Risk control

Objective: protect against financial loss

Risk control measures are applied to the assets underlying Eurosystem credit operations in order to protect the Eurosystem against the risk of financial loss if underlying assets have to be realised owing to the default of a counterparty. The risk control measures at the disposal of the Eurosystem are described below.

The Eurosystem applies specific risk control measures according to the types of underlying assets offered by the counterparty. The ECB determines the appropriate risk control measures for both marketable and non-marketable eligible assets. The risk control measures are broadly harmonised across the euro area and ought to ensure non-discriminatory conditions for any type of eligible asset across the euro area.

Applied risk control measures of the Eurosystem

• Valuation haircuts: The Eurosystem applies “valuation haircuts” in the valuation of underlying assets. This implies that the value of the underlying asset is calculated as the market value of the asset less a certain percentage (haircut). Additional information on haircuts can be found in the occasional paper The valuation haircuts applied to eligible marketable assets for ECB credit operations, March 2023.
• Variation margins (marking to market): The Eurosystem requires the haircut-adjusted market value of the underlying assets used in its liquidity-providing reverse transactions to be maintained over time. This implies that if the value, measured on a regular basis, of the underlying assets falls below a certain level, the national central bank will require the counterparty to supply additional assets or cash (i.e. it will make a margin call). Similarly, if the value of the underlying assets, following their revaluation, exceeds a certain level, the counterparty may retrieve the excess assets or cash.
• Limits in relation to the use of uncovered bank bonds

Details on the risk control measures applied by the Eurosystem are laid down in the relevant Sections of the "General framework" as well as the “Temporary framework”, and are applicable until further notice.

Other possible risk control measures

• Initial margins: The Eurosystem may apply initial margins in its liquidity-providing reverse transactions. This would imply that counterparties would need to provide underlying assets with a value at least equal to the liquidity provided by the Eurosystem plus the value of the initial margin.
• Limits in relation to issuers / debtors or guarantors: The Eurosystem may apply additional limits, other than those applied to uncovered bank bonds, to the exposure vis-à-vis issuers/debtors or guarantors. Such limits can also be applied to specific counterparties, in particular if the credit quality of the counterparty appears to exhibit a high correlation with the credit quality of the collateral submitted by the counterparty.
• Additional guarantees: The Eurosystem may require additional guarantees from financially sound entities in order to accept certain assets.
• Exclusion: The Eurosystem may exclude certain assets from use in its monetary policy operations. Such exclusion can also be applied to specific counterparties, in particular if the credit quality of the counterparty appears to exhibit a high correlation with the credit quality of the collateral submitted by the counterparty.