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
Events from this Firm
16 Oct 2018, Other, Washington, DC, United States

Orrick Partner Rohit Sachdev is proud to Chair the inaugural Storage East summit put on by Infocast on October 16-17th in Washington, D.C.

16 Oct 2018, Other, Washington, DC, United States

Orrick Partner Rohit Sachdev is proud to Chair the inaugural Storage East summit put on by Infocast on October 16-17th in Washington, D.C.

17 Oct 2018, Speaking Engagement, New York, United States

Employment partner, Jill Rosenberg is participating in PLI’s Employment law Institute 2018.

 
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”

Related Topics
 
Related Articles
 
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions