Guidelines for pledging securities as collateral for loans in Norges Bank

1. Introduction

Norges Bank stipulates more detailed terms for pledging securities as collateral for loans in Norges Bank pursuant to §3 of the "Regulation on banks' access to loans and deposits in Norges Bank etc." (Regulation no. 473 of 25 April 2001).

This circular replicates Circular no. 5 of 25 August 2005 and contains some new information and clarifications:

• "Agreement relating to financial collateral for loans in Norges Bank" is being sent out and will replace "Framework agreement on the terms and conditions and routines relating to collateral for loans in Norges Bank".
• The listing requirement does not apply to notes with a satisfactory credit rating.
• An overview of eligible securities and the application form for approval of new securities is available on Norges Bank's website.

This circular will apply from 24 October 2005 and replaces Circular no. 5 of 24 August 2005.

2. General provisions

Agreement relating to financial collateral for loans in Norges Bank
In order to take a loan in Norges Bank, a bank must have entered into a "Framework agreement on the terms and conditions and routines concerning collateral for loans in Norges Bank" or an "Agreement relating to financial collateral for loans in Norges Bank". The latter Agreement will replace the Framework agreement.

Approved securities depositories
Norges Bank approves collateral registered in the following securities depositories:

• The Norwegian Central Securities Depository (VPS)
• Swedish Securities Depository
• Danish Securities Depository
• Euroclear in Belgium
• Clearstream Banking in Luxembourg

Banks wishing to pledge securities registered in one of the foreign securities depositories as collateral must make a special application.

Collateral registered in the VPS
Banks may choose the registrar themselves. If Norges Bank is to be the registrar, the entire VPS account is pledged as collateral in favour of Norges Bank, while other registrars must apply procedures for partial collateralisation in VPS.

Collateral registered in the VPS must be denominated in NOK.

Norges Bank's systems are designed to handle real-time collateralisation with immediate updating of the borrowing facility for collateral registered in the VPS. This is contingent on collateralisation being effected from account to account with Norges Bank as the registrar or in accordance with the procedure for partial collateralisation. Government or government-guaranteed debt instruments and securities (ISIN) that are or have been pledged as collateral in favour of Norges Bank in the preceding six months are eligible for such real-time collateralisation

3. Requirements applying to securities and fund units that are eligible as collateral for loans

Norges Bank accepts bonds and notes from Norwegian and foreign issuers as collateral for loans. Securities issued outside the EEA may be accepted provided that any need Norges Bank might have for legal confirmation that there are no problems, for example in realising the collateral, has been satisfied. Norges Bank will require that any costs associated with procuring such a confirmation be borne by the pledging bank.

Norwegian bond and money market funds are eligible as collateral provided that they are managed by a management company registered in Norway whose unit holdings are registered with the VPS. Pursuant to their statutes, the funds must be confined to investments in bonds and notes that are eligible under the current rules.

Securities (ISIN) and units in funds (ISIN) that have not been used as collateral for loans in Norges Bank in the last six months must be assessed further before they can be approved as collateral. Banks seeking to pledge such securities and fund units must submit a special application with annex. The requirement does not apply to Norwegian government bonds, Treasury bills or notes pledged as collateral in the VPS. The application form and a list of eligible securities are available on Norges Bank's website.

Credit rating requirements
Bonds and notes issued by Norwegian private entities are subject to credit rating requirements. Bonds and notes issued by Norwegian banks and mortgage companies owned by Norwegian banks are exempt from this requirement.

Asset-backed bonds issued by Norwegian mortgage companies are subject to credit rating requirements as from 1 November 2007.

Securities issued by foreign entities are subject to credit rating requirements. Government-guaranteed securities may be exempted from this requirement following an evaluation.

Norges Bank accepts credit ratings from Standard & Poor's (S&P) and Moody's. A satisfactory credit rating from one of these agencies is sufficient. Securities issued by foreign entities are subject to credit rating requirements, while for securities issued by Norwegian entities a credit rating of the issuer is sufficient.

Listing requirements
Securities issued by private entities are subject to listing requirements.

• Securities pledged in the VPS must be listed on a stock exchange or other market place approved by Norges Bank.
• Securities pledged as collateral in another securities depository approved by Norges Bank must be listed on a stock exchange.

The listing requirement does not apply to notes with a satisfactory credit rating.

Requirements relating to minimum volume outstanding
Securities issued by private entities are subject to requirements relating to minimum volume outstanding:

• Securities in NOK must have a minimum volume outstanding of NOK 300 million.
• Securities in a foreign currency must have a minimum volume outstanding equivalent to EUR 100 million.
• If a security is denominated in a foreign currency, a bank may not pledge more than 20 per cent of the loan's (ISIN) outstanding volume to Norges Bank.

Denomination requirement
Securities shall be denominated in NOK, SEK, DEK, EUR, USD, GBP, JPY or CHF.

