Eligible Securities

Last updated: 5 March 2019

This page outlines the criteria established by the Reserve Bank to determine whether securities are eligible for use in the Reserve Bank's domestic market operations.

1. Purchase of Securities by the Reserve Bank under Repurchase Agreement

The Reserve Bank applies minimum eligibility criteria to purchases of securities under a repurchase agreement (repo). A security's eligibility for purchase by the Reserve Bank under repo and the margins applied depends on the type of security, its maturity and/or its credit rating. All securities must meet the following criteria:

  • The security is denominated in Australian dollars and is lodged and active in Austraclear at the time of settlement of an agreed transaction with the Reserve Bank.
  • The Reserve Bank does not transact in securities held in Austraclear as Euro Entitlements. A Euro Entitlement exists where an Australian dollar denominated security has been deposited with an international Central Securities Depository (CSD; such as Euroclear or Clearstream) as an ‘Investor CSD’ but where Austraclear permits that security to settle through its system as an ‘Issuing CSD’ in the same manner as domestic securities.
  • The Reserve Bank will not accept what it considers to be highly structured securities.
  • Securities sold to the Reserve Bank under repo must not enter the ‘closed period to maturity’ during the term of the repo.
  • The Reserve Bank will not accept securities after a call notice has been issued (for CLF purposes this requirement will come into effect from 22 September 2017 as listed under CLF Notifications)

Securities that meet the above conditions and are issued on behalf of the Australian Government (Australian Government Securities (AGS)) or by the central borrowing authorities of the states and territories (semi-government securities) are eligible. The eligibility of all other securities is subject to an approval process and the Reserve Bank will not accept such securities under repo until the approval process is complete and the securities appear on the Current List of Eligible Securities. Requests can be made to add a security to the list. See Section 2 below for details on how to apply for eligibility status.

Unless otherwise expressly agreed, the Reserve Bank will not purchase eligible securities from eligible counterparties that the Reserve Bank considers to be materially related to the credit quality of those securities. Where applicable, counterparties considered by the Reserve Bank to be related to specific securities or programs appear on the Current List of Eligible Securities. In identifying these relationships, entities that are members of the same corporate group are considered by the Reserve Bank to be equivalent. Similarly, where one entity has an ownership stake in another entity that exceeds 15 per cent, the two entities are considered by the Reserve Bank to be equivalent.

The Reserve Bank may grant a ‘related-party exemption’ to a counterparty in respect of a specific eligible security which the Reserve Bank considers to be materially related to that counterparty. Under such a related-party exemption, the Reserve Bank would be willing to purchase the specific eligible security from the counterparty in repos contracted under the standing facilities, but not under open market operations. Typically, this exemption would only be granted with respect to the most senior notes in an eligible asset-backed security transaction and where at least 90 per cent of the collateral pool held by the issuer (by value) is comprised of fully documented, domestic, insured or certified to be insurable residential mortgages.

Securities that are currently listed as eligible will lose their eligibility status if they fail to meet the Reserve Bank requirements in the future, including mandatory reporting through the Securitisation System (see Section 2.2). Counterparties with outstanding repos with the Reserve Bank will be required to substitute eligible securities as replacement for those that have lost their eligibility status. The Domestic Markets Desk contacts any counterparties affected by a change in security eligibility to arrange for substitution.

The Reserve Bank has discretion to change its eligibility criteria at any time (subject to Section 9 of the CLF Operational Notes).

Further details about the specific eligibility criteria applying to each asset type are provided in the table and sections below.

Average Credit Ratings Required for Securities to be Eligible for Purchase by the Reserve Bank under Repo
Average Credit Rating Requirement(a)
Australian Government Securities n/a
Semi-government Securities n/a
Securities Issued by Supranationals and Foreign Governments(b) AAA
Securities with an Australian Government Guarantee n/a
Securities with a Foreign Sovereign Government Guarantee(b) AAA
ADI-issued securities  
– Residual maturity greater than 1 year BBB−
– Residual maturity of 1 year or less public credit rating
Asset-backed Securities A−1 or AAA
Other Securities A−1 or AAA
(a) Standard and Poor's equivalent average rating provided by the recognised credit rating agencies. See section 1.2 for more details.
(b) The credit rating requirement is waived for securities issued and/or guaranteed by the New Zealand government.

1.1 Recognised Credit Rating Agencies

The Reserve Bank only considers publically available and final credit ratings from Standard and Poor's, Moody's and Fitch when assessing the eligibility of securities. These agencies are referred to below as the recognised credit rating agencies.

To become a recognised credit rating agency under the Reserve Bank's framework, an entity must first be recognised by APRA as an External Credit Assessment Institution (ECAI) under the Basel framework (see the APRA website for APRA's guidelines on the recognition of an ECAI). Requests to be added to the list of recognised credit rating agencies should be sent to eligible_securities@rba.gov.au and will be assessed on a case-by-case basis.

