPO2 in the VPS (11:30 a.m.).

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).

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 and that Norges Bank has access to price information from Oslo Børs Informasjon.

Pursuant to 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.

Credit rating requirements
Securities issued by foreign issuers and bonds, notes and short-term paper issued by Norwegian private entities are subject to credit rating requirements.

OMFs (covered bonds issued under Norwegian law) issued by Norwegian mortgage companies are exempt from this credit rating requirement. Such covered bonds are not exempt from this requirement if they are backed by loans secured on residential or commercial property located outside Norway.

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.

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

The lowest acceptable credit rating for bonds with foreign issuers is A from S&P or the equivalent rating from Fitch or Moody’s, while the lowest acceptable credit rating for bonds issued by Norwegian issuers is BBB- from S&P or the equivalent rating from Fitch or Moody’s. The lowest acceptable credit rating for notes and short-term paper issued by foreign entities is A-1 from S&P or the equivalent rating from Fitch or Moody’s, while the lowest acceptable credit rating for notes and short-term paper from Norwegian issuers is A-3 from S&P or the equivalent rating from Fitch or Moody’s.

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 and short-term paper.

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 issued by a private entity 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. The same applies to asset-backed securities (ABSs) denominated in Norwegian kroner.

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

Government-guaranteed securities and securities issues by regional or local authorities
Subject to an assessment, Norges Bank may exempt securities with irrevocable and unconditional government guarantees from the listing and minimum outstanding volume requirements. Subject to an assessment, Norges Bank may also permit a bank to collateralise more than 20 per cent of the volume outstanding of a security of this type.

Subject to an assessment, Norges Bank may grant the equivalent exemption for securities issued by regional or local authorities as for government-guaranteed securities. These securities must then have a risk weighting of zero in accordance with the capital adequacy requirements.

In the case of government-guaranteed securities and securities issued by foreign regional or local authorities, Norges Bank may, subject to an assessment, accept a credit rating provided by the issuer or the government guarantor.

Asset-backed securities
Asset-backed securities (ABSs) must have a AAA credit rating from S&P or an equivalent rating from Fitch or Moody's at the time of collateralisation and must be assessed by Norges Bank as what are termed "true sale" ABSs and must not be secured on commercial property loans. An ABS may be rejected if the pledging bank has close ties to the special purpose vehicle (for example in the form of agreements on interest rate or currency swaps, lines of credit or the servicing of loans). Only the upper tranche will be accepted as collateral and the borrower cannot pledge more than 20 per cent of the volume outstanding of an ABS. An application to pledge an ABS must be accompanied by documentation in the form of a presale report from a credit rating agency. Where necessary, Norges Bank may require further documentation. ABSs that have already been approved as collateral when this circular enters into force may still be used as collateral provided that they fulfil the requirements in force on the date they were approved.

Other restrictions
Collateralised debt obligations (CDOs) are not 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 not pledge bonds, notes or 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. A bank may pledge securities backed by assets (covered bonds and ABSs) as collateral even if the securities are issued by the bank itself or by an entity that is part of the same corporate group as the bank.

Norges Bank does not accept collateral in the form of securities issued by banks and other financial institutions, or bonds, notes and short-term paper issued by companies where banks or other financial institutions indirectly or directly own more than 1/3. Bonds issued by holding-companies that largely own insurance companies, covered bonds and other asset-backed securities are eligible as collateral.

Subject to assessment, government short-term paper with a fixed rate or zero coupon may be eligible as collateral even if our data supplier (Interactive Data) is unable to quote a synthetic price.

Norges Bank may refuse to accept any debt instrument and any fund.

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. Securities are divided into four haircut categories (see table below). Within each category, the haircut depends on the security's maturity and fixed rate period.

For securities denominated in a currency other than NOK the haircut is increased by a further 5 percentage points. Covered bonds issued by a company that under the under the Accounting Act is considered as belonging to the same corporate group as the pledging bank or related to the pledging bank will be subject to a 5 per cent haircut in addition to the rates in the table.

Haircut rates	Category 1		Category 2		Category 3		Category 4
Maturity (yrs) \ Rate (%)	Fixed	Floating	Fixed	Floating	Fixed	Floating	Fixed	Floating
0-1	1	1	3	3	4	4	8	8
1-3	3	1	5	4	6	5	11	10
3-7	5	1	7	5	10	7	17	14
7+	7	1	10	6	13	9	22	17

 

Category 1:

• Government securities with a credit rating of AAA (or equivalent rating for notes and short-term paper)
• Units in money market and bond funds that are confined to investments in government securities with a credit rating of AAA [1]

Category 2:

• Government securities with a credit rating of AA+ down to and including A (or equivalent rating for notes and short-term paper)
• Covered bonds with a credit rating AAA down to and including AA-
• Bonds, notes and short-term paper issued by Norwegian local government authorities
• Bonds, notes and short-term paper issued by foreign local government authorities with minimum rating A from S&P or the equivalent from Fitch or Moody's (or equivalent rating for notes and short-term paper).
• Bonds, notes and short-term paper with risk weight 0 under the capital adequacy rules
• Bonds, notes and short-term paper guaranteed by government authorities
• Bonds, notes and short-term paper with private issuers with a credit rating of AAA (or equivalent rating for notes and short-term paper)

Category 3:

• Bonds, notes and short-term paper with private foreign issuers with a credit rating of AA+ down to and including A from S&P or the equivalent from Fitch or Moody’s (or equivalent rating for notes and short-term paper).
• Covered bonds with a credit rating A+ down to and including A
• Bonds, notes and short-term paper issued by private Norwegian issuers with a credit rating of AA+ down to and including A
• Units in money market and bond funds that are eligible under the current rules [1]

Category 4:

• Covered bonds from Norwegian issuers that are unrated or have a credit rating A- or lower
• Bonds, notes and short-term paper issued by private Norwegian issuers with a credit rating of A- down to and including BBB-

All asset-backed securities (ABSs) will be subject to a 15% haircut, regardless of maturity.

Price information on securities registered in foreign securities depositories 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:

• 15 percentage points for a rating of AAA from S&P or Fitch or Aaa from Moody's
• 20 percentage points for a rating of AA+, AA or AA- from S&P or Fitch or Aa1, Aa2 or Aa3 from Moody's
• 30 percentage points for a rating of A+ or A from S&P or Fitch or A1 or A2 from Moody's

For a fixed-rate bond that is pledged as collateral in a foreign securities depository, Interactive Data 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 with a counterparty with a credit rating of a minimum of A from S&P or Fitch or A2 from Moody’s.