Also, potential investors such as private banks, investment funds and hedge funds have become reluctant to invest at these levels and adopted a wait and see attitude, in the hope of even better spreads or clearer signs about future directions. As a consequence of this increase in risk aversion, the primary market is facing a mismatch between supply and demand: issuers do not want to sell at current conditions, and investors do not want to buy until prices have bottomed out. 4. The Eurosystem’s collateral framework and the ABS market during the turmoil  Let me dwell a bit on the role of our operational and collateral framework during the turmoil. Since its inception the operational framework of the Eurosystem has been tested on several occasions. The present market turmoil has posed new challenges, and in many aspects even more significant than those faced in the past. Overall, the Eurosystem’s operational framework, including its collateral-related component, has served us well during the market turmoil and has proven robust under stressed conditions. One contributing feature to its resilience is the fact that a broad range of counterparties, including all types of credit institutions irrespective of their size and the scope of their business, may access the credit operations of the Eurosystem, including the temporary refinancing operations. Moreover, credit is granted against a wide range of collateral. This implies that sufficiency of collateral should not become a constraint for counterparties.
These  4  BIS Review 68/2008  two features of the operational framework in combination with the large scale temporary refinancing operations have certainly helped the Eurosystem to effectively mitigate funding liquidity risk for counterparties when interbank markets stopped functioning properly. In order to understand better the specific role which ABSs fulfil in the implementation of our monetary policy, let me just remind you of some key elements of our collateral framework. The Eurosystem has a broad definition of debt instruments and against this background a wide range of public and private securities, including asset-backed securities, can potentially become eligible if they fulfil all the other eligibility criteria. Indeed, compared with the traditional concept of other central banks in the world, the Eurosystem accepts a large volume of high quality ABSs, and has done this well before the outbreak of the financial market turmoil. In addition to the general eligibility criteria, such as the denomination in euro and compliance with our minimum rating threshold, some specific requirements apply to ABSs: (i) only the most senior tranche of an ABS structure is eligible; (ii) ABSs must be backed by assets that have been legally acquired by the special purpose vehicle (SPV) in a manner that the Eurosystem considers to be “true sale”, and (iii) the issuing SPV must be located in the European Economic Area (EEA). There are no special restrictions on the underlying assets backing the transaction, with one exception, namely that underlying asset pools may not consist of credit derivatives.