Restrictions
Only ordinary bonds and notes are eligible as collateral.

Only the upper tranche of bonds issued by special purpose vehicles (ABSs and CDOs) are eligible as collateral. Securities that are directly or indirectly linked to credit derivatives and zero-coupon bonds with a residual maturity of more than 7 years are not eligible as collateral. Nor will instruments such as convertible bonds, index-linked bonds, inverse floating rate bonds, FRN Caps or subordinated loans be eligible.

A bank may pledge up to 35 per cent of its total collateral in the form of securities issued by Norwegian banks. The same quota includes bonds and notes issued by companies where Norwegian banks indirectly or directly own more than 1/3, and Norwegian VPS registered bond and money market funds which according to their statutes may invest in bonds that are included in the quota arrangement. The share is to be calculated on the basis of the nominal value of the pledged securities. Norwegian subsidiaries of foreign banks are regarded as Norwegian banks, while Norwegian branches of foreign banks are regarded as foreign banks.

A bank may not pledge bonds or notes as collateral which the bank itself or a bank in the same group has issued. The same applies to bonds and notes that are issued by companies of which the bank or a bank in the same group indirectly or directly owns more than 1/3.

Asset-backed bonds are not subject to this quota arrangement. A bank may pledge asset-backed bonds as collateral even if the entity that has issued the bonds is included in the same group as the bank.

Norges Bank may refuse to accept any debt instrument.

4. Value of pledged securities

As a general rule, Norges Bank will base the loan value of a security on the security's market value. The market value is given a haircut according to the rates in the table below. For debt instruments denominated in a currency other than NOK, the haircut is increased by a further 3 percentage points.

Securities\ Period to next interest rate adjustment	0-1 year	1-3 years	3-7 years	7+ years
Norwegian government and government-guaranteed bonds, notes and short-term paper Norwegian government securities1 and Treasury bills foreign government and government-guaranteed bonds with a minimum rating of A by S&P or a minimum of A2 by Moody's foreign government and government-guaranteed notes and short-term paper with a minimum rating of A-1 by S&P or P-1 by Moody's	1	2.5	3	4
bonds, notes and short-term paper issued or guaranteed by Norwegian municipalities or counties Norwegian state enterprise bonds, notes and short-term paper bonds with a minimum rating of A by S&P or A2 by Moody's notes and short-term paper with a rating of A-1 by S&P or P-1 by Moody's asset-backed bonds issued by Norwegian entities VPS-registered bond and money market funds1	2	3.5	6	8
bonds, notes and short-term paper issued by Norwegian banks and mortgage companies owned by Norwegian banks bonds with a minimum rating of BBB- by S&P or Baa3 by Moody's issued by Norwegian entities	8	10	12	14

Price information on securities registered in foreign securities depositories will be delivered by Financial Times Interactive Data (FTID). If FTID cannot deliver price information for a floating-rate bond, the nominal value will be used and the bond will be given an additional haircut depending on the bond's rating. The additional haircut is:

• 2 per cent for a rating of AAA by Standard & Poor's or Aaa by Moody's
• 4 per cent for a rating of AA+, AA or AA- by Standard and Poor's or Aa1, Aa2 or Aa3 by Moody's
• 6 per cent for a rating of A+ or A by Standard & Poor's or A1 or A2 by Moody's

For a bond that is pledged as collateral in a foreign securities depository and that does not feature a floating rate, FTID must be able to deliver synthetic prices for a bond if it is to be eligible as collateral.

5. Transitional provisions

Securities that are pledged at the time of the entry into force of the provisions in this circular may be used as collateral up to 1 November 2007.

If the pledge is registered in the VPS, banks may increase their pledges of these securities (ISIN) during the transitional period. The requirements regarding volume outstanding, credit rating, listing and denomination that are detailed in this circular apply to these securities (ISIN) from 1 November 2007.

The following haircuts will apply to low-rated and unrated securities that are accepted during the transitional period:

Securities\ Period to next interest rate adjustment	0-1 year	1-3 years	3-7 years	7+ years
Bonds and notes issued by low-rated and unrated entities	13	15	20	25

For securities (ISIN) issued by Norwegian banks and bank-owned mortgage companies in NOK, the requirement relating to volume outstanding does not apply until 1 November 2007.

For asset-backed bonds, the requirements relating to credit rating and listing on a stock exchange or another market place apply from 1 November 2007.

The quota for bank securities is set at 45 per cent as from the entry into force of this regulation. As from 2 May 2006, this quota will be reduced to 40 per cent, and as from 1 November 2006 to 35 per cent.

An exception to this transitional rule is fixed-rate bonds that are pledged as collateral in a foreign securities depository and for which the FTID cannot deliver synthetic prices. Such bonds will not provide access to loans subsequent to the entry into force of the new regulation.

Footnotes

¹In the case of funds, duration will be used to determine the haircut instead of the period to the next interest rate adjustment