1.2 Determining the Average Credit Rating

To calculate the average rating, the Reserve Bank assigns an ordinal ranking to the ratings assigned by each of the recognised credit rating agencies that provide a rating for the security and/or issuer. A rating of AAA is assigned a ranking of 1, a rating of AA+ is assigned a ranking of 2, and so on. The average of these ordinal rankings, rounded to the nearest integer, corresponds with an average credit rating. An average ranking that ends in 0.5 is rounded to ensure that the more conservative rating is used.

In general, the Reserve Bank uses the lowest rating assigned to the security (where available) or to its issuer by a recognised credit rating agency as an input into the average credit rating calculation. For covered bonds, security credit ratings can be used in place of the issuer credit ratings; however, where an insufficient number of security credit ratings are available, the issuer credit rating will be used instead. For asset-backed securities, only security ratings are considered.

When a credit rating is placed on review for possible downgrade (i.e. negative watch), the Reserve Bank treats this as an immediate one notch downgrade.

1.3 Securities Issued by Supranationals and Foreign Governments

An average credit rating of AAA is required, except for securities issued by the New Zealand government. The eligibility of both short- and long-term securities is determined by the average long-term credit rating.

1.4 Securities with an Australian Government Guarantee

The security must have an explicit guarantee from the Australian Government that is defined in legislation. Securities issued by the Export Finance and Insurance Corporation (EFIC) and the National Housing Finance and Investment Corporation (NHFIC) meet this requirement. Both short-term securities (such as bills and certificates of deposit (CDs)) and long-term securities with such a guarantee are eligible.

1.5 Securities with a Foreign Sovereign Government Guarantee

The security must have an explicit guarantee from a foreign sovereign government that is defined in legislation (or arrangements deemed by the Reserve Bank to be equivalent).

An average credit rating of AAA is required, except for securities guaranteed by the New Zealand government. The eligibility of securities with only a short-term credit rating is determined by the average long-term credit rating of the guarantor.

1.6 ADI-issued Securities

ADI-issued securities include both senior unsubordinated debt securities, as well as certain credit-enhanced securities such as covered bonds.

Securities with a residual maturity greater than 1 year: an average credit rating of at least BBB− is required, and at least two of the recognised credit rating agencies must provide a credit rating for the security or the issuer.

Securities with a residual maturity of 1 year or less: at least one of the recognised credit rating agencies must provide a credit rating for the security or the issuer. There is no average credit rating requirement.

The repo eligibility of ADI-issued securities is not directly affected by the existence in foreign jurisdictions of statutory powers to bail in the ADI's creditors. However, unsecured debt securities that would be bailed in before other unsecured debt securities issued by the same institution (e.g. senior non-preferred) are not eligible.

1.7 Asset-backed Securities

Asset-backed securities include asset-backed commercial paper (ABCP), residential mortgage-backed securities (RMBS)[1], commercial mortgage-backed securities (CMBS) and securities backed by auto loans/leases. The securities must:

  • have an average public credit rating of A-1 or AAA from the recognised credit rating agencies and be accompanied by the relevant ratings reports from agencies that provide a rating to the security. If any tranche in a deal issued after 1 April 2019 is rated by more than one of the recognised credit rating agencies, only tranches rated by each of those same agencies will be considered for repo eligibility and the Reserve Bank will take the average; otherwise only one credit rating is required. For securities with an A-1 credit rating (such as ABCP), the issuer must be an Australian company or an Australian trust that has an Australian company as its trustee
  • have structural features or triggers that are not considered to be particularly complex or unusual by the Reserve Bank and cash flows that are not generated from synthetic assets underlying the transaction; in particular, the Reserve Bank will not accept collateralised debt obligations (CDOs) backed by other asset-backed securities
  • be freely tradeable in the secondary market; private placement securities are eligible so long as they meet all criteria; a requirement that a noteholder gains the consent of another party in order to be able to sell the security is an example of a trading restriction that would prevent a security from being granted eligibility
  • be based on a true sale of assets into a bankruptcy remote Special Purpose Vehicle (SPV)
  • make regular coupon payments, if the residual maturity is greater than 12 months
  • be compliant with the Reserve Bank's reporting requirements for asset-backed securities. For more information on the reporting requirements see Section 2 below.

For asset-backed securities where the counterparty to the repo is ‘related’ to the securities proposed as collateral, the Reserve Bank may: restrict the counterparty from selling the security to the Reserve Bank; or make adjustments to the margin ratio (see Section 2 of Margin Ratios). When determining whether a party is related to the securities, the Reserve Bank takes into account the information provided in the trust documents, the application for eligible security status, and Securitisation System reporting to the Reserve Bank.

1.8 Other Securities

This category covers other types of short-term paper and bonds that are not issued by ADIs, including corporate bonds, commercial paper, unsubordinated bonds and covered bonds.

An average credit rating of A-1 or AAA is required. For securities with an A-1 credit rating (such as commercial paper) to be eligible, the issuer must be an Australian company.

