Annex 4: Selection of Counterparties for Foreign Exchange Operations and Foreign Exchange Swaps for Monetary Policy Purposes

The selection of counterparties for foreign exchange operations and foreign exchange swaps for monetary policy purposes will follow a uniform approach irrespective of the chosen organisational set-up for the ESCB's external operations. Such a policy will not entail a substantial departure from existing market standards, as it will be derived by harmonising the national central banks' current best practices. The selection of counterparties to ESCB's foreign exchange operations will be based, primarily, on two sets of criteria.

The first set of criteria is inspired by the principle of prudence. A first prudence criterion is creditworthiness, which will be assessed using a combination of different methods (e.g. using credit ratings available from commercial agencies and the in-house analysis of capital and other business ratios); a second criterion is that the ESCB will require all its potential foreign exchange counterparties to be subject to supervision by a recognised supervisor; as a third criterion, all the ESCB's foreign exchange counterparties will need to follow high ethical standards and have a good reputation.

Once the minimum prudence requirement is fulfilled, the second set of criteria inspired by efficiency considerations will be applied. A first efficiency criterion relates to competitive pricing behaviour and the counterparty's ability to handle large volumes, even in turbulent market conditions. The quality and coverage of information provided by counterparties feature among other efficiency criteria.

The pool of potential foreign exchange counterparties will be sufficiently large and diverse to guarantee the necessary flexibility when implementing intervention operations. It will enable the ESCB to choose from among different intervention channels. In order to be able to intervene efficiently in different geographical locations and time zones, the ESCB will be able to use counterparties in any international financial centre. However, in practice, it is likely that a substantial share of the counterparties will be located in the euro area. For foreign exchange swap operation executed for monetary policy purposes, only counterparties located in the euro area will be used.

Credit exposures related to foreign exchange intervention and reserve management operations will be managed using a limit-based system.

ECB - European Central Bank