A definition released by the ECB as to what covered bonds it will consider “retained” has been described as surprisingly generous by some analysts, after the central bank on Friday released details of revised repo rules announced in July that come into effect today (Tuesday).

The European Central Bank in July announced changes to its repo eligibility rules and repo haircut tables, which were mainly seen as being about easing treatment of asset backed securities (ABS) but also targeted retained covered bonds by introducing additional haircuts for retained issues. These are 8% for covered bonds of credit quality step 1 (AAA to A-) and 12% for credit quality step 2 (triple-B ratings). (See here and here for previous coverage on The CBR.)

These measures came into effect today, with the ECB having on Thursday adopted the relevant decisions. The ECB also said that the decisions “include additional provisions to improve the overall consistency of the framework and its practical implementation, as agreed and announced by the Governing Council in the course of 2013”.

Covered bond analysts said that the decisions provide clarification of some important outstanding technical details, notably what the ECB considers to be a retained covered bond.

For the purposes of the additional haircuts announced in July the ECB has defined a retained covered bond as “‘own-use covered bonds … issued by either a counterparty or entities closely linked to it, and used in a percentage greater than 75% of the outstanding notional amount by that counterparty and/or its closely linked entities”.

According to Florian Eichert, senior covered bond analyst at Crédit Agricole, this means that the additional haircuts announced in July can be avoided by “merely keeping 25% of a fully retained bond sitting in ones’ own books and not pledge it to the ECB”.

“As such it is only a very gentle first push by the central bank to get banks off central bank funding (retained could have been defined as merely posting ones’ own name as well in an extreme case which would have included even big jumbo deals that banks might be trading themselves),” he said. “It also doesn’t impact banks’ trading in their own name covered bonds, which is good news.”

HSBC Trinkaus analysts said that the 75% threshold was a “surprising softening” of the ECB’s treatment of retained issuance.

“An issuer can therefore buy portions of its benchmark issues and obtain liquidity without higher haircuts,” they said. “In our opinion this will lead to increased buy-back offers.

“A bank can also use the large part of a ‘truly’ retained issue as collateral with the Eurosystem.”