As shown in Equation (2.1), the collateral value of a security in Eurosystem operations is its market, or in some cases, model, price less its haircut. The rules that determine whether a market or theoretical (model) price is used are laid down in the official documentation of the Eurosystem's collateral framework. As one would expect, there are separate pricing rules for marketable and nonmarketable collateral. This chapter describes changes to these rules over time, with a focus on marketable collateral. Non-marketable collateral is discussed toward the end. The chapter also provides evidence on the incidence of theoretical prices, initially in terms of the public list of eligible marketable collateral. This is followed by an estimate of the incidence of theoretical prices among pledged collateral.

ELIGIBLE MARKETABLE COLLATERAL

From January 1, 2007, to January 2, 2013, the pricing rule for marketable collateral was:

This passage reveals that both stale and theoretical prices are built into the collateral framework. Theoretical prices are used if market prices do not exist or are too stale, that is, more than five days old over the 2007–2012 time period. The pricing rule before 2007 was similar, but without the five-day staleness limit (ECB 2000/7 and 2005/2). The combination of haircuts that are rarely revised (Chapter 5) and stale or theoretical prices has the potential to create biases, along the lines of those documented in Chapter 4.