Self-collateralisation

Since October 2007, the Deutsche Bundesbank (BBk) and Clearstream Banking AG, Frankfurt (CBF) have offered self-collateralisation to the German market as a service for the monetary policy counterparties of the Bundesbank and CBF customers. Self-collateralisation (SC) enables SC participants in their capacity as purchasers of securities to refinance these securities on a short-term basis via the Bundesbank using the CBF reservation process in TARGET2 during night-time processing and for daytime processing prior to the start of SDS1 (first CBF same-day settlement at 10 am). A prerequisite for this is that the securities in question are eligible for self-collateralisation. The SC participant is thereby provided with additional liquidity in the form of central bank money for processing securities overnight and up until 10 am during the day.

By appropriately flagging his purchase instruction in the CASCADE system operated by CBF, the SC participant is able to use the corresponding security in a same-day refinancing transaction with the Bundesbank as a means of self-collateralisation. To a large degree, such flagged purchase instructions on securities eligible for self-collateralisation finance themselves – that is, after deducting an appropriate haircut.

From a settlement point of view, the procedure is similar to a repo transaction. From a legal viewpoint, however, it constitutes a credit promise and therefore a draw-down of a credit collateralised via a pledge in favour of the Bundesbank.

This procedure has the following advantages.

• It reduces the financing volume for night-time and daytime processing until the start of CBF’s SDS1.
• As a refinancing source for central bank money during the night and during the day before CBF’s SDS1 starts, it provides an additional service to existing daytime safe custody account facilities.
• Back-up in case of unexpected liquidity shortfall at counterparties during processing – the liquidity generated can be used as a safety buffer.
• It is based on an existing CBF functionality, reducing the need for customer adjustment to a minimum.