Description of the procedure
The principle of self-collateralisation is based on a customer flagging a purchase instruction (Receipt versus Payment – RVP) in the CASCADE system operated by Clearstream Banking AG in Frankfurt in order to enter into a same-day refinancing arrangement with the Deutsche Bundesbank which uses the category and amount of securities specified in the flagged purchase instruction as the collateral means for CBF night-time processing. The Bundesbank calculates the collateral values of the instructions that have been flagged. Prior to the start of CBF night-time processing, the Bundesbank verifies whether the customer and category of security are actually eligible for self-collateralisation.
In the course of the CBF night-time processing, and for daytime processing prior to the start of SDS1 (first CBF same-day settlement at 10 am), the refinancing transaction is delivered, concurrently with the payment (Delivery versus Payment = DVP). The Bundesbank takes receipt of the papers while the customer is given the countervalue (equivalent) amount (minus a haircut), which is immediately allocated to the customer’s cash position for the night-time processing.
Since there is no direct functional link between the flagged purchase instruction and the additionally generated self collateralisation delivery instruction the latter can also be processed using existing securities holdings.
Self-collateralisation step by step
The SC loan resulting from the settlement of the refinancing transaction with the Bundesbank must be repaid within RTS processing by 3:30 p.m. that same day. If same-day repayment is not possible in this manner, a special process will be initiated at the Bundesbank for which fees will be charged during this process, SC securities are automatically transferred to an SC operational safe custody account at the Bundesbank, providing another possibility for repayment by 6 p.m. The SC loan is an intraday credit which is converted to an interest-bearing, overnight Bundesbank loan if sufficient funds are not available by the end of the day (ie 6 p.m.).
From a settlement point of view, the procedure is similar to a repo transaction, as the provision of cash by the Bundesbank and the provision of securities collateral is carried out DvP during night-time processing and during daytime CBF processing prior to the start of SDS1. From a legal viewpoint, however, this constitutes a credit promise and therefore a draw-down of a credit collateralised via a pledge in favour of the Bundesbank.
The flagged purchase instructions and the self-collateralisation instructions which they generate are displayed in the CASCADE cash forecast. Each individual flagging of a purchase order for self-collateralisation purposes leads to a real-time update of the cash forecast. The self-collateralisation potential can be included in the amount to be managed or shown for information only. Choosing the first option means that the financing volume used for the night processing will be reduced, whereas with the second option this amount will not be reduced as the self collateralisation acts as a buffer.
A detailed description of the processes involved in CASCADE you see on the website of CBF.