Italy: EBA Launches Harmonisation Of European Covered Bonds Rules

Background

On 20 December 2016, the European Banking Authority (the "EBA") published the final version of a report entitled "EBA Report on Covered Bonds - Recommendations on Harmonisation of Covered Bond Frameworks in the EU" (the "Report"). The Report builds on previous work and provides additional recommendations on how to further harmonise the national legislative frameworks on the covered bond instrument.

In response to Recommendations of the European Systemic Risk Board (ESRB) and following the publication by the EBA of their Report on EU Covered Bond Framework and Capital Treatment*, the EBA began an extensive analysis of the regulatory and legal framework for covered bonds in individual Member States, with a specific focus on alignment with the EBA's best practices.
More recently, in March 2017 the European Covered Bond Council (ECBC) announced that it supported the Report's recommendations and offered its collaboration to implement the harmonisation of covered bonds across the EU in the most effective way.

The Report

The aim of the Report was to:

  1. summarise the activity of regulatory investigation which was carried out following publication of the Report on EU Covered Bond Framework and Capital Treatment (July 2014);
  2. develop four key recommendations (the "Recommendations") to implement a common regulatory framework for covered bonds; and
  3. set out three key steps for the implementation process of the Recommendations and define the necessary activities for each of them.

The Recommendations issued by the EBA are as follows:

Recommendation n. 1 – Three-step approach to the harmonisation of the European regulatory framework for covered bonds.
Recommendation n. 2 – Development of a covered bonds directive (the "CB Directive").
Recommendation n. 3 – Amendment of EU Regulation 575/2013 (the "CRR").
Recommendation n. 4 – Voluntary convergence of national rules governing covered bonds.
The Report suggests implementation of the above four Recommendations in three key steps which are summarised below.

STEP I: EU Covered Bonds Directive

The proposed three-step approach builds on the strengths of the existing national frameworks, but allows better regulation of covered bonds in order to achieve a broad harmonisation throughout the EU. The adopted model provides for the development and implementation of framework legislation ensuring more a consistent approach, particularly as regards prudential standards, generally applicable in all Member States, and which replaces the discipline currently contained in Article 52, paragraph 4, of Directive 2009/65/EU (Undertakings for Collective Investment in Transferable Securities – UCITS) (the "UCITS Directive"))** .

In particular, European legislation should define structural requirements for covered bonds with specific reference to:

  • requirements on the dual recourse of a covered bond, segregation of cover assets and bankruptcy remoteness;
  • requirements on the coverage principle, liquidity risk mitigation and cover pool derivatives;
  • requirements on a system of special public supervision and administration related to covered
  • bonds, including requirements for a cover pool monitor, supervision of the issuer on an ongoing basis, supervision in the event of the issuer's insolvency/resolution, and administration of the covered bond programme following the issuer's insolvency/resolution;
  • transparency requirements — i.e. scope, format and frequency of disclosure of information; and
  • conditions for soft bullets and conditional pass through covered bonds.
  • The EBA recommends developing a new covered bonds framework, which primarily deals with providing a single and organic definition of the instrument. The definition, obtained in light of the experience of market players as well as the work of the competent authorities, should:
  • define both minimum requirements and characteristics that covered bonds must have in all Member States;
  • facilitate the achievement of a good level of harmonisation;
  • differentiate covered bonds from other financial instruments with similar characteristics;
  • replace and supercede all previous definitions, including for example those contained in the UCITS Directive.

The CB Directive would become the new European regulatory framework, ensuring a uniform development of the same legislation in all Member States, granting each Member State sufficient flexibility to safeguard its specific needs.

STEP II: Amendments to the CRR

The second step of the process provides for amendments to the sections of the CCR dealing with covered bonds. Currently, the CRR deals with the regulation of covered bonds with reference to the following three main aspects:

  • Criteria for investors (credit institutions and investment firms) in covered bonds for preferential risk weight treatment of their covered bond investments, being the eligibility requirements for collateral and the disclosure requirements for an issuer (Article 129);
  • Risk weight treatment under the standardised approach (Article 129), preferential LGD (loss-given default) treatment of exposures in the form of covered bonds under the (foundation) IRB approach (Article 161(1)(d)), as well as preferential specific risk treatment (Article 336(3)); and
  • Criteria for the valuation of immovable property collateralising mortgages in cover pools (Article 208 and Article 229(1) via Article 129(3)).

