Technical Details for new Liquidity Measures

Eligible Securities and Haircuts

The Reserve Bank is in the process of adopting new measures to guard against further disruptions to banking system liquidity arising from international financial market turbulence. These changes are seen as temporary, to be kept in place while global markets remain unsettled. The Reserve Bank's liquidity arrangements will be further reviewed in 12 months time.

The Reserve Bank is extending the range of securities that will be eligible for acceptance in its domestic liquidity operations. The Reserve Bank has also introduced a graduated haircut regime for all eligible securities (reflecting the underlying credit and liquidity of the security). This will replace the current limit regime for domestic market operations. As a result, current limits applicable to Kauri bonds have been removed. The following table lists the new criteria for eligible securities and indicative haircuts to be applied.

Rating

Eligible Security

Cover Factor

Maturity

< 3 years = > 3 years

AAA

NZ Government

- Treasury bills

- Bonds

- Inflation-Indexed Bonds

1%

3%

Acceptable Kauri issues (NZ$)

3%

5%

Residential Mortgage Backed Securities (NZ$)

Bank paper (NZ$)

Local Authorities (NZ$)

State Owned Enterprises (NZ$)

8%

10%

AA- to AA+

Bank paper (NZ$)

Local Authorities (NZ$)

State Owned Enterprises (NZ$)

10%

15%

Implementation dates

The Reserve Bank anticipates it will start accepting the new range of eligible securities, with the exception of Residential Mortgage Backed Securities, from 3 June 2008. Residential Mortgage Backed Securities are expected to be accepted from 31 July 2008. Eligible securities will be acceptable in the Reserve Bank's Open Market Operations[1] and the Overnight Reverse Repurchase Facility (ORRF). Market participants who have signed a Master Repurchase Agreement with the Reserve Bank will be required to sign an updated copy of Annex 1.

The Reserve Bank intends to consult with market participants before finalising criteria, including the timing of implementation. This is expected to be finalised by 31 May 2008.

Cost

From 3 June 2008 the discount margin applied in the Reserve Bank's ORRF, across all eligible securities, will be 50 basis points to OCR. The Reserve Bank will continue to publish minimum market rates for its Open Market Operations.

The Overnight Reverse Repurchase Facility (ORRF)

The term of the ORRF will be extended from 1 day to a maximum of 30 days (at the counterparties' discretion). This will come into effect from 3 June 2008. Due to current system constraints only NZ Government Bonds and Treasury bills will be acceptable in the Austraclear automated ORRF for overnight transactions. Other eligible securities, and longer term transactions using NZ Government securities will be processed through the manual ORRF by the Domestic Markets team.

The Reserve Bank will be willing to accept exposure on Residential Mortgage Backed Securities up to 2% of gross assets and on Bank Bills up to 2% of gross assets (as per the latest set of audited accounts) per institution at OCR + 50 basis points. The margin above OCR for any use beyond these thresholds will be determined by the Reserve Bank at the time.

Residential Mortgage Backed Securities (RMBS)

A preliminary set of indicative terms and conditions for accepting Residential Mortgage Backed Securities is as follows:

  • New Zealand dollar, domestic-issued residential mortgage backed security;
  • a rating of AAA or equivalent from two of the major credit rating agencies;
  • transferable in the secondary market;
  • lodged in the Austraclear (New Zealand) system and settled in that system;
  • the Reserve Bank will provide cash value only for "Valued Assets" underlying these securities. Valued Assets comprise prime[2] domestic residential first mortgages on New Zealand properties that do not have high loan to value ratios (an indicative maximum loan to value ratio range is 60-80%);
  • if a market price is not available, the security will be valued at 90% of par value until a market price can be identified from a recognised and independent source;
  • the Reserve Bank must be provided on an ongoing basis with information on the status of the mortgages in the pool;
  • Mortgages that fall below the criteria for ‘Valued Assets" (eg that go into arrears or which have an LVR that exceeds the specified threshold) must be substituted with mortgages that do meet those criteria, or if that is not possible a margin call may be required; and
  • the securities may make regular coupon payments.

The Reserve Bank's existing securitisation requirements will continue to apply for capital adequacy purposes.

Application Process

Issuers wishing to apply for acceptance of their security in Reserve Bank Operations will need to send an application to the Reserve Bank. The Reserve Bank will process applications on a case by case basis and reserves the right to accept or refuse an application for any reason and is not required to disclose such reasons. Issuers of securities that are already accepted by the Reserve Bank, including AA rated Bank Registered, Transferable and Negotiable Certificates of Deposit, with 365 days or less to maturity do not need to apply. It is proposed that the following information and attestations will be required (note – these details will be finalised by 31 May 2008 and the application form for Residential Mortgage Backed Securities will be released at this time):

Information

  • Background on the issuer (including all ratings);
  • Details of the issue, as per an Issue Notice, Prospectus and/or Information Memorandum. This should include full legal name of issuer, physical and postal address, description, issue size, pricing convention (full details), currency, arranger, dealers, registrar, paying agent, term, clearing system, governing law, redemption, payments and record date and listing (Stock exchange if any).

Attestation

Confirm that the issue meets the following criteria:

  • Issuer and issue have a long term AAA/AA rating from at least two acceptable ratings agencies (excluding Local Authorities and State Owned Enterprises where one rating is required) – where there are more than two agencies rating the issuer/issue, at least two agencies must rate the issuer/issue as AAA/AA, and no rating be lower than AA+/A+ or equivalent;
  • Issue is plain vanilla (e.g., a bond with no optionality and not sub-ordinated). Not applicable to Residential Mortgage Backed Securities.
  • Issue's pricing convention follows price and yield formulae as used by the Reserve Bank – in particular bonds should have a semi-annual coupon. This formula can be found in the Appendices of the Operating rules and guidelines (PDF 132KB).
  • Issue denominated in New Zealand dollars;
  • Issue will be lodged in Austraclear . Eligibility criteria for lodgement into Austraclear include having a suitable registrar, and paying agent (not Reserve Bank); and
  • Issue has more than three days to maturity.

Also as is usual for securities in Austraclear, only Austraclear members who have a valid resident withholding tax certificate are allowed to hold these securities in the Austraclear depository.

Subsequent issues of the same security will not require Reserve Bank approval.

The above information must be signed by authorised signatories of the Issuer. The Reserve Bank will require a list of authorised signatories for the Issuer and evidence satisfactory in form and substance to the Reserve Bank of the authority of the authorised signatories of the Issuer to execute this Agreement, any other notice or communication issued in respect of this Agreement on behalf of the Issuer.

[1] Note that the Bank may not accept all eligible securities in its Open Market Operations every day. Details on what eligible security it is willing to accept for that particular operation will be released with the Open Market Operation details.

[2] Prime mortgages are those which have been extended to parties who have a good credit record, acceptable servicing to income ratios and have provided full documentation.