The European Central Bank (ECB) said that it no longer intends to accept ABS collateral for its repo operation if it is not backed by a liquidity facility that is worth at the minimum 20% of the deal’s nominal value.

ECB president Jean-Claude Trichet speaking at a press conference yesterday revealed the conclusion of the review the ECB undertook in response to concerns that some banks might have been overusing its repo program.

“We only want to be sure we are optimizing the risk management of this collateral,” he said.

Trichet added that while its unlikely that banks will be negatively impacted by the decision, he does expect some counterparties will need to bring forward collateral, maintain levels of available collateral in order to continue to tap the central bank funding.

Additionally, a 12% haircut will be applied to any fixed-coupon ABS with a residual maturity of more than ten years. A 5% haircut will be applied to ABS platforms that are “theoretically valued”, Trichet said at the conference.

The ceiling for haircut charges remains pegged at 18%. The ECB will review its adjusted policy in February 2009 and invited comment from participants.

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