Media Release Changes to Eligible Securities and Margining for Domestic Market Operations

Number 2011-26
Date

The Reserve Bank has reviewed the range of securities it is willing to accept under repurchase agreements (repos) in its domestic market operations and has reassessed the initial margins that it uses to discount the securities purchased under repo. The changes, which will be effective from 1 February 2012, are detailed below.

Eligible Securities

The Bank has decided to maintain most of its existing criteria for determining eligible securities. The only change pertains to the eligibility of securities issued by authorised deposit-taking institutions (ADIs). In particular, from the implementation date, all senior debt securities with a residual maturity of 12 months or less that have been issued by ADIs with a public credit rating will be eligible for market operations. Additionally, the minimum credit rating for eligible long-term debt securities issued by ADIs will be reduced from A− to BBB+. There will no longer be a requirement for the issuing ADI to be an exchange settlement (ES) account holder with the Bank.

The range of eligible securities is as follows:

General Collateral ($A)

  • Commonwealth Government Securities
  • Securities issued by State and Territory Government Central Borrowing Authorities (Semis)
  • Securities with an Australian Government Guarantee
  • Securities with a Foreign Sovereign Government Guarantee
  • Securities Issued by the New Zealand Government or with a New Zealand Government Guarantee
  • Domestic Issues by Supranationals and other Foreign Governments

Private Securities ($A)

  • ADI-issued debt securities, including bills and certificates of deposit
  • Asset-backed commercial paper
  • Asset-backed securities, including residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS) and securities backed by auto loans/leases and credit card receivables

As a number of restrictions apply to these securities, including a minimum ratings requirement and related party conditions, please refer to the ‘Eligible Securities’ page of the Bank's website for further details.

Initial Margins

The new margin schedule is shown in the table below.

Initial Margins on Eligible Securities
Per cent
Current Margins New Margins (Effective 1 Feb 2012)
Min. Rating 0–1 yrs 1–5 yrs 5–10 yrs >10 yrs 0–1 yrs 1–5 yrs 5–10 yrs >10 yrs
General Collateral
CGS n/a 2 2 2 2   1 2 2 2
Semis n/a 2 2 2 2   1 2 2 2
Supras & sovereigns A−1 or AAA(b) 2 2 2 2   2 3 4 4
Aust govt-guaranteed n/a 2 2 2 2   2 3 4 4
Foreign govt-guaranteed A−1 or AAA(b) 2 2 2 2   2 3 4 4
Private Securities
ADI-issued securities(a)(c) AAA 2 4 6 8   6 7 8 10
AA− 2 4 6 8   10 12 14 16
A− 2 5 7 9   12 14 16 18
BBB+ 2 n/a n/a n/a   15 17 20 23
Other rated 2 n/a n/a n/a   20 n/a n/a n/a
Asset-backed Securities
– Standard A−1 or AAA 10 10 10 10   10 10 10 10
– Other A−1 or AAA 2 n/a n/a n/a   10-20 10-20 10-20 10-20
Other A−1 or AAA 2 4 6 8   6 7 8 10
(a) For ADI-issued debt securities issued with only a short-term credit rating, the lesser of the margin applicable to the issuer's long-term unsecured credit rating, or 20 per cent, will apply.
(b) Minimum rating requirement waived for New Zealand.
(c) Includes covered bonds.

The margins take into account the general risk characteristics of each security class. Within each maturity bracket, the lowest margins are applied to Commonwealth Government Securities (CGS) and securities issued by the semi-government authorities. Other securities qualifying as general collateral, such as supranational and government-guaranteed debt, will also have lower margins than those applied to private securities.

While margins on most asset-backed securities (such as residential mortgage-backed securities (RMBS)) will remain at 10 per cent, those asset-backed securities that incorporate non-standard features, but are nevertheless eligible for market operations, will have higher margins.

Where the Bank cannot identify a timely market price for long-term securities, general collateral will be valued using a yield which is 50 basis points above an equivalent maturity swap rate referenced to 3-month BBSW, while private securities, such as self-securitised RMBS, will be valued at a price equal to 90 per cent of par, prior to the application of margins. The Bank regularly reviews these pricing conventions, and any changes will be noted on the Bank's website.

Margin Maintenance

The Bank will continue to revalue securities held under repo each business day. Where the market value of the securities held (discounted for agreed margins) falls more than 1 percentage point below the accrued cash value of repos outstanding with a counterparty, the Bank will make a margin call on that party. Conversely, where the discounted value of the securities exceeds the cash value of the repos by more than 1 percentage point, the Bank will meet margin calls made by its counterparty.

Interest Rates on Repos

In its daily market operations, the Bank will continue to assess approaches for repos against private securities separately from approaches for general collateral repo.

Interest rate arrangements for the Bank's intraday and overnight repo facilities are unchanged. Overnight repos will be contracted at 25 basis points above the cash rate target, while all intraday repos will be provided without any interest charge.

Transitional Arrangements

Repos contracted ahead of the implementation date will be allowed to mature under the current margin schedule.

Enquiries

Dr Guy Debelle
Assistant Governor (Financial Markets)
Reserve Bank of Australia
SYDNEY

Phone: +61 2 9551 8200

Mr Chris Aylmer
Head of Domestic Markets Department
Reserve Bank of Australia
SYDNEY

Phone: +61 2 9551 8300

Media Office
Information Department
Reserve Bank of Australia
SYDNEY

Phone: +61 2 9551 8111
Fax: +61 2 9551 8033
E-mail: rbainfo@rba.gov.au