With reference to the risk weight treatment of covered bonds, the EBA recommends that the CRR is amended to be aligned with the provisions of the newly introduced CB Directive. In particular, with reference to Art. 129 of the CRR:

  • eligible assets: the EBA believes that the current level of eligible assets for Cover Bonds should not be extended. Funding for small and medium-sized enterprises (SMEs) and infrastructure financing should not be included among eligible assets; furthermore, they recommend further analysis on ship loans guarantees which are currently included in Art. 129 of the CRR as eligible assets) would be needed. In addition, the EBA recommends not extending the exemption for the inclusion of RMBS and CMBS beyond December 2017;
  • limit on substitution assets: the EBA recommends to amend the CRR in order to provide for the rules on composition of both replacement assets and limits within which replacement may be expected (this limit should be set at 15% of the minimum required coverage);
  • LTV limits: the EBA considers that the current LTV (loan to value) limits set out in the CRR are appropriate, however, the CRR should specify that they are "soft coverage" LTV limits and should be applied on an ongoing basis throughout the life of the programme;
  • overcollateralisation: the EBA suggests setting the minimum effective overcollateralisation at 5%; the percentage limits on exposures as currently set out in Art. 129 of the CRR should continue apply but should not be relevant to the voluntary overcollateralisation; and
  • improving the disclosure policy for the issuer, so that the dissemination of transparent information can become a standard requirement for all regulated covered bonds, rather than a specific condition for obtaining a preferential prudential weighting factor.

STEP III: Voluntary convergence

The third and final phase seems to be less binding than the others; in any case, it will depend on the actions taken by individual Member States. In this respect, the EBA recommends and encourages voluntary convergence between national frameworks also for other aspects (i.e. portfolios of assets constituted by underlying homogeneous activities or debtors located in jurisdictions not belonging to the European Economic Area).
Taking a long-term view, the EBA believes that such spontaneous and non-binding approach to legislative reform could lead to extended homogeneity across the Member States.

The table below provides a summary of main principles of the harmonisation programme recommended by the EBA described above.

STEP I:

Development of a covered bond framework (directive

STEP II:

Amendments to the CRR (related to preferential risk weight treatment)

STEP III:

Voluntary convergence

Establishment of the base-line definition of the covered bond for EU financial regulation

Replacement of the covered bond-related provisions in UCITS Directive

Focus on structural features

Point of reference for prudential regulatory purposes (e.g. BRRD, LCR)

Applicable across sectors

Requirements in Step I obligatory for all covered bonds seeking regulatory recognition

Enhanced conditions for preferential risk weight treatment

Focus on credit risk related features

Requirements in Step I as well as Step II obligatory for all covered bonds seeking preferential risk weight treatment

Voluntary convergence of national frameworks through non-binding instruments

Specific areas with less material impact on the overall robustness of the covered bond frameworks

Areas covered:

1. Dual recourse, segregation of cover assets and bankruptcy remoteness of the covered bonds

2. Requirements for coverage, liquidity risk mitigation and cover pool derivatives

3. Requirements for the system of special public supervision and administration:

(i) Cover pool monitor

(ii) Supervision of covered bond issuer

(iii) Supervision in the event of issuer's insolvency/resolution

(iv) Administration post issuer's insolvency/resolution

4. Transparency requirements

5. Conditions for soft bullet and CPT covered bond structures

Areas covered:

All requirements in STEP 1

+

1. Requirement for eligible cover assets

2. Limits on substitution assets

3. LTV limits for mortgage cover assets

4. Minimum overcollateralisation

Areas covered:

1. Composition of the cover pools

2. Cover pools with underlying assets/obligors located in jurisdictions outside the EEA

3. LTV measurement and frequency of revaluation

4. Stress testing by the covered bond issuer

* This consultation also dealt with the issue related to the development of a harmonised European framework for covered bonds, admitting that legislative divergences between countries may pose a major obstacle in terms of liquidity and investment opportunities and highlighting the importance of several recommendations on best practices suggested by the EBA.

** In accordance with paragraph 1, first subparagraph. Member States may raise the limit of 5% up to a maximum of 25% if the obligations are issued by credit institutions having their registered office in a Member State and subject to a special public supervision for protection of bonds' holders. In particular, sums deriving from issue of such bonds are invested, conforming to the law, in assets able to cover receivables linked to the bonds for the entire duration and that, in case of insolvency of the issuer, would be used on a priority basis for both repayment of capital and payment of accrued interest. Where a UCITS invests more than 5% of its assets in bonds referred to in the first paragraph, issued by a single issuer, the value of such investments will not exceed 80% of the value of UCITS' assets. Member States shall communicate to the Commission the list of bonds categories referred to in the first subparagraph, as well as the categories of issuers authorised under the law and supervisory arrangements to issue obligations complying with criteria set out in the Report. These lists shall be accompanied by a description of the offered guarantees. The Commission shall immediately submit this information to the other Member States, along with appropriate comments, and make it accessible to the public. Such information may be exchanged with the European Securities Committee referred to in Article 112 (1).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.