2. Applications and Reporting Requirements

Before securities (other than AGS and semi-government securities) can be made eligible for purchase by the Reserve Bank under repo, an application form and the relevant supporting documentation must be submitted for an assessment of eligibility. The status of applications currently under assessment can be found on the list of Outstanding Repo Eligibility Applications and Ineligible Securities. Once a security has been approved, it will appear on the Current List of Eligible Securities. There are also ongoing mandatory reporting requirements for asset-backed securities which are detailed below.

2.1 Applications for Eligibility

Applications to add a security to the Current List of Eligible Securities must be made using the Application Form for Eligible Securities. All of the required fields and supporting documentation are listed on the application form and must be provided before the assessment process can commence. Self-securitisations and private placements are not exempt from any of these documentation requirements. This information must be verifiable from other sources and it is up to the applicant to demonstrate that the security meets the Reserve Bank's requirements. The completed application form and supporting material should be e-mailed to eligible_securities@rba.gov.au. For asset-backed securities, the Reserve Bank's eligibility assessment process will only begin once a valid submission has been made to the Securitisation System by the applicant or their nominated Information Provider. For more information on the Reserve Bank's reporting requirements, see the RBA Securitisations Industry Forum.

For short-term debt securities, it is generally sufficient for the applicant to demonstrate that the program, rather than individual securities, meets the Reserve Bank's eligibility requirements.

For asset-backed securities, a completed application form and the associated supporting documentation must also be provided whenever there is an asset substitution, top-up of the collateral pool or if new notes are issued from the trust. A list of the required supporting documentation can be found within the application form (by selecting the appropriate application type).

2.2 Ongoing Reporting (Asset-backed Securities)

The Reserve Bank and the public must be provided with reliable details on the composition of the assets underlying all eligible asset-backed securities on an ongoing basis. The reporting requirements reflect the Reserve Bank's desire to receive comprehensive and standardised information on these securities and to promote broader transparency in the securitisation market. Compliance with these ongoing reporting requirements is necessary for asset-backed securities to be considered eligible securities by the Reserve Bank. Any securities that fail to comply with the mandatory reporting requirements will be considered ineligible for repo operations. A list of these securities can be found on the list of Outstanding Repo Eligibility Applications and Ineligible Securities.

Reporting through the Securitisation System must be lodged by the monthly anniversary of the distribution date for the asset backed securities. Securities that lose eligibility due to late reporting will remain ineligible until all outstanding submissions related to that security have been made and a subsequent submission has been lodged successfully by the due date. Information Providers can contact the Securitisation Support Centre before the deadline to request an extension if they anticipate having trouble meeting the deadline in a given month. These requests will be assessed on a case-by-case basis and will typically only be granted under exceptional circumstances.

For more information on the Reserve Bank's reporting requirements, see the RBA Securitisations Industry Forum.

3. Sales of Securities by the Reserve Bank under Repurchase Agreement

Excepting those repos contracted under the AOFM Securities Lending Facility, securities sold by the Reserve Bank under repo are sourced from the Reserve Bank's portfolio of AGS and semi-government securities held on an outright basis. Securities sold by the Reserve Bank under repo are adjusted for a margin ratio. For more details, see Margin Ratios Section 3.

Eligible counterparties may approach the Reserve Bank's Domestic Markets Desk outside of scheduled open market operations to enquire about borrowing specific securities under a repurchase agreement. The Reserve Bank will negotiate such repos at its discretion. The Reserve Bank publishes details of its outright holdings of AGS in Domestic Market Operations Table 1.

The Reserve Bank will apply a margin ratio to the market value of AGS and semi-government securities it sells in a securities lending repo. The margin ratio will apply only if the Reserve Bank's counterparty delivers cash collateral.

In securities lending repos where the Reserve Bank simultaneously sells and purchases securities, the margin ratio is only applied to the market value of the securities purchased by the Reserve Bank.

4. Outright Transactions

Eligible securities for outright transactions are AGS and semi-government securities that are denominated in Australian dollars and are lodged and active in Austraclear at the time of settlement of an agreed transaction with the Reserve Bank. The Reserve Bank does not transact in securities held in Austraclear as Euro Entitlements. A Euro Entitlement exists where an Australian dollar denominated security has been deposited with an international Central Securities Depository (CSD; such as Euroclear or Clearstream) as an ‘Investor CSD’ but where Austraclear permits that security to settle through its system as an ‘Issuing CSD’ in the same manner as domestic securities.

Ahead of a large AGS bond maturity, the Reserve Bank may seek to purchase AGS or semi-government securities that mature on the relevant maturity date. For more details see Open Market Operations Section 3.

Footnote

For a summary of structural features typically found in Australian RMBS, see Arsov I, I S Kim and K Stacey (2015), ‘Structural Features of Australian Residential Mortgage-backed Securities’, RBA Bulletin, June, pp 43–58. [1]