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Keywords: FSA, covered bonds, debt securities, asset pool, UCITs Directive, Capital Requirements Directive, Sourcebook

Originally published March 2008

As mentioned before, the Sourcebook sets out the guidance, directions and rules made by the FSA under the Regulations, which in particular relate to:

  • The registration formalities and requirements;

  • The notification requirements towards the FSA;

  • The FSA's enforcement process and procedures.

This part 3 contains a brief description of the guidance, directions and rules set out in the Sourcebook.

3.1 Registration

In order to issue Regulated Covered Bonds, the issuer and the covered bonds (programme) must be registered in the relevant Register of the FSA. This section 3.1 sets out some practical aspects of the registration procedure of the FSA.

Submission Of Application Form And Payment Of Registration Fees

In order to become admitted to both Registers, the issuer must submit an application for registration form, which:

  • will cover the registration of both the issuer and the covered bond, because the FSA will not consider applications for issuer registration in isolation from the application for registration of the covered bond; and

  • must be submitted for each proposed issuance of covered bonds (even if it is already registered in the Register of Issuers), unless the regulated covered bonds will be issued under a programme (as the UK structured covered bonds issued to date have been). In the latter case, the issuer merely has to notify the FSA of each issuance by submitting a "series issuance notification form"; and

  • will not be considered by the FSA until it has received a registration fee of £25,000 (by way of bankers draft, cheque or credit transfer). This fee is non-refundable (even in case the application is not successful); and

  • must be verified by a senior manager of the issuer, who also has to make a number of required confirmations in the form (such as the confirmation that the arrangements relating to the covered bond or the covered bond programme (as the case may be) comply with the Regulations and the Sourcebook) and consent to the FSA displaying their confirmation of compliance with the Regulations and the Sourcebook on the FSA's website.

Evidence Of Compliance To Be Provided

According to the Sourcebook, the application form must provide the relevant details of the covered bond or the covered bond programme (as the case may be) and demonstrate how each of the requirements of the Regulations and the Sourcebook will be complied with.

In order to enable the issuer to demonstrate this compliance, the Sourcebooks sets out a number of expectations of the FSA in relation to the requirements set out in the Regulations, such as:

  • In order to satisfy the requirement of having an asset pool with sufficient quality (see section 2.4 of part 2 above), the FSA expects the issuer to demonstrate that (i) it has in place appropriate systems, controls, procedures and policies in place and (ii) the cashflows generated by the assets are sufficient to meet payments in a timely manner.

  • In considering the sufficient quality of the asset pool, the FSA will also take account of any over collateralisation to mitigate the asset credit risk, concentration risk, market risk and counterparty risk and consider the loss in the event of a default.

  • The issuer must demonstrate that the covered bond or the covered bond programme (as the case may be) contains provisions that adequately deal with (amongst others):

    • identification and rectification of any breach of the asset pool requirements set out in the Regulations;

    • the appointment of replacement servicers, cash managers or paying agents; and

    • the winding up of the asset pool in case any breach of the asset pool requirements are not rectified in a timely manner.

  • The issuer must obtain written advice and reports regarding the compliance of the issuer and the covered bond or the covered bond programme (as the case may be) with the Regulations and the Sourcebook from suitable independent third party advisers (such as lawyers and accountants) before making an application.

    The Sourcebook also clarifies that the FSA requires legal advice and an auditor's report, each covering a number of listed items. In particular, the FSA expects legal advice to deal with a minimum set of matters required by the Regulations for Regulated Covered Bonds. The following are examples of such matters:

    • bankruptcy remoteness of the transfer of the assets to the owner and that there is no risk of the transfer being recharacterised as a security interest;

    • whether the contractual arrangement for the covered bond transaction limits the property in the pool to "eligible property" as determined by Regulation 2(1) and located in the permitted locations determined by Regulation 2(2);

    • whether the owner is a company registered in the UK and its "centre of main interest" likewise is situated in the UK;

    • whether the security granted over the asset pool by the owner is enforceable;

    • whether the contractual arrangements provide for a priority of payments in the case of winding up of the owner consistent with Regulation 27 (see part 2 of this paper above).

Where assets are situated in jurisdictions outside England and Wales, the FSA expects the issuer to obtain advice on whether the law of those jurisdictions impacts on the enforceability of security and the availability of those assets in relation to matters such as true sale, perfection of security, priority and recognition of insolvency proceedings and foreclosure rights.

3.2 Annual Confirmations Of Compliance

In order to monitor the on-going compliance with the Regulations and the Sourcebook (and in particular, the asset coverage requirements described in section 2.4 of part 2 above), the issuer must send to the FSA an annual written confirmation of compliance.

This annual confirmation of compliance:

  • will be published on the FSA's website;

  • must be preceded by the issuer having obtained and considered written advice or reports from suitable independent third party advisers (such as accountants and lawyers); and

  • must be sent for the first time (covering the period from the registration date up to the confirmation date) to the FSA on the earlier of (i) the date selected by the issuer and (ii) the date 12 months from the registration date. Any subsequent confirmations (covering the period from the last confirmation date to the date of the current confirmation) must be made on the anniversary on the first confirmation date.

If the issuer is in insolvency, the annual confirmation requirements will be imposed on the owner, with the owner having to make an additional confirmation of compliance within one month of the date of insolvency.

3.3. Asset Pool Notifications And Other Notifications

The issuer (or the owner, in case of insolvency of the issuer) must provide the FSA with on-going information about the asset pool. Such information must be provided by completing an asset notification form and delivering this to the FSA within one month of the end of each quarter following the registration date.

The Sourcebook also determines that, in case of a change of the owner or any proposed material changes to the regulated covered bond, the FSA will need to be notified thereof.

3.4 Annual Fees

In addition to the non-refundable registration fees (see 3.1 above), each registered issuer must pay to the FSA a fee of £20,000 for each financial year in which the issuer is on the Register of Issuers (as at 31 March of the previous financial year).

For the first year, the annual fee will be either £20,000, £15,000, £10,000 or £5,000 (depending on the registration date of the issuer).

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