EC consultation on covered bonds Harmonised Transparency Template - - PowerPoint PPT Presentation

CBIC responses to… …EC consultation on covered bonds …Harmonised Transparency Template

Richard Kemmish Consulting Limited

EC consultation – key messages in CBIC response

Key messages

• Commission must be careful not to needlessly disrupt a well functioning market
• Different covered bonds reflect different underlying risk characteristics and it is

the job of the market to identify and price these risks appropriately

• Only eliminate risk due to differences between regimes
• not risks that are a function of the underlying assets or commercial models

Did pricing converge, is that a sign of market fragmentation?

Fragmentation = failure?

• Fragmentation between markets, not between different classes of covered

bonds

• Strength of covered bond regimes ..was a mitigant of widening sovereign risk
• Weaknesses in covered bond regimes per se not a reason for spread widening

Are there borders…

• No. And no but there should be.
• To cross border investment?
• Largest barrier is client investment mandates
• To cross border cover pools
• Strong concerns about desirability of cross-border pools
• Preference for one country – one pool model
• Concerns about issuer ‘free option’

Should we have a more integrated framework

Yes, with substantial concerns

• There are potential benefits
• But Commission shouldn’t water down existing frameworks
• Stability of frameworks is important
• There can be no balance between different measures either
• Better liquidity is not a substitute for collateral. Or visa versa.

Which option is best for convergence?

Opinions diverged

• Opinion 1: voluntary non-legislative based measures
• market forces would apply eg, adoption of EBA guidelines
• investor side rules, would enhance convergence
• Opinion 2: anything purely voluntary is too weak
• Unanimous opinion: 29th regime wouldn’t work
• Directive specifying strong minimum standards?
• Consultation paper contains too little information on the details of the two
• ptions for investors to make firm judgements

New legal definition?

To replace UCITS 52(4)

• Definitions should be bought into line wherever possible
• Drop the ‘EEA-only’ criteria as long as
• ‘equivalence’ (= EBA’s best practice guidelines,
• comparability of the underlying assets with CRR 129(7)

and

• ease of valuation
• emerging markets cb eligible subject to the quality of regime and supervision.

Do you agree with definitions of eligible assets

Yes, with safeguards

• Transparency is more important than a strict criteria
• Loans in arrears shouldn’t be eligible at inception
• but we should stuill have a claim over them
• Impossible to have common valuation rules across Europe
• But rules should conform to article 208
• Ships and aircraft – different opinions

Views on coverage and over-collateralisation rules

Yes, with safeguards

• National specificities important
• Some investors expressed preference for nominal basis for coverage
• Collateralisation tests ‘post-stress test’ create a potential double count with

supervisory stress tests

• Support for pool specific over-collateralisation to be set by regulator
• Vital that regime recognises ‘voluntary’ over-collateralisation

Some other questions

And also

• Are market-led initiatives such as the "Covered Bond Label" sufficient?
• Label is a very important step forward
• Will only succeed with further help from regulatory bodies
• Is treatment of other collateralised instruments fair?

Different opinions, but kudos to STS initiative

CBIC responses to… …Harmonised Transparency Template

Strong support for harmonised transparency template

Ongoing process since 2012

• Investors very supportive of harmonised transparency template
• Used in initial decisions and due diligence
• Accessibility, timeliness and integrity of information all commended
• Not enough of them
• Suggestions for HTT 2.0
• Greater transparency of definitions
• Links / details on key contractual terms
• Audit trail of changes to pool
• More information on relatied counterparties (eg swap providers)
• More information on substitute assets