UK: UK Regulated Covered Bond Regulations 2008 - Highlights Of The UK´s Regulated Covered Bond Regulations - Part 1 Of 4

To view the entire article please click here.

Keywords: FSA, covered bonds, debt securities, asset pool, UCITs Directive, Capital Requirements Directive, credit institutions, ring-fenced pool

Originally published March 2008


The UK's "Regulated Covered Bond Regulations 2008" and the Financial Services Authority's Regulated Covered Bond Specialist Sourcebook came into force on 6 March 2008. Under the Regulations, UK credit institutions will be able to issue covered bonds complying with art. 22(4) of the UCITs Directive ("Regulated Covered Bonds"). The new framework introduced by the Regulations and the Sourcebook brings about a number of regulatory incentives for the issuance of Regulated Covered Bonds which will have an impact upon the strategy of UK credit institutions going forward.

What Is A Covered Bond?

Covered bonds are debt securities issued by banks and other credit institutions, the repayment of which is secured by a ring-fenced pool of assets backing the bond.

What Is A "Regulated Covered Bond"?

These are covered bonds that comply with a number of criteria set forth by Council Directive 85/611/EC (the "UCITs Directive"). The criteria are the following:

  1. the issuer must be a credit institution with its registered office in the EU;

  2. the issuance by such credit institution must be subject by law to special public supervision to protect covered bondholders;

  3. sums deriving from the issue must be reinvested in eligible assets which, during the life of the bonds, are capable of covering claims attaching to the covered bonds; and

  4. in the case of failure by the issuer, such sums would be used on a priority basis for repayment to the covered bondholders.

The definition of such "eligible assets" is determined in part 12, Annex VI of the Banking Consolidation Directive (2006/48/EC) (the "Capital Requirements Directive" or "CRD"). The common feature of these assets is their good quality and safety from a credit risk point of view (i.e. exposures to (i) EU Central Governments, (ii) AAA-rated banks and (iii) exposures secured by residential or commercial real estate with a maximum 80% or 60% LTV, respectively, etc.).

What Are The Benefits Of Regulated Covered Bonds?

Holders of Regulated Covered Bonds have a direct claim against the issuer credit institution secured by a first ranking claim against a pool of high quality assets. The combination of these features makes Regulated Covered Bonds a very safe debt instrument, usually with a top credit rating. Because of these features, Regulated Covered Bonds merit the following regulatory benefits which make them an attractive instrument from both issuer and investor perspectives:

  1. collective investment institutions regulated by the UCITs Directive may invest up to 25% of their assets (rather than 5%) in Regulated Covered Bonds of one issuer;

  2. insurance companies under the Life and Non-Life Insurance Directives (Directives 92/96/EEC and 92/49/EEC) may invest up to 40% of their assets (instead of 5%) in Regulated Covered Bonds of one issuer; and

  3. credit institutions investing in Regulated Covered Bonds benefit from a reduced risk weighting compared with the senior unsecured debt of the same issuer.

More than 30 European countries have implemented some form of legislation to allow their credit institutions to issue Regulated Covered Bonds. Part 4 of this paper provides a comparison of the main features of these regulations in 5 European countries. UK, Germany, Spain, France and Italy.

What Is The Purpose And Main Features Of The UK's "Regulated Covered Bond Regulations 2008" (The "Regulations")?

The Regulations are aimed at incorporating into UK law the above UCITs Directive and CRD criteria so that UK credit institutions may issue Regulated Covered Bonds. The regulatory criteria for Regulated Covered Bonds are based on the principles that have already existed in the UK structured covered bond regime since the first issuance in 2003; as a result, almost all outstanding UK structured covered bonds should qualify as Regulated Covered Bonds, subject to certain changes and subject to registration and increased supervision.

HM Treasury has drafted the Regulations in cooperation with the FSA and with the industry through a consultation in July of 2007 (the "July 2007 consultation"). The overarching principle of the Regulations is to create a flexible framework for Regulated Covered Bonds in the UK to promote market innovation, while inserting certain "quality markers" to "help increase investor confidence and ensure the development of liquid products". To reflect this approach, the final text of the Regulations have incorporated a number of changes to the initial draft, such as:

  1. a more restricted list of eligible assets compared with that provided in part 12, Annex VI of the CRD;

  2. a more restricted list of countries where eligible assets may be located;

  3. the limitation of eligible issuers of Regulated Covered Bonds to UK authorised credit institutions only (i.e. no UK branches of non-UK credit institutions), and the requirement that the SPV acquiring the pool of assets must have its centre of main interests in the UK to ensure that insolvency proceedings will fall under UK jurisdiction; and

  4. extended supervision powers for the FSA over Regulated Covered Bonds.

More importantly, the Regulations have dropped the "integrated model" (the "integrated model") that was contemplated by the July 2007 consultation. This integrated model is used by Regulated Covered Bonds in other EU Member States such as Germany or Spain, and involves setting up a legislative ring-fence around the asset pool, which remains on the issuing bank's balance sheet (thus no need for an SPV). As market participants questioned whether this model was workable given existing UK insolvency law, HM Treasury decided not to include the integrated model in the Regulations at this stage, but this position will be reconsidered when the Regulations are reviewed one year after implementation.

Part 2 of to this paper summarises the Regulations in further detail. Part 3 of this paper summarises the Financial Services Authority's Regulated Covered Bond Specialist Sourcebook (the "Sourcebook"), which sets out the guidance, directions and rules made by the Financial Services Authority (the "FSA") under the Regulations.

A copy of the Regulations can be found on the website of the UK's Office of Public Sector Information ( A copy of the Sourcebook can be retrieved from the FSA's website (

To view the entire article please click here.

Mayer Brown is a global legal services organization comprising legal practices that are separate entities ("Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP, a limited liability partnership established in the United States; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales; and JSM, a Hong Kong partnership, and its associated entities in Asia. The Mayer Brown Practices are known as Mayer Brown JSM in Asia.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

Copyright 2008. Mayer Brown LLP, Mayer Brown International LLP, and/or JSM. All rights reserved.

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

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

In association with
Related Video
Up-coming Events Search
Font Size:
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
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (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

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’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.


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.


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 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.


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.


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.


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.


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

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

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

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