On 5 May 2020, the Reserve Bank of Australia announced that it had broadened the range of eligible collateral for its repurchasing agreements to include corporate investment grade debt securities.
Repurchase agreements (repos) are frequently used by the Reserve Bank in its daily open market operations, allowing counterparties to access short-term cash by borrowing against eligible debt securities. By expanding eligible repo collateral, the Reserve Bank aims to promote both access to a range of financing options as well as liquidity in the Australian capital markets, which have been significantly impacted in recent months due to the COVID-19 pandemic.
The Reserve Bank's market announcement can be found here.
Minimum criteria for eligibility
In order to qualify as eligible collateral for purchase under a repo, securities must meet certain criteria established by the Reserve Bank.
All securities must satisfy the following minimum eligibility criteria:
- The security is denominated in Australian dollars and is lodged and active in the Austraclear clearing system (securities held in Austraclear as Euro Entitlements will not be eligible);
- The security is not considered a highly structured security;
- The security must not enter the 'closed period to maturity' during the term of the repo; and
- A call notice has not been issued for the security.
Australian Government securities and semi-government securities will automatically be eligible for purchase under a repo if they meet the above criteria.
The repo eligibility of all other securities, including corporate bonds and commercial paper, is subject to additional eligibility criteria and the Reserve Bank's approval process and will only become eligible securities once listed in the Reserve Bank's Current List of Eligible Securities.
Additional criteria for corporate bonds
Corporate bonds and commercial paper must also satisfy the following eligibility criteria:
- The security must be senior and unsubordinated;
- The security must have an average credit rating of BBB- (for long-term debt securities) or A-3 (for short-term debt securities);
- A credit rating for the security or the issuer must have been provided by at least two of the recognised credit rating agencies; and
- For securities with a maturity of less than 12 months, the issuer must be an Australian company.
The Reserve Bank's approval process
In addition to satisfying both sets of criteria mentioned above, an application for an assessment of eligibility must be submitted to the Reserve Bank. An applicant will need to demonstrate that the security meets the Reserve Bank's requirements. Once approved, the security will appear on the Reserve Bank's Current List of Eligible Securities and will then be made eligible for purchase under repo.
For further information please contact one of our Debt Capital Markets practitioners.
Authors: Caroline Smart, Partner; Timon Ibrahim, Senior Associate.
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